Mustafa ahmed project report on income tax of india

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ENROLLMENT NO :- MHA-0634 Page 1
AEREN FOUNDATION Maharashtra Govt.Reg. No.: F-11724
INDIAN SCHOOL OF BUSINESS MANAGEMENT AND ADMINISTRATION
AN ISO 9001:2008 CERTIFIEDINTERNATIONAL B-SCHOOL
Name of Student Mustafa Ahmed
Reference No MHA-0634
Course DMS
Specialization Taxation Management
Thesis Title Income Tax
Thesis prepared in the field of income tax in india

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A
PROJECT REPORT
ON
“a brief study on incomeTax in india”
YEAR--2016
Submitted by:
MR. MUSTAFA AHMED
A project reportsubmitted in partial fulfillment of the requirements for the degree of
Doctorate in Managementstudies (DMS )
Of
Indian School ofBusiness Management& Administration ( ISBM )-India

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STUDENT DECLARATION
I hereby declare thatthis projectentitled:
“A BRIEF STUDY OF INCOME TAX IN INDIA”
Submitted in partial fulfillment of the requirements for the degree of Doctorate of
Management Studies ( DMS ) to Indian School of Business Management &
Administration , India, is my original work and not submitted for the award for any other
degree, diploma, fellowship, or any other similar title or prizes.
Place:Mumbai Mustafa Ahmed
Date: 23/09/2016 (Signature)

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ACKNOWLEDGEMENT
In my efforts towards the realization of the project, I have drawn on the guidance of
several websits Through internet for which I am glad to acknowledge.
I take this opportunity to thank my institute ISBM Which are give me a opportunity to
prepare a projectreporton taxation so Iglad and proofme as a researcher .
I am preparing this report depend on my only hardworking Own knowledge
experience,patience , and concentrate .

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TABLEOF CONTENTS
S.NO PARTICULARS PAGE NO.
1 INTRODUCTION
7-16
2 ANALYSIS OF BASIC CONCEPTS RESIDETL STATUS AND ITS
EFFECT ON TAX INCIDENCE AND INCOME THAT IS EXEMPT
FROM TAX. 17-34
3 ANALYSIS AND COMPUTATION HEADS OF INCOME
35-155
4
VARIOUS TERMS OF TAXES AND INCOME
AND DEDUCTIONS FROM GROSS TOTAL INCOME 156-218
5 RESEARCH METHODOLOGY
219-232
6 TAX AUDIT AND ACCOUNTING FOR INCOME TAX
233-252
7 ROLE,OBJECTIVES, LIMITATIONS &CONCLUSION
253-272
8 BIBLIOGRAPHY
273-274

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INTRODUCTION

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INTRODUCTION
Income Tax
Income tax is an annualtax on income.The Indian Income Tax Act (Section 4)
provides that in respectof the total income of the previous year of every
person income tax shall be charged for the corresponding assessmentyear
at the rates laid down by the Finance Actfor that assessmentyear.Section 14
of the Income-tax Act further provides that for the purpose ofcharge of
income tax and computation of total income all income shall be classified
under the following heads ofincome:
Salaries
Income from house property
Profits and gains ofbusiness or profession.
Capitalgains
Income from other sources.
The total income from all the above heads ofincome is calculated in
accordancewith the provisions of the Act as they stand on the first day
of April of any assessmentyear
Definition: An income tax is a governmenttax on the taxable profit earned byan
individual or corporation.The resulting revenue is usually one of the chief sources ofcash
for a governmententity. It is considered one ofthe more fair forms of taxation, since it is
only imposed if a person orbusiness has been successfulenough to generate taxable
income.Thus,its impacton the pooror unprofitable is minorto nonexistent.

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Mosttax rates are progressive,which means that the tax rate increases as the level of
income increases.The reasoning behind this tax structure is that the poorare less able to
pay taxes, while the rich have more excess cash with which to pay taxes.
The amountof income tax paid can be reduced bya numberofdeductions,which are
allowed as the result of legislation by the relevant governmententity.
These deductions are usuallyintended to foster certain types of behaviorby taxpayers.
Income Tax
A charge imposed by government on the annualgains ofa person,corporation, orother
taxable unitderived through work,business pursuits,investments, property dealings, and
other sources determined in accordance with the Internal Revenue Code or state law.
Taxes have been called the building block of civilization. In fact, taxes existed in Sumer,
the first organized society of record,where their paymentcarried greatreligious meaning.
Taxes were also a fundamentalpart of ancientGreece and the Roman Empire. The
religious aspectof taxation in Renaissance Italy is depicted in the BrancacciChapel,in
Florence. The fresco Rendering ofthe Tribute Money depicts the gods approving the
Florentine income tax. In the United States, the federal tax laws are setforth in the
Internal Revenue Code and enforced by the Internal Revenue Service (IRS).
Most of the transactions we enter into in our daily life – whether we are individuals or
corporate entities – have an impact on the tax to be paid by us to the government. For
example when you buy a medicine from the drugstore you see in the bill given to you not
only the costof the medicine butthe sales tax or VAT added;and you have to pay the

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full amount.Likewise when you do a job for someone and he pays you your bill, he does
not pay you the full amountyou have billed him butdeducts tax and pays only the
balance.
Managing tax liability is a majorarea of concern for everyone and requires proper
understanding ofthe laws and appropriate,timely action.
In this introductory unit on the subjectof Tax Management,we start with the need for tax
and the tax structure of ourcountry. We go on to distinguish between directand indirect
taxes. We then deal with the conceptof tax planning and its subtle variation from tax
avoidance and tax evasion.
Taxes are the basic source ofrevenue to the government. Revenue so raised is utilised
for meeting the expenses ofgovernmentas well as to carry out developmentwork. The
governmentreviews its tax structures every year at the time of the Central Budgetand
announces changes thatwould best suit its socio-economic strategies.
Taxes are broadly of two kinds:direct and indirect. While direct taxes are taxes on the
income earned bya person,indirecttaxes are taxes on the products and services
produced and sold.
Direct taxes: Directtaxes are taxes on income orprofits. Everyone who earns ‘taxable
income’i.e. income above the exempted level has to calculate the amountearned during
the financial year, and the tax payable thereon. He should remitthe tax to the
governmentin the mannerand atthe time specified. In doing so,however,he can plan
his transactions and his incomes carefully, and this will help him reduce his tax burden.
This initiative goes underthe name of ‘tax planning’.Depicts below ... the advantages of
tax schemes.

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Indirecttaxes: Indirect taxes are taxes on products and services and are payable on the
purchase,production and sale ofproducts and purchase and delivery of services.In
making and selling a product/service the resources utilised,the place and method of
manufacture, and all other factors related to the business can be planned.This planning
helps to effectively reduce the indirect tax impact on the profits of the business.This is
anothertax planning initiative.
In both versions of tax planning,we are talking aboutdoing it legally. The idea is to
conductoperations with clear knowledge ofthe tax impact of different options, and

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choose the one that optimises the tax burden – within the ambitof the tax laws.
Minimising ornot paying tax using unlawful means is not tax planning buttax avoidance,
or in extreme cases,tax evasion.
Types ofTaxes
There are two main types of taxes: Direct taxes and indirect taxes.
1.Directtaxes:Direct taxes are taxes on income orprofits. Everyone who earns
‘taxable income’i.e. income above the exempted level has to calculate the amount
earned during the financial year, and the tax payable thereon.He should remit the tax to
the governmentin the mannerand atthe time specified.
The mostwell-known direct tax is income tax. Other direct taxes are wealth tax, interest
tax and dividend tax. Estate duty was anotherkind of directtax on the property of a
deceased person butthis tax was repealed in the late 80s.
2. Indirecttaxes: Indirect taxes are taxes on products and services and are payable on
the purchase,production and sale ofproducts and purchase and deliveryof services.
Prominentindirect taxes are excise duty, sales tax, customs duty and value added tax.
The responsibility for computing and paying the tax rests on the vendorof the productor
provider of service, and in the case of customs duty the importer of the goods.
The burden ofDirect Taxes is actually borne by the person on whom they are imposed
and paid while the burden ofIndirect Taxes can be shifted by the imposerto the ultimate
Consumer Directtaxes accountfor 30% of government’s revenues,and indirecttaxes
make up the remaining 70%. Indirect taxes therefore accountfor bulk of the
government’s tax revenues.

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The ConceptofTax Planning
Underthe different direct and indirecttax laws, a taxpayer is entitled to plan his taxes in
such a mannerthat the tax incidence in relation to his income is minimal i.e., his net
income after tax is the maximum.
Tax planning involves a study of the exemptions,rebates,deductions and reliefs given
underthe direct and indirecttax laws for specific business decisions in the case of
business persons,and personalfinancialdecisions in the case ofindividuals in such a
way that the tax amountas percentage ofhis income is the least.
This does notmean that every rebate or relief should be made use of, because itwill
certainly have other ramifications. Tax planning is the art and science ofevaluating the
alternatives and picking the one that maximises the income,butnot necessarilyby
minimising the tax.
Forinstance a companyhas the option of setting up its business in a backward area,
which entitles it to enjoy certain direct and indirecttax benefits. But the downside of
going to the backward area could be the highercostof doing business.It is therefore
important for the companyto assess whetherthe tax benefit is greaterthan the
additional costor vice versa. This is the essence oftax planning.
Similarly in the case ofindividuals, income tax law allows a person to reduce from his
taxable income certain specific investments. The decision to do so will depend upon
whether the net income earned from the specified investment is higherthan the income
from another investment after deducting tax.

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Objectives ofTax Planning
The prime objectives of tax planning are:
a. Reduction oftax liability by utilisingthe benefits available in the tax laws.
b. Informed and pragmatic financialdecisions: Aperson adds the dimension oftax
incidence in his decision-making on financialmatters, and this helps him optimise his
decisions.
c. Multi-dimensional investmentdecisions: In a democratic welfare state like India the
governmentrequires substantial investment in infrastructure, education and healthcare.
The tax laws give attractive benefits to investors in these areas;and by taking up these
investments one can contribute to nation-building and at the same time enjoy normal
returns on one’s investment.
d. Discharging a citizen’s duty: No one likes to paytax, and it is indeed a temptation to
hide income earned and skip paying income tax, or make purchases withoutbills and
escape sales tax. But these are unlawful methods of reducing tax liability and result in
economic evils like black money.Tax planning provides the perfect avenue to remain a
responsible citizen while paying the least amountof tax.
Reducing pressure on the legalinfrastructure: The long arm of the law invariably
catches up with economic offenders,but the process is tedious and puts an enormous
burden on the legalsystem. This can be successfully prevented by sensible tax
planning.
Factors to be Considered in Tax Planning
The following factors are essential in effective tax planning.

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1.Residential status and citizenship ofthe taxpayer: It is important for the taxpayer
to knowwhether he is a residentor a non-residentin a country in which he earns
income.The numberofdays’ stay in the country is usually the deciding factor for
residential status. If a person residentin the US in a particular financial year earns
income in India and pays tax in India on such income,he can set it off againsthis tax
liability in his tax return in the US. This kind of set off is subjectto Double Taxation
Avoidance Agreement(DTAA) entered into by different countries with each other.
2. Heads ofincome/assets to be included in computingnetincome/wealth: Income
Tax Act provides specific heads ofincome underwhich income earned has to be
declared;and Wealth Tax Act specifies the heads underwhich wealth has to be
declared.Knowledge ofthe items covered by each head ofincome/wealth is essential.
3. The tax laws: The basic Acts of law that stipulate taxes on income,wealth, products,
etc. are the Income Tax Act, the Wealth Tax Act and a set of indirecttax acts such as
Sales Tax Act, Excise Act and Customs Act. These laws are amended and improvised
from time to time through notifications and circulars;and every year a Finance Actis
passed during the Central Budgetand brings in significant changes.Knowledge ofthe
relevant Acts and updates is essential.
4.Form v.Substance: The taxpayershould be focussed on the substance ofa
transaction, the real intent, and notonly with the form. He should atno time try to change
the form for the only purpose ofreducing oreliminating tax. It is often seen that a
transaction that in substance should resultin a tax liability does notdo so because itis
structured in a mannerthat allows it to escape the tax. Forinstance customs duty is

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payable on equipmentbeing imported, butthe equipmentis soughtto be imported under
an exemptchapterheading.Such actions are clearly illegal and to be eschewed.
Tax Planning and Tax Evasion
Tax planning reduces tax,and so does tax evasion:but while tax planning is perfectly
Legaltax evasion is equally perfectly illegal. Tax evasion is non-paymentoftaxes
through illegal means such as hiding income earned,showing artificial expenses to
reduce taxable profit, smuggling goods into the country without paying customs duty,
selling goods withoutbills (and so not charging sales tax) or despatching goods without
paying excise duty. The value of the transaction is falsified blatantly or ingenuouslyto
evade the tax payable.
Tax Avoidance
Tax avoidance is reduction of tax liability by exploiting loopholes in the tax laws. The
measures adopted in tax avoidance are lawful, but the intentions are not. Transactions
are structured with the sole purpose ofreducing oreliminating the tax. The fundamental
difference between planning and avoidance is in the intent of the taxpayer

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ANALYSIS OF BASIC CONCEPTS TYPES RESIDENTAL STATUS AND ITS
EFFECT ON TAX INCIDENCE AND INCOME THAT IS EXEMPT FROM TAX

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BASIC CONCEPTS OF INCOME TAX
An assesses maygetincome from different sources,eg:-salaries-house propertyincome-
profits and gains of business orprofession - capital gains income from other sources like
interest on securities , lottery winnings,races etc.
Income from each of these sources calculated first to find outthe gross total income,and then
permissible deduction allowed arriving in total income according to sec 80c to 80u.
Every person whose taxable income in the previous year exceeds the minimum taxable limit is
liable to pay income tax during the currentfinancial year at the rates applicable to the current
financial year.
ASSESSMENT YEAR SEC 2(9)
Assessmentyear means the period of12 months commencing on the first day of April every
year and ending on 31stmarch ofthe nextyear. The currentassessmentyearis 2007 -008
(1.4.2007 to 31.03.2008).
An Assessee is liable to pay tax on the income ofthe previous year during the next following
assessmentyear. Eg: - during the Assessmentyear2007-08 income earnedduring 2006-07
is taxed.
PREVIOUS YEAR SEC 3
Previous year means the financial year immediately preceding the assessmentyear.
The previous year relevant to the Assessmentyear 2007-08 is 2006-07(1.4.06 to 31.03.07)
.i.e the year in which income is earned is known as previous year.

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PERSONS SEC 2(34)
1. Individual
2. Hindu undivided family
3. Company
4. Firm
5. Association of persons orbodyof individual
6. Localauthority
7. Artificial juridical person
ASSESSEE SEC 2(7)
Assessee is a person,who has liability to pay tax or any other sum of moneyunderIncome
Tax actof 1961,so the afore said persons include in the category of Assessee.Every
Assessee whose taxable income in the previous year exceeds the minimum taxable limit is
liable to pay income tax during the currentfinancial year at the rates applicable to the current
financial year.
EXCEPTIONS TO THE GENERAL RULE
Generally income earned in the previous year is taxed in the assessmentyear.But there
Are certain exceptions to the generalrule.Ie the previous year and assignmentyearare same;
The Assessee is liable to be assessed in the same yearin which he earns the income in the
following case,
1. Income from non residentshipping company
2. Income of person leaving India
3. Income of person likely to transfer assets to avoid tax
4. Income from discontinued business.

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GROSS TOTAL INCOME
It is the aggregate taxable income underthe different heads ofincome such as income from
salary, income from house property, income from profits or gains of business,capital gains
and income from other sources.Ie total income computed in accordance with the provision of
the actbefore making any deductions underSec 80 C to 80 U.
TOTAL INCOME SEC 2(45)
Total income is arrived after making various deductions from gross total income undersection
80 C to 80 U. It is computed on the basis of residential status of an Assessee
RESIDENTIAL STATUS
Income tax is charged on total income earned byan Assessee during the previous year, but at
the rate applicable to the assessmentyear. It shall be determined on the basis of the
residential status of the Assessee.Sec.6 ofthe act divides the Assessee into 3 categories’
*Resident
*Non resident
*Not ordinary resident
There is basic and additionalcondition for determining the residential status of different
assessee.
Basic condition
1.If he has been India in that previous year for a period orperiods amounting in all to 182
Days or more
2.if he has been India for a period orperiods amounting in all to 365 days or more,during the
years preceding the relevant previous year and has been in India for a period orperiods

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amounting in all to 60 days or more in that previous year.
Additionalconditions
1.An individual who has been in India at least 2 outof 10 previous years preceding the
relevant previous year.
2.The individual has been India for at least 730 days in all during the 7 previous year
Preceding the relevant previous year.
RESIDENT AND ORDINARY RESIDENT
Persons who are residentin India is popularlyknown as ordinary resident. An individual,
To become an ordinaryresidentin India in any previous year should also satisfy the two
Additional conditions along with basic conditions.
NOT ORDINARILY RESIDENT INDIVIDUAL- SEC.6 (6)
If an individual fulfills any one of the basic conditions (specified in the case of resident)
But doesn’tsatisfy both additional conditions,he becomes a ‘not ordinaryresident’
NON RESIDENT INDIVIDUAL
As per section 2(30)of the income tax act, if an Assessee doesn’tfulfill any of the two basic
conditions or tests will be treated as non residentAssessee during the relevant previous year
ncome Tax Rate Chart/Income Tax Slabs as Applicable for AssessmentYear 2017-18 /
FinancialYear 2016-17
1.Individual, Hindu undivided family, association of persons, body of individuals,
2.artificial juridical person.
i.The rates of income-tax in the case ofevery individual (other than

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those mentioned in (ii) and (iii) below) or Hindu undivided family or every
association ofpersons or body ofindividuals, whether incorporated or
not, or every artificial juridical person referred to in sub-clause (vii) of
clause (31) ofsection 2 ofthe Act (notbeing a case to which any other
Paragraph ofPartIII applies) are as under:-
Income Slabs Tax Rates
i. Where the total income does notexceed Rs.2,50,000/-. NIL
ii.
Where the total income exceeds Rs.2,50,000/-butdoes notexceed Rs.
5,00,000/-.
10% of
amountby
which the
total
income
exceeds
Rs.
2,50,000/-
iii.
10,00,000/-.
Rs.
25,000/-+
20% of the
amountby
which the
total
income
exceeds
Rs.
5,00,000/-.
iv. Where the total income exceeds Rs.10,00,000/-.
Rs.
1,25,000/-
+ 30% of
the amount
by which
the total
income
exceeds
Rs.

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10,00,000/-
.
(ii) In the case of every individual, being a resident in India, who is of
the age ofsixty years or more but less than eighty years atany time
during the previous year,—
ii.
5,00,000/-
10% of the
amountby
which the
total
income
exceeds
Rs.
3,00,000/
iii.
10,00,000/-
Rs.
20,000/-+
20% of the
amountby
which the
total
income
exceeds
Rs.
5,00,000/-.
iv. Where the total income exceeds Rs.10,00,000/-
Rs.
120,000/-
+ 30% of
the amount
by which
the total
income
exceeds
Rs.
10,00,000/-
.

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(iii) in the case of every individual, being a resident in India, who is of
the age of eighty years or more atanytime during the previous year,—
ii.
10,00,000/-
20% of the
amountby
which the
total
income
exceeds
Rs.
5,00,000/-.
iii. Where the total income exceeds Rs.10,00,000/-
Rs.
100,000/-
+ 30% of
the amount
by which
the total
income
exceeds
Rs.
10,00,000/-
.
3.Co-operative Societies
In the case ofco-operative societies, the rates of income-tax have been specified in
Paragraph B ofPart III of the First Schedule to the Bill. These rates will continue
To be the same as those specified for financial year 2015-16.
The amountofincome-tax shall be increased by a surcharge atthe rate oftwelve
percent. of such income-tax in case ofa co-operative society having a total income
exceeding one crore rupees.

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However, the total amountpayable as income-tax and surcharge on total
income exceeding
one crore rupees shall notexceed the total amountpayable as income-tax on a total
income ofone crore rupees by more than the amountofincome thatexceeds one
crore rupees.
4.Firms
In the case offirms, the rate of income-tax has been specified in Paragraph C ofPartIII
of the First Schedule to the Bill. This rate will continue to be the same as thatspecified for
financial year 2015-1 6.
percent. of such income-tax in case ofa firm having a total income exceeding one
crore rupees.
However, the total amountpayable as income-tax and surcharge on total income exceeding
income ofone crore rupees by more than the amountofincome thatexceeds
one crore rupees.
4.Local authorities
The rate of income-tax in the case ofevery local authority is specified in Paragraph D of
Part III of the First Schedule to the Bill. This rate will continue to be the same as that
specified for the financial year 2015-16.

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percent. of such income-tax in case ofa local authority having a total income exceeding
one crore rupees.
However, the total amountpayable as income-tax and surcharge on total income exceeding
income ofone crore rupees by more than the amountofincome thatexceeds one
crore rupees
5. Companies
The rates of income-tax in the case ofcompanies are specified in Paragraph E ofPartIII
of the First Schedule to the Bill. In case ofdomestic company, the rate ofIncome-tax
shall be twenty nine per cent. ofthe total income ifthe total turnover or gross
receipts of the company in the previous year 2014-15 does notexceed five crore
rupees and in all other cases the rate ofIncome-tax shall be thirty per cent. of the total
income.
In order to provide relief to newly setup domestic companies engaged solely in the
business ofmanufacture or production ofarticle or thing, it is proposed to amend the Act
by way of insertion of new section 115BA, to provide that the income-tax payable in
respectof the total income ofa domestic company for any previous year
relevant to the assessmentyear beginning on or after the 1st day ofApril, 2017 shall
be computed @ 25%atthe option of the company, if, –
the company has been setup and registered on or after 1st day ofMarch, 2016;

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the company is engaged in the business ofmanufacture or production ofany article or thing
and is notengaged in any other business;
the company while computing its total income has notclaimed any benefitunder
section 10AA,
benefit of accelerated depreciation, benefitofadditional depreciation, investment
allowance, expenditure on scientific research and any deduction in respectofcertain income
under Part-C of Chapter-VI-A other than the provisions of section 80JJAA; and
the option is furnished in the prescribed manner before the due date offurnishing ofincome.
ResidentialStatus and Tax Incidence under the Income Tax Act,FEMAand
Companies act
Tax incidence on an assesseedepends on his residential status. Forinstance, whetheran
income,accrued to a person outside India, is taxable in India depends upon the residential
status of the person in India. Similarly, whether an income earned bya foreign national in
India (or outside India) is taxable in India depends on the residentialstatus of the individual,
rather than on his citizenship. Therefore, the determination of the residential status of a person
is very significant in orderto find out his tax liability.
The residential status of an assessee is to be determined in respectof each previous year as
it may vary from previous year to previous year. The foreign investors may be Indian nationals
residing outside India, person ofIndian origin and other foreign investors including corporations.

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UnderSection 2(31)of the Income Tax Act, the term person includes an individual,a Hindu
Undivided Family, a Partnership Firm, a Company,an Association of Persons,a Body of
Individual, a LocalAuthority and every other Artificial Juridical Entity. Similarly, underFEMA,
clause (u) of Section 2, person includes allthe above categories and also any agency,office
or branch owned orcontrolled by any such person.
The residential status of a person has been dealtunderthe Income Tax Act, 1961, Foreign
Exchange ManagementAct, 1999 (FEMA), Companies Act, 1956 and underthe proposed
Direct Tax Code Bill 2009.
Residentialstatus under Income Tax Act,1961
Residentialstatus ofan Individual&Hindu Undivided Family
Residential status of an assessee is important in determining the scope ofincome on which
income tax has to be paid in India. Broadly, an assessee maybe residentor non-residentin
India in a given previous year.
UnderSection 6(1), an individual is said to be resident in India in any previous year if he
satisfies any one ofthe following basic conditions:
He is in India in the previous year for a period ofat least182 days or,
He is in India for a period of at least60 days during the relevant previous year and at least
365 days during the four years preceding that previous year.
In case an Indian citizen leaves India for employmentabroad in anyyear for the purpose of
employment(or where an individual, who is a citizen of India, leaves India as a member ofthe

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crew of an Indian ship), or where an Indian citizen or a person ofIndian Origin, who has settled
abroad,comes on a visit to India in the previous year, shall not attract clause (b) of the basic
conditions Therefore, such individuals may stay in India upto 181 days in a given previous year
without becoming residentin India for that previous year. An individual who does notsatisfy
either of the above basic conditions is non-residentfor that previous year.
A Hindu Undivided Family (HUF) is said to be residentin India if control and managementofits
affairs is wholly or partly situated in India during the relevant previous year.
A residentindividual or HUF assessee mayfurther be classified into (i) residentand ordinarily
resident(ROR) and (ii) residentbut notordinarily resident(RNOR). A residentindividual or
HUF is treated as ROR in India in a given previous year, if he satisfies the following additional
conditions:-
He has been residentin India in at least9 out of 10 previous years (according to basic
conditions noted above)preceding the relevant previous year; and
He has been in India for a period of at least730 days during 7 years preceding the relevant
previous year.
An individual or HUF becomes RORin India if the individual orKarta of HUF satisfies at least
one of the basic conditions and both the additional conditions.An individual or Karta of HUF
who is residentin India but does notsatisfy both the additional conditions is RNOR for that
previous year.
Residentialstatus ofassesseeother than an Individual&HUF
In case of an assessee,otherthan an individual and HUF, the residential status depends upon

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the place from which its affairs are controlled and managed.
As per Section 6(2), a partnership firm or an association of persons are said to be residentin
India if control and managementoftheir affairs are wholly or partly situated within India during
the relevantprevious year. They are, however,treated as non-residentif control and
managementof their affairs are situated wholly outside India.
As per Section 6(3), an Indian companyis always residentin India. A foreign Companyis
residentin India only if, during the previous year, control and managementofits affairs is
situated wholly in India. Where partor whole of control and managementof the affairs of a
foreign companyis situated outside India, it shall be treated as a non-residentcompany.
As per Section 6(4), every other person is residentin India if control and managementof his
affairs is, wholly or partly, situated within India during the relevant previous year. On the other
hand,every other person is non-residentin India if control and managementof its affairs is
wholly situated outside India.
Residentialstatus under FEMA
UnderFEMA the residential status of an individual is determined by the purpose for which he
goes abroad.Section 2(v) provides that a person residing in India for more than 182 days
during the course of the preceding financialyear is a person residentin India. Further, it says
that in case any person comes to or stays in India for or on taking up employmentor for
carrying on business orvocation or for any other purpose,in such circumstances as would
indicate his intention to stay in India for an uncertain period will be regarded as residentin
India for such financial year. Similarly if any person goes outof India orstays outside Indiafor

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fulfilling or achieving any of the aforesaid purposes as would indicate his intention to stay
outside India for an uncertain period will be regarded as non-residentin India.
Further, it provides that any person orbodycorporate registered or incorporated in India and
an office, branch oragencyin India owned orcontrolled by a person residentoutside India or
by a person residentin India will also be regarded as person residentin India.
An Indian citizen who stays abroad for employmentor for carrying on business orvocation
outside India or stays abroad undercircumstances indicating an intention for an uncertain
duration of stay is a non-resident(persons posted in U. N. organizations and officials deputed
abroad byCentral / State Governmentand Public Sector Undertakings on temporary
assignments are also treated as non-resident).
Residentialstatus under Companies Act,1961
Schedule XIII of the Companies Act, 1961 deals with conditions to be satisfied for
The appointmentof a managing orwhole-time director or a manager (referred to as
“managerialperson”) of the Companywithout the approvalof the Central government.
Explanation to Clause (e) of Part I of the Schedule provides that a residentin India includes
a person who has been staying in India for a continuous period ofnot less than twelve months
immediately preceding the date of his appointmentas a managerialperson and who has come
to stay in India for taking up employmentin India or for carrying on a business in india
Incidence ofTax
As per Section 5 of the Income Tax Act 1961,incidence oftax on a taxpayer depends on his
residential status and also on the place and time of accrualor receiptof income.

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In orderto understand the relationship between residential status and tax liability, one must
understand the meaning of“Indian income”and “Foreign income”. An Indian income is one
which satisfies any of the following conditions:
1.If income is received (or deemed to be received)in India during the previous year and
at the same time it accrues (orarises or is deemed to accrue orarise) in India during the
previous year, or
2) if income is received (or deemed to be received)in India during the previous year butit
accrues (orarises)outside India during the previous year, or
3) if income is received outside India during the previous year butit accrues (orarises or is
deemed to accrue orarise)in India during the previous year.
Similarly, Foreign income is one which satisfies both the following conditions:
1) Income is not received (or notdeemed to be received)in India; and
2) income does not accrue orarise (or does notdeemed to accrue orarise) in India.
Indian income is always taxable in India irrespective of the residential status of the taxpayer.
Foreign income ofan individual and HUF from a business controlled or profession setup in
India will be taxable in the hands ofresidentand ordinarily residentand residentbutnot
ordinarily residentbut notin the hands ofa non-resident.However,Foreign income from a
business controlled or profession setup outside India will be taxable only in the hands of
residentand ordinarily residentand notin the hands ofa residentbut notordinarily resident
or a non-residentperson.

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SEC 10 : EXEMPTED INCOMES
Tax Exemption in India :
India has a well developed three-tier federal tax structure. According to ChapterIII of the
Income Tax Act, 1961 there is a provision of exemptions in income tax. Tax Exemption
induces reduction ofthe tax burden on a specific section of the society to
achieve some level of equilibrium among all. To encourage some economic activities
through the process ofreduction of the tax burden on some organizations orindividuals
involved in that activity is also anothercause for Tax Exemptions. Forinstance, there are
exemptions from the property tax, and also an individual is exepted from paying income
tax if there are dependents orchildren financially dependenton him/her.
Tax Exemptions have the authority to bring aboutsocialand economic changes within the
society followed by unprecedented consequences.However,for such exemptions on tax
some conditions are mandatory to follow. Some of them are like-
The age ofthe individual taxpayer
The public services performed by the individual taxpayers
The type of property owned by the individual
The geographic location of property
The netincome of the individual paying the tax
The value of the taxable property
The differentsectionsunder tax exemptionin India
Sec 10(3)for exemption on income received in the non recurring orcasualform but not
exceeding Rs.5,000 and in case of winnings from a horse race it should notexceed Rs.

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2,500
Sec 10(4)(i)for exemption on income from interests on bonds and securities which
includes premium on repurchaseofbonds
Sec 10(4B)for exemption on income from interest on specific savings certificate issued by
the central government
Sec 10(5)for exemption on the value of the Leave Travel Concession (LTC)notmore
than actual amountspent
Sec 10(5A)for exemption on specific paymentto a non-residentperson ora foreigner for
the purpose ofshooting a film in India
Sec 10(5B) for exemption on income tax which is paid by the employer on behalfof the
salary of certain employees from outside the country, indulged in scientific research
Sec 10(6)(ii) for exemption on income received by the diplomats, ambassador,etc
Sec 10(6)(vi) for exemption on income received by the employees ofthe foreign
Companies
Sec 10(6)(vi a) for exemption on income received from any international philanthropic
Organizations
Sec 10(11)for exemption on income received from Statutory Provident Fund and Public
Provident Fund
Sec 10(13)for exemption on income received from Superannuation Fund within a
specific limit
Sec 10(13A)for exemption on specific allowance to employees such as house rent
Allowance

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Sec 10(30)for exemption on income received in form of subsidy from the Tea board
Sec 10(31)for exemption on income received in form of subsidy from the specific boards of
the coffee, rubber,cardamom,and othercommercialcrops

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ANALYSIS AND COMPUTATIONHEADS OF INCOME
Heads ofIncome
Underchapter4 of Income Tax Act, 1961 (Section 14),income of a person is calculated under
various defined heads ofincome.The total income is first assessed underheads ofincome
and then it is charged for Income Tax as underrules ofIncome Tax Act. According to Section
14 of Income Tax Act, 1961,there are following heads ofincome under which total income of
a person is calculated:
Heads of income : Salary
Heads of income : House property
Heads of income : Profit in Business/profession
Heads of income : Capital gains
Heads of income : Other source
Salary Income Tax - Heads ofIncome:Salary
Definition of Salary
Salary is the remuneration received by an individual for service rendered as a resultof an

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express orimplied contract.
The statute gives an inclusive but notexhaustive definition of salary.
As per Section 17(1),salary includes the following:
Wages
Annuity orpension
Gratuity
Fees,commission,perquisites orprofits in lieu of salary
Advance salary
Receiptfrom providentfund
Contribution of employerto a recognised providentfund above prescribed limit
Leave salary
Compensation as a result of variation of service contract
Basis of Charge
Section 15 deals with the basis of charge.Salary is chargeable to tax either on ‘due’ basis
or on ‘receipt’ basis, whichever is earlier.
However, where any salary, paid in advance, is assessed in the year ofpayment, it
cannotbe subsequently broughtto tax in the year in which itbecomes due.
If the salary paid in arrears has already been assessed on the due basis, the same
cannotbe taxed again when itis paid.
Exceptions to salary income
The existence of an ‘employer-employee’relationship is necessaryfor a paymentto be
taxed underthe head salaries.Accordingly,the following classes of payments do notfall

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underthe head ‘salary’. (They are taxed underthe following different heads ofincome:
Salary received by a partner from his partnership firm carrying on a business:This income is
taxable underthe head “profits and gains of business and profession”.
Salary received by a person as MP or MLA: This income is taxable underthe head ‘Income
from other sources’.However, the salary received by a person as a minister of central
governmentor state governmentis chargeable underthe head ‘Salaries’.
Family pension that is pension received by the members of the family of an employee
subsequentto his death: This is taxable underthe head ‘Income from other sources’.
However, the pension received by an employee from his former employeris taxable
under the head ‘Salaries’
Salary typically comprises the followingcomponents:
Basic salary
Dearness allowance (DA)
House rentallowance (HRA)
Conveyance allowance
Leave travel concession
Special /performance allowance
Variable pay
Apart from these monetary components employers also provide non-monetaryperquisites.
Taxability of the elements of salary
House rentallowance (HRA): UnderSection 10 (13A) of the Act, HRA is exemptfrom income

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tax to the extent prescribed in Rule 2A of the Income Tax Rules,1962,which stipulates that the
least of the following amounts is exempt:
The actual amountof HRA
The actual rent paid in excess ofone-tenth of the salary
If the accommodation is situated in Mumbai,Kolkata, Delhi or Chennai,50%of the salary
If the accommodation is situated in any other place, 40% of the salary
Points to remember: Salary includes DA but excludes allother allowances and perquisites.
Only the expenditure actually incurred on paymentof rent in respectof residential
accommodation occupied bythe assessee qualifies for exemption from income tax. Thus,
HRA granted to an employee residing in a house orflat owned by him is not exempt.
The disbursing authorities should satisfy themselves in this regard by insisting on
production of evidence of actual paymentof rentbefore excluding the HRA or any
portion from the total income ofthe employee.
Though incurring actual expenditure on paymentof rent is a pre-requisite for claiming
deduction underSection 10(13A),it has been decided as an administrative measure that
salaried employees drawing HRA up to ` 3,000 permonth will be exemptfrom production
of rent receipt. However, this concession is only for the purpose oftax deducted atsource.
In the regularassessmentof the employee,the assessing officer (AO) will be free to make
inquiries to satisfy himself that the employee has incurred actual expenditure on payment
of rent. The assessee mustproduce such a rent recipt.
If the annualrentpaid by the employee exceeds `1,80,000 perannum,it is mandatoryfor

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the employee to report the PermanentAccountNumber(PAN) of the landlord to the
employer. In case the landlord does nothave a PAN, a declaration by the landlord along
with his name and address should be filed by the employee.
Conveyance allowance:The transportallowance given to an employee to meethis travel
expenses between the place of residence and the work place is exemptto the extent of `
800 per month.
Leave travel concession orallowance (LTC):The LTC received by an employee for himself
and his family in with regard to his proceeding on leave to any place in India is exempt
underClause (5)of Section 10.However, this is subjectto the conditions prescribed in
Rule 2B of the Income Tax Rules,1962.
In this clause,‘family’ refers to the following:
Spouse and children ofthe individual
Parents, brothers and sisters of the individual or any of them, wholly or mainly dependent
on the individual.
The amountexemptunderthis clause cannotexceed the amountof expenses actually
incurred in this travel.
In respectof the assessmentyear(AY) 2012-12,Rule 2Bmentions that for one year in
a block of two years, the LTC is exemptto the extent of actual cost of to and fro tickets,
limited to economyclass airfare.
All other elements of the salary are taxable.
Terminalpayments
Gratuity, leave salary and providentfund are some elements of remuneration to which an

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employee is entitled when he leaves the services of an employeror when he retires on
reaching the age of superannuation.
Place of AccrualSalary
Under section 9(1)(ii), salary earned in India is deemed to accrue or arise in India even if
it is paid outside India or it is paid or payable after the contract of employmentin India
comes to an end.
Advance Salary
Advance salary is taxable when itis received by the employee irrespective ofthe fact
whether it is due or not. It may so happen thatwhen advance salary is included and
changed in a particular previous year, the rate oftax at which the employee is assessed
may be higher than the normal rate oftax to which he would have been assessed.

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Loan or Advance against Salary
The loan is different from salary. When an employee takes a loan from his employer,
which is repayable in certain specified instalments, the loan amountcannotbe broughtto
tax as the salary of the employee.
Similarly, advance againstsalary is different from advance salary. It is an advance taken
by the employee from his employer. This advance is generally adjusted with his salary
over a specified time period. It cannotbe taxed as salary.
Arrears of Salary
Normally, salary arrears mustbe charged on the basis.However, there are circumstances
when it may not be possible to bring the same to charge on due basis. For example, ifthe
Pay Commission is appointed by the Central Governmentand itrecommends revision of
salaries ofemployees, the arrears received in thatconnection will be charged on receipt
basis.
Annuity
An annuity is a sum payable in respectofa particular year. Annuity received from a
presentemployer is to be taxed as salary. It does notmatter whether it is paid in
pursuance ofa contractual obligation or voluntarily. Annuity received from a past
employer is taxable as profit in lieu of salary. Annuity received from a person other than
an employer is taxable as ‘income from other sources’.
Gratuity: This is payable to employees who have completed 5 years’ service with the

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employer, and is calculated on the basis of basic play and DA. The amountreceived is
tax-free up to ` 10 lakh.
Gratuity is a collectable amountfor an employee,paid as a gratitude by the organization.
It is also known as the end of service benefits. An individual who has worked in an organization
for a minimum period of 5 years is eligible for this benefit. This calculation is based on his/her
average salary, dearness allowance andnumberofyears he / she worked in the organization.
This gratuity calculatorwill help common salaried people to calculate their gratuity amount.
Whatis the Tax treatmentofGratuity?
Forthe purpose ofexemption of gratuity undersec.10 (10)the employees are divided
underthree categories:
A) In RespectofGovernmentEmployees
Any death cum retirement gratuity received by Centraland State Govt.employees,
Defense employees and employees in Localauthority shallbe exempt.
B) In RespectofNon GovernmentEmployeescoveredby PaymentofGratuity Act
Gratuity amountreceived by non governmentemployees covered bythe Payment of
Gratuity Act is tax free up to the leastamountof the following:
Amountof gratuity paid,or
15 days salary for every completed year of employment(salary is the amountof last
salary drawn)
Rs 10 lakh (Increased from Earlier limit of Rs. 3.50 Lakh w.e.f. 24.05.2010)

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C) In RespectofVoluntary PaymentofGratuity to Employees notcoveredby
PaymentofGratuity Act
Where companies paygratuity voluntarily to employees who are not eligible to receive
gratuity underthe Act, such amountis tax free up to the leastamountof the following:
Amountof gratuity paid,or
Half month’s salary for every completed year of employment(salary is average salary
received in the last 10 months of service.)
Rs 10 lakh (Increased from Earlier limit of Rs. 3.50 Lakh w.e.f. 24.05.2010)
The exemption in respectof gratuity is permissible even in cases of termination
of employment due to resignation.The taxable portion of gratuity will qualify for relief u/s
89(1).Gratuity paymentto a widow or other legalheirs of any employee who dies in
active service shall be exemptfrom income tax subjectto provisions mentioned above.
The ceiling of Rs.10 lakh applies to the aggregate of gratuity received from one or more
employers in the same ordifferent years.
Under Whathead itis Taxable?
Gratuity received by an employee on his retirement is taxable underthe head “Salary”
and gratuity received by the legal heir is taxable underthe head”Income from Other
Sources”.
Gratuity Exemption – Sec 10(10)
If Gratuity is received by any employee while in employmentthen it is fully taxable in the

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hands ofemployee.While if gratuity is received in case ofdeath or retirement or
resignation,then exemption is available up to the following limits.
In case ofGovernmentemployee– Any gratuity received by an employee of Central
Government, State Governmentor local authority is wholly exemptfrom tax. This
exemption is not available to employees ofStatutory Corporation.
In case ofemployeescoveredby PaymentofGratuity Act –
An amountequalto the leastof the following will be exemptfrom tax
15/26 x Salary last drawn x No. Of completed years of service or part thereof in excess of
6 months.1000000 gratuity actually received .
Notes:
In case of seasonalestablishments,15 days is substituted by 7 days.
Salary includes basic salaryand dearness allowance butdoes notinclude bonus,
commission,overtime wages or any other allowance.
Part of a year exceeding six months is taken as a complete year.
In case ofany other employee –
An amountequalto the leastof the following will be exemptfrom tax
½ x Average salary of last 10 months preceding the month of retirement x Completed
year of service (fraction of a year is ignored)
10,00,000
Gratuity actually received
Notes:
Salary includes basic pay,dearness allowance to the extent it forms part of retirement

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benefits and percentage wise fixed commission on turnover.
If gratuity is received by an employee from more than one employerin the same previous
year or in different previous years the aggregate maximum amountexemptfrom tax on
accountof gratuity cannotexceed Rs.10,00,000.
If an employee had also rendered service to anyother employer,then period of service to
such former employeris also included while calculating “completed year of service”
subjectto condition that any gratuity is not received from such former employer.
How to Calculate Gratuity
a) In respectofEmployeescoveredUnder the PaymentofGratuity Act,1972:
As per the Act, the gratuity amountis 15 days’ wage multiplied by the numberofyears put
in by you. Here wage refers to basic salary plus dearness allowance.Take the monthly
salary drawn by you last (basic + dearness allowance)atthe time of resignation
or retirement. Divide this by 26.This gives you your daily salary. Multiply this amountby
15 days, and further by the numberof years of service you have putin.
If you have put in 10 years and seven months in an organisation,your service period will
be taken to be 11 years. But if your service tenure is 10 years and five months,then for
the purpose ofthis calculation your tenure will be taken to be 10 years only.
Take an example.Suppose thatyour average monthly salary is Rs 26,000.Your daily
salary will be Rs 1,000.Multiply this by 15 and then by 10. The gratuity you are entitled to
after 10 years of service will be Rs 1.5 lakh.

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Formula :- Gratuity shall be calculated as perthe belowformula:
Gratuity = Lastdrawn salary x 15/26 x No. of years of service
Your last drawn salary will comprise your basic + DA. Forcomputation of gratuity, your
service period will be rounded off to the nearestfull year.
b) In respectofEmployees notcoveredUnder the PaymentofGratuity Act,1972:
Fornon-governmentemployees,who are not covered underthis Act, the manner
of calculating gratuity is different. First, the average salary is calculated: for this the
average of last ten months’ salary is taken (this will include the basic plus dearness
allowance plus commission as a percentage ofturnover achieved by the employee).
Divide this average salary by 30 (ignore fractions). Now, multiply this amountby 15 and
further with the numberofyears of service put in. Dividing the daily salary by 30 instead of
26 does putthose not covered by the Gratuity Act at a disadvantage.
Formula :- Gratuity shall be calculated as perthe belowformula
Gratuity = Lastdrawn salary x ½ x No. of years of service
Your last drawn salary will comprise your basic + DA+ commission on sales on turnover
basis.For computation of gratuity, your service period will not be rounded off to the
nearestfull year. While calculating completed years, any fraction of the year will be
ignored.Forinstance,if the employee has a total service of 20 years, 10 months and 25
days, only 20 years will be factored into the calculation.
Leave salary: This is also calculated on the basis of basic play and DA and is exemptfrom
income tax.

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Many organisation provide the facility of encashmentof leave (by whatever name called be it
earned leave,sick leave etc) either
1) during the period of employmentor
2) at the time of retirement (including separation on accountof resignation,retrenchment,
VRS etc other than termination) of the employee or
3) at the time of Termination of the employee
Fortax treatment of leave encashmentu/s 10(10AA)of Income Tax Act 1961 the employees
has been classified into two types:
1) Govt Employees and
2) Non-Govt employees (PSU employees are considered as non-govtemployees)
The tax treatment of Leave encashmentis explained with the help of following table:
Leave encashmenttiming
During period of service
At the time of retirement or separation (other than on accountof Termination)
At the time of termination of employee
* Here salary means Basic + Dearness Allowance (forms part of pay) + Commission
(Fixed % on turnover)
** Cash equivalentto leave to the creditof employee at time of retirement is
= {(A X B) – C} X D
Where
A) No of completed year of service (excluding partof the year)

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B) Numberofleave credited each year (Subject to maximum of 30 leave peryear)
C) Numberof leave taken or leave encashed during period ofemployment
D) Average salary for last 10 months
The following additional points should be noted:
i. Where leave salary is received from two or more employers in the same year, then the
aggregate amountof leave salary exemptfrom tax cannotexceed Rs 3,00,000
ii. Where leave salary is received in any earlier year from a former employer and again received
from anotheremployer in a later year, the limit of Rs 3,00,000 will be reduced bythe amount
of leave salary exemptearlier.
iii. Relief u/s 89 read with Rule 21Acan be claimed by the employee in cases where the amount
of leave encashmentis fully taxable.
iv. Leave salary (or leave encashment)received by the legal heir of the deceased employee is not
at all taxable in the hands ofhis legalheirs (F.35/1/65-IT(B), dated 5-11-1965)
The treatment of leave salary can be explained with the help of an example:
Example:Mr. Gupta retired on 1.12.2014 after 20 years 10 months of service, receiving leave
salary of Rs 5,00,000.
Other details of his salary income are:
Basic Salary : Rs 5,000 p.m.(Rs 1,000 was increased w.e.f. 1.4.2014)
Dearness Allowance :Rs 3,000 p.m. (60% of which is for retirement benefits)
Commission : Rs 500 p.m.
Bonus : Rs 1,000 p.m.
Leave availed during service : 480 days
He was entitled to 30 days leave every year.

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Whatwill be the taxable leave salary assuming:
(a) He is a governmentemployee.
(b) He is a non governmentemployee.
Solution:
(a) He is a governmentemployee.
Leave Salary received at the time of retirement Rs 5,00,000
Less : Exemption undersection 10(10AA) Rs 5,00,000
Taxable Leave salary Nil
(b) He is a non-governmentemployee
Leave Salary received at the time of retirement Rs 5,00,000
Less : Exemptundersection 10(10AA)[See Note below] Rs 26,400
Taxable Leave Salary Rs 4,73,600
Exemption is least of the following:
1) Statutory Limit Rs 3,00,000
2) Leave encashmentamountactually received Rs 5,00,000
3) 10 months’ salary
{(5000*8)+(4000*2)+(60%of 3,000 *10)*10}/10 Rs 66,000
4) Cash equivalentto leave to the credit of employee at time of retirement
((20*30)- 480)*(6600/30) Rs 26,400
Providentfund: This is accumulated in the employee’s accountcomprises employee’s and
employer’s contribution plus interest accrual.This is totally tax-free.
The scheme ofProvident Funds implies compulsorysaving by the employees from their
salary every month. The contribution at some stipulated rate is deducted from the salary
by the employerwho is also generally obliged to contribute some amountto the fund

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simultaneously in addition to paying regularsalary. The combined amountis then
invested in gilt edged securities or remitted to Provident Fund Commissionerordeposited
in the bank to earn interest, which is again credited to the Provident Fund Accountofthe
employees.
Thus the Provident Fund Accountof any employee atany given time consists of the
employer’s contribution, employee’s contribution and interest on both. This money is
payable to the employee on his retirement or on his leaving of the service. In case of
death the amountstanding to his creditis paid to his legalheirs. Since the scheme is
connected with savings, it is natural for the governmentto come forward with incentives of
different kinds.The incentives concerning its tax liability are discussed here.
Types ofprovidentFunds:
Statutory ProvidentFunds :
Statutory providentfunds are managed and administered underthe Provident Funds Act,
1925.They are found in institutions like Universities, Localbodies and Governments
Departments. They are also known as GovernmentProvident Funds.
RecognizedProvidentFunds:
These funds are recognized bythe CommissionerofIncome-tax for purposes ofthe Act.
They are governed bythe rules contained in part A of the Fourth Schedule to the Income-
tax Act, 1961.Provident Fund governed bythe Provident Fund Act, 1952 is also known as
a Recognized ProvidentFund,RecognizedProvidentFund is found in banks,insurance
companies,manufacturing and trading concerns etc.operating in private sector.

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Unrecognized ProvidentFund :
They are notgranted recognition by the CIT and,therefore, these are known as
Unrecognized ProvidentFunds.
TransferredBalance: This is the balance standing to credit orthe employee in the
Unrecognized ProvidentFund on the date when it gets recognition for the first time. This
balance is automatically transferred from the UnrecognizedProvidentFund to the
Recognized ProvidentFund.
The amountof transferred balance is taxable to the extent of employer’s contribution and
interest thereon and is included in salary. The employee’s own contribution is ignored
because ithas been taxed throughoutas the fund was not recognized.
Approved Superannuation Funds :
Superannuation funds are created to give pension benefits to employees.They arc known
as approved if they are keptin accordance with the rules contained in part B of the Fourth
Schedule and approved bythe CIT. The scheme is sometimes contributory when the
employees are asked to contribute while at times only the employer may bearthe whole
burden.
a) As regards administration, the whole scheme maybe entrusted to the LIC wherein
periodicalpayments are made overand in return the Corporation undertakes to pay
annuities to the employees on retirement, cessation of service or on death. The annuity
may be paid annually,half yearly, ormonthly depending uponpreference ofthe
incumbent.

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b) The Superannuation Fund mayalso be administered privately by making trusts. In this
case contributions are invested by the trustees in approved securities and interest is
earned thereon.On the retirement etc., pensions are paid from this fund. Employee’s own
contribution to the fund will qualify for rebate of income-tax at 20% u/s 88.
Public ProvidentFund :
The Governmenthas instituted a Public Provident Fund Scheme underthe PPF Act,
1968,in orderto mobilize personalsavings.It provides a medium for long-term saving to
all sections of the community particularly self employed persons.Membership ofthe fund
is open to all individuals. Subscription during a year may range from a minimum of Rs.
100 to maximum of Rs. 60,000 and maybe made in the multiple of Rs. 5 in as many
installments as the subscriberchooses.Butnotmore than once in a month. Subscriptions
are received at all the offices and branches ofthe State Bank of India and its subsidiaries.
The scheme is in force with effect from July 1, 1968.The balance in this accountearns a
lax free interest at rates prescribed by the Governmentfrom time to time. One may get
back the amountanytime after 15 years form the end of the financial year in which the
accountis opened.The balance in the Public Provident Fund accountis not attachable,
a) An individual participating in the Public ProvidentFund is eligible for the same tax
concessions as are available to participants in GovernmentProvident Funds.Thus
contributions made to it qualify for rebate of tax u/s 88 along with savings through other
specified media,namely life insurance premium,CTD in Post Office etc., subjectto the
existing overall qualifying limits. Any amountreceived from the Fund is also exemptfrom

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income lax in the hands ofthe recipientin the same manneras in the case ofamounts
received from GovernmentProvident Funds,
b) In case the employee is compelled to resign on accountof circumstances created by
the employer,then such a resignation would for all practical purposes be regarded as
termination of service by the employer.Ratra v CIT (1986)161 ITR 251 (Raj), Refund
from RPF will, therefore, not be taxable in such cases even,when the employee leaves
employmentbefore completing five years.
Fringe Benefits and Perquisites
Perquisites are benefits or amenities in cash or kind provided by the employerto the
employee in addition to the salary. Section 17(2)of the Act defines the term ‘perquisite’
to include the following:
I.The value of rent free accommodation provided to the assessee byhis employer
(Section 17(2)(i)).
II.The value of concession in the matter of rentor accommodation provided to the assessee
by his employer(Section 17(2)(ii)).
III.The value of benefit or amenity granted or provided free of cost or at concessionalrate is
taxable only in the case of specified employees.
The following are specified employees:
a.A director employee.
b. An employee having substantial interest in the companyi.e. having beneficial ownership
of equity shares carrying 20% or more voting power.

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c.An employee drawing salary in excess of` 50,000.Here,salary means remuneration paid
in cash and taxable monetary benefits.
IV.Any sum paid by the employerin respectof any obligation, which otherwise would have
been payable by the employee (17(2)(iv)).
V.Any sum payable by the employer whetherdirectly or through a fund other than a
Recognized providentfund or approved superannuation fund or depositlinked insurance
Sure the fund or to life of the employee (17(2)(v)).
VI.The value of any specified security or sweatequity shares allotted or transferred, directly
Or indirectly, by the employer, or former employer, free of costor at concessionalrate to the
assessee.This is with effect from 1st April, 2010 (AY 2010-11).
VII.The amountof any contribution to an approved superannuation fund by the employerin
respectof the assessee,to the extent it exceeds `1,00,000.
VII.The value of any other fringe benefit or amenity (excluding the fringe benefits chargeable
To tax underChapterXII – H) as prescribed in Section (17(2)(vii).
Notes:
In determining the salary for the purpose ofvaluation of perquisites,the aggregate salaryfrom
more than one employermust be considered.
Valuation ofPerquisites
Rent-free accommodation or accommodation provided atconcessionalrates
(i) Accommodation provided bythe governmentto its employees:
Unfurnished accommodation:The value shall be the license fee determined by the Union or

MUstAfaAHMED ITI
State governmentin respectof accommodation in accordance with the rules framed by that
governmentas reduced bythe rent actually paid by the employee.
Furnished accommodation:The value shall be increased by10% of the cost of furniture
(including television sets, radio sets, refrigerators, other household appliances,air
conditioning plantor equipment)or if such furniture is hired from a third party, the actual
hire charges paid orpayable for the same.The valuation of furniture shall be reduced by
any charges paid orpayable for such furniture by the employee.
ii) Accommodation provided by any other employer:
Unfurnished accommodation:Table Belowdepicts the valuation of the perquisite if the
accommodation is provided by any other employer.
Nature of
Accommodation
City having population
exceeding25 lakh as
per 2001 census
City having
population between
10 & 25 lakh as per
2001 census
City having
population less than
10 lakh as per 2001
census
Accommodatio
n is the owned by
the employer 15 % off salary 10 % of salary 7.5% of salary
if the employer
takes
accommodation
on lease
Actual lease rentpaid or
15% of salary whichever
is less,reduuced bythe
rent paid by employee
Actual lease rentpaid
or 15% salary
whcheveris less
,reduced bythe rent
paid by employee
Actual lease rentpaid
or 15 % of salary
whiichever is less
reduced bythe rent
paid by employee
Furnishedaccommodation:
1. Calculate value of rent-free unfurnished accommodation as explained earlier.
2. Add the value of furniture of the following conditions:
i) If furniture is owned by employeradd 10% of costof furniture.

MUstAfaAHMED ITI
ii) If furniture is taken on hire, add actual hire charges borne bythe employer.
3. Add the amounts from steps 1 and 2 to get the value of rent free furnished accommodation.
The following is the method to valuate the accommodation provided atconcession to an
employee:
1. Calculate value of the accommodation provided free.
2. Deductthe amountof concessionalrentrecovered from the employee.
3. The difference between step 1 and step 2 will be the value of the perquisite.
(iii) Where the accommodation is provided in a hotel
The value of the accommodation will be 24%of the salary or the actual charges paid to
the hotel whicheveris lower, less the rent, actually paid or payable by the employee.
There will be no perquisite value if the accommodation is provided in a hotel if the following
two conditions are fulfilled:
I. Such accommodation is provided for a period notexceeding 15 days and
II.It has been provided on the transfer of the employee from one place to another.
Illustration :
Jalaja, a managerin Sparta Ltd., Bangalore is posted in Delhi. She is given accommodation
in a hotel for 13 days. The rentamounts to ` 34,300 (including service tax @12.36%). Her
salary is ` 5,2,500 permonth. Discuss the taxability of hotel rent reimbursed to her.
Solution:
As Jalaja is given hotel accommodation because ofhertransfer, and as herstay does not
exceed 15 days,the reimbursementis not taxable in her hands.

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If she had stayed longer,she would have to pay tax on 24% of hersalary for the period she
stayed at the hotel, or actual hotel expenses reimbursed,whicheveris lower. Salary for this
purpose includes basic pay,dearness allowance,commission and all taxable allowances.
Valuation of monetary obligation of the employee discharged bythe employer in the hands
of the employee
As discussed earlier,any monetary obligation of the employee discharged bythe employer,
which otherwise would have been payable by the employee,is considered as a perquisite
and is taxable. The value of these perquisites is the actual expenditure incurred bythe
employer. The following are examples ofperquisites:
I.Gas, electricity bill paid or reimbursed
II.Domestic servant(sweeper,gardener,watchman orpersonalattendant, cook,etc.)
III.Children’s education expenses paid orreimbursed
IV.Medical expenses reimbursedin excess of` 15,000
V.Income tax or professionaltax paid by the employer
Profit in Lieu of Salary
Section 17(3)defines ‘profit in lieu of salary’ to include:
1. The amountof compensation due to orreceived by an assessee from his employeror
former employerat or in connection with
a) Termination of employmentor
b) Modification of the terms and conditions of employment.
2.Any paymentdue to or received by the assessee from his employeror former employeror
from providentor any other fund or any sum received undera key man insurance policy

MUstAfaAHMED ITI
including the sum allocated by way of bonus on such policy. (It does notinclude exempt
payments from superannuation fund, gratuity, commuted pension,retrenchment
compensation,house rentallowance,employee’s contribution to PF and interest thereon).
1.Any amountdue to orreceived whetherin lumpsum orotherwise, by any assessee from
any person before his joining any employmentwith that person orafter cessation of his
employmentwith that person.
Tax-Free Perquisites
I.Medical facility or medicalreimbursement:The following are tax-free medicalperquisites:
First-aid medicalfacility: The value of any medicaltreatment provided to an employee
or any memberofhis family in a hospital, dispensaryor a nursing home maintained by
the employer
II.Medical reimbursement:Any sum paid by the employer in respectof any expenditure
incurred by the employee on his medicaltreatment or treatment of any memberof his family
subjectto maximum of ` 15,000 in the previous year.
III.Food and beverages provided to employees:The following are tax-free perquisites in
the hands ofthe employees.
Any foods or beverage provided by the employer to his employees in the office or factory
Any foods or beverage provided by the employer to his employees through paid vouchers
which are nottransferable and usable only at eating joints, up to ` 50 per meal
Recreationalfacilities
Loans to employees

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Perquisites provided outside India
Training of employees
Accommodation in a remote area
Use of health club,sports and similar facilities provided by the employerto his employee.
Use by the employee or any memberofhis household oflaptops and computers belonging
to the employeror hired by him.
Leave travel concession subjectto limits specified
The premium paid by the employeron an accidentpolicy taken out by it in respectof the
Employee
Computation ofNetSalary ofan Employee
Particulars Amount(Rs)
Basic Salary
Fees Commission and Bonus
Allowances
Perquisites
Retirement Benefits
-------------------
Gross Salary -------------------
Less:Deductions from Salary
Standard Deduction
Entertainment Allowance
Professional Tax

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-------------------
Net Salary -------------------
Example 1.ForAssessmentYear 2014-15 calculation ofincome tax in the case of
an employee belowage of sixty years where medicaltreatment expenditure borne
expenditure was borne by the employer( With valid PAN furnished to employer).
S.No. Particulars Rupees
1 Gross Salary 4,00,000
2 MedicalReimbursementby employeron the treatment of self and 35,000
dependentfamily member
3 Contribution of GPF 20,000
4 LIC Premium 20,000
5 Repaymentof House Building Advance 25,000
6 Tuition fees for two children 60,000
7 Investment in Unit-Linked Insurance Plan 20,000
Computation oftotalincome andtax payable thereon
1 Gross Salary 400,000
Add: Perquisite in respectof reimbursementofMedical
Expenses In excess ofRs.15,000/- in view of Section 17(2)(v)
20,000
2 Taxable income 420000
Less: Deduction U/s 80C(i) GPF Rs.20,000/-(ii)LIC Rs.20,000/-
(iii) RepaymentofHouse BuildingAdvanceRs.25,000/-
(iv) Tuition fees for two children Rs.60,000/-
(v) Investment in Unit-Linked Insurance PlanRs.20,000/-

MUstAfaAHMED ITI
Total=Rs.1,45,000/-Restricted to Rs. 1,00,000/-
3 TotalIncome 320000
4 Income Tax thereon/payable 10000
Add: (i). Education Cess @2% 200
(ii). Secondaryand HigherEducation Cess @1% 100
5 TotalIncome Tax payable 10300
6 Rounded offto
Example 2
ForAssessmentYear 2014-15
Illustrative calculation of House RentAllowance U/s 10 (13A)in respect
residental accommodation situated in Delhi in case of an employee belowthe age
of sixty years (With valid PAN furnished to employer).
1 Salary 2,50,000
2 Dearness Allowance 1,00,000
3 House RentAllowance 1,40,000
4 House rentpaid 1,44,000
5 GeneralProvident Fund 36,000
6 Life Insurance Premium 4,000
7 Subscription to Unit-Linked Insurance Plan 50,000
Computation oftotalincome andtax payable thereon

MUstAfaAHMED ITI
1
Salary + Dearness Allowance + House RentAllowance
2,50,000+1,00,000+1,40,000 = 4,90,000 490000
2 TotalSalary Income 490000
Less: House Rentallowance exemptU/s 10(13A):Leastof:(a).Actual
amountof HRA received= 1,40,000
(b). Expenditure of rent in excess of10% of salary (including D.A. presuming
that
D.A. is taken for retirement benefit) (1,44,000-35,000) = 1,09,000
(c). 50% of Salary(Basic+ DA)= 1,75,000
Gross TotalIncome 381000
Less: Deduction U/s 80C(i) GPFRs.36,000/-(ii)LICRs.4,000/- Rs.4,000
(iii) Investment in Unit-Linked Insurance Plan Rs.50,000/- 90000
Total=Rs.90,000/-
3 TotalIncome 291000
Tax payable on total income 7100
Add: (i). Education Cess @2% 142
(ii). Secondaryand HigherEducation Cess @1% 71
Total Income Tax payable 7313
Rounded offto 7330
Income from House Property
Rental income from a property being building or land appurtenantthereto of which the taxpayer
is owneris charged to tax underthe head 'Income from house property'.This is taxed in the
hands ofthe ownerof the property.
Rental income ofa person otherthan the ownercannotbe charged to tax underthe head
'Income from house property'. Hence,rental income received by a tenant from sub-letting

MUstAfaAHMED ITI
cannotbe charged to tax underthe head 'Income from house property'. Such income is
taxable underthe head 'Income from other sources' orprofits and gains from business or
profession,as the case may be.
RentalIncome ofa Shop: Shop being a building,rental income will be charged to tax under
the head 'Income from house property'.
Deemed Owner
In the following cases a person may notbe the registered ownerof the property, buthe will be
treated as the owner(i.e., deemed owner)ofthe property and rental income from property will
be charged to tax in his hands:
1.If an individual transfers his or herhouse propertyto his/her spouse (notbeing a transfer
in connection with an agreementto live apart) or to his/herminor child
(not being married daughter)without adequate consideration,then the transferor will be
deemed as ownerofthe property.
2. Holderof impartible estate is deemed as the ownerof the property comprised in the estate.
A memberofco-operative society, companyorother association of persons to whom a
3.building (or partof it) is allotted or leased underhouse building scheme ofthe society,
companyorassociation,as the case may be, is treated as deemed ownerofthe property.
4.A person acquiring propertyby satisfying the conditions of section 53Aof the Transfer
of Property Act, will be treated as deemed owner(although he maynot be the registered

MUstAfaAHMED ITI
owner).Section 53Aof said Act prescribes following conditions:
1. There must be an agreementin writing.
2. The purchase consideration is paid or the purchaseris willing to pay it.
3. Purchaserhas taken the possession ofthe property in pursuance ofthe agreement.
In case of lease of a property for a period notless than 12 years (whetheroriginally fixed
or provision for extension exists), lessee is deemed to be the ownerof the property.
However, any right by way of lease from month-to-month or for a period notexceeding
one year is not covered by this provision.
Composite Rent
When apartfrom recovering rent of the building, in some cases the ownergets rentof other
assets (like furniture) or he charges fordifferent services provided in the building (for instance,
charges for lifts, security, air conditioning,etc.). The amountso recovered is known as
'composite rent'.
The composite rent is to be bifurcated and the sum attributable to the use of property will be
charged to tax underthe head 'Income from house property' and charges forvarious services
will be charged to tax underthe head 'Profits and gains of business and profession' or'Income
from other sources' (as the case may be).
If letting outof building and letting out of other assets are non-separable (i.e.,both the lettings
are composite and notseparable),entire rentis taxed underthe head 'Profits and gains of
business orprofession' or'Income from other sources'.
Computation ofAnnualValue

MUstAfaAHMED ITI
Gross annualvalue of a property is determined in the following manner:
1. Compute reasonable expectedrentofthe property
Reasonable expected rentwill be higherof the following:
I. Municipalvalue of the property (Forcollection of municipaltaxes, local authorities make
periodic survey of all buildings in their jurisdiction. Such value determined by the
municipalauthorities in respectof a property, is called as municipalvalue of the property.)
II. Fair rentof the property (Fair Rent is the reasonable expected rentwhich the property
can fetch. It can be determined on the basis of rent fetched by a similar property in the
same or similar locality.)
If a property is covered underRentControl Act, then the reasonable expected rentcannot
exceed standard rent.Standard Rentis the maximum rent which a person can legally
recoverfrom his tenant underthe RentControl Act. Standard rent is applicable only in
case of properties covered underRentControl Act.
2.Compute actualrentofthe property
Actual rentmeans the rent for which the property is let out during the year. While computing
actual rent, rent pertaining to vacancy period is notto be deducted.However, unrealized
rent* is to be deducted from actual rentif conditions specified in this regard are satisfied.
* Unrealised rentis the rent of the property which the ownerof the property could notrecover
from the tenant, i.e., rent not paid by the tenant. If following conditions are satisfied, then
unrealised rentis to be deducted from actual rentof the year:

MUstAfaAHMED ITI
1. The tenancy is bona fide.
2.The defaulting tenant has vacated the property, or steps have been taken to compel
him to vacate the property.
3. The defaulting tenant is notin occupation of any other property of the taxpayer.
4. The taxpayer has taken all steps to recoversuch amount,including legal proceedings
or he satisfies the Assessing Officer that legalproceedings would be useless.
3. Compute gross annualvalue
Out of sum computed above,any loss incurred due to vacancyin the house propertyshall
be deducted and the remaining sum so computed shallbe deemed to be the gross annual
value.
(If however,the RentControl Act is applicable,the G.A.V. is the standard rent orrent received,
whicheveris higher).
Computation ofgrossannualvalue in the case ofa property which is vacantfor some
time during the year
Where the property or any part of the property is let and was vacantduring the whole or any
part of the previous year and owing to such vacancythe actual rent received or receivable by
the ownerin respectthereof is less than the reasonable expected rentthan the actual rentso
received or receivable (as reduced bythe vacant allowance)shallbe considered to be the
Gross AnnualValue of the property.
It may be noted that if the let outproperty was vacantfor whole or any partof the previous year
and owing to such vacancythe actual rent received or receivable is less than the sum referred

MUstAfaAHMED ITI
to in clause (a) above,then the amountactually received/receivable shallbe taken into account
while computing the G.A.V. If any portion of the rentis unrealisable,(condition ofunrealisability
of rent are laid down in Rule 4 of I.T. Rules) then the same shall notbe included in the actual
rent received/receivable while computing the G.A.V.
Net AnnualValue (N.A.V.) is the G.A.V. less the municipaltaxes paid by the owner.Only
municipaltaxes paid by the ownerduring the year can be deducted.Hence,municipaltaxes
due butnot paid during the year cannotbe deducted ortaxes borne by the tenantcannotbe
deducted.
AnnualValue is the N.A.V. less the deductions available u/s 24.
Deductions available
1. Deduction undersection 24(a)@ 30% of Net AnnualValue.
2.Deduction undersection 24(b)on accountofinterest on capital borrowed for the purpose
of purchase,construction,repair,renewalor reconstruction of the property.
The provision in this regard are as follows :
Interest is classified as pre-construction period interest and postconstruction period interest.
Post-constructionperiodinterest is the interest pertaining to the relevant year (i.e., the
year for which income is being computed). Pre-construction period is the period
commencing from the date of borrowing ofloan and ends on earlier of the following:
Date of repaymentof loan; or
31stMarch immediately prior to the date of completion of the construction/acquisition of
the property.

MUstAfaAHMED ITI
Interest pertaining to pre-construction period is allowed as deduction in five equalannual
instalments, commencing from the year in which the house propertyis acquired or
constructed. Thus,total deduction available to the taxpayer undersection 24(b)on account
of interest will be 1/5th of interest pertaining to pre-construction period (if any) + Interest
pertaining to postconstruction period (if any).
Deduction in case oflet-outproperty
Deduction under section 24(b)for interestaccrued on loan taken for the purpose of
purchase,construction,repair,renewalor reconstruction of the property is available without
any limit.
Municipaltaxes including service-taxes levied by any local authority in respectof house
property is allowed as deduction,if:
1. Taxes are borne by the owner;and
2. Taxes are actually paid by him during the year.
Deduction in case ofSelfoccupied property
A self-occupiedproperty means a propertyowned by the taxpayer which is occupied
throughoutthe year by the ownerfor the purposes ofhis own residence and is not actually
let out during the whole or anypart of the year. Thus, a property notoccupied bythe owner
for his residence cannotbe treated as a self occupied property. However, there is one
exception to this rule. If the following conditions are satisfied, then the property can be
treated as self-occupied and the annualvalue of a property will be 'Nil', even though the
property is notoccupied bythe ownerthroughoutthe year for his residence:

MUstAfaAHMED ITI
1. The taxpayer owns the property;
2.Such property cannotactually be occupied byhim owing to his employment,
business orprofession carried on at any other place and he has to reside at that
other place in a building not owned byhim;
3. The property mentioned in (a) above (or part thereof) is not actually let out at any time
during the year;
4. No other benefit is derived from such property.
In case of a self occupied property, the limit for deduction is Rs. 2,00,000 (w.e.f. 01.04.2015
Earlier Rs. 150,000/-)orRs. 30,000,as the case maybe.
If all the following conditions are satisfied, then the limit in respectof interest on borrowed
capital will be Rs.2,00,000/-:
1. Capital is borrowed on or after 1-4-1999.
2. Capital is borrowed for the purpose ofacquisition or construction (i.e., not for repair,
renewal,reconstruction).
3. Acquisition or construction is completed within 3 years from the end ofthe financial
year in which the capital was borrowed.
4. The person extending the loan certifies that such interest is payable in respectof the
amountadvanced for acquisition or construction of the house oras re-finance of the
principal amountoutstanding underan earlier loan taken for acquisition orconstruction
of the property.
If any of the above condition is not satisfied, then the limit will be reduced to Rs. 30,000.

MUstAfaAHMED ITI
In case of a self occupied property, deduction underSection 24(a)(30% of Net Assett
Value)and deduction for municipaltaxes is not avilable.
Deduction for intereston housingloan [Section 80EE]:
One time deduction of up to Rs. 1 Lakh shall be allowed to an individual for the interest
incurred on loan taken for residential house property subjectto the following conditions:
1.Loan is sanctioned during the financial year 2013-14,i.e.,between 01-04-2013 to
31-03-2014;
2. Loan is taken from a financial institution (a bank or house finance company);
3. Amountof loan sanctioned for acquisition of house property does notexceed Rs.25 Lakhs;
4. The value of residential house propertydoes notexceed Rs.40 Lakhs;and
5. The assessee does notown any residential house propertyon the date of sanction of loan.
Illustration :
Mr. X has gotthe following details in respectof income from house property during
financial 2016-17 (AssessmentYear 2017-18):-
Rent received Rs.240000/=
Property tax paid Rs.25000/=
Insurance of building Rs.5000/=
Interest paid on borrowed capitalRs.60000/=
Calculate the income from house property?
Solution:
COMPUTATIONOF
INCOME FROM HOUSE

MUstAfaAHMED ITI
PROPERTY
Rent Received (Annual
Value) 240000
Less: Property Tax paid 25000
Net AnnualValue 215000
Less: Standard
Deduction @ 30% 64500
(Forrepairetc.)
Less: Interest on
borrowed capital 60000 124500
Income from House
Property 90500
Note: Insurance expenses willnot be allowed as deduction againstincome from house
property.
Some Points on Loss from House Property
Now when we see the formula then we can see if interest is more than the annualrental income
municipaltaxes – 30% of annualrentalincome then income from house propertycan be
negative. But if let out renton house propertyis more than interest then there will be
income from house property.In case of self occupied propertyannualrental value is zero and
any amountof interest on borrowed capital will have negative effect in income from house
property calculation.
Other points
Interest on house propertyis deductible on due basis it is notnecessarythat it must be paid.

MUstAfaAHMED ITI
When the loan was taken during the construction of house then it is possible amountof tax
was due in construction period also. This interest which was occurred during the construction
period can be claimed in equalinstallments within 5 years immediately after the house
is completed.
Conclusion
House property can be a big factor while calculating your income for tax. This negative income
can reduce yourtax liability and more over you get a house ofyour own.So I suggestevery
one musttake home loan to acquire a house propertyif necessaryit will reduce your tax liability.
Profits and gains ofany business or profession
Any compensation orother payments due to or received by any person specified in
section 28 of the Act Income derived by a trade, profession orsimilar association from
specific services performed for its members
Profit on sale of importentitlement licences,incentives by way of cash compensatory
supportand drawback ofduty
The value of any benefit or perquisite, whetherconverted into moneyor not, arising from
Business Any interest, salary, bonus,commission,orremuneration received by a
Partner of a firm from such a firm
Any sum whether received or receivable in cash orkind, underan agreementfor not
carrying outany activity in relation to any business ornotto share any know-how,patent,
copyright, franchise,or any other business orcommercialrightof similar nature or technique
likely to assist in the manufacture or processing ofgood

MUstAfaAHMED ITI
Any sum received undera keyman insurance policy
Income from speculative transactions.
In the following cases,income from trading or business is nottaxable underthe head "profits
and gains of business orprofession":-
Rent of house propertyis taxable underthe head " Income from house property". Even if the
property constitutes stock in trade of recipientof rent or the recipientof rentis engaged in
the business ofletting properties on rent.
Deemed dividends on shares are taxable underthe head "Income from other sources".
Winnings from lotteries, races etc. are taxable underthe head "Income from other sources".
Profits and gains of any other business are taxable,unless such profits are subjected to
Exemption.Generalprincipals governing the computation of taxable income underd "profits
And The head ‘’profits and gains ofbusiness or profession:-
Business orprofession should be carried on by the assessee.It is notthe ownership of
business which is important , but it is the person carrying on a business orprofession,
who is chargeable to tax.
Income from business orprofession is chargeable to tax underthis head only if the business
or profession is carried on by the assessee atany time during the previous year.
his income is taxable during the following assessmentyear.
Profits and gains ofdifferent business orprofession carried on by the assessee are not
separately chargeable to tax i.e. tax incidence arises on aggregate income from all
businesses orprofessions carried on bythe assessee.But, profits and loss of a speculative
business are keptseparately.
It is not only the legalownership butalso the beneficial ownership that has to be considered.

MUstAfaAHMED ITI
Profits made by an assessee in winding up of a business orprofession are not taxable, as
no business is carried on in that case.However,such profits may be taxable as capital gains
or as business income,ifthe process ofwinding up is such as to involve the carrying on of
a trade.
Taxable profit is the profit accrued orarising in the accounting year. Anticipated or potential
profits or losses,which may occurin future, are notconsidered forarriving at taxable income.
Also, the profits, which are taxable, are the real profits and notnotional profits. Real profits
from the commercialpointof view, mean a gain to the person carrying on the business .
The yield of income by a commercialassetis the profit of the business irrespective of the
mannerin which that assetis exploited by the ownerof the business.
Any sum recovered by the assessee during the previous year, in respectof an amountor
expenditure which was earlier allowed as deduction,is taxable as business income ofthe
year in which it is recovered.
Modes ofbook entries are generally not determinative of the question whether the assessee
has earned anyprofit or loss.
The Income tax act is notconcerned with the legality or illegality of business orprofession.
Hence,income ofillegal business orprofession is not exemptfrom tax.
BASIS OF CHARGE [Section 28]:
Under section 28, the following income is chargeable to tax under the head “Profits and gains
of business or profession”:
a. a.Profits and gains ofany business or profession;
b.Income derived by a trade, professional or similar association from specific services

MUstAfaAHMED ITI
performed for its members;
c.The value of any benefit or perquisite, whether convertible into money or not, arising from
business or the exercise ofa profession;
d. Export incentive available to exporters;
e. Any interest, salary, bonus, commission or remuneration received by a partner from firm;
f. Any sum received for notcarrying outany activity in relation to any business or notto share
any know-how, patent, copyright, trademark, etc.;
g. Any sum received under a Keyman insurance policy including bonus;
h. Profits and gains ofmanaging agency;
i. Income from speculative transaction etc
RENT, rates, taxes, repairs and insurance for building [Section 30]:
Under section 30, the following deductions are allowed in respectofrent, rates, taxes,
repairs and insurance for premises used for the purpose ofbusiness or profession:
a.the rentof premises, the amountofrepairs (notbeing capital expenditure), ifhe has
undertaken to bear the costofrepairs (this is applicable ifthe assessee has occupied the
property as a tenant);
b. the amountof currentrepairs (notbeing capital expenditure) (ifthe assessee has
occupied the premises otherwise than as a tenant);
c.any sum on accountofland revenue, local rates or municipal taxes; and
d. amount of any premium in respect of insurance against risk of damage or destruction of the
premises.
D DEPRECIATION ALLOWANCE [Sec. 32]:

MUstAfaAHMED ITI
Following conditions mustbe satisfied to avail depreciation:
1. Asset mustbe owned by the assessee.
2. Asset mustbe used for the purpose ofbusiness or profession.
3. Asset should be used during the relevant previous year: Normal depreciation (i.e., full
year’s depreciation) is available if an assetis putto use atleast for sometime during the
previous year. However, where an assetis acquired during the previous year butputto use for
for the purpose of business or profession for less than 180 days during that year, in such a
case, halfof the normal depreciation is allowed
4.Depreciation is available on tangible assets (Building, machinery, plantor furniture) as
well as intangible assets(know-how, patents, copyrights, trademarks, licenses, franchises
or any other business or commercial rights ofsimilar nature). However, it mustbe noted that
the intangible assets mustbe acquired after March 31, 1998.
If all the above conditions are satisfied, depreciation is available (it is a must, it is notat the
option of the assessee to claim or notto claim, depreciation in such cases).
Basis concepts for computation of depreciation allowance:
1. Block of Assets:
The term “block of assets” means a group ofassets falling within a class ofassets in
respectofwhich the same percentage ofdepreciation is prescribed. A taxpayer may have
13 different block ofassets (outof which 12 blocks are for tangible assets and 1 block is for
intangible asset). These blocks are given below:
Number Nature of asset ROD
Block 1 Buildings: Residentialbuildingsotherthan hotels and boarding
Houses
5%
Block 2 Buildings: Office, factory, godowns or buildings which are not
mainly used for residential purpose [itcovers hotels and boarding
10%

MUstAfaAHMED ITI
houses butdoes notcover those which are covered under blocks
1 and 3]
Block 3 Purely temporary erections such as wooden structures 100%
Block 4 Furniture: Any furniture/ fittings including electrical fittings 10%
Block 5 Plant and machinery: Any plantand machinery (notcovered by
block 6, 7, 8, 9, 10, 11 or 12), motor cars (other than those used
in a business ofrunning them on hire) acquired orputto use on or
after April 1, 1990
15%
Block 6 Plant and machinery: Ocean-going ships, vessels ordinarily
operating on inland waters including speed boats
20%
Block 7 Plant and machinery: Buses, lorries and taxis used in the
business ofrunning them on hire (applicable only when the
assessee is in the business ofhiring outits/ his buses, lorries or
taxis), machineryused in semi-conductorindustry, moulds used in
rubber and plastic goods factories and life saving medical
equipment
30%
Block 8 Plant and machinery: Aeroplanes 40%
Block 9 Plant and machinery: Containers made of glass or plasticused
as re-fills
50%
Block 10 Plant and machinery: Computers including computer software. It
also includes books (other than annual publications) owned by a
professional. It also includes gas cylinders; plant used in field
operations by mineral oil concerns; directfire glass melting
furnaces
60%
Block 11 Plant and machinery: Energy saving devices; renewal energy
devices; rollers in flour mills, sugar works and steel industry
80%
Block
12
Plant and machinery: Air pollution control equipments;
water
100%

MUstAfaAHMED ITI
pollution control equipments; solid waste control
equipments,
recycling and resource recovery systems; cinematograph
films,
bulbs of studio lights; wooden match frames; and books
(being
annual publications) owned by assesses carrying on a
profession
or books (mayor may not be annualpublications)owned by
a
person carrying on business in running lending libraries
Block
13
Intangible assets (acquired after March 31,1998):Know-
how,
25%
patents, copyrights, trademarks, licenses, franchises and
any
other business or commercial rights ofsimilar nature
2.Written down value/ Depreciated value:
WDV atthe year end
= WDV ofthe block on the 1st day ofthe previous year
Add: Actual cost of the asset(falling in the block) acquired during the previous year
Less: Money received/ receivable* (together with scrap value) in respectofthatasset(falling
within the block ofassets) which is sold, discarded, demolished or destroyed during the
previous year .
(* It does mean gross consideration. Itis netconsideration after excluding expenditure
incidental to sale. Further, here actual money received or receivable in cash or by cheque or
draft is deductible. In other words, any other things or benefit which can be converted in

Mustafa ahmed project report on income tax of india

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Mustafa ahmed project report on income tax of india