TAX -1

(Computation of Total Taxable Income of an Individual)

Semester – V
B. Com Regular

Student Workbook

Edition: 2021
#44/4, District Fund Road, Behind Big Bazaar, Jayanagar 9th Block, Bengaluru, Karnataka 560069

V SEMESTER

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Program: B.Com Semester: V
Subject: TAX - I
Total Lecture Hours: 60 Credits: 04
Course Objectives
1. Provide the regulatory outline under which the direct law functions.
2. Inculcate the practice of applying tax concepts for practical scenarios.
3. Provide knowledge of concepts that can be applied to day-to-day lifestyle while
calculating taxable income for any natural person.
4. Unify the students to solve problems on the application of Tax Provisions available.
5. Extend the pros of tax planning for efficient decision making.
Module – 1: Introduction to Taxation 14 hours
Brief history of Indian Taxation – Legal Frame work – Cannons of Taxation – Finance Bill
– Scheme of Income Tax- Meaning of Assessee – Person – Assessment year – Previous
year – Income – Gross Total Income – Total Income- Agricultural income- Capital and
Revenue- Residential Status and Incidence of Tax on individual- Exempted Incomes.
Income tax authorities: CBDT – powers and functions; Commissioner of Income Tax –
powers and functions; Types of assessment and rectification of mistakes; Recovery of tax
and refunds. Time limits for the submission of information, claims and payment of tax,
penalties for non-compliance – Tax planning
Module-2: Income from Salary 14 hours
Basic Salary- Allowance - Types – Perquisites – Types section 89(1) – Tax Rebate U/S 88
- Problems. (Restricted to Individual Assessee) Allowance – Leave Encashment – Pension
–Gratuity – Perquisites compensation received on termination of the service.
Module-3 : Income from House Property 12 hours
Introduction – Annual value under different situations (self-occupied – Let out – Partly
self-occupied partly let out – Portion wise and time wise) – Deductions (u/s 24) –
Problems.
Module – 4: Income from Capital Gains - 10 hours
Meaning and kinds of capital asset, transfer, transactions not regarded as transfer, full
value of consideration, cost of acquisition, cost of improvement, capital gains exempt
from tax, exemptions from capital gains u/s 54. Problems on computation of short term
and long-term capital gains.
Module -5: Income from Other Sources 10 hours
General income, specific incomes, treatment of specific incomes, deduction of tax at
source with respect to interests, winnings, prizes etc. Problems on computation of taxable
income from other sources and deduction u/s 57 and amounts expressly disallowed u/s
58.
Course Outcomes
1. Elaborate the outline to the students with basic principles underlying the provisions of
direct tax laws and to develop a broad insight of the tax laws and accepted tax practices.
2. Apply basic tax concepts to simple fact situations relating to salary head and
communicate potential income tax ramifications in writing and orally.
3. Students of the course will be able to explain different concepts of income from house
property and their taxability and expenses and their deductibility and will be able to learn
their implication in practical situations.
4. Summarize the scope of charges and explain different exemption under capital gains
5.Examine different types of income under other source head and their taxability,
expenses ,deductibility and their implication in practical situations.

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 .
Reference Books
1. Vinod K Singhania. and Monica Singhania, Students’ Guide to Indirect Taxes, Taxmann
Publications Pvt. Ltd., Delhi. – 2020.
2. Swamynathan. C, Abhirami.D, Srinivas. G, Income tax – Kalyani Publications –
Bangalore. – 2020.
3. B.B. Lal Income Tax Law and Practice. Konark Publications, New Delhi. B.Com Program
CBCS Department of Commerce, University of Delhi, Delhi . – 2020.
4. Dr. Mehrora and Dr. Goyal: Direct taxes – Law and practice, Taxmann publication. –
2020.
5. Gaur and Narang: Income Tax – 2020.

Income Tax Slab Rate for AY 2022-23 for Individuals:

Individual (resident or non-resident), who is of the age of less than 60 years on
the last day of the relevant previous year:

Net income range Income-Tax rate

Up to Rs. 2,50,000 Nil
Rs. 2,50,000- Rs. 5,00,000 5%
Rs. 5,00,000- Rs. 10,00,000 20%
Above Rs. 10,00,000 30%

Resident senior citizen, i.e., every individual, being a resident in India, who is of
the age of 60 years or more but less than 80 years at any time during the previous
year:

Net income range Income-Tax rate

Up to Rs. 3,00,000 Nil
Rs. 3,00,000 – Rs. 5,00,000 5%
Rs. 5,00,000- Rs. 10,00,000 20%
Above Rs. 10,00,000 30%

Resident super senior citizen, i.e., every individual, being a resident in India, who
is of the age of 80 years or more at any time during the previous year:

Net income range Income-Tax rate

Up to Rs. 5,00,000 Nil
Rs. 5,00,000- Rs. 10,00,000 20%
Above Rs. 10,00,000 30%

Plus:-
➢ Health and Education cess: - 4% of income tax and surcharge.

➢ Surcharge: -

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 Rs. 50 Lakhs to Rs. Rs. 1 Crore to Rs. 2 Rs. 2 Crores to Rs. 5 Rs. 5 crores to Rs. 10 Exceeding Rs. 10
1 Crore Crores Crores Crores Crores

10% 15% 25% 37% 37%

Note: - A resident individual is entitled for rebate under section 87A if his total
income does not exceed Rs. 5, 00,000. The amount of rebate shall be 100% of
income-tax or Rs. 12,500, whichever is less.

Module – I

INTRODUCTION

Tax is levied by the government to form a pool of resources to be used for the collective
benefit of the public. Taxes collected would be used by the government for public welfare
programs, maintenance of law and order in the country, running public sector
undertakings etc.
There are two types of taxes – Direct and Indirect. Direct tax is a type of tax where the tax
is imposed on a person and it is paid by the same person. That means the incidence and
the impact of tax are on the same person.

OBJECTIVES OF THIS MODULE:

1. To understand the basic concepts of tax.
2. To know various terminologies used.
3. To give a clear idea about, how individuals are treated under taxing system.
4. To be familiar with the authorities related to income tax and their functioning.

1.Brief History of Income Tax:

The concept of income tax was introduced in India for the first time by Sir James
Wilson in the year 1860 in order to recover the expenditure incurred by the Government
on account of Sepoy Munity in 1857 (First war of Indian Independence). Thereafter
several amendments were made in 1918, 1921 etc. In 1961, based on the
recommendation of the Direct Tax Committee and in consultation with the Law Ministry
a Bill was framed and introduced in the Parliament on 1st September 1961 and the same
came to force with effect from 1st April 1962.
The comprehensive Income Tax Act 1961 includes 14 section and sub section
running into thousands and many amendments which were made since 1961. Finance
minister presents budget every year in the parliament with a view to change rates and
laws of income tax if any needed in the interest of the nation building.
Income tax is levied by the Central Government and administered by Central
Board of Direct Taxes (CBDT). Income tax shall be levied only on those persons whose

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 income exceeds certain limit. Total tax revenue collected by the Central Government is
shared by Central and State Government on the basis of recommendation of finance
commission.

1.2 Legal framework:

Income tax is a direct tax. It is levied and collected from the public who have income
more than the exempted limit for a given financial year. Income tax is a central subject
and it is levied, collected, administered, regulated and monitored by the Central Board
of Direct Taxes (CBDT) under the Ministry of Finance, Government of India. The scope
of Income tax subject covers the following aspects. Viz
1. Income Tax Act,1961 (Bare Act – subjected to many amendments from time to time till
date)
2. Income Tax Rules 1962
3. Finance Act (passed in the Parliament every year)
4. Judicial pronouncements relating to various issues in Income Tax.

1.3 Tax:

It is compulsory levy under certain conditions and it is meant for the general purposes of
the state.

1.3.1 Features of tax:

1) It is compulsory payment to be paid by the citizens who are liable to pay it, hence refused
to pay tax is a punishable offence.
2) It is levied to meet public expenditure incurred by the government in the common
interest of the nation.
3) The payment of tax by a person does not entitle him to receive any direct benefits from
the government in return for the tax.
4) There is no direct relationship between the tax paid by the person and the benefits that
he may receive as a result of government expenditure.
5) It has to be paid regularly and periodically as determined by the tax authority.

1.3.2 Types of taxes:

1) Direct Taxes: It is a kind of tax where in incidence and impact is on the same person.
‘Incidence’ means liability to pay tax to the Government and
‘Impact means burden of paying the tax.
E.g. Income Tax, Wealth Tax, Property Tax etc.
Customs Duty, GST
Difference between Direct tax and Indirect Tax

Particulars Direct Tax Indirect Tax

Meaning It is a kind of tax where in It is a kind of tax where in
incidence and impact is on the ‘incidence’ and ‘impact’ is on two
same person. different persons.
Nature of Tax Progressive in nature. Regressive in nature.

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 Taxable event Taxable income of the Purchase/Sale/Manufacture of
Assessee goods and or rendering of services.
Levy and Levied and collected from the Levied and collected from the
Collection Assessee. consumer but paid or deposited to
the exchequer by the Assessee or
Dealer.
Shifting of Tax burden is borne by the Tax burden is shifted to the
Burden person on whom it is levied. subsequent or ultimate user.
Hence, the burden cannot be
shifted.
Tax Collection Tax is collected on the income At the time of sale or purchase or
for a year is earned. rendering of services.
Examples Income Tax, Wealth Tax, Excise Duty, Customs Duty, Sales
Property Tax etc. Tax, Service Tax etc.
1.3.3. Principles or Canons of taxation:

1) Canon of Equality:
According to this canon taxes imposed should be in accordance with an individual’s
ability to pay. That is it should be impartial and based on one’s ability to pay.

2) Canon of Certainty: The amount to be paid, the time and the method of payment should
be clear and certain for the tax payers to adjust his/her income and expenditure
accordingly.

3) Canon of Convenience: This canon says that the time of payment and the manner
payment should be convenient to the tax payer.

4) Canon of Economy: Every tax involves a collection cost. It is important that the cost of
collection should be the minimum possible. The tax is economical, in the sense that the
cost of collection is very small.

5) Canon of Productivity: The tax system should sufficiently yield the revenue needed to
meet the requirements of the state. Productivity again means that the government should
not depend upon deficits.

6) Canon of Elasticity: Elasticity is closely connected with fiscal adequacy. This canon
implies that yield from taxation should grow along with increase in population and
development of economy.

7) Canon of Simplicity: Calculation of taxable income and taxable liability should be simple
and understandable to the tax payer.

8) Canon of Flexibility: Income tax authorities should revise the tax structure at the right
time in order to meet the changing needs of the economy.

1.4 BASIC TERMINOLOGIES UNDER INCOME TAX:

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 1.4.1. Income Tax:

It is a tax on the income earned by an assessee during the previous year and the tax is
payable in the assessment year at the rates prescribed by the relevant Finance Act. It is a
tax levied by the Central Government on the income earned by an assessee every year.

1.4.2. Assessment U/S 2(8):

According to section 2(8) of Income Tax Act, 1961 the term assessment means-
1) Computation of total income or taxable income
2) Computing the tax on the income and
3) Imposition of tax liability
1.4.3. Assessment Year U/S 2(9):

Assessment year is defined as “the period of twelve months starting from 1st of April and
ending of 31st March every year”. The current Assessment year is 2022-23.

1.4.4. Previous Year U/S 2 (34)

It is the financial year immediately preceding the Assessment year. In other words, the
year in which income is earned is known as previous year. The previous year for the
assessment year 2022-23 is 2021-22.

1.4.5. Difference between Previous year and Assessment year

Previous year Assessment year

The year in which income is earned. The year in which the income of the
previous year is assessed to tax.

It always precedes the assessment year. It always succeeds the previous year.
It may be either a full year or part of the It is always a full year
year.
The present previous year is 2021``-22. The present assessment year is 2022-23.

1.4.6. Exception to the General Rule Previous Year:

Normally all the incomes of the P.Y are assessed to tax in the A.Y. But there are certain
exceptions to this rule. In these cases, the income of a financial year is assessed to tax in
the same year. They are:
1) Sec. 172 – Income of non-resident from shipping business.
2) Sec. 174 – Income of persons leaving India either permanently or for a long period of time.
3) Sec. 174 (A) – Income of bodies formed for short duration.
4) Sec. 175 – Income of a person trying to transfer his/her assets to avoid the payment of
tax.
5) Sec. 176 – Income of a discontinued business.

1.4.7. Assessee U/Sec 2(7):

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 An assessee means a person by whom any tax or any other sum is payable under the
Income Tax Act of 1961, it includes:
a) Every person in respect of whom any proceeding under this Act has been taken for the
assessment of income or any refund due to him or to such other person.
b) Deemed Assessee.
c) Deemed Assessee in default.

1.4.7(1) Deemed Assessee:

A person may be liable not only for his own income but also on the income of other
persons. A person who is liable to pay any tax or file return of income for the income
earned by a minor, agent of non-resident or by any other person is called Deemed
Assessee.
Deemed assessee is a person who is assessable for the income of any other person under
this act and includes the following.
1) The executors or the legal heirs of a deceased person
2) The guardian of a minor, lunatic or idiot having taxable income
3) The agent of any non – resident Indian having income in India.

1.4.7(2) Assessee in Default: When a person is responsible for doing any work under
the Income Tax Act and fails to do it, he is called as assessee in Default. E.g. A company is
treated as assessee in default for non-deduction of TDS.

1.4.8. Person Sec 2(31):

The term person includes:

a) An individual
b) A Hindu Undivided Family
c) A Firm
d) A Company
e) An association of persons/body of individuals
f) A Local Authority
g) Artificial Juridical Person

1.4.9. Income Sec 2(24):

The term income means and includes

1) Profit and gains of business
2) Dividends
3) Voluntary contribution received by a Trust or an Institutions
4) Perquisites of profit in lieu of salary/Allowance
5) Capital Gains
6) Winning from Lottery/ Cross word Puzzle/ Race
7) Sum received under Keyman insurance policies including bonus thereon
8) Gifts as per section 56
9) Any consideration received for issue of share as exceeds the fair market value of shares
as referred in clause of (vii)(b) of section 56(2)

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10)Any sum of money referred to in section 56(2)(ix) sum of money received as an advance
or otherwise in course of negotiations for transfer of Capital Asset, if it is forfeited and
negotiations do not result in transfer of such capital asset.

1.4.10. Casual Income:

An income becomes casual income, if it contains the following feature: It is unanticipated,

it is non-recurring in nature, it arises from an unknown source, no specific efforts were
put in to earn such income. For example,
1) Winning from lottery
2) Income from cross word Puzzles and card games
3) Tips given to taxi drivers
4) Prize awarded for coin or stamp collection

1.4.11. Heads of Income:

Different heads of income are:
1) Income from Salary
2) Income from House Property
3) Profits and gains from Business or Profession
4) Capital Gains
5) Income from Other Sources

Income from Salary All the money you receive while rendering your
job as a result of an employment contract

Income from house Income from house property you own; property
property can be self-occupied or rented out.

Income from Income/loss arising as a result of carrying on a

business and business or profession. Freelancers’ income come
profession under this head.

Income from capital Income earned from the sale of a capital asset
gains (mutual funds or house property).

Income from other Income accrued from fixed deposits and savings
sources account come under this head.

1.4.12. Gross Total Income:

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 It is the aggregate of the income computed under various heads of income after allowing
set-off of losses according to the provision of Income Tax Act. Section 14 deals with the
Gross Total Income and it includes:

1) Income from Salary

2) Income from House Property
3) Profits and gains from Business or Profession
4) Capital Gains
5) Income from Other Sources

1.4.13. Total Income Sec 5:

Total income of an assessee is Gross Total Income after making deductions u/s 80C to
80U.This is also called as taxable income.

Exempted incomes
The exempted incomes are given u/s 10(1) to 10 (49) of the act and are not included for
the calculation of total income of the assessee. Some of these incomes are listed below:

1. Agricultural income from a land in India – fully exempted u/s 10(1).

2. Share of income from HUF- fully exempt u/s 10(2)
3. Share of income from firms assessed as firm u/s 184 or 185 is fully exempt u/s 10(2A)
4. Any income from investment by an NRI in bonds and securities –fully exempted u/s10
(4)(i). No exemption on such bonds issued after 1.6.2002.
5. Any income from interest on Non-resident (external) account – fully exempted u/s 10
(4)(ii).
6. Leave travel concession to an Indian citizen employee – exempted up to limits laid
down u/s 10(5)
7. Tax paid by government or an Indian concern on behalf of foreign company (sec
10(6A))
8. Perquisites and allowances given by the government to its employees posted abroad -
fully exempted u/s 10 (7).
9. Any income of employees of foreign countries working in India under co-operative
technical assistance Programme – fully exempted u/s 10(8).
10. Amount of retrenchment compensation given to workers – fully exempted u/s
10(10B)
11. Compensation received in case of any disaster [sec 10(10BC)] – in case an individual
or his legal heir receives any compensation on account of any disaster from central or
state Government or a local authority, the same shall be exempted.
12. Any amount received from life insurance corporation on maturity of policy with or
without bonus – fully exempt u/s 10(10D). The sum assured shall be exempt along with
bonus in the following cases:
a) If any sum received from insurance company on insurance of a dependent handicapped
member

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b) If any sum received from insurance company when a dependent, or a member of family
is suffering from a notified disease,
c) Any sum received under a key man insurance policy
13. Payment received out of statutory provident fund – fully exempt u/s 10(11)
14. Payment received out of recognized provident fund – fully exempt u/s 10(12)
15. House rent Allowance – exempted as per conditions given u/s 10 (13A).
16. Income from certain exempted securities u/s 10(15).
17. Educational scholarships given by government or any other organizations - fully
exempt under sec 10(16).
18. Allowances received by MPs/MLAs – exempted u/s 10(17) up to the following extent:
• Daily allowance and Constituency allowance – fully exempted.
19. Any Awards instituted or notified by central or state government in the following
fields– fully exempt u/s 10(17 A)
a) Literary, scientific or artistic work or attainment
b) Services alleviating the distress of the poor, the week and the ailing
c) Proficiency in sports or games
d) Gallantry awards (paramveerchakra, Mahaveer chakra) approved by the
government
20. Any pension received by winners of Param veer chakra, Mahaveer chakra and veer
chakra and family pension received by their dependents- fully exempted under sec
10(18)
21. Family pension received by family members of armed forces. u/s 10(19).
22. Annual value of any one palace of an ex-ruler of Indian states shall be fully exempt u/s
10(19A)
23. Income of a local authority – exempted as per conditions given u/s 10(20)
24. Income of a scientific research association – exempted as per conditions given u/s
10(21).
25. Income of a fund set up for welfare of employees or their dependents exempted as per
conditions given u/s 10(23AAA).
26. Any income of a trust or society approved by Khadi and Village Industries Commission
u/s 10(23B).
27. Income of mutual fund – exempted as per conditions u/s 10(23D).
28. Income of a venture fund - exempted as per conditions u/s 10(23FA)
29. Income by way of dividend from an Indian company –fully exempted u/s 10(34)
30. Income from units of UTI and other mutual funds (sec 10(35)
Any income by way of:
a) Any income received by way of dividend from a domestic company.
b) Income received in respect of units from the specified company.
31. Income from sale of shares in certain cases [sec 10(36)]
Any income arising from the transfer of a long-term capital asset, being an eligible
equity share in a company purchased on or after march 1, 2003 and before march 1, 2004
and held for a period of twelve months or more.
32. Any income from long- term capital asset being self-cultivated urban agricultural land
on compulsory acquisition [section 10(37)]- in case of an assessee, being an individual or
a Hindu Undivided family, capital gain arising from the compulsory acquisition of self-
cultivated land shall be fully exempted.
33. Income from international sporting event (sec 10(39))
Any specified income of specified persons from any international event held in India shall
be fully exempt if:

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a) Such event is approved by the international body regulating the international sport
relating to such event;
b) It has participation by more than two countries; and
c) It is notified by the central government in this regard.

2.1 Agriculture income

According to Sec 2 (IA) Agriculture income means:

1) Any rent or revenue received from land which is used for agricultural purpose and
situated in India.
2) Any income derived from such land by agricultural operations including processing of
agricultural produce, raised or received as rent in kind so as to render it fit for the market,
or sale of such produce.
3) Income attributable to a farm house subject to the condition that building is situated on
or in immediate vicinity of the land and is used as a dwelling house, store house etc.

2.1(a) Examples of Agricultural Income:

1) Income from sale of replanted trees.

2) Rent received from agricultural land.
3) Income from growing flowers and creepers.
4) Share of profit of a partner from a firm engaged in agricultural operations.
5) Interest on capital received by a partner from a firm engaged in agricultural operations.
6) Income derived from sale of seeds, straw, dried Tobacco leaves.
7) Land leased for grazing of animals required for agriculture purpose.
8) Insurance money received for destruction of agricultural produce.

2.1(b) Examples of Non- Agricultural Income:

1) Income from sale of earth for brick making.

2) Income from stone quarries and fishing
3) Income from sale of spontaneously grown trees.
4) Income from dairy farming, poultry farming.
5) Interest received by a money lender in the form of agriculture products.
6) Income of salt produced by flooding the land with sea water.
7) Royalty income from mines.
8) Income from butter and cheese making.
9) Maintenance allowance charged on agriculture land.
10)Remuneration received as an employee of an agriculture farm.
11)Dividend received from a company engaged in agricultural operations.

Illustration
Determine whether the following incomes are agricultural incomes or not.
1. Income from interest on arrears of rent payable in respect of land used for agricultural
purpose.
2. Income from use of land for grazing of cattle required for agricultural operations.
3. Income from the sale of trees spontaneously grown.
4. Income from the sale of replanted trees in the forest.

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5. Lease rent for letting out a tea estate by the assessee doing the business of growing and
manufacturing tea.

Solution:
1. Non-agricultural income as the income is derived from a financial activity and not from
direct agricultural activity.
2. Agricultural income as it is an agricultural activity.
3. Non-agricultural income because no agricultural activity is involved.
4. Agricultural income as there is some agricultural activity involved.
It is agricultural income as the estate is used for agricultural activities

2.1(c) Partly Agricultural Income:

Sometimes, there is composite income which is partially agricultural and partially non-
agricultural income. For certain crops, income tax act gives fixed percentages to segregate
agricultural and non- agricultural incomes. Agricultural income is not taxable and the
non-agricultural portion would be taxable.

Table 1.1
PARTLY AGRICULTURAL AND PARTLY NON-AGRICULTURAL INCOME
Crop Rule Agricultural Non-
income agricultural
income
1) Growing and manufacturing of 8 60% 40%
tea
2) Rubber manufacturing business 7A 65% 35%
3) Coffee grown and cured by seller 7B(1) 75% 25%
4) Coffee grown and cured, roasted 7B(1A) 60% 40%
and grounded by the seller in India
with or without mixing chicory or
other flavoring agents

2.2. Integration of Agricultural Income with Non-Agricultural Income: [sec 2(2)]:

Agricultural income is exempt from tax u/s 10(1) but it is included in the total income for
tax liability calculation. The object of aggregating the net agricultural income with non-
agricultural income is to tax the non-agricultural income at higher rates.

2.2.1. Conditions for aggregation:

• Integration is done only in case of Individuals, HUF, Firms assessed as association of

persons (AOP), Association of persons, Bodies of individuals, artificial juridical persons.
• Integration is done only if Non-agricultural income of persons mentioned above exceeds
the exempted limits which are Rs.2,50,000 for individuals and HUF, and Rs. 3,00,000 for
senior citizens in the relevant previous year.

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• Integration is done if net agricultural income of all these persons exceeds Rs. 5000 in the
relevant previous year, companies and co-operative societies.

2.2.2 Calculation of net agricultural income:

It is computed in accordance with the rules laid down u/s 2(iA) of the Income tax act 1961
and rules 7 & 8 of the income tax rules 1962. These rules are:
1. Rent or revenue derived from agricultural land will be computed on the same basis which
is adopted for computation of income under the head income from other sources u/s 57
to 59 of the income tax act.
2. Income derived from agricultural operations will be computed as if it is income
chargeable to tax under the head profits & gains of business or profession. Depreciation
and loss on the death of animals used in agricultural operations are allowed as expenses.
3. Income from agricultural house property will be computed as if such income is
chargeable to tax under the head ‘income from house property’ and provisions under
section 22 to 27 shall be applicable.
4. For computing share of income from tea business income is computed under rule 8 which
shall be considered to be agricultural income.
5. For computing share of income or loss of a firm assessed as AOP same rules are applicable
as provided in income tax act for computing share of profits and losses from firm assessed
as firm.
6. Loss incurred in agriculture will be allowed to be set off only against agricultural incomes.
7. Any sum payable by the person on account of any tax levied by State Govt. on agricultural
income will be allowed as deduction.
8. Where the net result of agricultural income from the various sources stated above in a
particular previous year is a loss, such loss will be disregarded and net agricultural
income shall be taken as nil.

2.3 Capital and Revenue:

2.3.1 Introduction
It is necessary to understand the distinction between capital and revenue items to
determine the tax treatment of expenses and incomes. For the understanding of the
concepts, it is divided into three parts:
i) Receipts
ii) Expenditure
iii) Losses

Capital Receipt Revenue Receipt

1.Amount of fixed capital received is a 1.Amount received as circulating capital is
capital receipt. a revenue receipt.
2.A receipt in substitution of a source of 2. A receipt in substitution of an income is
income is a capital receipt. E.g. a revenue receipt. E.g. Bonus received by
Compensation received from his employer an employee from his employer is a
revenue receipt.

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 for the termination of service is a capital
receipt.
3.An amount received as a compensation 3. An amount received under an
for the surrender of certain rights under agreement as compensation for loss of
an agreement is a capital receipt. E.g. future profits is a revenue receipt.
Amount paid to a retiring director of a Compensation paid for breach of
company for not starting a competing agreement is a revenue receipt
business after his retirement
4. If the asset is used by the assessee as an 4. If the asset is kept in the business as
investment then the sale proceeds thereof stock in trade i.e. for the purpose of
will be a capital receipt. E.g.: Motor car making profit from its sale then the sale
used by a business is a capital asset and proceeds thereof is a revenue receipt. E.g.
the sale proceed thereof is a capital Sale proceeds of motor cars maintained by
receipt. vehicle dealer.
5. Subsidies or grants received from the 5. Subsidies or grants received from the
government for specific capital purpose. government for meeting foreign
E.g., For any development scheme or competition or otherwise assisting the
renovation or modernization is a capital trader in his business are revenue
receipt. receipts.
6. Insurance money received for a capital 6. Insurance money received for a trading
asset is capital receipt. asset is revenue receipt.

2.3.2. Capital Expenditure and Revenue Expenditure:

Capital expenditure is not deductible from the gross income of the business but the
revenue expenditure is deductible therefore, it is essential to know the difference
between the two:

Capital expenditure Revenue expenditure

1. Cost of acquisition and installation of 1. Purchase price of goods bought for
a fixed asset is a capital expenditure. resale along with expenses on their
purchase is revenue expenditure.
2. An expenditure incurred to discharge 2. An expenditure incurred to discharge
a capital liability is a capital expenditure. a revenue liability is revenue
expenditure.
3. An expenditure incurred for acquiring 3. An expenditure incurred for earning
a source of income is a capital expense. an income is a revenue expense.
e.g. acquisition expenses of a business
4. An expenditure incurred for 4. An expenditure incurred for
increasing the earning capacity of a maintaining a fixed asset in good
business by improving its fixed assets is condition is revenue expenditure.
a capital expenditure.
5. Capital expenditure is a non- recurring 5. It is recurring in nature.
item.
6. Expenditure in obtaining capital by 6. Expenditure incurred in raising loans
issuing shares is a capital expenditure. or issuing debentures is revenue
expenditure.
2.3.3 Capital and revenue Losses:

FOR PRIVATE CIRCULATION ONLY 15

 Loss on the sale of a capital asset is a capital loss whereas loss on sale of goods of the
business is a revenue loss. Loss sustained on account of embezzlement done by an
employee, destruction of goods or non-recovery of any amount due in connection with
business is a revenue loss. Loss sustained by theft committed by an employee during
usual business hours or outside business hours is a revenue loss being incidental to the
trade.

2.3 Summary:

• Agricultural income from India is exempt from tax.

• Classification of receipts and payments is very essential for determining the taxability of
the transaction.

• Capital receipts are not taxed whereas revenue receipts are taxed.

• Capital losses are not allowed as expenses in calculation of taxable income whereas
revenue expenses and losses are allowed to be subtracted from income.

RESIDENTIAL STATUS AND INCIDENCE OF TAX

3.1 Introduction:
Under section 4 of the act income tax is charged on the total income of a person. Section
5 of the act defines the total income of a person on the basis of his or her residential status.
This section divides a person into three categories:
a) Resident and ordinary resident
b) Resident but not ordinary resident
c) Non-resident.
The status of the assessee is determined every year as it may change.

It refers to the status of an individual, which determined on the basis of his/her total stay
in India. Under section 6, the residential status of an individual is divided into the
following categories.

Residential status of an individual

Resident Any one of the basic Non- Resident

condition

Ordinarily Resident Not Ordinarily

Resident

FOR PRIVATE CIRCULATION ONLY 16

 3.2. Determination of residential status of individual:

An individual’s residential status is decided number days he or she stayed in India

on the basis of basic conditions and additional conditions.
To get a residential status any one basic condition has to be satisfied will become
Resident Suppose (1) Assessee satisfies one Basic condition U/S6 (1) and Both
Additional Basic condition/S 6(6), He/She is a Resident and Ordinarily Resident.
(2) Assessee satisfies one Basic condition U/S6 (1) and one or none of the
Additional Basic condition/S 6(6) is satisfies he / She becomes Resident but not
ordinarily Resident
(3) Assessee does not satisfy any basic conditions will become Non-Resident.

Basic Conditions u/s 6 (1)

(i) An assessee must be in India for a period of 182 days or more during the previous year
OR
(ii) An Assessee must be in India for a period of 60 days or more during the previous year
and 365 days in 4 years preceding the relevant previous year.
Exceptions to the 2nd Basic Condition In respect of an individual who is a
citizen of India or person of Indian origin leaves India for employment during an FY, he
will qualify as a resident of India only if he stays in India for 182 days or more. Such
individuals are allowed a longer time greater than 60 days and less than 182 days to stay
in India. However, from the financial year 2021-22, the period is reduced to 120 days or
more for such an individual whose total income (other than foreign sources) exceeds
Rs 15 lakh. In another significant amendment from FY 2021-22, an individual who is a
citizen of India who is not liable to tax in any other country will be deemed to be a resident
in India. The condition for deemed residential status applies only if the total income
(other than foreign sources) exceeds Rs 15 lakh and nil tax liability in other countries or
territories by reason of his domicile or residence or any other criteria of similar nature.
NOTE 2: Income from foreign sources means income which accrues or arises
outside India (except income derived from a business controlled in India or
profession set up in India).

FOR PRIVATE CIRCULATION ONLY 17

 However, W.e.f., Assessment year 2022-23, the finance act 2020 has inserted the
following two more situation wherein a resident person is deemed to be Not Ordinarily
Resident’ in India:
a) An Indian Citizen or a person of Indian origin whose total income (other than
foreign sources) exceeds Rs. 15 lakhs during the previous year and who has
been in India for the period of120 days or more but less than 182 days.
b) An Indian Citizen who is deemed to be resident in India as per new section
6(1A).
A resident individual who does not satisfy any of the aforesaid conditions or satisfies
only one of the aforesaid conditions will be treated as resident but not ordinarily
resident.

Exception: II Basic condition is subject to the following exceptions

(i) In case of an assessee who is an Indian citizen leaves India for employment purpose or as
a crew member of an Indian ship.
(ii) In case of an assessee who is of an Indian origin comes to India during the previous year
for a visit.
In the above cases 60 days, as suggested u/s 6 (1) shall be replaced by 182. In other
words, the second basic condition shall not be applicable.

Additional Conditions u/s 6(6)

(i) An assessee must be a Resident for 2 or more years out of 10 years preceding the relevant
previous year.
AND
(ii) An assessee must have been in India for at least 730 days in 7 years preceding the relevant
previous year.

3.3 Types of Residential Status

An individual who satisfies any one of the above Basic conditions u/s 6(1) is treated as a
resident for the previous year.

FOR PRIVATE CIRCULATION ONLY 18

1) Ordinary Resident (O.R): An individual who satisfies any one of the basic conditions and
both the additional conditions.
2) Not Ordinary Resident (N.O.R): An individual who satisfies any one of the basic
conditions and any one or none of the additional conditions
3) Non-Resident (N.R): An individual who does not satisfy any of the basic conditions will
be treated as Non-Resident; here the additional conditions are irrelevant.
However, from the financial year 2020-21, the period is reduced to 120 days or
more for such an individual whose total income (other than foreign sources)
exceeds Rs 15 lakh.
In another significant amendment from FY 2020-21, an individual who is a citizen
of India who is not liable to tax in any other country will be deemed to be a resident
in India. The condition for deemed residential status applies only if the total
income (other than foreign sources) exceeds Rs 15 lakh and nil tax liability in other
countries or territories by reason of his domicile or residence or any other criteria
of similar nature.

Illustration 1:
Mr. Prakash an Indian citizen left India on 15 August 2021 for the first time to U.K. for the
purpose of employment. He plans to visits India every year and stay here from 15th April
to 10th September from 2022 onwards. What will be his residential status for A.Y. 2022-
2023?

FOR PRIVATE CIRCULATION ONLY 19

 Solution:
STEP 1:
Basic condition
a) An assessee must be in India for a period of 182 days or more during previous year
Or
b) An assessee must be in India for a period of 60 days more during the previous year and
365 days in 4 years preceding the relevant previous year.

Additional condition

a) Assessee must be a resident in India at least two out of ten previous years preceding years
preceding the relevant previous year,

And

b) An assessee must have been in India for at least 730 days or more during the seven
previous years preceding the previous year.

STEP 2:
Calculation of Number of Days Stayed
Stay in India during the P.Y.2021 -2022.
1st April 2021 to 15th August 2021 = 137days.

STEP 3:
RESIDENTIAL STATUS
Mr. Prakash being an Indian citizen and left India for the purpose of employment will
come under the categories of exception to 2nd basic condition. Hence 60days or more in
second basic conditions will be replaced by 182 days. Since the basic condition is not
satisfied, he is a non-resident for the assessment year 2022– 2023

Illustration 2:
Mr. Ajith went to England for studies on 5th August 2021 and came back to India on 25th
February 2022. He had never been out of India before. What is his residential status for
the A.Y 2022– 2023?

Solution:
STEP 1:
Basic condition
a) An assessee must be in India for a period of 182 days or more during previous year
Or
b) An assessee must be in India for a period of 60 days more during the previous year and
365 days in 4 years preceding the relevant previous year.

Additional condition
a) Assessee must be a resident in India at least two out of ten previous years preceding
the relevant previous year,
And

FOR PRIVATE CIRCULATION ONLY 20

 b) An assessee must have been in India for at least 730 days or more during the seven
previous years preceding the previous year.

STEP 2:
Calculation of Number of Days Stayed

Mr.Ajith’s stay in India from during the previous year is as under:

1st April 2020 to 5th August 2020 = 127 days
25th February to 31st March 2021 = 35 days
Total no. Of days = 162 days
He was in India in the earlier previous year completely.

STEP 3:
Residential Status
Mr. Ajith’s stayed in India during the previous year 2021– 2022 for 162 days and satisfies
the second basic condition. Since he leaves India in the previous year for the first time, he
has been resident for more than two years and also stayed for more than 730 days in past
preceding years. He satisfies second basic condition and both the additional conditions.
Hence, he is a resident and Ordinary Resident for the A.Y 2022-23

Illustration 3: Mr. Irfan comes to India for the first time on April 16, 2021. He has stayed
in India up to October 5, 2021. Determine his residential status for the A.Y 2022-23.

STEP 01: Apply Basic Conditions and Additional Conditions (write down)

STEP 02: Calculation of Number of Days Stayed

a) In the previous year – 01/04/2021-31/03/2022
16/04/2021 -05/10/2021 = 173days
b) In preceding to previous years, he has not been in India, as he has come to India for the
first time in the year 2021.

STEP 03: RESIDNETIAL STATUS

Mr. Irfan is not an Indian citizen as he came to India for the first time in the year
2020. His stay in India is for a total period of 173days. Thus, he does not satisfy any of the
basic as well as additional condition. So, he is considered as a NON-RESIDENT for the AY
2022-2023.

FOR PRIVATE CIRCULATION ONLY 21

4. During the previous year 2021-22, X, a foreign citizen, stayed in India for just 69 days.
Determine his residential status for the assessment year 2022-2023 on the basis of the
following information: (i) During 2018-19, X was present in India for 366 days. (ii) During
2015-16 and 2014-15, X was in Japan for 359 and 348 days respectively and for the
balance period in India. (iii) Mrs. X is „resident‟ in India for the assessment year 2022-
2023. • To determine whether he is resident or not —

Step-1 apply the basic conditions

He is resident for previous year 2019-20 as he satisfies the second condition as he was
here during the previous year for 69 days and in the preceding 4 years for 366 days.

Step-2 calculation of number of days stay in India

• To determine whether he is ordinarily resident or not — He should satisfy both of the

additional conditions.

2020-21 Nil Non-resident

2019-20 Nil Non-resident

2018-19 366 days Resident

2017-18 Nil Non-resident

2016-17 Nil Non-resident

2015-16 7 days Non-resident

2014-15 17 days Non-resident

2013-14 Nil Non-resident

Step -3 Residential Status

And earlier years Nil Non-resident

He was in India for less than 730 days in the 7 preceding previous years.

He is also non-resident in 9 out of 10 previous years preceding the previous year.

Hence, he is “resident but not ordinarily resident”.

FOR PRIVATE CIRCULATION ONLY 22

 Incidence of tax or taxability of total income on the basis of residence:

1) Resident: Total income of any previous year of a person who is an “Ordinary Resident”
includes all income from whatever source derived which:
a) Is received or deemed to be received in India
b) Accrues or arises or is deemed to accrue or arise to him in India
c) Accrues or arises to him outside India during the previous year.

2) Resident but not Ordinary Resident

The total income of a person who is a resident but not ordinary resident includes all
income from whatever source derived which:
a) Is received or deemed to be received in India
b) Accrues or arises or deemed to accrue or arise to him in India
c) Accrues or arises to him outside India from a business controlled in or a profession
setup in India.

3) Non–resident
Total income of a Non-resident includes all income from whatever source derived which:
a) Is received or deemed to be received in India
b) Accrues or arises or is deemed to accrue or arise to him in India during such year.

TERMINAL QUESTIONS:

Section: A
1. What are the types of residents for income tax purpose?
2. Who is a Not Ordinary Resident?
3. Who is Non-resident?
4. When an individual becomes Ordinary Resident?

Section B and C:

1. Mr. James a citizen of West Indies was appointed as sales manager in India on 1 stApril
2017 at Mumbai. On 25 January 2020he went to Uganda on deputation for period of 3

FOR PRIVATE CIRCULATION ONLY 23

 years, but left his wife and children in India. On 1st May 2020 he came to India and took
with him his family to Uganda on 30th June 2020. He returned to India and joined his
original job on 24th January 2021. Determine his residential status for the A.Y 2022-23.

2. Mr. Raj, citizen of U.S. came to India for the first time on 01.05.2017. He stayed here
without any break for 3 years and left for Bangladesh. on 01.05.2020. He returned to India
on 01.04.2021 and went back to U.S. on 01.12.2021 He was posted back to India on
20.01.2022. Determine his residential status for the A.Y 2022-23.

3. Vaishak, a foreign national (not being a person of Indian origin), comes to India for the
first time on April 15, 2015. During financial years 2016-17, 2017-18, 2019-20, 2021-
21,2020-2022he was in India for 130days, 80days, 13 days, 210 days and 75 days
respectively. Determine his residential status for the A.Y 2022-23.

4. Mr. Kohli, a citizen of India, is an export manager of Arjun Overseas Limited, an Indian
4 Company, since 1.5.2017. He has been regularly going to USA for export promotion.
He spent the following days in U.S.A. for the last five years: Previous year ended No.
of days spent in USA 31.3.2018 317 days 31.3.2019 150 days 31.3.2020 271 days
31.3.2021 311 days 31.3.2022 294 days Determine his residential status for
assessment year 2022-2023. assuming that prior to 1.5.2017 he had never travelled
abroad.

Incidence of Tax

Chart showing the Incidence of Tax for different types of status:

II- Indian income, CI- Controlled income, EI- Exempted income and FI- Foreign income.

Different types of status

Nati
Resident
Types of income ona Not-
and Non-
l Ordinarily
Ordinarily Resident
inco Resident
Resident
me

FOR PRIVATE CIRCULATION ONLY 24

 1. Income received or deemed to be II
received in India. But received outside Taxable Taxable Taxable
India
2. Income earned or deemed to be II
earned outside India but received in Taxable Taxable Taxable
India
3. Income earned and received in India II
or income deemed to be earned and Taxable Taxable Taxable
received in India
4. Income earned or deemed to be FI
Taxable Not Taxable Not Taxable
earned and received both outside India
5. Income earned and received outside CI
India from the business controlled or
Taxable Taxable Not Taxable
profession setup in India income may
or may not be remitted to India
6. Income earned and received outside FI
India from a business controlled or Taxable Not Taxable Not Taxable
profession setup outside India
7. Past untaxed income brought into EI
Not Taxable Not Taxable Not Taxable
India during the relevant previous year
8. Gift is not an income, If it is less than EI
Rs. 50,000. (If gift is received by an
Not Taxable Not Taxable Not Taxable
individual from a relative or at the time
of marriage or by a will, it is tax free)
9.Gift from a friend exceeding Rs. II
50,000 received in India is an income. Taxable Taxable Taxable
Therefore taxable.
10.Dividend from an Indian company is II
exempted up to10,00,000 in case of a
Taxable Taxable Taxable
resident. Further, in case of non-
resident, it is fully exempted from tax
II
11.Dividend from Cooperative societies Taxable Taxable Taxable
12.Dividend from foreign company II
Taxable Taxable Taxable
received in India
13. Share of profits from HUF EI Not Taxable Not Taxable Not Taxable

TABLE SHOWING NUMBER OF DAYS PER MONTH FOR THE AY 2021-2022

PY: 01/04/2020-31/03/2021 AY:01/04/2021-
31/03/2022
MONTH DAYS MONTH DAYS
April 2020 30 October 31

FOR PRIVATE CIRCULATION ONLY 25

 May 31 November 30
June 30 December 31
July 31 January 2021 31
August 31 February 28
September 30 March 31

Illustration 1: Kishan, a foreign national furnishes the following particulars of his income
relevant for the previous year 2021-2022.
1. Profit on sale of plant at London (one half is received in India) 1,46,000.
2. Profit on sale of plant at Delhi (one half is received in London) 1,02,000
3. Salary from an Indian company received in London (one half is paid for services
rendered in India) Rs.60, 000.
4. Interest on UK development bonds (entire amount received in London) Rs. 40,000
5. Income from property in London received there Rs. 30,000
6. Profit from a business in Delhi managed from India Rs. 49,000
7. Income from agriculture in London received there, half of which is used for meeting
hostel expenses of his son and remaining amount is later on remitted to India Rs. 25,000.
8. Dividend (gross) received in London from a company registered in India but mainly
operating in London Rs.17,000.
9. Rental income from a property in Nepal deposited by the tenant in a foreign branch of
an Indian bank operating there. Rs. 12,000
10. Gift from a relative in foreign currency (one third of which is received in India and
remaining amount is used for meeting education expenses of Kumar’s son in USA) Rs.
3,90,000.
Determine gross total income of Kishan for the assessment year 2022-223 if he is
a) Resident and ordinary resident
b) Resident but not Ordinary resident, and
c) Non-resident.

Solution:
Computation of Gross Total Income of Kishan for the A.Y 2022-23

Not
Ordinary Non-
Details of Income ordinary
resident resident
resident
1. Profit on sale of plant at London 1,46,000 73,000 73,000
2. Profit on sale of plant at Delhi 1,02,000 1,02,000 1,02,000
3. salary from an Indian company 60,000 30,000 30,000
4. Interest on UK development bonds 40,000 Not taxable Not taxable
5. Income from property in London 30,000 Not taxable Not taxable
6. profit from a business in Delhi 49,000 49,000 49,000
7. income from agriculture in London 25,000 Not taxable Not taxable
8. Dividend from an Indian company 17,000 17,000 17,000
9. Rental income from property in Nepal 12,000 Not taxable Not taxable
10. gift from a relative Exempt Exempt Exempt
Gross total income 4,81,000 271,000 2,71,000

FOR PRIVATE CIRCULATION ONLY 26

 Illustration 2
Mr. Satya gives you the following information being a Resident Ordinary Resident.
1. Salary Rs.80,000 received in Japan for the services rendered in India.
2. Commission received in India for the services given in Sri Lanka Rs.1,40,000.
3. House rent of the house situated in Nepal received in India Rs.30,000.
4. Dividend of a England based company received in India Rs.75,000.
5. Profit of the business situated in Japan brought to India Rs.5,00,000.
Determine the residential status of Mr. Satya for the previous year 2021-22 and explain
that on which income he is liable to pay tax in India.
Compute his taxable income for the AY 2022-2023.

Computation of Total income

Name of the Assessee: Ms. Satya P.Y.2021-2022
Residential status: Resident Ordinary Resident A. Y. 2022-2023
Types of Income NI R
Salary received in Japan for the services rendered in
1
India (Assumed to be computed income) Rs.80,000
Commission received in India for the services given
2
in Sri Lanka Rs.1,40,000.
House rent of the house situated in Nepal received in
4
India Rs.30,000.
5 Dividend of a England based company received in India
Rs.75,000.
6 Profit of the business situated in Japan brought to India Rs.5,00,000.
GTI/ TOTAL INCOME 8,16,000

Illustration 3
Mr. Jacob is a foreign national furnishes the following particulars of income relevant for
the previous year 2020-2021.
I. Profit on sale of land at London (½ received in India) Rs 1,46,000.
II. Profit on sale of plant at Delhi (1/2 received in London) Rs 1,02,000.
III. Salary (net of salary deduction) from Indian co. received in London Rs 60000.
IV. Interest on U.K. development bonds Rs 60,000. (1/3 is received in India)
V. Income from property in London received there Rs 30000.
VI. Income from agriculture in London received there but later on remitted to India Rs
2500.

FOR PRIVATE CIRCULATION ONLY 27

 VII. Dividend received in London from company registered in India 17000.
VIII. Profit from a business in Delhi, managed from India Rs 49000.
IX. Profit for the year 2019-20 of a business in USA remitted to India during 2020-21 (Not
taxed earlier)
X. Gift from friends 80,000
XI. Dividend paid by an Indian company. Received in Canada ₹20,000
XII, Pension from Indian company received in London
XIII. Profit from business in Indonesia, Controlled from Delhi

Determine gross total income of Mr. Jacob for assessment year 2021-22. If he is
(1) Ordinary resident, (2) Not ordinary resident, (3) non-resident

Computation of Total income

Previous year2020-2021
Name of the Assessee: Mr. Jacob Assessment Year: 2021-2022
Types of Income NI R NOR NR
Profit on sale of land at London
73000
I (½ received in India) Rs II 73,000 73,000
73,000
1,46,000 FI
Profit on sale of plant at Delhi
II (1/2 received in London) Rs II 1,02,000 1,02,000 1,02,000
1,02,000.
Salary (net of salary deduction)
III from Indian co. received in II 60,000 60,000 60,000
London Rs 60000.
Interest on U.K. development
20,000
IV bonds Rs 60,000. (1/3 is FI 20,000 20,000
40,000
received in India) II
Income from property in
V London received there Rs 30,000 Not taxable Not taxable
30000. FI
Income from agriculture in
VI London received there but later 2,500 Not taxable Not taxable
on remitted to India Rs 2500. FI
Dividend received in London
VII from company registered in 17,000 17,000 17,000
India 17000. II
Profit from a business in Delhi,
VIII 49,000 49,000 49,000
managed from India Rs 49000. II
Past untaxed income is
IX EI Tax free Tax free Tax free
exempted
X Gift from friends II 80,000 80,000 80,000
Dividend paid by an Indian
XI 17,000 17,000 17,000
company. Received in Canada II

FOR PRIVATE CIRCULATION ONLY 28

 Pension from Indian company
XII 36,000 36,000 36,000
received in London II
Profit from business in
XIII Indonesia, Controlled from 1,20,000 1,20,000 Tax free
Delhi CI
GTI 7,19,500 5,74,000 4,54,000

Illustration 4. From the following particulars of Mr. Uday compute his Gross total income
for the A.Y.2022-23 if he is 1. Resident, 2. Not Ordinarily Resident and 3. Non-Resident
(a) Income from business from Raichur Rs. 50,000
(b) Profit from business in U.K. controlled from India Rs 60, 000
(c) Income from house property in Japan not received in India Rs 30, 000
(d) Income from business in India but received in Pakistan Rs 50, 000
(e) Salary received in India for service rendered in USA Rs 70, 000
(f) Interest on deposit with State Bank in Bangalore Rs 10, 000
(g) Profit from business in Ceylon controlled from India (1/3 profit received in India)
Rs 30,000
(h) Salary received in India for service rendered in Kuwait Rs 35, 000
(i) Past untaxed foreign income brought into India Rs 8, 000
(j) Dividend received from Domestic Company Rs 5,000
(k) Interest on Post Office Savings Bank A/c Rs 1,000
(l) Agriculture income earned in Nepal Rs 25,000.
(m) Gift in cash from a relative received in India Rs 60000.
(n) Interest received from a firm in UK later on remitted to India Rs 10000

Computation of Total income

Previous year2021-2022
Name of the Assessee: Mr.Uday Assessment Year: 2022-2023
Types of Income NI R NOR NR
(a) Income from business from Raichur II 50,000 50,000 50,000
Not
(b) Profit from business in U.K. controlled from India 60, 000 60, 000
CI Taxable
Income from house property in Japan not received in Not Not
(c) 30, 000
India FI Taxable Taxable
Income from business in India but received in
(d) 50, 000 50, 000 50, 000
Pakistan Rs II
(e) Salary received in India for service rendered in USA 70,000 70,000 70,000
II
(f) Interest on deposit with State Bank in Bangalore 10, 000 10, 000 10, 000
II
Profit from business in Ceylon controlled from India II& 10, 000 10, 000
(g) 10, 000
(1/3 profit received in India) Rs 30,000 CI 20,000 20,000
Salary received in India for service rendered in
(h) 35, 000 35, 000 35, 000
Kuwait Rs II

FOR PRIVATE CIRCULATION ONLY 29

 Not Not Not
(i) Past untaxed foreign income brought into India
EI Taxable Taxable Taxable

(j) Dividend received from Domestic Company 5,000 5,000 5,000

II
Not Not Not
(k) Interest on Post Office Savings Bank A/c
EI Taxable Taxable Taxable
Not Not
(l) Agriculture income earned in Nepal. 25,000
FI Taxable Taxable
(m) Gift in cash from a relative received in India II 60000 60000 60000
Interest received from a firm in UK later on Not
(n) 10,000 10,000
remitted to India CI Taxable

Illustration 5. Following are the incomes of Mr. Vishnu for the previous year 2020-21

a) Received Rs.20,000 in India, which accrued in England.

b) Rs.10,000 earned in India but received in England.

c) Rs.5,000 were earned and received in Africa but brought to India.

d) Rs.10,000 were earned and received in Japan from a business which was controlled
and managed in Japan.

e) Rs.16,000 was untaxed foreign income of some earlier year, which was brought to
India in the previous year.

f) Interest on FD in State Bank of Mysore, Bangalore Rs.1,200.

g) Income from agriculture in Africa, received in India Rs.10,000.

h) Dividends received in U.K from an American Company Rs.10,000.

i) Salary income for three months for working in Indian Embassy's office in Australia
and salary received there Rs.72,000.

j) Income from house property in Mumbai Rs.1,00,000.

k) Interest received on POSB a/c Rs.1,000.

l) Pension income from Belgium for services rendered in India with a limited company
Rs.2,20,000.

m) Gift from friends Rs.80,000.

Which of the above incomes are taxable if Mr. Vishnu is – a) Resident and ordinarily
resident?
b) Resident but not ordinarily resident c) Non-resident.

FOR PRIVATE CIRCULATION ONLY 30

Computation of Total Income of Mr. Vishnu
Previous Year: 2020-21
Assessee: Mr. Vishnu Assessment Year: 2021-22
Types of Income NI R NOR NR
a) Received Rs.20,000 in India, which accrued in
England II 20,000 20,000 20,000
b) Rs.10,000 earned in India but received in England. II 10,000 10,000 10,000
c) Rs.5,000 were earned and received in Africa but
brought to India FI 5,000 NIL NIL
d) Rs.10,000 were earned and received in Japan from a
business which was controlled and managed in Japan FI 10,000 NIL NIL
e) Rs.16,000 was untaxed foreign income of some
earlier year, which was brought to India in the previous
year EI NIL NIL NIL
f) Interest on FD in SBM, Bangalore II 1,200 1,200 1,200
g) Income from agriculture in Africa, received in India II 10,000 10,000 10,000
h) Dividends received in U.K from an American
company Rs.10,000 FI 10,000 NIL NIL
i) Salary income for three months for working in India
Embassy's Office in Australia and salary received there
Rs.72,000 II 72,000 72,000 72,000
j) Income from house property in Mumbai Rs.1,00,000
II 1,00,000 1,00,000 1,00,000
Not Not Not
k) Interest received on POSB A/c
EI Taxable Taxable Taxable
l) Pension income from Belgium for services rendered
in India with a limited company Rs.20,000 II 20,000 20,000 20,000
m) Gift from friends
II 80,000 80,000 80,000
Total income 3,38,200 3,13,200 3,13,200

PRACTICAL PROBLEMS

1. Mr. Anish has the following incomes for the previous year 2021-2022
₹

FOR PRIVATE CIRCULATION ONLY 31

 1. Income from salary in India from a company 50,000
2. Dividend from an Indian company received in England and
spent there 10,000
3. Income from house property in India received in Pakistan 20,000
4. Dividend from a foreign company received in England
deposited in a bank there 10,000
5. Income from business in Kolkata, managed from USA 20,000
6. Income from business in USA (controlled from Kanpur) 12,000
7. Income was earned in Australia and received there but brought
into India 25,000
8. His maternal uncle sent bank draft from France as a gift
on his marriage 20,000

Compute the gross total income, if he is:

(i) Resident (ii) Not-ordinary Resident (iii) Non-resident.

2. Mr. Naresh is an Indian Citizen. He left India on 16th July 2020 to England and return
to India on 02 Feb 2021. During the Previous Year his details of income were as follows:
(a) Interest on Securities of an Indian Company received in England Rs 22,000
(b) Agricultural Income in Gujarat Rs 30,000
(c) Dividend from Indian Company Rs 10,000
(d) Interest received from a firm in England remitted to India Rs 9,500
(e) Amount brought to India out of past untaxed profit earned in England Rs 22,000
(f) Income from business in Pakistan being controlled from India Rs 15,000
(g) Interest earned & received in England from bank & deposited there Rs20,000
(h) Income from Salary received in India for services rendered in England Rs20,000
Determine his Residential Status & Gross Total Income for the AY 2022-23.

3. Suresh is an Indian citizen went out of India on 28th august 2019 for service in a
company in Japan and came back to India on 1st April 2020 to meet his family. During the
year 2020-21, he received the following incomes:
I. Incomes from salary in Japan Rs 28000.
II. Interest on bonds of central government of India Rs28000
III. Taxable income from shares from foreign company Rs 7500 received in Japan.
IV. Income from agricultural land situated in Punjab Rs 10000
V. Interest received from firm in U.K. remitted to India Rs.9200
VI. Payment from public provident fund Rs 20000.
VII. Commission received in India for the services given in Nepal Rs.10000.
VIII. Profit from business in Srilanka Rs.40000 (business controlled from Chennai) of which
Rs15000 was received in India.
IX. Profit of the business in Nepal brought to India. Rs 50000
X. Amount brought to India out of past-untaxed profit earned in Japan Rs 8000.
XI. Share of income from HUF Rs 12000.
Calculate the gross total income of Krishna after ascertaining his residential status for
assessment year 2022-2023.

5. Following are the particulars of Mr. Praful for the previous year 2021-22.

FOR PRIVATE CIRCULATION ONLY 32

 i) Profit on sale of plant at Singapore (on-half is received in India) Rs. 2,50,000.
ii) Profit on sale of property at Bengaluru (one-half received in Hong-Kong)
Rs.50,000.
iii) Interest on UK Development Bonds Rs.2,00,000 of which Rs.1,00,000
remitted to India.
iv) Profit from business in Mangalore, the control is from USA Rs.30,000,
v) Income from business Mysuru but received in Holland Rs.5,00,000.
vi) Profit from business in Pakistan controlled from India (40% profit received
in India) Rs.6,00,000
vii) Dividends from domestic company Rs.2,00,000.
viii) Interest on post office Savings Bank Account Rs.1,000.
ix) Past untaxed foreign income brought to India during previous year
Rs.2,00,000.
x) Rural agricultural income in India Rs.3,00,000.
xi) Salary and allowances from UNO Rs.3,00,000.
xii) Interest and dividends from units of UTI Rs.20,000.
xiii) Income earned in Australia and received there but brought to India
Rs.2,00,000.
xiv) Salary (computed) received in India for services rendered in Sri Lanka
Rs.1,50,000. Compute his taxable income for the A.Y. 2022-23.
days more during the previous year and 365 days in 4 years proceeding the relevant
previous year.

Additional condition
a) Assessee must be a resident in India at least two out of ten previous years preceding
the relevant previous year,
And

b) An assessee must have been in India for at least 730 days or more during the seven
previous years preceding the previous year.

STEP 2:
Calculation of Number of Days Stayed

Mr.Ajith’s stay in India from during the previous year is as under:

1st April 2020 to 5th August 2020 = 127 days
25th February to 31st March 2021 = 35 days
Total no. Of days = 162 days
He was in India in the earlier previous year completely.

STEP 3:
Residential Status
Mr. Ajith’s stayed in India during the previous year 2021– 2022 for 162 days and satisfies
the second basic condition. Since he leaves India in the previous year for the first time, he

FOR PRIVATE CIRCULATION ONLY 33

 has been resident for more than two years and also stayed for more than 730 days in past
preceding years. He satisfies second basic condition and both the additional conditions.
Hence, he is a resident and Ordinary Resident for the A.Y 2022-23
Illustration 3: Mr. Irfan comes to India for the first time on April 16, 2021. He has stayed
in India up to October 5, 2021. Determine his residential status for the A.Y 2022-23.

STEP 01: Apply Basic Conditions and Additional Conditions (write down)

STEP 02: Calculation of Number of Days Stayed

c) In the previous year – 01/04/2021-31/03/2022
16/04/2021 -05/10/2021 = 173days
d) In preceding to previous years, he has not been in India, as he has come to India for the
first time in the year 2021.

STEP 03: RESIDNETIAL STATUS

Mr. Irfan is not an Indian citizen as he came to India for the first time in the year
2020. His stay in India is for a total period of 173days. Thus, he does not satisfy any of the
basic as well as additional condition. So, he is considered as a NON-RESIDENT for the AY
2022-2023.

Incidence of tax or taxability of total income on the basis of residence:

1) Resident: Total income of any previous year of a person who is an “Ordinary Resident”
includes all income from whatever source derived which:
a) Is received or deemed to be received in India
b) Accrues or arises or is deemed to accrue or arise to him in India
c) Accrues or arises to him outside India during the previous year.

2) Resident but not Ordinary Resident

The total income of a person who is a resident but not ordinary resident includes all
income from whatever source derived which:
a) Is received or deemed to be received in India
b) Accrues or arises or deemed to accrue or arise to him in India
c) Accrues or arises to him outside India from a business controlled in or a profession
setup in India.

FOR PRIVATE CIRCULATION ONLY 34

 3) Non–resident
Total income of a Non-resident includes all income from whatever source derived which:
a) Is received or deemed to be received in India
b) Accrues or arises or is deemed to accrue or arise to him in India during such year.

TERMINAL QUESTIONS:

Section: A
5. What are the types of residents for income tax purpose?
6. Who is a Not Ordinary Resident?
7. Who is Non-resident?
8. When an individual becomes Ordinary Resident?

Section B and C:

6. Mr. James a citizen of West Indies was appointed as sales manager in India on 1 stApril
2017 at Mumbai. On 25 January 2020he went to Uganda on deputation for period of 3
years, but left his wife and children in India. On 1st May 2020 he came to India and took
with him his family to Uganda on 30th June 2020. He returned to India and joined his
original job on 24th January 2021. Determine his residential status for the A.Y 2022-23.

7. Mr. Raj, citizen of U.S. came to India for the first time on 01.05.2017. He stayed here
without any break for 3 years and left for Bangladesh. on 01.05.2020. He returned to India
on 01.04.2021 and went back to U.S. on 01.12.2021 He was posted back to India on
20.01.2022. Determine his residential status for the A.Y 2022-23.

8. Vaishak, a foreign national (not being a person of Indian origin), comes to India for the
first time on April 15, 2015. During financial years 2016-17, 2017-18, 2019-20, 2021-
21,2020-2022he was in India for 130days, 80days, 13 days, 210 days and 75 days
respectively. Determine his residential status for the A.Y 2022-23.
Incidence of Tax

Chart showing the Incidence of Tax for different types of status:

II- Indian income, CI- Controlled income, EI- Exempted income and FI- Foreign income.

FOR PRIVATE CIRCULATION ONLY 35

 Different types of status
Nati
Resident
Types of income ona Not-
and Non-
l Ordinarily
Ordinarily Resident
inco Resident
Resident
me
1. Income received or deemed to be II
received in India. But received outside Taxable Taxable Taxable
India
2. Income earned or deemed to be II
earned outside India but received in Taxable Taxable Taxable
India
3. Income earned and received in India II
or income deemed to be earned and Taxable Taxable Taxable
received in India
4. Income earned or deemed to be FI
Taxable Not Taxable Not Taxable
earned and received both outside India
5. Income earned and received outside CI
India from the business controlled or
Taxable Taxable Not Taxable
profession setup in India income may
or may not be remitted to India
6. Income earned and received outside FI
India from a business controlled or Taxable Not Taxable Not Taxable
profession setup outside India
7. Past untaxed income brought into EI
Not Taxable Not Taxable Not Taxable
India during the relevant previous year
8. Gift is not an income, If it is less than EI
Rs. 50,000. (If gift is received by an
Not Taxable Not Taxable Not Taxable
individual from a relative or at the time
of marriage or by a will, it is tax free)
9.Gift from a friend exceeding Rs. II
50,000 received in India is an income. Taxable Taxable Taxable
Therefore taxable.
10.Dividend from an Indian company is II
exempted up to10,00,000 in case of a
Taxable Taxable Taxable
resident. Further, in case of non-
resident, it is fully exempted from tax
II
11.Dividend from Cooperative societies Taxable Taxable Taxable
12.Dividend from foreign company II
Taxable Taxable Taxable
received in India
13. Share of profits from HUF EI Not Taxable Not Taxable Not Taxable

FOR PRIVATE CIRCULATION ONLY 36

TABLE SHOWING NUMBER OF DAYS PER MONTH FOR THE AY 2021-2022
PY: 01/04/2020-31/03/2021 AY:01/04/2021-
31/03/2022
MONTH DAYS MONTH DAYS
April 2020 30 October 31
May 31 November 30
June 30 December 31
July 31 January 2021 31
August 31 February 28
September 30 March 31

Illustration 1: Kishan, a foreign national furnishes the following particulars of his income
relevant for the previous year 2021-2022.
1. Profit on sale of plant at London (one half is received in India) 1,46,000.
2. Profit on sale of plant at Delhi (one half is received in London) 1,02,000
3. Salary from an Indian company received in London (one half is paid for services
rendered in India) Rs.60, 000.
4. Interest on UK development bonds (entire amount received in London) Rs. 40,000
5. Income from property in London received there Rs. 30,000
6. Profit from a business in Delhi managed from India Rs. 49,000
7. Income from agriculture in London received there, half of which is used for meeting
hostel expenses of his son and remaining amount is later on remitted to India Rs. 25,000.
8. Dividend (gross) received in London from a company registered in India but mainly
operating in London Rs.17,000.
9. Rental income from a property in Nepal deposited by the tenant in a foreign branch of
an Indian bank operating there. Rs. 12,000
10. Gift from a relative in foreign currency (one third of which is received in India and
remaining amount is used for meeting education expenses of Kumar’s son in USA) Rs.
3,90,000.
Determine gross total income of Kishan for the assessment year 2022-223 if he is
a) Resident and ordinary resident
b) Resident but not Ordinary resident, and
c) Non-resident.

Solution:
Computation of Gross Total Income of Kishan for the A.Y 2022-23

Not
Ordinary Non-
Details of Income ordinary
resident resident
resident
1. Profit on sale of plant at London 1,46,000 73,000 73,000
2. Profit on sale of plant at Delhi 1,02,000 1,02,000 1,02,000
3. salary from an Indian company 60,000 30,000 30,000
4. Interest on UK development bonds 40,000 Not taxable Not taxable
5. Income from property in London 30,000 Not taxable Not taxable
6. profit from a business in Delhi 49,000 49,000 49,000
FOR PRIVATE CIRCULATION ONLY 37
 7. income from agriculture in London 25,000 Not taxable Not taxable
8. Dividend from an Indian company 17,000 17,000 17,000
9. Rental income from property in Nepal 12,000 Not taxable Not taxable
10. gift from a relative Exempt Exempt Exempt
Gross total income 4,81,000 271,000 2,71,000

Illustration 2
Mr. Satya gives you the following information being a Resident Ordinary Resident.
6. Salary Rs.80,000 received in Japan for the services rendered in India.
7. Commission received in India for the services given in Sri Lanka Rs.1,40,000.
8. House rent of the house situated in Nepal received in India Rs.30,000.
9. Dividend of a England based company received in India Rs.75,000.
10. Profit of the business situated in Japan brought to India Rs.5,00,000.
Determine the residential status of Mr. Satya for the previous year 2021-22 and explain
that on which income he is liable to pay tax in India.
Compute his taxable income for the AY 2022-2023.

Computation of Total income

Name of the Assessee: Ms. Satya P.Y.2021-2022
Residential status: Resident Ordinary Resident A. Y. 2022-2023
Types of Income NI R
Salary received in Japan for the services rendered in
1
India (Assumed to be computed income) Rs.80,000
Commission received in India for the services given
2
in Sri Lanka Rs.1,40,000.
House rent of the house situated in Nepal received in
4
India Rs.30,000.
5 Dividend of a England based company received in India
Rs.75,000.
6 Profit of the business situated in Japan brought to India Rs.5,00,000.
GTI/ TOTAL INCOME 8,16,000

Illustration 3
Mr. Jacob is a foreign national furnishes the following particulars of income relevant for
the previous year 2020-2021.
I. Profit on sale of land at London (½ received in India) Rs 1,46,000.
II. Profit on sale of plant at Delhi (1/2 received in London) Rs 1,02,000.
III. Salary (net of salary deduction) from Indian co. received in London Rs 60000.

FOR PRIVATE CIRCULATION ONLY 38

 IV. Interest on U.K. development bonds Rs 60,000. (1/3 is received in India)
V. Income from property in London received there Rs 30000.
VI. Income from agriculture in London received there but later on remitted to India Rs
2500.
VII. Dividend received in London from company registered in India 17000.
VIII. Profit from a business in Delhi, managed from India Rs 49000.
IX. Profit for the year 2019-20 of a business in USA remitted to India during 2020-21 (Not
taxed earlier)
X. Gift from friends 80,000
XI. Dividend paid by an Indian company. Received in Canada ₹20,000
XII, Pension from Indian company received in London
XIII. Profit from business in Indonesia, Controlled from Delhi

Determine gross total income of Mr. Jacob for assessment year 2021-22. If he is
(2) Ordinary resident, (2) Not ordinary resident, (3) non-resident

Computation of Total income

Previous year2020-2021
Name of the Assessee: Mr. Jacob Assessment Year: 2021-2022
Types of Income NI R NOR NR
Profit on sale of land at London
73000
I (½ received in India) Rs II 73,000 73,000
73,000
1,46,000 FI
Profit on sale of plant at Delhi
II (1/2 received in London) Rs II 1,02,000 1,02,000 1,02,000
1,02,000.
Salary (net of salary deduction)
III from Indian co. received in II 60,000 60,000 60,000
London Rs 60000.
Interest on U.K. development
20,000
IV bonds Rs 60,000. (1/3 is FI 20,000 20,000
40,000
received in India) II
Income from property in
V London received there Rs 30,000 Not taxable Not taxable
30000. FI
Income from agriculture in
VI London received there but later 2,500 Not taxable Not taxable
on remitted to India Rs 2500. FI
Dividend received in London
VII from company registered in 17,000 17,000 17,000
India 17000. II
Profit from a business in Delhi,
VIII 49,000 49,000 49,000
managed from India Rs 49000. II

FOR PRIVATE CIRCULATION ONLY 39

 Past untaxed income is
IX EI Tax free Tax free Tax free
exempted
X Gift from friends II 80,000 80,000 80,000
Dividend paid by an Indian
XI 17,000 17,000 17,000
company. Received in Canada II
Pension from Indian company
XII 36,000 36,000 36,000
received in London II
Profit from business in
XIII Indonesia, Controlled from 1,20,000 1,20,000 Tax free
Delhi CI
GTI 7,19,500 5,74,000 4,54,000

Illustration 4. From the following particulars of Mr. Uday compute his Gross total income
for the A.Y.2022-23 if he is 1. Resident, 2. Not Ordinarily Resident and 3. Non-Resident
(a) Income from business from Raichur Rs. 50,000
(b) Profit from business in U.K. controlled from India Rs 60, 000
(c) Income from house property in Japan not received in India Rs 30, 000
(d) Income from business in India but received in Pakistan Rs 50, 000
(e) Salary received in India for service rendered in USA Rs 70, 000
(f) Interest on deposit with State Bank in Bangalore Rs 10, 000
(g) Profit from business in Ceylon controlled from India (1/3 profit received in India)
Rs 30,000
(h) Salary received in India for service rendered in Kuwait Rs 35, 000
(i) Past untaxed foreign income brought into India Rs 8, 000
(j) Dividend received from Domestic Company Rs 5,000
(k) Interest on Post Office Savings Bank A/c Rs 1,000
(l) Agriculture income earned in Nepal Rs 25,000.
(m) Gift in cash from a relative received in India Rs 60000.
(n) Interest received from a firm in UK later on remitted to India Rs 10000

Computation of Total income

Previous year2021-2022
Name of the Assessee: Mr.Uday Assessment Year: 2022-2023
Types of Income NI R NOR NR
(a) Income from business from Raichur II 50,000 50,000 50,000
Not
(b) Profit from business in U.K. controlled from India 60, 000 60, 000
CI Taxable
Income from house property in Japan not received in Not Not
(c) 30, 000
India FI Taxable Taxable
Income from business in India but received in
(d) 50, 000 50, 000 50, 000
Pakistan Rs II
(e) Salary received in India for service rendered in USA 70,000 70,000 70,000
II

FOR PRIVATE CIRCULATION ONLY 40

(f) Interest on deposit with State Bank in Bangalore 10, 000 10, 000 10, 000
II
Profit from business in Ceylon controlled from India II& 10, 000 10, 000
(g) 10, 000
(1/3 profit received in India) Rs 30,000 CI 20,000 20,000
Salary received in India for service rendered in
(h) 35, 000 35, 000 35, 000
Kuwait Rs II
Not Not Not
(i) Past untaxed foreign income brought into India
EI Taxable Taxable Taxable

(j) Dividend received from Domestic Company 5,000 5,000 5,000

II
Not Not Not
(k) Interest on Post Office Savings Bank A/c
EI Taxable Taxable Taxable
Not Not
(l) Agriculture income earned in Nepal. 25,000
FI Taxable Taxable
(m) Gift in cash from a relative received in India II 60000 60000 60000
Interest received from a firm in UK later on Not
(n) 10,000 10,000
remitted to India CI Taxable

Illustration 5. Following are the incomes of Mr. Vishnu for the previous year 2020-21

a) Received Rs.20,000 in India, which accrued in England.

b) Rs.10,000 earned in India but received in England.

c) Rs.5,000 were earned and received in Africa but brought to India.

d) Rs.10,000 were earned and received in Japan from a business which was controlled
and managed in Japan.

e) Rs.16,000 was untaxed foreign income of some earlier year, which was brought to
India in the previous year.
f) Interest on FD in State Bank of Mysore, Bangalore Rs.1,200.

g) Income from agriculture in Africa, received in India Rs.10,000.

h) Dividends received in U.K from an American Company Rs.10,000.

i) Salary income for three months for working in Indian Embassy's office in Australia
and salary received there Rs.72,000.

j) Income from house property in Mumbai Rs.1,00,000.

k) Interest received on POSB a/c Rs.1,000.

l) Pension income from Belgium for services rendered in India with a limited company
Rs.2,20,000.

FOR PRIVATE CIRCULATION ONLY 41

 m) Gift from friends Rs.80,000.

Which of the above incomes are taxable if Mr. Vishnu is – a) Resident and ordinarily
resident?

Computation of Total Income of Mr. Vishnu

Previous Year: 2020-21
Assessee: Mr. Vishnu Assessment Year: 2021-22
Types of Income NI R NOR NR
a) Received Rs.20,000 in India, which accrued in England II 20,000 20,000 20,000
b) Rs.10,000 earned in India but received in England. II 10,000 10,000 10,000
c) Rs.5,000 were earned and received in Africa but brought to
India FI 5,000 NIL NIL
d) Rs.10,000 were earned and received in Japan from a business
which was controlled and managed in Japan FI 10,000 NIL NIL
e) Rs.16,000 was untaxed foreign income of some earlier year,
which was brought to India in the previous year EI NIL NIL NIL
f) Interest on FD in SBM, Bangalore II 1,200 1,200 1,200
g) Income from agriculture in Africa, received in India II 10,000 10,000 10,000
h) Dividends received in U.K from an American company
Rs.10,000 FI 10,000 NIL NIL
i) Salary income for three months for working in India Embassy's
Office in Australia and salary received there Rs.72,000 II 72,000 72,000 72,000
j) Income from house property in Mumbai Rs.1,00,000
II 1,00,000 1,00,000 1,00,000
Not Not Not
k) Interest received on POSB A/c
EI Taxable Taxable Taxable
l) Pension income from Belgium for services rendered in India
with a limited company Rs.20,000 II 20,000 20,000 20,000
m) Gift from friends
II 80,000 80,000 80,000

FOR PRIVATE CIRCULATION ONLY 42

Total income 3,38,200 3,13,200 3,13,200
b) Resident but not ordinarily resident c) Non-resident.

PRACTICAL PROBLEMS

1. Mr. Anish has the following incomes for the previous year 2021-2022
₹
9. Income from salary in India from a company 50,000
10. Dividend from an Indian company received in England and
spent there 10,000
11. Income from house property in India received in Pakistan 20,000
12. Dividend from a foreign company received in England
deposited in a bank there 10,000
13. Income from business in Kolkata, managed from USA 20,000
14. Income from business in USA (controlled from Kanpur) 12,000
15. Income was earned in Australia and received there but brought
into India 25,000
16. His maternal uncle sent bank draft from France as a gift
on his marriage 20,000

Compute the gross total income, if he is:

(i) Resident (ii) Not-ordinary Resident (iii) Non-resident.

2. Mr. Naresh is an Indian Citizen. He left India on 16th July 2020 to England and return
to India on 02 Feb 2021. During the Previous Year his details of income were as follows:
(a) Interest on Securities of an Indian Company received in England Rs 22,000
(b) Agricultural Income in Gujarat Rs 30,000
(c) Dividend from Indian Company Rs 10,000
(d) Interest received from a firm in England remitted to India Rs 9,500
(e) Amount brought to India out of past untaxed profit earned in England Rs 22,000
(f) Income from business in Pakistan being controlled from India Rs 15,000
(g) Interest earned & received in England from bank & deposited there Rs20,000
(h) Income from Salary received in India for services rendered in England Rs20,000
Determine his Residential Status & Gross Total Income for the AY 2022-23.

3. Suresh is an Indian citizen went out of India on 28th august 2019 for service in a
company in Japan and came back to India on 1st April 2020 to meet his family. During the
year 2020-21, he received the following incomes:
XII. Incomes from salary in Japan Rs 28000.
XIII. Interest on bonds of central government of India Rs28000
XIV. Taxable income from shares from foreign company Rs 7500 received in Japan.
XV. Income from agricultural land situated in Punjab Rs 10000

FOR PRIVATE CIRCULATION ONLY 43

 XVI. Interest received from firm in U.K. remitted to India Rs.9200
XVII. Payment from public provident fund Rs 20000.
XVIII. Commission received in India for the services given in Nepal Rs.10000.
XIX. Profit from business in Srilanka Rs.40000 (business controlled from Chennai) of which
Rs15000 was received in India.
XX. Profit of the business in Nepal brought to India. Rs 50000
XXI. Amount brought to India out of past-untaxed profit earned in Japan Rs 8000.
XXII. Share of income from HUF Rs 12000.
Calculate the gross total income of Krishna after ascertaining his residential status for
assessment year 2022-2023.

9. Following are the particulars of Mr. Praful for the previous year 2021-22.
xv) Profit on sale of plant at Singapore (on-half is received in India) Rs. 2,50,000.
xvi) Profit on sale of property at Bengaluru (one-half received in Hong-Kong)
Rs.50,000.
xvii) Interest on UK Development Bonds Rs.2,00,000 of which Rs.1,00,000
remitted to India.
xviii) Profit from business in Mangalore, the control is from USA Rs.30,000,
xix) Income from business Mysuru but received in Holland Rs.5,00,000.
xx) Profit from business in Pakistan controlled from India (40% profit received
in India) Rs.6,00,000
xxi) Dividends from domestic company Rs.2,00,000.
xxii) Interest on post office Savings Bank Account Rs.1,000.
xxiii) Past untaxed foreign income brought to India during previous year
Rs.2,00,000.
xxiv) Rural agricultural income in India Rs.3,00,000.
xxv) Salary and allowances from UNO Rs.3,00,000.
xxvi) Interest and dividends from units of UTI Rs.20,000.
xxvii) Income earned in Australia and received there but brought to India
Rs.2,00,000.
xxviii) Salary (computed) received in India for services rendered in Sri Lanka
Rs.1,50,000. Compute his taxable income for the A.Y. 2022-23.

FOR PRIVATE CIRCULATION ONLY 44

 Module II

Computation of Taxable Income under the different heads of Income

• Different heads of income are:
• Income from Salary
• Income from House Property
• Profits and gains from Business or Profession
• Capital Gains
• Income from Other Sources
Salary (Section 15 – 17) Salary is the remuneration received by or accruing to an
individual, periodically, for service rendered as a result of an express or implied contract.
The actual receipt of salary in the previous year is not material as far as its taxability is
concerned. According to Income Tax Act there are certain conditions where all such
remuneration is chargeable to income tax:
• When due from the former employer or present employer in the previous year, whether
paid or not
• When paid or allowed in the previous year, by or on behalf of a former employer or
present employer, though not due or before it becomes due.
• When arrears of salary are paid in the previous year by or on behalf of a former employer
or present employer, if not charged to tax in the period to which it relates.

1.1 Basis of charge:

• Relationship between payer and payee is vital.

• Salaries and wages are not conceptually different. Both are compensation for work done
or services rendered.
• Salary from more than one source or employer also considered.
• Salary from former employer, present or prospective employer shall also taxable.
• Salary income must be real and not fictitious.
• Foregoing of salary: Section 15 taxes salary on ‘’due’’ basis even if it is not received.
• Voluntary payments: Salary perquisites or allowances may be given as a gift to an
employee yet they would be taxable.

Section 17(1) of the Income tax Act gives an inclusive and not exhaustive definition of
“Salaries”, which includes:

1) Wages
2) Annuity or pension
3) Gratuity
4) Fees, Commission, allowances perquisites or profits in lieu of salary
5) Advance of Salary
6) Amount transferred from unrecognized provident fund to recognized provident fund
7) Contribution of employer to a Recognized Provident Fund in excess of the prescribed
limit

FOR PRIVATE CIRCULATION ONLY 45

8) Leave Encashment
9) Compensation as a result of variation in Service contract etc.
10) Contribution made by the Central Government to the account of an employee under a
notified Pension scheme.

1.2 Arrears of Salary - Salary in arrears / advance, received in lump sum, is liable to
tax in the year of receipt. Relief can be obtained for salary arrears u/s 89(1) of the
Income Tax Act.

1.3 Salary: is paid by the employer to the employee in consideration of the service
rendered by him to the organization. It includes monetary value or non-monetary value
of benefits and facilities provided by the employee. Any amount received other than from
employer cannot be termed as salary.
1.4 Computation of taxable income from salary of for the assessment year 2022-23

Format for Computing Taxable Income from Salary

Name of the Assessee: XXX Previous year: 2021-22

Residential Status: - R/NOR/NR Assessment year: 2022-23

Particulars ₹ ₹
1. Basis Pay xxx
2. Advance salary xxx
3. Arrear salary (If it not taxed earlier) xxx
4. Dearness Pay/ Dearness Allowances xxx
5. Fees, xxx
6. Bonus, xxx
7. Commission xxx
8. Allowance’s u/s 17(2) xxx
9. Taxable perquisites u/s 17(3) xxx
10. Profits in lieu of salary xxx
11.Encashment of Earned Leave xxx
12. Employer's contribution to RPF in excess of 12% of salary xxx
13. Accrued Interest on RPF in excess of 9.5% xxx
14. Taxable portion of gratuity xxx

15. Taxable portion of compensation on retirement xxx

16. Taxable portion of compensation on Voluntary retirement xxx

17. Pension from the date of retirement to the end of previous year xxx
18. Taxable portion of the commuted value of pension xxx

FOR PRIVATE CIRCULATION ONLY 46

 Gross Salary xxxx

Less: Deductions U/s 16

a) Standard Deductions U/S 16(IA) (Maximum limit

of 50,000or gross salary, WEL) xxx
b) Entertainment Allowance U/S 16(ii) xxx
( In case of Government employee) xxx
c) Professional tax U/S 16(iii) xxx

Taxable Income from Salaries xxx

Notes: From the above table No.1 to No.10 (ie from Basic Pay to Profits lieu in salary) is
fully taxable.

1.5 Salary sec 17(1)

The term salary includes the following:

a. Wages
b. Any annuity or pensions
c. Any gratuity
d. Any fees, commission, perquisites or profits in lieu of salary
e. Any advance salary
f. Encashment of earned leave salary
g. Employer’s contribution in excess of 12% of employee salary to RPF and interest on RPF
in excess of 9.5% p.a.
h. The contribution made by Central Government to the account of an employee under
Pension scheme referred to in sec. 80CCD.

1.6 Basic Salary: It is fully taxable; there are two methods of calculating Basic Salary,

1) Receipts Basis: Under this method salary will be received at the end of every month. It
falls due on the last date of the same month (1st April 2021 o 31st March 2022).
2) Due Basis: Under this method, salary of any month will be received in the first week of
next month. It falls due on the first day of next month (March 2021-Februray 2022).

1.7 Leave Salary: Section 17 (1) (a)

It is also called as salary in lieu of leave. An assessee is entitled for certain number of
leaves as per the employment contract. If the assessee does not avail such leave, then he
can get the salary for the number of days he has not availed leave.
Leave Salary Received can be classified into two types. They are:

1. Leave Salary received while in service: It is fully taxable for both government
employees and non- government employees.

FOR PRIVATE CIRCULATION ONLY 47

2. Leave salary received at the time of retirement: It is fully exempt U/S 10(10AA) for
government employee and it is partially exempted U/S 10(10AA) for non–government
employee.

Encashment of Leave Salary [Sec. 10(10AA)]

Encashment of leave by surrendering earned leave standing to the employee's credit is known as
encashment of leave salary"

Tax Treatment

Leave salary received during the service period Leave salary received at the time of retirement
Non-Government Government
Government employee i.e employee i.e employee Non-Government Employee
1. Leave encashment actually
received. Total earn leave
(Employees of
((service period x actual earned.
state or Central (Other employees)
leave) - (Actual earn leave used
Government)
x Last drawn Fully tax-free
salary)},
2. Leave salary as per IT law-
[(1 month salary or Actual
earned leave, w.e.l) x
(service period-earned leave
Fully taxable Fully taxable Fully tax free
used) x average salary)
3. 10 months average salary.
4. Maximum limit of Rs.
3,00,000

Note:

1. Average salary means the total of basic salary, dearness pay, dearness allowance
enters into all retirement benefits), commission (if it is based on a fixed percentage of
turnover achieved by the employee), for 10 months immediately preceding the date of
retirement, divided by 10.

2. To find out the duration of service period, fraction of the year shall be ignored.

3. If employee receives leave salary from two or more employers in the same year, the
maximum limit of 3,00,000 shall be reduced by the amount of leave salary exempted
earlier. This provision is applicable for non-government employees receiving leave salary
at the time of retirement.

4. Leave salary paid to the legal heirs of the deceased employee is fully exempt from tax.

5. If total earned leave less leave availed is negative, it must be taken as nil.

FOR PRIVATE CIRCULATION ONLY 48

Illustration-1

Mr. Nagaraj (resident) was a manager in a Private Company. He sought pre mature
retirement from service on 1st November 2021 after completing 25 years of
service. His salary for 10 months preceding retirement was 36,900. He had seven
months leave to his credit on the basis of 30 days per year which was approved and
he was paid 27,300 as salary. Compute the amount of encashment exempt from tax
for P. Y. 2022-21, if his last drawn salary is 3,900.

Solution:

Computation of Taxable Leave Salary

Assessee: Mr. Narasimha Previous Year: 2021-2022

Status: Resident Assessment Year: 2022-23
Category: Non-Govt. Employee
Particulars ₹ ₹
Actual leave salary received (25x1=25-18=7x3,900) 27,300
Less: Least of the following:
1. Actual leave salary received 27,300
2. Leave salary as per IT law (1x 25 = 25-18=7x3,690) 25,830
3. (10x3,690), 10 months average salary 36,900
4. Maximum limit 3,00,000 25,830
Taxable Leave Salary 1,470

Note:
36,900
1. Calculation of average salary: average salary = = 3,690
10

2. The amount of leave salary exempt from tax is 25,830.

Illustration-2

Mr. Govind (resident) resigned from his service from a public company on 30th
November 2021 after completing 24 years and 10 months of service. During his
service he was allowed to get 45 days of earned leave for every completed year of
service. During his service he had availed 10 months leave and had encashed 6
months leave. On resignation he was paid leave salary of 2,20,000 for his credit of
20 months earned leave. His average salary during the 10 months preceding to the
date of his resignation was 11,000.

Compute his taxable leave salary for the assessment year 2022-23.

Solution:

FOR PRIVATE CIRCULATION ONLY 49

Computation of Taxable Leave Salary

Assessee: Mr. Kumar

Status: Resident Previous Year: 2021-22
Category: Non-Govt. Employee Assessment Year: 2022-23
Particulars ₹ ₹.
1080 2,20,000
Leave encashment received (45 x 24 = = 36 − 16 = 20) (20 ∗ 11,000)
30 -

Less: Least of the following:

i) Leave encashment received 2,20,000
ii) Leave salary as per IT law
720
(30*24= 30
= 24 − 16 = 8)(8 ∗ 11,000) 88,000

iii) 10 months average salary (11,000 × 10). 1,10,000

iv) Maximum limit 3,00,000
Exempted amount of earned leave 88,000
Taxable Leave Salary 1,32,000
Last drawn salary is not specified in the problem. Therefore, average salary is assumed
to be last drawn salary, i.e., Rs. 11,000

Illustration-3

Mr. Suresh (resident) retired from ABC Ltd. On 1-11-21 after serving the company
for 25 years and 9 months. At the time of retirement his basic pay was Rs. 20,000
p.m. and D.A. of Rs. 800 p.m. [which is treated as salary for the purpose of all
retirement benefits] but it was Rs. 18,000 per month basic and Rs. 200p.m DA up
to 31-7-2021.

He is entitled for 45 days of leave per year of service and has availed 55 days leave
and encashed 20 days of leave throughout his service and received a leave salary
Rs. 7,28,000. Compute taxable part of leave salary for the A.Y. 2022-23.

Solution:

Assessee: Mr. Suresh

Status: Resident Previous Year: 2021-22
Category: Non-Govt. Employee Assessment Year: 2022-23
Particulars ₹ ₹.
1,050
Leave encashment received (25 x 45) = (1,125-75) = 30 = 35 ∗ 20,800) -

Less: Least of the following: 7,28,000

i) Leave encashment received 7,28,000

FOR PRIVATE CIRCULATION ONLY 50

 ii) Leave salary as per IT law
675
(25*30) =750-75= = 22.5 ∗ 18,980 4,27,050
30

iii) 10 months average salary (11,000 × 10). 1,89,800

iv) Maximum limit 3,00,000
Exempted amount of earned leave 1,89,000
Taxable Leave Salary 5,38,200

Calculation of Average Salary: (Salary from 01-01-2020 to 30-10-2021)

1. Salary = 18,000 x 7 = {1,26,000+ (20,000 x 3) = 60,000) = 1,86,000

2. DA = 200 x 7 = {1,400+ (800 x 3) = 2, 400} = 3,800 AS = 1,89,800/10 = 18,980

Gratuity:
Gratuity is a retirement benefit generally payable at the time of cessation of employment
and on the basis of duration of service.

Gratuity received can be classified into two types. They are:

1. Gratuity received while in service: it is fully taxable for both government and non–
government employees.
2. Gratuity received at the time of retirement: This includes
a. Gratuity received by government employees: It is fully exempt
b. Gratuity received by non–government employees who are covered by the payment of
gratuity Act 1972 it is taxable but exemption can be availed U/S 10(10).
c. Gratuity received by non – government employees who are not covered by the payment
of gratuity Act 1972 it is taxable but exemption can be availed U/S 10(10).

A) Format of Calculation of Taxable Gratuity (non–government employee when

gratuity received is covered by payment of gratuity act, 1972)
Particulars ₹. ₹.
Actual Gratuity Received XXX
Less: Least of the following is exempted u/s 10(10):
1. Actual Gratuity received XXX
2. Maximum amount 20,00,000
3. 15/26 X Last salary Drawn X No. of years completed service XXX
Exempted Gratuity XXX
Taxable Gratuity XXX

NOTE:
1. Salary last drawn comprises of
Basic salary + Dearness allowance of the month of retirement (full month salary should
be taken)
2. No. of years of service (rounded off): if it is 6 months or less ignore and if it is more than
6 months round it off to next year.

FOR PRIVATE CIRCULATION ONLY 51

 B. Calculation of taxable gratuity (non – government employee when gratuity
received is not covered under payment of gratuity act, 1972)

Particulars ₹. ₹.
Actual Gratuity Received XXX
Less: Least of the following is exempted u/s
10(10): XXX
1. Actual Gratuity received 20,00,000
2. Maximum amount XXX
3. 1/2 X Average salary X No of years completed XXX
service
Exempted Gratuity
Taxable Gratuity XXX

Therefore, taxable gratuity will be actual amount of gratuity received minus exempt U/S
10(10).

NOTE:
1. Average salary: It is the average of last 10 months salary proceeding the month of
retirement. It includes
Basic salary
(+) Dearness allowance (if it enters retirement benefit)
(+) Commission at a fixed rate calculated on turnover achieved by assessee.

2. For the service period any fractional month is given in the problem should be ignored
(Only completed number of years must be considered).

Illustration 1.
Mr. Ganesh (resident) employed at a salary of ₹. 6,200 per month. He is also getting
DA of ₹. 2,800 per month. He receives ₹. 5,000 as bonus. On 30/5/2021 he retired
from his service. He had service of 29 years and 5 months. He received ₹. 2,00,000as
gratuity under the payment of Gratuity Act. Compute his taxable gratuity for the
Assessment year 2022- 2223.

Name of the Assessee: Mr. Ganesh Previous year: 2021-22

Residential Status: - Resident Assessment year: 2022-23

Category- Non Govt employee

Particulars ₹. ₹.
Actual Gratuity Received 2,00,000

FOR PRIVATE CIRCULATION ONLY 52

 Less:
Least of the following is exempted u/s 10(10):
1.Actual Gratuity received 2,00,000
4. 2. Maximum amount 20,00,000
5. 3. (15/26) X (9,000 X 29) 1,50,577
Exempted Gratuity (1,50,577)
Taxable Gratuity 49,423
Last drawn salary ---6,200+2,800= 9,000, Service period -29 years
(fractional months should be ignored)
Formulae: 15/26 X Last salary Drawn X No. of years completed service

Illustration 2.
Sri. Moushumi Das is employed at a salary of ₹. 6,000 per month in a seasonal
factory. Besides, he also gets DA at ₹. 2,500 per month and annual Bonus Rs. 5,000.
He retires on 30/9/2021. He gets ₹. 1,75,000 gratuities under the payment of
Gratuity Act, 1972. He served for 30 years and 7-month, Compute taxable amount
of Gratuity for the Assessment year 2022-22.

computation of taxable gratuity

Name of the Assessee: Sri. Moushumi Previous year: 2021-22
Residential Status: - Resident Assessment year: 2022-23
Category- Non Govt employee
Particulars ₹ ₹
Actual Gratuity Received 1,75,000
Less:
Least of the following is exempted u/s 10(10):
1.Actual Gratuity received 1,75,000
2. Maximum amount 20,00,000
3. (7/26) X (8,500X 31) 70,942

Exempted Gratuity (70,942)

Taxable Gratuity 1,04,058

salary last drawn- 6,000+ 2,500=8,500 Service period 30 years + 1 Month (7months is
more than 6 months, so fractional month is converted into one year)
Formulae: 7/26 X Last salary Drawn X No. of years completed service

Illustration 3.

FOR PRIVATE CIRCULATION ONLY 53

Sri. Venial Patra, received ₹. 60,000 on his retirement on 30/9/2021 as gratuity
from his employer with Whom served for 29 years and 7 months. Compute taxable
amount in each of the following cases: If his salary during calendar year 2020 was
₹. 2,000 and during 2021 was 2,400 and it is due on 1st of every month. He had
worked earlier with a company for 6 years and received 92,000 as gratuity, which
was fully exempted.
1. He is a government employee
2. He is working in a factory (cover under the payment of
gratuity Act.)
3. He is working in a commercial office at Delhi.
Solution
1) If Sri. Venial Patra is a Govt employee, entire gratuity amount of Rs.60,000 is
exempted from tax.
2) Computation of taxable gratuity (Under the payment of gratuity Act)

2)computation of taxable gratuity (Under the payment of gratuity Act)

computation of taxable gratuity
Name of the Assessee: Sri. Venial Patra Previous year: 2021-22
Residential Status: - Resident Assessment year: 2022-23
Category-Non Govt employee

Particulars ₹ ₹

Actual Gratuity Received 60,000

Less:
Least of the following is exempted u/s 10(10):
1.Actual Gratuity received 1,75,000
2. Maximum amount (20,00,000-92,000) 19,08,000
3.(15/26) X (2,400X 30)
41538
Exempted Gratuity (41538)

Taxable Gratuity 18,462

3)computation of taxable gratuity (Not Under the payment of gratuity Act)

FOR PRIVATE CIRCULATION ONLY 54

 computation of taxable gratuity
Name of the Assessee: Sri. Venial Patra Previous year: 2021-22
Residential Status: - Resident Assessment year: 2022-23
Category-Non Govt employee

Particulars ₹ ₹

Actual Gratuity Received 60,000

Less:
Least of the following is exempted u/s 10(10):
1.Actual Gratuity received 1,75,000
2. Maximum amount (20,00,000-92,000) 19,08,000
3.(1/2 x Average salary x service period) (1/2 x 2320x29)
33,640
Exempted Gratuity (33,640)

Taxable Gratuity 26,360

Notes.
Average salary- (1/11/19 to 30/8/2020)
Form (Nov to Dec)- 2000 x 2= 4000
From (Jan to Aug)- 2400 x 8 =19200 (19,200 +4,000) = 23200/10 = 2320
Fractional month should not be considered therefore serviced period is 29
months.

1.9 Pension U/S 17(1)(ii) – [Exemption U/S10(10A)]

It is the amount received by employee from his employer after his retirement for the
service rendered. Pension received in the employee is only covered here. Any pension
received by family members after the death of employee is discussed under income from
other sources. The amount of pension received by an employee is taxable like salary. If an
employee receives a lump sum instead of receiving monthly pension, it is called
commutation of pension.

Commuted pension would be taxed in the following manner:

Tax Treatment

FOR PRIVATE CIRCULATION ONLY 55

 Government employees
(ie, employees of State Non-Government employees
or Central, Local
authority and
statutory corporation If employee receives If employee does not
gratuity receives gratuity
Least of the following Least of the following
is exempt is exempt
1. Actual commuted 1. Actual commuted
Fully exempted from
pension received pension received
Tax
or or
1/3 rd of full value 1/2 of full value
of commuted pension of commuted pension

a) Government Employee:
Commuted pension received by government employee is exempt from tax. Govt employee
includes central Govt employee, state Govt employee, employee of a local authority or any
Govt employee absorbed into a public sector undertaking.

b) Non–government employees:
In this case the commuted value of pension is exempt to the following extent:
a) Where the employee receives gratuity, the commuted value of one-third (1/3) of the
pension
b) Where the employee does not receive any gratuity, the commuted value of one-half (1/2)
of the pension.
c) Any payment received by way of commutation of pension by an individual out of an
annuity plan of LIC of India after 31.7.1996 or any other insurer is fully exempt.

Illustration-1

Mr. Sumeet Basak (resident) retired from services on 31st March 2020. His
pension was fixed at ₹.6,000 p.m. He commutes one-half of his pension and
received ₹.3,00,000. Find out the taxable amount of commuted pension, if:

a) He is a government employee.

b) He is a non-Govt. employee who also gets gratuity and c) He is a non-Govt.

employee who does not get any gratuity.

Solution:

Computation of Taxable Pension

FOR PRIVATE CIRCULATION ONLY 56

 Assessee: Mr. Sumeet Basak Previous Year: 2021-22
Status: Resident Assessment Year: 2022-23
Particulars ₹. ₹.
(a) If Mr. Sunder Basak is a Government employee
Entire commuted pension of 3,00,000 will be
exempted from tax 2,20,000
Total Taxable Commuted Pension Nil

(b) If Mr. Sumeet Basak is a Non Govt. employee,

who also gets gratuity 3,00,000
Commuted pension received
Less: Least of the followings:
1. Actual commuted pension received 3,00,000
100 1
(3,00,000 X
50
X
3
) 2,00,000 2,00,000
2.1/3 of full value of commuted pension

Total Commuted Taxable Pension 1,00,000

b) If he is a Non Govt. employee, who does not gets

gratuity Commuted pension received
3,00,000 3,00,000
Less: Least of the followings: (3,00,000 X
100
X
1
)
3,00,000
1. Actual commuted pension received 50 2

2.1/2 of full value of commuted pension

3,00,000
Total Commuted Taxable Pension Nil

Notes. 1.If Mr. Sunder Basak is a government employee

Entire commuted pension up to 3,00,000 will be exempted from tax. In this problem Rs.
2,20,000 is pension received, it is less than ₹.3,00,000 therefore entire amount of
2,20,000 is exempted from tax.

Illustration-2

Mr. Arun (resident) is getting a pension of 8,000 p.m. from a company. During the P.Y. 2021-22he
got his 2/3 pension commuted and received of 5,08,000. Compute the exempted amount:

(i) if he has also received gratuity

(ii) (ii) if he does not received gratuity.

Solution:

FOR PRIVATE CIRCULATION ONLY 57

 Computation of Taxable Pension

Assessee: Mr. Arun Previous Year: 2021-22

Status: Resident Assessment Year: 2022-23
Particulars ₹. ₹.

(b) If Mr. Arun is a Non Govt. employee, who also gets

gratuity
Commuted pension received 5,08,000
Less: Least of the followings:
1. Actual commuted pension received 3 1
5,08,000
2.1/3 of full value of commuted pension (5,08,000 X 2 X ) 2,54,000
3
2,54,000
Total Commuted Taxable Pension 2,54,000

(b) If he is a Non Govt. employee, who does not gets

gratuity
Commuted pension received 5,08,000
Less: Least of the followings:
1. Actual commuted pension received 100 1 5,08,000
)
2.1/2 of full value of commuted pension (3,00,000 X 50 X 2 3,81,000
3,81,000
Total Commuted Taxable Pension 1,27,000
Illustration-3

Mr. Anand a non-government retired employee is getting a pension of 12,000 per month from a
company. During the previous year 2021-22 he got his half of pension commuted and received * ₹.
5,00,000. Compute the exempted amount of commuted pension for the A.Y. 2022-23 if:

a) He receives gratuity b) He does not receive any gratuity

Solution: Computation of Taxable Pension

Assessee: Mr. Anand Previous Year: 2021-22

Status: Resident Assessment Year: 2022-23
Particulars ₹
(b) If he receives gratuity
Commuted pension received 5,00,000
Exempt: 1/3 of full value of commuted pension 3,33,333
5,00,000 X 2/1 = 10,00,000
10,000,000 X 1/3
Total Commuted Taxable Pension 1,67,667
(b) If he does not receive gratuity
Commuted pension received 5,00,000
Exempt: 1/2 of full value of commuted pension 5,00,000
5,00,000 X 2/1 = 10,00,000
10,000,000 X 1/2
Total Commuted Taxable Pension Nil

FOR PRIVATE CIRCULATION ONLY 58

 1.10. Provident Fund (PF)

To encourage savings for the social security of employees, government has setup various
kinds of provident funds. The employee contributes a fixed percentage of salary towards
these funds and in many cases, employer also contributes an equal amount.

The mechanism of PF works like this

1. Every month the employee will be contributing to this fund for his future benefits.
2. Normally the same amount will be contributed by the employer also to the fund.
3. Interest will be earned by investing these funds in some good rated securities.
4. Assessee can withdraw this at the time of leaving the job or retirement or death.

Provident Fund:
Any fund to be provided in the future is known as provident fund. In this fund certain
percentage is deducted from the salary of an employee and an equal sum is contributed
by the employer and both the amounts are deposited in provident fund account by the
employer on behalf of employee.

Types of Provident Fund:

1. Statutory Provident Fund (SPF): Any fund maintained as per the Provident Fund
Act of 1925 and it is generally maintained by the employees of Government &
Statutory Corporation.
2. Recognized Provident Fund (RPF): Provident Fund which is recognized by
commissioner of Income Tax of the purpose of tax exemption is known as RPF and
generally maintained by private companies.
3. Unrecognized Provident Fund (URPF): It is a fund which is not recognized by
commissioner of income tax but still contribution can be made in this fund. Employee of
private and unorganized sector will contribute to this fund.
4. Public Provident Fund (PPF): Any member of the public whether salaried employee or
self-employed can invest in the public provident fund by opening a PPF account at the
State Bank of India and its subsidiaries or any other nationalized banks.

S.No. Particulars SPF RPF URPF PPF

1 Employers Fully Exempted up to To be ignored Not
Contribution Exempted 12% of at the time of applicable
employee’s salary contribution

FOR PRIVATE CIRCULATION ONLY 59

 2 Employees Qualifies Qualifies for Not qualifies for Qualifies
Contribution for deduction u/s deduction u/s for
deduction 80C 80C deduction
u/s 80C u/s 80C
3 Interest on Fully Exempted up to To be ignored Fully
PF Exempted 9.5% p.a. in the year of Exempted
credit
4 Refund from Fully It is fully
• Employee Fully
Provident Exempted exempted. contribution is Exempted
fund deposit If the employee fully exempted.
has rendered• Employers’
continuous contribution
service of 5 years and interest
otherwise it is thereon is taxed
treated as refund under the head
from URPF and income from
accordingly taxed salary.
• Interest on
employee
contribution is
taxed under the
head income
from other
sources.

Illustration-1

Calculate the taxable amount of annual accretion to RPF if the following

information is provided by Mr. Kiran (resident)
1.Basic salary @ 10,000 P.m.
2. Commission received by him on the basis of turnover of ₹. 5,00,000@ 10%
3. Employer contribution towards RPF @b15% of salary.
Interest credited on 30th June 2019 to RPF balance @ 14% is ₹. 50,000

Computation of Taxable amount of annual accretion

Name of the assessee: Mr Kiran Previous year 2021 - 22

Status: Resident Assessment year: 2022 -23
Category: Non-Government employee
Particulars Amount (₹.)
Employee towards RPF @ 15% salary
15/100 X (1,20,000 + 50,000) 25,500

FOR PRIVATE CIRCULATION ONLY 60

 Less 12% of salary is exempted
(12% of 1,70,000) (20,400) 5, 100
Interest credited to RPF @ 14%
50,000
Less: Exempted up to 9.5%
(50,000 X 9.5/ 14) ( 33,929 )

Taxable amount of Interest towards RPF 16,071

Taxable portion of annual accretion 21, 171

Illustration- 2

Compute gross salary of Mr. Amit Majumder (resident) for the Assessment year
2022-23 from the information given below
Basic Salary ₹.4.000 P.m.
DA ₹. 750 p.m. Out of which 300 p.m. enters to pay for employment purpose.
Advanced salary for two months ₹. 10,000
Employers’ contribution to RPF ₹. 800 per month.

Computation of Taxable amount of annual accretion

Name of the assessee: Mr Amit Majumder Previous year 2021 - 22
Status: Resident Assessment year: 2022 -23
Particulars Amount (₹.)
Basic salary (4,000 x 12) 48,000
DA (Which is entered) (300 x 12)
3,600
DA (does not entered) (450 x 12) 5,400 9,000
Advanced Salary for two months 10,000
Employee contribution toRPF (800 X 12) 9,600
Less 12% 0f salary 12/100 (48,000+ 3,600)
6192 3,408

Gross Salary 70,408

1.12 Allowances:
Fixed sum of money given regularly in addition to basic salary to meet a particular
purpose are known as allowances. The types of allowances are:

FOR PRIVATE CIRCULATION ONLY 61

1) Fully Exempted Allowances:
1. Foreign allowance to Government employee
2. Allowance from UNO
3. Allowances given to judges of High Court and Supreme Court

2) Fully Taxable Allowance

1. Dearness allowance
2. City compensatory allowance
3. Tiffin allowance
4. Fixed Medical allowance
5. Servant allowance
6. Foreign allowance to non-government employee
7. Overtime allowance
8. Deputation allowance
9. Project allowance
10. Warden allowance
11. Lunch allowance
12. Non practicing allowance
13. Marriage allowance

3) Partly Taxable Allowance

(a) Allowance related to official duties: These allowances are exempted to the extent they
are spent and balance is taxable.
1. Uniform allowance
2. Daily allowance
3. Transfer allowance
4. Conveyance allowance
5. Helper allowance
6. Research allowance
7. Professional Development allowance

(b) Allowance related to employee’s personal expenses: A fixe amount determined by

Central Government is exempted irrespective of the actual expenditure incurred.
1. Tribal Area Allowance: Exempted up to ₹. 200 p.m.
2. Compensatory Hill Allowance: Exempted up to ₹. 300 p.m. to ₹. 7,000 p.m. based on the
area.
3. Children Education Allowance: Exempted up to ₹. 100 p.m. per child up to a maximum
of two children.
4. Child Hostel Allowance: Exempted up to ₹. 300 p.m. per child up to a maximum of two
children.
5. Transport Allowance: Exempted up to ₹. 1,600 p.m. and in case of handicapped
employee up to ₹. 3,200 p.m.
6. Allowance for transport employees: Exempted to the least of 70% of such allowance
or ₹. 6,000 p.m. whichever is less.
7. Entertainment Allowance: It is the amount paid by employer for availing entertainment
services. It is first added to gross salary and then allowed as deduction u/s 16(ii).
In case of government employee. Least of the following is given as deduction u/s 16(ii):
- Actual Entertainment Received or

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- 20% of basic salary or
- Maximum limit of ₹. 5,000
8. House Rent Allowance: It is an allowance given by an employer to an employee to meet
the cost of accommodation which is partly exempted, according to section 10(13A).
Exemption for HRA is not available if the assessee is living in his own house or a house
for which he is not paying rent.

Particulars Amount Amount

Actual HRA received xxx
Less: Least of the following is exempted:
1) Actual HRA received xxx
2) Excess of Rent paid over 10% of salary xxx
3) 40% of salary (50% in case of Delhi, Mumbai, xxx
Kolkata and Chennai) xxx
Exempted HRA
Taxable HRA xxx

Salary for HRA:

1. Basic pay
2. Dearness pay
3. Dearness allowance (If it enters into retirement benefit)
4. Commission based on turnover

Particulars Amount Amount

Actual HRA received xxx
Less: Least of the following is exempted:
4) Actual HRA received xxx
5) Excess of Rent paid over 10% of salary xxx
6) 40% of salary (50% in case of Delhi, Mumbai, xxx
Kolkata and Chennai) xxx
Exempted HRA
Taxable HRA xxx
Illustration-1

X, who resides in Chennai gets ₹ 3,00,000 per annum as basic salary. He receives ₹
50,000per annum as house rent allowance. Rent paid by him is ₹ 40,000 per annum. Find
out the amount of taxable house rent allowance for the assessment year 2022-23.

FOR PRIVATE CIRCULATION ONLY 63

 Amount Amount
Particulars (₹) (₹)

Actual HRA received 50,000

Less: Least of the following is exempted:
1) Actual HRA received 50,000
2) Excess of Rent paid over 10% of salary(40,000-
10,000
30,000)( 3,00,000X10%)
3) 50% of salary (50% in case of Delhi, Mumbai,
1,50,000
Kolkata and Chennai)
Exempted HRA -10,000
Taxable HRA 40,000

Illustration-2

X is a resident of Ajmer, receives ₹ 1,92,000 per annum as a basic salary during the
previous year 2021-22. In addition, he gets ₹. 19,200 per annum as dearness
allowance forming part of basic salary for computation of all retirement benefits,
7% commission on sales made by him (sales during the relevant previous year is ₹.
86,000) and ₹.24,000 per annum as house rent allowance. He however, pays ₹.
21,500 per annum as a house rent. Determined the quantum of house rent
allowance exempt from tax.

Amount Amount
Particulars (₹) (₹)

Actual HRA received 24,000

Less: Least of the following is exempted:
1) Actual HRA received 24,000
2) Excess of Rent paid over 10% of salary(40,000-
Nil
30,000)( 2,17,220X10%)
3) 40% of salary (50% in case of Delhi, Mumbai,
86,888
Kolkata and Chennai)(being the excess of rent paid
Exempted HRA 24,000
Taxable HRA 0

1.13. Perquisites
Monetary or Non-monetary benefits (either in cash or in kid) received by an employee
from an employer in addition to salary.

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 Perquisites

Tax free perquisites Taxable perquisites

Taxable in all cases Taxable in hands of

specified employee only

a) Tax free perquisites

1) Computer, laptops given to employee for official or personal use.

2) Employer’s contribution towards Staff Group Insurance Scheme.
3) Employee’s refreshments provided by an employer to all employees during working
hours in office.
4) Refreshments during working hours provided outside the place of work upto Rs. 50 per
day will be exempted.
5) Rent free house provided to the judges of High Court, Supreme Court or an officer of
parliament or Union Minister.
6) Amount spent on training of employees or fees paid for refreshing management course.
7) Free ration provided to Defense force.
8) Medical insurance premium paid by the employer.
9) Telephone facility provided by employer to employee.
10) Interest on loan given by the employer is not taxable if the loan amount does not
exceed Rs. 20,000.
11) Perquisites given to Government employee who is staying abroad.
12) Gifts in kind if the value is less than ₹. 5,000.
13) Family planning expenses.
14) Products at concessional rate to employee sold by his/her employer.

b) Taxable perquisites in hands of specified cases

Specified employee is one who satisfies any one of the following conditions:
(a) The assessee must be a director employee in the employer company or
(b) If he is the beneficial owner of equity share carrying 20% or more voting power in the
employer company or
(c) The total taxable monetary receipts of the employee from all employers during the
Previous Year after deduction u/s 16 exceed ₹. 50,000.

c)Taxable perquisites in the hands of specified employee

1. Free service of Sweeper, Gardner, Watchman and Personal Attendant: Actual salary paid
by employer is taxable.

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2. Free supply of gas, electricity, water supply for household purpose: Manufacturing cost
or amount paid by employer is taxable.
3. Educational institution owned by employer:
(a) If education institution owned by the employer
- If it is for the children of the employee- any amount in excess of Rs. 1,000 per month per
child is taxable.
- If it is for other members of the employee – actual cost of the education is taxable.
(b) For outside institutions
4. Leave Travel Concession in India (LTC): Leave travel benefits extended by an employer
to an employee for going anywhere in India along with his family are exempt from tax as
the provision of the IT Act. The exemption is available only in respect of fare for going
anywhere in India along with family twice in a block of four year.
5. Medical Facilities: If the employer reimburses or provides the expenditure incurred by
the employee is taxable as follows:
- If medical treatment is taken from a hospital maintained by the employer – not taxable
- If medical treatment is taken in Government Hospital – not taxable
- If medical treatment is taken in Private Hospital – exempted up to Rs. 15,000
6. Transport facilities by transport undertaking: it is exempted if it is provided by airlines
or railways. In case of other modes of transportation value of such benefit offered to
public is chargeable to tax.

d)Taxable Perquisites under all cases u/s 17(2)(d)

FOR PRIVATE CIRCULATION ONLY 66

 Note:
1) For the above cases furnished value will be 10% of cost of furniture or actual hire charges.
RFFA = Unfurnished + Furnished Value
2) Salary for RFA is
1. Basic pay
2. Dearness allowance entering into retirement benefit
3. Dearness pay
4. All taxable allowance
5. Leave encashment
It includes all monetary payment except the following
a) Dearness allowance not entering into retirement benefits
b) Provident Fund contribution and interest there on C) Value of Perquisites

Illustration- 1

Mr. Arunan Lal (resident), Who serviced KSSC Ltd for 25 years 10 months
11days retired from service on 31 Dec 2021. The following were his salary
particulars for the previous year2021-22
1. Basic salary Rs.6,000 per month (up to March 2020 it was 5,000 per
month)
b Dearness pays 20% of basic Pay
c DA – ₹. 1,000 per month (60% enters into pay for all retirement benefits)
d HRA- ₹. 5,000 per month (rent paid ₹. 6,500 at Bangalore).
Conveyance Allowance ₹. 800 per month (completely
e used for official purpose ).
f CCA ₹. 150 per month.
g Motor car (1400 cc) with driver is provided
h. Payment of his LIC premium ₹. 8,000 and education expenses of
his son ₹ 10,000 by the company
i Services of sweeper (Salary ₹. 250 per month)

on the date of retirement, he received a gratuity of ₹. 90,000 and a leave salary of ₹.

70,200. During the service period he had availed leave of 16 months. He had 9
months leave to his credit on the basis of 30 days per year. He also entitled to a
pension of ₹. 1,000 per month. 3/4 of which he got contribution at the end of
February for ₹. 27,000. He also gets refund from URPF ₹. 1,00,000 (Employer
Contribution plus interest there on) Compute Taxable salary for the assessment year
2022-23.

Name of the Assessee: Mr. Arun Lal Previous year: 2021-22

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 Residential Status: - Resident Assessment year: 2022-23
Category- Non Govt employee
Basic salary (6,000 X 9 ) 54,000
Dearness pay(20%basicg 54000 10,800
gratuity (Note 1) Nil
leave salary encashment 1080
Pension 17,250
Dearness allowances (1000 X9) 9,000
HRA 16,250
conveyance allowances Tax free
CCA 150 X 9 1,350
Motor Car ( 1,800/900 X9 ) 24,300
Payment of LIC premium 8,000
Children education expenses 10,000
Services of Sweeper (250x 9 ) 2,250
Refund from URPF 1,00,000
Gross salary 2,54,950
Less; Deductions U/S 16
1. Standard deductions U/S 16 (ia) 50,000

2. Entertainment allowances Paid U/S 16(ii) Nil

3. Professional Taxes paid U/S 16( iii) Nil -50,000

Taxable salary 2,04,950

Working Notes
I Calculation of taxable gratuity
Actual gratuity received 90,000
Least of the following exempted from Tax
gratuity not received under the act of gratuity 1972
1 1/2 X No. of years of service completed X Average slalary
1/2 X 25 X 7,500 94,500
2 Maximum limit 10,00,000
3 Actual gratuity received 90,000 90,000

Taxable Gratuity Nil

Calculation of gratuity for Average salary ( 1/2/20 to 30 /11/ 20)
Basic salary (5000x2)+ (6,000X8) =( 10000+48,000) = 58,000
Dearness pay 20% of 58,000 11,600
Dearness Allowances 1000 X 10 X 60% 6,000
Commission Nil
Total salary 75,600
2 Leave salary

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 Actual leave salary received (25X 1 = 25-16 = 9 X 7,800) 70,200
Less least of the following is exempt from Tax
Leave salary as per IT Law (25 X1= 25 -16=9 X 7680) 69,120
Actual leave salary received (25X 1 = 25-16 = 9 X 7,800) 70,200
Specified amount 3,00,000
10x Average salary (7680 X 10) 76,800
-
Exemption 69,120

Taxable leave salary 1080

Calculation of Average salary for leave encashment
Basic salary (5000X 1) + (6000X 9) 59,000
Dearness pays 20% of 59,000 11,800
Dearness allowances 1000X 10X 60% 6,000
Total 76,800
Average Salary= 76800/10 7,680
Last drawn salary = Basic 6,000 + DP 1,200 + DA 600 = 7,800
3 Calculation of Taxable pension
Un commuted pension ( Jan + Feb + March= 1,000 + 1,000+ 250) 2,250
Commuted pension 27,000
Less = Exempted 27,000X 4/3 X1 /3
(12,000) 15,000
Taxable Pension 17,250
4 Calculation of Taxable HRA
Actual HRA received
Calculation of salary for HRA 45,000
Less: Least of the following is Exempted HRA
40% Salary (40%70,200) j(6500 X 9) 28,080
Rent paid -10% 0f of salary (6,500 x9) - (10% of 70,200) =(58,500-7,020 51,480
Actual HRA received (5,000 X 9) 45,000
-
Taxable HRA Exempted 28,080
Taxable HRA 16,920
Calculation of salary for HRA
Basic 54,000
Dearness pays 10,800
Dearness allowances 5,400
Salary 70,200
Mr. Arun lal Monetary income exceeds 50,000
so he is specified employee there for Motor car
and sweeper perquisites is Taxable

FOR PRIVATE CIRCULATION ONLY 69

 Illustration- 2

Following are the particulars furnished by Mr. Jayanth (Resident)

for the year ending 31/3/2021. Net salary received Rs. 1,74,000
after deduction of the following
a) His contribution towards to RPF 16,800
b) Income Tax of Rs. 20,000
c) Housing loan instalment Rs. 12,000
Other Components of his salary are
a) Employers’ contribution to RPF Rs.16,800
b) Interest on RPF (on accumulated balance Rs. 1,15,000) Rs.15,000
c) House rent allowances of Rs 24,000 (the house is in Chennai
and rent paid by him is Rs. 50,000)
d) Conveyance allowance Rs. 1,000 P.M. (60% spent for official purpose)
Entertainment allowances. 500 per month
e) Education allowances for his three children Rs. 48.000
f) Transport allowance Rs. 8,000
g) He paid insurances premium on his own life policy Rs. 10ooo
h) Income tax Rs. 20,000
i) Hostel allowance for his 3 children Rs. 20,000
j) Professional tax paid by the employer Rs. 300P.M. and
paid by Jayanth Rs. 200 per month
k) Reimbursement of medical expenses Rs. 25,000
(treatment taken in a recognized hospital)
i) Education facility to his dependent brother in remote area Rs. 500 P. M.
Compute salary income of Mr. Jayanth for the Assessment Year 2021- 22

Previous Year
Name of the assessee: Mr. Jayanth :2021 - 22
Assessment Year:
Status: Resident 2022-23
Category: Non-Government Employee
1 Basic salary (1,74,000+ 20,000 + 16,800+ 12,000) 2,22,800

Employers’ contribution to Recognised

2 Provident fund 16,800

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 less: Exemption 12% of salary (26,736) 750
Taxable RPF (Refer Notes 1)
3 Interest on Recognised Provident fund @10%
(15,000/ 1,50,000 X 100) of 10%
Taxable interest is (0.5 %X 15000) (Refer Notes 2)

4 House Rent allowance received 24000

Less: Least of the following is exempt from tax
a) Actual HRA received (24,000)
b) 50% of 2,22,800 1,11,400
c) Excess rent Paid 27,720
Exempted HRA -24000
Taxable HRA Nil
5 Conveyance Allowance (40% only) (Refer Notes 3) 4,800
6 Entertainment allowances (500 X12) 6,000
7 Education Allowance for three children 48,000
Less: Exemption (100 X2=200 X12) (2,400 )
Taxable Education Allowance 45,600
8 Transport Allowance 8,000
9 Hostel Allowance for three children 20,000
Less: Exemption (300 X2=600 X12) (7,200 )
Taxable Hostel Allowance 12,800
10 Professional Tax paid by the employer (300 X 12) 3,600
11 . Reimbursement of medical expenses Tax free
12 Education facility in remote area (500 X 12) 6,000
Gross Salary 3,10,350
Less deduction U/S 16
Standard Deduction/S 16 (ia) 50,000
Professional Tax paid by the employer (3600 + 2400)
6,000 -56,000
Taxable Salary 2,54,350
Notes
1. More than 12% of RPF is Taxable but Jayanth RPF
contribution is less than 12% therefore there is no
taxable RPF,it is Nil
2. As per interest of RPF exempted is 9.5 % whereas
Jayanth is getting10% the difference of
10%-9.5%= 0.5% is Taxable
3. For Conveyance allowance exempted per months. 1600
and Rs.19,200 for Govt employees per year. Out of total
benefit 60% is for official purpose therefore 40% has to be
taken into
consideration
FOR PRIVATE CIRCULATION ONLY 71
 4. Entertainment allowances
Entertainment allowances is first included in the salary then
the deduction has to be made U/S 16(ii)
The tax treatment
1. Under Non-Government employee fully Taxable
2. For Government Employees least of the following
a) Maximum limit of 5,000
b) 20% 0f basic pay or 1/5 of basic pay
c) Actual amount received

Terminal questions:

1. Mr. P was appointed as a manager on 1st July 2012 in the grade of 20,000-500-22000-
1000-25000. Find out his salary for the A.Y. 2022-23 if
a) salary is due on the first day of the next month and
b) Salary is due on the last day of the same month.

2. Mr. A retires from his job on 30th November 2020 after putting 30 years and 7 months
service. He received ₹. 1,80,000 as gratuity under the payment of gratuity Act. His salary
including Dearness Allowance at the time of retirement was ₹ 7,800. Compute taxable
gratuity for the A.Y.2022-23

3. Mr. Dinesh an employee of Reliance industries ltd receives ₹.96, 000 as gratuity. He
is not covered under payment of Gratuity Act. He retires from service on 31-12-2020
after 28 years and 9 months service. At the time of his retirement his monthly salary
was Rs.6, 300. Find out the amount of Gratuity exempt u/s 10(10).

4. Mr. A who is not covered under the payment of gratuity Act, 1972, receives a
gratuity of Rs.3, 88,000 when he retires on 23 June 2021 after a service of 34 years 11
months and 20 days. He had received ₹.40,000 as gratuity from the previous
employer. His last drawn emoluments are as follows:
Basic 25,000 p.m., D.A. 6,600 p.m., Servant Allowance 600 p.m., Annual increment of
basic ₹. 1,000 p.m. falls due on 1st January every year. Calculate taxable gratuity for
the A.Y. 2022-23.

FOR PRIVATE CIRCULATION ONLY 72

 5. Mr. Reddy retires from private service on 30th April, 2020 and his pension
has been fixed at Rs. l500. p.m. He gets 1/2 of his pension commuted during Jan 2020
and gets Rs. 80,000. Compute taxable pension for the A.Y. 2022-23 if:
a) He receives gratuity, b) He doesn't receive gratuity.

6. Mr. Rajiv retired on 31-12-2020 and his pension was fixed at Rs.3,600 p.m. He
got 3/4th of the pension commuted for which he receives Rs. 1, 80,000 from his
employer. Find the taxable pension if:
a) He gets gratuity; b) he does not get gratuity &c) if he is Government employee

7. Mr. Manju a non-government employee receives Rs 57,000 as leave salary at the time
of retirement on 1-1-2018. On the basis of following information determine the amount
of taxable leave salary for the A.Y. 2018-19. Basic pay Rs 4,800. p.m. since 2020 Duration
of service 30 years and 8 months, leave entitlement for every year of actual service: 1 ½
month Leave availed during service period 25 months Leave due at the time of retirement
(45-25) 20 month

7. Mr. Mohan, a resident of Delhi is working in a private company. His salary particulars are
Basic salary Rs. 10,000 p.m.
- D.A -20% of basic salary (enters for service benefits)
- HRA received Rs. 20,000 p.m.
- Rent paid Rs. 12,000 p.m.
Compute taxable HRA for the Assessment Year 2021-22.

8. Find out the taxable HRA in each of the following cases:

(a) Basic pay Rs.7,000 p.m., Dearness Pay @ 10% of basic pay, Commission based on fixed
percentage of turnover Rs. 12,000 for the whole year. House rent allowance Rs. 2,000
p.m., Actual rent paid by the assessee Rs. 1,600 p.m., House situated at Agra.
(b) Basic pay Rs.9,000 p.m., Dearness Allowance @ 10% of basic pay, House rent allowance
Rs. 1,500 p.m., Actual rent paid by the assessee Rs.2,100 p.m., House situated at Mathura.

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(c) Basic pay Rs.8,000 p.m., Dearness Allowance @ 10% of basic pay (enters into retirement
benefits), House rent allowance Rs.800 p.m., Actual rent paid by the assessee Rs.2,000
p.m., House situated at Delhi.

9. Mr. Vikas gets a salary of Rs. 13,000. p.m. and he has been provided with a rent-free
furnished accommodation at Manipal (population below 10,00,000). The fair rental value
of the unfurnished house is Rs 20,000. p.a.
He gets D.A. @ 40% salary which is given as per terms of employment.
He gets education allowance of Rs.300. p.m. for education of his son.
The cost of furnishing of the house is Rs.30,000. The employee has been provided with
hired air conditioner for five months and hire charges of Rs 1,000. p.m. is paid by the
employer.
Calculate the value of RFA.

10. Mr. Santosh has furnished following particulars:

Salary @ Rs 20,000 p.m., Dearness allowance @ Rs. 1,000 p.m. (it enters into retirement
benefits) Entertainment allowance @ Rs 600 p.m., Bonus Rs 8,400, Cost of furnishing Rs
20,000.
Calculate the value of rent-free house if:
1. The assessee is govt. employee and rent of the fixed by the govt. is Rs 600.pm.
2. The assessee is a semi-government employee working at Chennai and fair rental value
of the house is Rs. 2,000 p.m.
3. The assessee is working in a private sector company at Madi Keri (population below
10,00,000 and Fair Rental Value of the house hired by employer is Rs.6,000 p.m. He is
also provided with hired refrigerator whose hire charges of Rs.600 p.m. are paid by
employer.
4. The assessee is working in a private sector at Delhi (more than 25 lakhs) and rental
value of the house not owned by the employer is Rs. 7,000p.m.

Section - C

1) Sri Rama Krishna is employed as an engine driver in southern railway.

a) He is getting Rs. 7,500.p.m.as basic pay, Rs. 2,500 as dearness pay and Rs. 2,500 as
dearness allowance.
During the previous year he received the following allowances also:
FOR PRIVATE CIRCULATION ONLY 74
b) Rs. 16,500 as running allowance
c) Rs. 200 p.m. per child as education allowance for the education of his two sons.
d) One of these sons is living in hostel on whom Sri. Ramakrishna is spending Rs. 800p.m.,
He is
getting hostel allowance of Rs. 500 p.m. for his son for meeting this expenditure.
e) Rs. 250 p.m. as city compensatory allowance
f) Rs. 400 p.m. as uniform allowance which was fully spent for employment purpose
g) Rs. 1,250 p.m. as House Rent Allowance.
h) Sri. Ramakrishna has taken a house for his residence at Coimbatore at Rs. 1,500p.m. as
rent.
i) He contributes 10% of his Basic pay and dearness pay to his statutory fund and the
southern
railway also contributes the same.
Compute the salary income of Rama Krishna for the A.Y.2021-2022.

2) Smt. Jyothi’s the principal of a private college in Chennai. She is in the grade of 6,500-200-
8,500 since 1st January 2014.
a) She gets Rs. 6,000 p.m. as dearness allowance and Rs. 200.p.m. as CCA.
b) She has been provided with furnished accommodation by the college. The college is not
the owner of the house. The rental value of the house is Rs. 3,000 p.m. and furniture
costing Rs 24,000 has also been provided by the college.
c) She has been given a small car, which in addition to college work, is used by her for her
private purpose also. The driver's remuneration and all the expenses relating to the use
of the car are borne by the college.
d) She has been provided with the facility of a gardener, watchman and a servant who are
paid by the college @ Rs. 150.p.m, Rs. 1, 200.p.m, and Rs. 800 p.m. respectively.
e) She gets LTC for going to a hill station Rs. 26,500. Actual expenses were Rs. 19,650.
f) She contributes 10% of her pay to R.P.F. towards which the college contributes @ 8%.
g) Assume that the salary is due on the 1st day of the next month;
Determine her taxable salary income for the A.Y.2022-23.

3) Mr. Naveen is the Manager of a company at Kolkata since 1st March, 2010. He is in the
grade of Rs. 10,000-500-15,000-750-25,000
a) Dearness allowance @ 20% of his basic pay, half of which enters into retirement benefits.
b) He contributes 14% of his salary to Recognized Provident Fund to which his employer
contributes an equal amount.
c) Interest on PF during the year is Rs. 10,500 at 10.5% p.a.
d) He has been provided with a house owned by the Co., the fair rent of which is Rs. 20,000
per annum.
e) He is getting conveyance allowance of Rs. 500 p.m. for private purposes,
f) Medical allowance of Rs. 400 p.m.
g) Servant allowance of Rs. 400 p.m.
h) His club bills of Rs. 3,000 were also paid by the Company.
i) He received Rs. 60,000 for encashment of leave on 1st September, 2017, being 10 months'
leave not availed of. As per the rules of the company Mr. Nair was entitled to 30 days'
leave for every year of service.
j) He had been provided with the facility of a gardener and a cook, who are each paid Rs.
150 p.m. by the employer.
k) He is also provided with a small car by the employer for official use only.

FOR PRIVATE CIRCULATION ONLY 75

l) On 15-06-16 the Co. sold a computer to him for Rs. 5,000. The cost of the computer is Rs.
24,900.
Compute Mr. Nair's taxable salary for the assessment year 2022-2023 assuming that
salary is due on the first day of the next month.

4) From the following particulars given below calculate taxable salary for the A.Y2022-
2023.
a) Basic pay ₹. 15,000 p.m. (due on last day of month)
b) D.A. 60% of salary (50% forms part of salary from 1 -1 -2014)
c) Bonus-one month's salary
d) Commission ₹. 66,000
e) Leave encashment ₹. 20,000
f) He has engaged an helper at Rs. 1,200 p.m. and his employer pays him ₹. 1,500 p.m. on
his a/c
g) Medical bills reimbursed from a notified hospital ₹. 12,000; from a private nursing home
₹. 38,000.
h) Mobile telephone bills paid by employer ₹. 15,000
i) On 1-12-2017 he has taken a loan of ₹. 3, 00,000 from his employer to purchase a car.
Rate of interest charged by employer is 4.75% p.a.
j) Repayment of loan at ₹. 5,000 p.m. is to start after 4 months from the date of taking loan.
k) He has employed a cook for his personal use at ₹. 1,000 p.m. and his employer has
reimbursed such amount,
l) He and his employer contribute ₹. 3,000 p.m. each towards RPF.
m) Interested credited on the balance of RPF at 10% is ₹. 20,000.
n) He has been provided with free use of car of 1.81.c.c. car is used partly for personal and
partly for office use

5) Mr. Vikas is an employee of HCL Ltd. He supplies you the following particulars of his
income.
a) Basic salary ₹. 20,000 p.m.
b) Dearness Allowance ₹. 5,000 p.m. (50% Enters into salary)
c) Fixed Medical Allowance ₹. 1,000 p.m.
d) Education allowance ₹.500 p.m. per child for his three children.
e) Transport allowance ₹. 1,200 p.m.
f) City compensation allowance (CCA) ₹. 100 p.m.
g) Employer’s contribution to RPF at 15% of Salary.
h) Interest Credited to RPF at 905% P.A is ₹. 28,000
i) He is provided with free lunch in office. The cost per meal is ₹. 50.
j) The employer has given him the use of a small car which he uses for both personal and
official purposes. He meets the expenses for personal purpose from out of his pocket.
k) He was also provided with rent free house at Bangalore for which the employer paid a
rent of Rs. 9, 000 p.m. He was allowed the use of Furniture costing Rs. 28, 000
respectively.
l) Life insurance premium of Rs. 12, 000 was paid by employer on an insurance policy of Rs.
2,40,000.
Compute his taxable salary for the AY 2022-2023.

6) Mr. Vinayak an employee of Ranchi (population 15 lakhs) based company provides the
following particular of his salary income for the A.Y.2022-2023.

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a) Basic salary Rs. 12,000 p.m.
b) Profit bonus Rs. 12,000.
c) Commission on turnover achieved b him Rs. 42,000
d) Entertainment allowance Rs. 2,000 p.m.
e) Club facility provided by his employer Rs. 6,000
f) Transport allowance Rs. 1,000 p.m.
g) Free use of car of more than 1.6 lt capacity for both personal and employment purposes;
expenses are met by employer.
h) Rent free house provided by employer. Rent paid by the employer Rs. 6,000 p.m.
i) Free education facility for three children of the employee (Bill issued in the name of
employer) Rs. 22,500.
j) Gas, water and electricity bills issued in the name of employee but paid by the employer. Rs.
16,800

7) Following details are available from P.N. Nair a resident individual for the year ending on 31-
3-2019. You are required to compute his taxable income under the head salary.
a) Salary received Rs. 71,800
b) Income tax deducted at source Rs. 1,200
c) Own contribution to RPF deducted from salary Rs. 8,000
d) Dearness allowance 50% of salary
e) Employers’ contribution to RPF Rs. 8,000
f) Interest on accumulated balance of RPF @ 9.5% Rs. 2,400
g) He is provided with furnished accommodation for residential purposes in Thiruvanthapuram
(population exceeds 25 lakhs) owned by his employer, the fair rental of which is at Rs. 4,000
p.m. cost of furnishing is Rs. 45,000.
h) Gardeners’ salary paid by employer is Rs. 3,000 p.a.
i) He is provided with a car of 1.5 lt. capacity by his employer for both personal and office use
and expenses of maintaining and running the car with chauffeur are borne by the employer.
j) He has two life insurance policies: one on his own life for a value of Rs. 80,000 on which
annual premium paid by his employer is Rs. 8,200; and another on the life of his wife for a
policy value of Rs. 20,000 on which premium paid by him is Rs. 1,800.
Compute his salary income for the assessment year 2022-2023.

8) Mr. Eswaran is employed as an engine driver in Southern Railways. He is getting Rs. 7,500
p.m. as basic pay, Rs, 2,500 p.m. as dearness pay, Rs. 2,500 p.m. as dearness allowance. During
the previous year he received the following allowance also:
a) Rs. 16,500 as running allowance.
b) Rs. 200 p.m. per child as education allowance for his two sons.
c) One of these sons is living in hostel on whom Eshwaran is spending Rs. 800 p.m. he is getting
Rs. 500 p.m. for his son as hostel allowance.
d) Rs. 250 p.m.as city compensatory allowance.
e) Rs. 400 p.m. uniform allowance (fully spent for uniform)
f) Rs. 1,250 p.m. house rent allowance.
g) Mr. Eshwaran has taken a house for his residence at Hassan at Rs. 1,500 p.m. as rent.
h) He contributes 10% of his basic pay and dearness pay to his statutory provident fund and his
employer contributes an equal amount.
Compute income from salary of the assessee for the A.Y. 2022-2023.

9) Mr. Ravi is an employee of a private company in Bangalore. He gives the following

information for the A.Y 2022-2023.

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 a) Basic salary Rs. 16,000 p.m.
b) Dearness allowance Rs. 12,000 p.m. (Rs. 2,000 enters into retirement benefits)
c) City compensatory allowance Rs. 1,600 p.m.
d) Family allowance Rs. 1,200 p.m.
e) Education allowance for two children at Rs. 350 p.m. per child.
f) House allowance Rs. 3,200 p.m. but he pays Rs. 6,000 p.m. as actual rent.
g) Entertainment allowance Rs. 1,500 p.m.
h) Company has provided a telephone at his residence by meeting all the expenses amounting to
Rs. 12,000 for the year.
i) The company paid his income tax of Rs. 1,2000 during the previous year in his taxable income.
j) Conveyance allowance of Rs. 16,000 for visiting the branches.
k) He is allowed to use one motor car of 1.6 liters c.c. both for official and personal purposes.
l) Provision of the following domestic servants who were paid by the company.
m) Watchman Rs. 600 p.m.
n) Sweeper Rs. 360 p.m.
o) Gardner Rs. 360 p.m.
p) Cook Rs. 600 p.m.
q) He and the company contribute 14% of salary toward the RPF
r) Interest on the above fund Rs. 21,000 at 15% p.a.
s) Interest free loan for purchasing home appliance Rs. 1,20,000 (date of loan borrowed 01-04-
2017) and assume SBI lending rate for similar loan on 01-04-2017 is 12% p.a.
t) New Year gift Rs. 7,000.
u) Holiday home facility at Kulu Rs. 26,000.
Compute income from salary.

12. Mr. Prasanth (age 51 years) a Director of LMN (P) Ltd receives the following emolument
during the previous year relevant for the assessment year 2019-20.
a. Basic salary Rs 4,80,000
b. Dearness allowance Rs 48,000 (not forming part of basic pay)
c. Commission 2% of turnover (turnover achieved by X during the previous year Rs 16,00,000)
arrears of bonus of the previous year 2012-13 Rs 9,000 (not taxed earlier),
d. Employer’s contribution towards recognized provident fund Rs 68,000.
e. Interest credited in provident fund account @ 11% on June 3, 2018: Rs 80,000
f. Conveyance allowance Rs 10,000 (60% of which is utilized for official purpose)
g. Education allowance for X, s three sons @ Rs 200 per month per child
h. Rs 7,200 rent – free furnished house in Calcutta (lease rent of unfurnished house paid by the
employer Rs 1,80,000 rent of furniture Rs 8,000)
i. Free services of gardener, cook and watchman (salary Rs6,000, Rs 9,000 and Rs 12,000
respectively).
j. On March 10, 2019, LMN (P) Ltd sells imported furniture to X for Rs 10,000 (the furniture
was purchased by the company on June 30, 2012 for Rs 1,90,000 and since then it was used
for business purpose)
k. He runs a business. During the previous year, income from the business is Rs 11,02,000.
l. He makes the following payments during the previous year:
i. Own contribution towards recognized provident fund Rs 42,000.
ii. Deposit in Home loan account of the National Housing Bank Rs 6,000 (including advance
deposit of Rs 1,000)
iii. Contribution towards National Saving Certificate VIII Issue Rs 1,40,000.
Determine the net income and tax liability for the assessment year 2022-2023.

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 Chapter III.
Income from House Property

Introduction:

This is the second head of income which charges income from house properties by way
of rent received or receivable.

1.1. Basis of charge:

According to Sec 22, Annual value of a property, consisting of any building, or land
appurtenant thereto, of which the assessee is the owner, is chargeable to tax under the
head “income from house property”.

Rental income is taxable under the head “income from house property if the following
conditions are satisfied.
a) The property should consist of any building or land appurtenant thereto
b) The assessee should be the owner and
c) The property should not be used by the owner for any business or profession carried on
by him

1.2. Explanation:

a) Building and land appurtenant thereto: - Income tax is charged on buildings and land
appurtenant (belonging) thereto. Income from a land which is not part of any building
will be charged under income from other sources.
b) Land appurtenant to building include compound walls, playground, garden etc., in case of
non- residential building car parking spaces, drying grounds, connecting roads in the
factory building shall be included in lands appurtenant to buildings.
c) Buildings include residential houses, warehouses, auditoriums, cinema halls, buildings
let out for office use, dance halls, lecture halls etc.,

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1.3. Exceptions to the rule that income from house property is taxable under the
head house property:

The income from following buildings is not taxable under the head house property:
1) Buildings or staff quarters let out to employees – if the assessee lets out staff quarters to
his employees whose residence there is necessary for the efficient conduct of business,
then the rent collected by the assessee is taxable as income from business and not as
income from house property.
2) If a building is let out to authorities for locating bank, post office, police station etc., the
income is taxable as business income, provided the dominant purpose of letting out the
building was to carry on assessee business more efficiently.
3) Composite letting of building with other assets: - where the assessee gives on hire,
building along with machinery, plant for a composite rent and the rent of the building is
inseparable from other assets, the income from such letting is chargeable under income
from other sources or business income.
4) Income from paying guest accommodation is chargeable under business income.

1.4. Deemed owners:

Deemed owners are not legal owners of the property, but according to Income act they
are treated as owners of the property. In the following circumstances assessee shall be
treated as deemed owners:
1) An individual who transfers any house property to his or her spouse, without adequate
consideration, or to a minor child, not being a married daughter shall be deemed to be
the owner of the house property so transferred.
2) The holder of an impartible estate is deemed to be the owner of all the properties
comprised in the estate.
3) A member of a co-operative society, company, or an AOP to whom a building or its part is
allotted or leased under a house building scheme shall be deemed to be owner of that
property.

1.5. Exemptions regarding income from house property:

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 Income from the following sources is not taxable under income tax act.
▪ Income from a farm house
▪ Income from property owned by
I. Local authority
II. Scientific research association
III. Trade union
IV. Charitable trust
V. Political party
VI. University or other educational institutions
VII. Hospitals or medical institutions
▪ Income from property used for assessee own business or profession.
▪ Income from two self-occupied house.
▪ Income from house meant for self-residence but could not be occupied throughout the
previous year on account of his service or business / profession elsewhere.

1.6. BASIC TERMINOLOGIES UNDER HOUSE PROPERTY:

a) Annual Value: Income from house property does not mean rental income, but it is a
sum for which the building might reasonably be expected to be let from year to year.
Annual value of the property is calculated by considering the municipal valuation of the
property; fair rental value, standard rent and actual rent receivable of the house property
Annual value may be Gross Annual Value (GAV) or Net Annual Value (NAV).

b)Municipal rental value (MRV): It refers to the rental value of the house property fixed
by the municipal authorities to levy the municipal taxes.

c)Fair Rental value (FRV): It refers to the rental value of similar accommodation in the
same or similar locality as determined by local authority or any other competent
authority.

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 d)Standard Rental value (SRV)/ Minimum Rent: It refers to the rental value fixed by
the Rent Control Authority.

e) Annual Rental Value (ARV)/ De-facto Rent: It refers to the rent received or
receivable by the owner of the property. It is also called as de-facto rent. While
determining the de facto rent, rent collected for other services such as water, electricity,
garden maintenance and security should be excluded from the composite rent.

f) Composite rent: It refers to the rent collected by the owner for the house property let
out along with the facilities of water, gardening, stair case lighting, security charges,
pump maintenance etc. composite rent should be split into Annual Rental value and
service charges for associated services.

g) Expected Rental Vale (ERV): It refers to the highest of MRV or FRV but subject to a
maximum of SRV.

h) Unrealized Rent - Unrealized rent is the amount of rent which the owner cannot
realize or which is payable but not paid by the tenant. It is allowed to be deducted from
GAV if conditions of Rule 4 are satisfied. Those conditions are as follows:
a) The tenancy is Bonafede.
b) The defaulting tenant has vacated, or steps have been taken to compel him to vacate the
property;
c) The defaulting tenant is not in occupation of any other property of the assessee;
d) The assessee has taken all reasonable steps of insisting legal proceedings for the recovery
of the unpaid rent or satisfies the assessing officer that legal proceedings would be
useless.
e)
i)Vacancy Allowance: It relates to rent of vacant period.

1,7. Computation of gross annual value (GAV)

Format Determination of Gross Annual Value

Name of the Assessee: Previous Year 2021-22
Status: Assessment Year 2022- 23
Municipal Value
Whichever
Step 1 xxx
is higher
OR

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 Fair rental value xxx
Notional Rent xxxx

Notional Rent
Whichever
step 2 ( The resultant of step 1) xxxx
is Less
OR
Standard Rent xxx
Expected Rent xxxx
Expected Rent
( The resultant of step 2 ) Whichever xxx
step 3
OR is higher
Actual rent xxx
(Actual rent =Actual rent-Unrealised rent- cost of common facilities)
Gross annual Value before vacancy period loss xxx
Less: - vacancy period loss xx
Gross annual Value xxxx

(b)Computation of income from house property of an L.O.P/D.L.O. P

Gross annual value xxx

Less: municipal taxes “paid by owner” xxx
Xxxx
Net annual value xxx
Less: deduction u/s 24
(i)Standard deduction 30% of NAV.
(ii)Interest on loan:(no limit)
a) Pre-construction interest 1/5th xxx
b) Post-construction interest. Xxxx
Income or loss from house property.

1.8. Determination of actual rent:

Sometimes the owner takes upon under an agreement the burden of providing certain
facilities to the tenant, e.g. lift, water pump, electricity, vehicle parking, gardener, etc., in

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such a case the actual rent received or receivable minus the cost of providing such
facilities will be the actual rent.
If the tenant has undertaken the obligations of the landlord, the amount so paid will be
added in rent received to arrive at the actual rent. However, no adjustment will be made
in determination of actual rent regarding the following:
i) Tax paid by the tenant to the local authority
ii) Repair charges borne by the tenant
iii) Notional interest on deposit taken from the tenant.
Treatment of Pre-Construction period Interest.
Calculate the allowable interest on loan from NAV of the house property.

1. Date of borrowing loan 01-06-2013

2. Date of repayment of loan 10-05-2021

Date of completion of
Construction May-18
4. Amount of loan borrowed Rs. 30,000
5. Interest on Loan 20% P.A
01-06-2013 31-03-2014 30,000 X 20 % X 10 months 5,000
01-04-2014 31-03-2015 30,000 X 20% X 12 months 6,000
01-04-2015 31-03-2016 30,000 X 20% X 12 months 6,000
01-04-2016 31-03-2017 30,000 X 20% X 12 months 6,000
01-04-2017 31-03-2018 30,000 X 20% X 12 months 6,000
Total 29,000
For the first-year loan taken is in the month of June, so the total interest is calculated only
for 10 months in 2013- 2014. The total of 29,000 has to be adjusted from 2017 to 2022
(5 years)
Pre-Construction Period interest deductible in the previous year = 29,000/5= 5,800
Previous year interest (i.e., Current year interest) = 6,000
Total -11,800(5,800 +6,000)

1.9 Treatment of unrealized rent recovered or realized during the P.Y.2021-22 or

subsequently {sec 25A & Sec 25AA:}

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(i) Any unrealized rent recovered during the previous year, which was disallowed earlier, is
not taxable.
(ii) Any unrealized rent recovered during the previous year, which was allowed earlier, is
fully taxable as deemed income.
Note: No standard deduction under Sec 24 is allowed. Similarly, expenses incurred to
realize unrealized rent is also not allowed.

1.10. Deductions from Annual value (Sec 24)

While computing income from house property the following items are to be deducted
i) A sum equal to 30% of Annual value as standard deduction.
ii) Interest on loan taken in respect of house property:
Interest on loan taken for the purpose of purchasing, constructing, reconstructing or
repairing the house property is allowed as deduction on accrual basis.

1) House property self-occupied for a part of the previous year and let out for the remaining
part of the previous year:
In such a case the house shall be treated as let out house property (deemed to be let out
house property).
2) More than one house is in occupation of the house:
Where the owner of the house occupies more than one house for his residence for full
previous year, except one house all other houses are deemed to be let out.

Points to be noted:

a) The expected rent would be GAV as the house property is not actually let out.
b) The full amount of interest on loan taken for such property shall be allowed to deduct
from annual value u/s 24.
c) The assessee can choose the house which would be treated as self-occupied house.
d) For the FY 2020-21 and onwards, the benefit of considering the houses as self-occupied
has been extended to 2 houses. Now, a homeowner can claim his 2 properties as self-
occupied and remaining house as let out for Income tax purposes.

Illustration 1
Mrs. Shanthi (resident) owns two houses in Bangalore. She has let-out both the houses
throughout the year for residential purpose.

House 1 House 2
Municipal value 4,00,000 12,00,000
Fair Rental value 7,20,000 7,20,000
Rent received 4,80,000 8,00,000
Standard Rent 6,00,000 6,00,000
Repairs 72,000 1,00,000
Municipal Tax paid 40,000 1,20,000
Insurance Premium paid 48,000 70,000

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On 1st April 2020, she bought residential house for self-occupation for Rs. 10,00,000 by
taking a housing loan in Canara Bank.

Loan amount was Rs. 7,00,000 and rate of interest 12% p.a.

Compute taxable income from House property for the Assessment Year 2022-23.

Solution:

Computation of Taxable Income from House Property

Assessee: Mrs. Shanthi Previous Year: 2021-22

Status: Resident Assessment Year: 2022-23

Particulars House I House II House III
LOP LOP Self-Occupied
Municipal rental value 4,00,000 12,00,000
or whichever
Fair rental value is higher 7,20,000 7,20,000
Notional rent 7,20,000 12,00,000
Notional rent 7,20,000 12,00,000
or whichever
Standard rent is less 6,00,000 6,00,000
Expected rent 6,00,000 6,00,000
Expected rent 6,00,000 6,00,000
or whichever
Actual rent is higher 4,80,000 8,00,000
Gross Annual Value 6,00,000 8,00,000 Nil
Less: Municipal tax 40,000 1,20,000 -
Net Annual Value 5,60,000 6,80,000 Nil
Less: Standard Deduction U/s
24
30% of NAV 1,68,000 2,04,000 -
Interest on borrowed capital
for the previous year
(7,00,000x12/100) - - 84,000
Income from HP 3,92,000 4,76,000 84000

Computation of Taxable
Income of House
Property
House I Let-out property 3,92,000
House II Let-out property 4,76,000
House II Self occupied
property 84,000
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 Taxable Income from
House Property 7,84,000

Illustration 2

Mr. Praveen is the owner of three houses. The particulars are as follows:

Particulars House A House B House C

Annual fair rent 40,000 35,000 50,000
Municipal
valuation 50,000 40,000 50,000
Standard rent 45,000 42,000 55,000
Let out (per
month) 3,000 2,500 -
Purpose of use Let out Let out Self
Residential business occupied
Repairs 2,000 - 5,000
Collection charges 3,000 1,000 -
Interest on loan 15,000 5,000 2,000

Municipal tax is 10% taken for repairs of MV. Municipal tax of House A was paid by
tenant, but Municipal tax of House B was not paid till 31.03.22, municipal tax of House C
was paid by owner. House A remained vacant for 4 months. Compute income from
House Property for A.Y. 2022-23.

Solution:

Computation of Taxable Income from House Property

Assessee: Mr. Praveen

Previous Year: 2021-22

Status: Resident

Assessment Year: 2022-23

House A House B House C
Particulars Let out
residential LOB Self-Occupied
Municipal rental value 50,000 12,00,000
or whichever
Fair rental value is higher 40,000 7,20,000
Notional rent 50,000 12,00,000
whichever 50,000 12,00,000
is less

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 Notional rent
or
Standard rent 45,000 6,00,000
Expected rent 45,000 6,00,000
Expected rent 45,000 6,00,000
or whichever
Actual rent (3,000x4) is higher 36,000 8,00,000
Gross Annual Value 45,000 8,00,000 Nil
Less: Vacancy period
(3,000x4) 12,000 1,20,000 -
Gross/Net Annual
Value 33,000 6,80,000 Nil
Less: Municipal tax
paid Nil Nil Nil
Net annual value 33,000 40,000
Less: Deduction U/s
24 -
(i) 30% of NAV 9,900 12,000 Nil
(ii) Interest on loan 5,000 5,000 2,000
Income from House
Property 8,100 23,000 2,000

Computation of Taxable Income of House Property

House A
8,100
House B
23,000
House C
2,000
Taxable Income from House Property
29,100

Terminal Questions:

Section – A
1) What is Gross Annual Value?
2) What is Net Annual Value?
3) What do you mean by Municipal Valuation of Property?
4) What is standard rent of property?
5) What are the deductions available U/S 24?
6) What is fair rent property?
7) How do you treat unrealized rent?
8) How do you treat unrealized rent realized?
9) What do you mean by pre construction period?
10)What is meant by composite rent?

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 Section – B

1) Roopa is the owner of the following house properties. Find out the net annual value for
the assessment year 2022-23.
Particular A B C
Municipal value 1,80,000 1,80,000 3,60,000
Fair rental value 1,92,000 1,68,000 3,96,000
Standard rent 2,04,000 2,40,000 3,00,000
Actual rent (p.a) 2,16,000 1,92,000 2,88,000
Municipal tax paid 12,000 24,000 -
Municipal tax due 12,000 - 24,000

2) Compute GAV from the following information

Particulars A B C D
FRV 1,25,000 1,20,000 1,44,000 1,08,000
MRV 1,20,000 1,25,000 1,08,000 1,44,000
SRV 1,10,000 1,44,000 1,25,000 1,20,000
ARV 1,44,000 1,08,000 1,20,000 1,32,000
Unrealized rent 27,000 10,000 11,000
Vacancy Allowance 24,000 9,000 20,000 22,000

3) Calculate NAV in the following cases:

Particular H-1 H-2 H-3
Municipal value 80,000 1,40,000 1,40,000
Fair rental value 78,000 1,50,000 1,50,000
Standard rent 85,000 1,20,000 1,20,000
Actual rent 72,000 96,000 1,44,000
Unrealized rent 6,000 16,000 12,000
Vacancy Allowance 3 Months 4 Months 2 Months
Municipal tax paid 10% of Municipal value.

4) From the following information compute Net Annual Value of House Property for the A.Y.
2022-2023.
Municipal Value Rs. 1,80,000
Fair Rental Value Rs. 1,00,000
Let out (per month) Rs. 16,000
Standard Rent Rs. 1,20,000
Unrealized rent for one month.
Vacancy Allowance one month.
Municipal tax paid by owner of house property Rs. 20,000
Municipal tax paid by tenant Rs. 10,000

5) Mr. A is the owner of a house. The particulars of which are as follows:

Municipal value Rs. 1,80,000
Faire Rental value Rs. 1,95,000
Standard rent Rs. 1,90,000

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 Actual rent Rs. 15,500 p.m.
Vacancy period 1 month
Municipal tax paid by owner Rs. 20,500
Municipal tax paid by tenant Rs. 2,500
Determine the taxable income from house property for the A.Y. 2022-23.

6) From the following information compute Net Annual Value of House Property for the A.Y.
2022-23.
Municipal Value Rs. 1,80,000
Fair Rental Value Rs. 1,00,000
Let out (per month) Rs. 16,000
Standard Rent Rs. 1,20,000
Unrealized rent for one month.
Vacancy Allowance one month.
Municipal tax paid by owner of house property Rs. 20,000
Municipal tax paid by tenant Rs. 10,000

8)Arun owns a house in Bangalore. From the particulars given below compute the income
from house property for the P.Y.2021-22.
• Municipal value Rs 1,10,000
• Fair rental value Rs 1,30,000
• Standard rent Rs 1,25,000
• Actual rent per month Rs 12,000
• Municipal taxes paid Rs 11,000
• Expenses on repairs Rs 5,000
• Insurance premium Rs 2,000
• Unrealized Rent Recovered during the year 15,000 of 14-15

SECTION – C

1)From the following particulars of house properties owned by Sri. Viswanath. Compute
his income from house property for the A.Y.2022-23.

Particulars I House II House III House IV House

Municipal value 8,000 9,000 20,000 24,000
Actual rent -- --- 24,000 30,000
Local taxes paid 1,600 1,800 4,000 4,800
Repair charges 1,000 -- 3,000 --
Fire insurance premium 50 150 200 500
Interest on loan for 1,180 -- 1,800 4,200
construction -- --- 3,000 --
Unrealized rent -- -- 3 months ---
Vacancy period

The first and second house is self-occupied. The third house is let out for residence and
the fourth house is let out for business. The tenant paid local taxes of the fourth house.

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2)Mr. Sukruth is the owner of four houses in Bangalore. He gives the following particulars
of these properties.

Use of the House I HP SOPII HP Self III HP LOP IV HP LOP

Business
Rent received - - 66,000 54,000
Fair rental value 60,000 70,000 56,000 90,000
Municipal value 62,000 67,000 70,000 60,000
Municipal Tax - Paid by Paid by Tenant
10% Tenant but deducted
5,000 3,000 - from Rent
Repairs - - - -
Interest on loan 2 months - 1 month 3,000
Vacancy period -

Find out the Income from House Property for the AY 2022-23.

3)Mr. Chopra owns four houses. The details of these properties are given below for the
PY 2021-22.
Self-occupied Self-
for Residence Let out occupied Let out
Particulars
for
Residence
Municipal value 1,20,000 1,32,000 10,80,000 2,20,000
Fair rental value 1,50,000 1,60,000 12,00,000 2,50,000
Standard rent - 1,55,000 10,00,000 2,48,000
Rent receivable per - 8,000 - 15,000
month 3 months 1month - -
Vacancy period - - - 6,000
Unrealized rent
(conditions satisfied)
Municipal tax 9,600 4,000 42,000 1,000
• Paid by Chopra 6,000 11,000
• Paid by Tenant
Interest on loan - 8,600 1,00,000 3,900
borrowed

Compute his total income for the previous year 2021-22.

5)Mr. Kumar owns a house at Delhi. During the previous year 2021-22, 3/4th portion of
the house is occupied for self-residence for full year and 1/4th portion is let out for
residential purposes from 1.4.2021 to 31-12-2021on a rent of Rs. 700 p.m. From 1-1-
2019 this portion was used for own residency by him. Municipal valuation of the entire
house is Rs. 20,000 and fair rental value is Rs. 24,000. Expenses incurred in respect of
the house property were: Municipal Taxes Rs. 60,000; Repairs Rs. 2,000; Fire insurance

FOR PRIVATE CIRCULATION ONLY 91

premium Rs. 3,500; Land Revenue Rs. 4,000 and Ground Rent Rs. 200. These expenses
were paid during the year

Find out his income from house property for the assessment year 2022-23.

5)Mr. Gurudas owns following four house properties. Other particulars are as follows:
House 3 House 4
House 1 House 2
Let out to a Used for
Particulars Self- Self-
business own
occupied occupied
house business
Municipal value 20,000 50,000 70,000 45,000
Standard rent --- ---- 72,000 48,000
Fair rental value 26,000 60,000 80,000 50,000
Annual rent --- --- 96,000 ----
Vacancy --- --- 1 month ----
Unrealized rent --- --- 16,000 ----
Municipal taxes 5,000 2,000 6,000 4,000
Repairs 4,000 2,000 8,000 5,000
Interest on money
borrowed 8,000 10,000 18,000 ----
(construction)
Determine the house property income of Mr. Gurudas.

6)Mr. Ramachandran owns two houses at Chennai which are let out for residential and
business purpose. Compute his income from house property for the A.Y. 2022-23.
F.R.V. 36,000 1,20,000
Actual Rent 4,000 p.m. 12,000 p.m.
Municipal Rental Value 40,000 1,30,000
Standard rent 38,000 N.A.
Municipal Tax 10%. 10%
Actual repairs expenses 4,000 12,000
Ground Rent 2,000 2,500
Collection Charges 500 1,200
Interest on loan 12,000 48,000
Vacancy period 3 months NIL
Bonafede unrealized rent of current year NIL 36,000

Compute taxable income from house property of Mr. Thomas for the assessment year
2019-20 [Hints: House 3 is treated as two separate units]

8)Smt. Ramya owns 4 houses. HP 1 is let out for business purpose, HP2 is occupied for
own business and HP3 and HP4 are occupied for own residence. Following particulars
are available with respect to these properties for the PY 2021-22.

Particulars HP1 HP2 HP3 HP4

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 Municipal value 60,000 10,000 1,36,000 1,90,000
Fair Rental Value 78,000 36,000 1,54,000 1,90,000
Standard Rent 72,400 24,000 1,50,000 1,80,000
Annual Rent 84,000 - - -
Unrealized Rent 7,000 - - -
Municipal tax-
- Paid by owner 3,000 8,000 12,000 16,000
- Paid by tenant 3,000 - - -
Date of completion 31-05-2014 31-05-2014 31-03-2014 01-04-15
of Construction
Interest on loan for 63,900 - 84,921 1,37,996
pre-construction

Determine Smt. Ramya’s income from house property for the AY 2022-23.

CHAPTER IV
INCOME FROM CAPITAL GAINS

Any profit or gain that arises from the sale of a ‘capital asset’ Under section2(14) is
chargeable to tax under section 45, is a capital gain. This gain or profit comes under the
category ‘income’, and hence assessee will need to pay tax for that amount in the year in
which the transfer of the capital asset takes place. This is called capital gain tax, which
can be short-term or long-term.
Capital gains are not applicable to an inherited property as there is no sale, but only a
transfer of ownership [except such transfers as are given in sections 46 and 47]. The Income Tax
Act has specifically exempted assets received as gifts by way of an inheritance or will.
However, if the person who inherited the asset decides to sell it, capital gains tax will be
applicable. Any gains arising out of transfer of capital asset in the previous year is called
as capital gains. To tax an income under the head capital gains the following conditions
are to be fulfilled.
WHAT IS THE BASIS OF CHARGE [SEC. 45]

Any gain arising from the transfer of a capital asset during a previous year is chargeable to tax under
the head "Capital gains" in the immediately following assessment year, if it is not eligible for
exemption under sections 54, 54B, 54D, 54EC, 54F, 54G, 54GA and 54GBt. In other words, capital
gain's tax liability arises only when the following conditions are satisfied:

Condition 1 There should be a capital asset.

Condition 2 The capital asset is transferred by the assessee.
Condition 3 Such transfer takes place during the previous year.

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 Condition 4 Any profit or gains arises as a result of transfer.
Such profit or gains is not exempt from tax under sections
Condition 5 54, 548, 54D, 54EC, 54EE, 54F, 54G, 54GA and 54CB1.

Section 45 in The Income- Tax Act, 1995

45. Capital gains 1

(1) Any profits or gains arising from the transfer of a capital asset effected in the previous
year shall, save as otherwise provided in sections 54, 54B,54D, 54E, 54F, 54G and 54H, be
chargeable to income- tax under the head" Capital gains", and shall be deemed to be the
income of the previous year in which the transfer took place.
(2) Notwithstanding anything contained in sub- section (1), the profits or gains arising
from the transfer by way of conversion by the owner of a capital asset into, or its
treatment by him as, stock- in- trade of a business carried on by him shall be chargeable
to income- tax as his income of the previous year in which such stock- in- trade is sold or
otherwise transferred by him and, for the purposes of section 48, the fair market value of
the asset on the date of such conversion or treatment shall be deemed to be the full value
of the consideration received or accruing as a result of the transfer of the capital asset.
(3) The profits or gains arising from the transfer of a capital asset by a person to a
firm or other association of persons or body of individuals (not being a company
or a co- operative society) in which he is or becomes a partner or member, by way
of capital contribution or otherwise, shall be chargeable to tax as his income of the
previous year in which such transfer takes place and, for the purposes of section 48, the
amount recorded in the books of account of the firm, association or body as the value of
the capital asset shall be deemed to be the full value of the consideration received or
accruing as a result of the transfer of the capital asset.
(4) The profits or gains arising from the transfer of a capital asset by way of distribution
of capital assets on the dissolution of a firm or other association of persons or body
of individuals (not being a company or a co- operative society) or otherwise, shall be
chargeable to tax as the income of the firm, association or body, of the previous year in

FOR PRIVATE CIRCULATION ONLY 94

which the said transfer takes place and, for the purposes of section 48, the fair market
value of the asset on the date of such transfer shall be deemed to be the full value of the
consideration received or accruing as a result of the transfer.]
(5) Notwithstanding anything contained in sub- section (1), where the capital gain arises
from the transfer of a capital asset, being a transfer by way of compulsory acquisition
under any law, or a transfer the consideration for which was determined or approved by
the Central Government or the Reserve Bank of India, and the compensation or the
consideration for such transfer is enhanced or further enhanced by any court, tribunal or
other authority, the capital gain shall be dealt with in the following manner, namely:-
(a) the capital gain computed with reference to the compensation awarded in the first
instance or, as the case may be, the consideration determined or approved in the first
instance by the Central Government or the Reserve Bank of India shall be chargeable as
income under the head" Capital gains of the previous year 2 in which such compensation
or part thereof, or such consideration or part thereof, was first received]; and
(b) the amount by which the compensation or consideration is enhanced or further
enhanced by the court, tribunal or other authority shall be deemed to be income
chargeable under the head" Capital gains" of the previous year in which such amount is
received by the assessee. Explanation. - For the purposes of this sub- section,-
(i) in relation to the amount referred to in clause (b), the cost of acquisition and the cost
of improvement shall be taken to be nil;
(ii) the provisions of this sub- section shall apply also in a case where the transfer took
place prior to the 1st day of April, 1988 ;
(iii) where by reason of the death of the person who made the transfer, or for any other
reason, the enhanced compensation or consideration is received by any other person, the
amount referred to in clause (b) shall be deemed to be the income, chargeable to tax
under the head" Capital gains", of such other person.]
(6) 3 Notwithstanding anything contained in sub- section (1), the difference between the
repurchase price of the units referred to in subsection (2) of section 80CCB and the capital
value of such units shall be deemed to be the capital gains arising to the assessee in the
previous year in which such repurchase takes place or the plan referred to in that section
is terminated and shall be taxed
WHICH ARE THE ASSETS, INCLUDED IN AND EXCLUDED FROM CAPITAL ASSET

"Capital asset" is defined by section 2(14).

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"Capital asset" means property of any kind, whether fixed or circulating, movable or
immovable, tangible or intangible. Besides, it includes the following-

1. Any rights in or in relation to an Indian company, including rights of management or

control or any other rights whatsoever.

2. Property of any kind held by an assessee (whether or not connected with his business
or profession).

3. Any securities held by a Foreign Institutional Investor which has invested in such
securities in accordance with the regulations made under the SEBI Act.

4. Any unit-linked insurance plan (ULIP policy) issued on or after February 1, 2021 to
which exemption under the term of such section 10(10D) does not apply (ie, if
insurance premium payable in any previous year during policy exceeds Rs. 2.50 lakh).

The following assets are excluded from the definition of "capital assets" –

1. Stock-in-trade (other than securities referred to in point 3 above).

2. Personal effects (movable assets).

3. Agricultural land in a rural area in India.

4. A few gold bonds and special bearer bonds (this point does not have any practical
utility).

5. Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit
certificates issued under the Gold Monetization Scheme, 2015.

WHAT IS TRANSFER OF CAPITAL ASSET?

Transfer, in relation to a capital asset, includes sale, exchange or relinquishment of the

asset or the extinguishment of any rights therein or the compulsory acquisition thereof
under any law [sec. 2(47)]

Certain transactions not included in transfer- For the purpose of section 45, the
following transactions are not regarded as transfers (in other words, in the following
cases, there is no capital gain)

1. Distribution of assets in kind by a company to its shareholders on its liquidation.

2. Any distribution of capital assets in kind by a Hindu undivided family to its members
at the time of total or partial partition.

3. Any transfer of capital asset under a gift or a will or an irrevocable trust (exception-
gift of ESOP shares is chargeable to tax).

FOR PRIVATE CIRCULATION ONLY 96

4. Transfer of capital asset between holding company and its 100 per cent subsidiary
company, if the transferee company is an Indian company.

5. Transfer of capital asset in the scheme of amalgamation/demerger, if the transferee-

company is an Indian company.6. Transfer of shares in amalgamating
company/demerged company in lieu of allotment of shares in amalgamated
company/resulting company in the above case.

The following transactions are not treated as Transfer:

1. Transfer of asset in a scheme of amalgamation, demerger.
2. Transfer of agricultural land before 01-04-1970.
3. Transfer of debenture or bonds into shares.
4. Transfer of asset in kind at the time of liquidation.
5. Transfer of asset by a parent company to the own subsidiary company.
6. Transfer of asset under gift or will.
7. Transfer of capital asset at the time of partition of HUF.
8. Transfer of capital asset, being a government security, made outside India by Non-
Resident to another Non-Resident.
CAPITAL GAINS HOW COMPUTED [SEC. 48]

Computation of capital gain depends upon the nature of capital asset transferred, viz,
short-term capital asset or long-term capital asset. Capital gain arising on transfer of a
short-term capital asset is short-term capital gain, whereas transfer of long-term capital
asset generates long-term capital gain. The tax incidence is generally higher in the case
of short-term capital gain as compared to long-term capital gain.

The method of computation of short-term and long-term capital gain is as follows:

Computation of short-term capital gain Computation of long-term capital gain

1. Find out full value of consideration 1. Find out full value of consideration
2. Deduct the following:
2. Deduct the following: a. expenditure incurred wholly and
a. expenditure incurred wholly and exclusively in connection with such
exclusively in connection with such transfer
transfer b. indexed cost of acquisition [in some
b. cost of acquisition cases cost of acquisition is deducted]
c. cost of improvement c. indexed cost of improvement (in some
cases cost of improvement is deducted)

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 3. From the resulting sum deduct the 3. From the resulting sum deduct the
exemptions provided by sections 54B, exemption provided by 54, 548, 54D,
54D, 54G and 54GA. 54EC. 54EE, 54F, 54G, SIGA and 54GB
4. The balance amount is short-term 4. The balance amount is long-term
capital gain. capital gain.

Notes

1. Securities transaction tax is not deductible while computing income under the head
"Capital gains".

WHAT IS FULL VALUE OF CONSIDERATION [SEC. 48]

Full value of consideration is the consideration received or receivable by the transferor

in lieu of assets, which he has transferred. Such consideration may be received in cash or
in kind. If it is received in kind, then fair market value of such assets is taken as full value
of consideration. Full value of consideration does not mean market value of that asset
which is transferred.

➢ Adequacy of consideration - Adequacy or inadequacy of consideration is not a

relevant factor for the purpose of determining full value consideration. However,
in the case of transfer of land or building (or both), if stamp duty value is more
than 110 per cent of sale consideration, the stamp duty value is taken as full value
of consideration.
➢ Receipt of consideration-It makes no difference whether (or not) "full value of
consideration" is received during the previous year. Even if consideration is not
received, capital gain is chargeable to tax in the year of transfer.
➢ If consideration is not determinable- Where in the case of a transfer, consideration
for the transfer of a capital asset(s) is not determinable, then for the purpose of
computing capital gains, the fair market value of the asset shall be taken to be the
full market value of consideration [sec. 50D).

HOW TO FIND OUT EXPENDITURE ON TRANSFER

Expenditure incurred wholly and exclusively in connection with transfer of capital asset
is deductible from full value of consideration. The expression "expenditure incurred

FOR PRIVATE CIRCULATION ONLY 98

wholly and exclusively in connection with such transfer means expenditure incurred
which is necessary to effect the transfer.

Examples of such expenses are: brokerage or commission paid for securing a purchaser,
cost of stamp registration fees borne by the vendor, travelling expenses incurred in
connection with transfer, litigation expenditure for claiming enhancement of
compensation awarded in the case of compulsory acquisition of assets.

WHAT IS COST OF ACQUISITION

Cost of acquisition of an asset is the value for which it was acquired by the assessee.
Expenses of capital nature for completing or acquiring the title to the property are
includible in the cost of acquisition. Interest on money borrowed to purchase asset is part
of actual cost of asset.

The amount paid for discharge of a mortgage is part of "cost of acquisition", if the
mortgage was not created by the transferor. For instance,

on June 1, 2018, X took a loan of Rs. 5 lakhs by mortgaging his house property. X
could not repay the loan during his lifetime and after his death on July 2, 2020, the
property (with mortgage) is transferred to Mrs. X. Mrs. X transfers the property on
march2, 2022 and before transfer, a sum of Rs. 7.2 lakh is paid to clear the
mortgage. Rs. 7.2 lakh will be deductible as part of cost of acquisition of the
property while calculating capital gains in the hands of Mrs. X. If, however, loan is
taken by Mrs. X. then repayment of loan will not be deductible as part of cost of
acquisition of the property while calculating capital gains in the hands of Mrs. X.

WHAT IS COST OF IMPROVEMENT

Cost of improvement is capital expenditure incurred by an assessee in making any

additions/improvement to the capital asset. It also includes any expenditure incurred to
protect or complete the title to the capital assets or to cure such title. Any expenditure
incurred to increase the value of the capital asset is treated as cost of improvement.

Improvement cost incurred before April 1, 2001-Cost of improvement

incurred before April 1, 2001 is never taken into consideration. This rule
does not have any exception.

HOW TO CONVERT COST OF ACQUISITION/IMPROVEMENT INTO INDEXED COST

OF ACQUISITION/IMPROVEMENT

FOR PRIVATE CIRCULATION ONLY 99

Indexed cost of acquisition is calculated as follows
𝑪𝒐𝒔𝒕 𝒐𝒇 𝒂𝒄𝒒𝒖𝒊𝒔𝒊𝒕𝒊𝒐𝒏
𝑿 𝑪𝒐𝒔𝒕 𝒊𝒏𝒇𝒍𝒂𝒕𝒊𝒐𝒏 𝒊𝒏𝒅𝒆𝒙 𝒇𝒐𝒓 𝒕𝒉𝒆 𝒚𝒆𝒂𝒓 𝒊𝒏 𝒘𝒉𝒊𝒄𝒉 𝒕𝒉𝒆 𝒂𝒔𝒔𝒆𝒕 𝒊𝒔 𝒕𝒓𝒂𝒏𝒔𝒇𝒆𝒓𝒓𝒆𝒅
𝑪𝒐𝒔𝒕 𝒊𝒏𝒇𝒍𝒂𝒕𝒊𝒐𝒏 𝒊𝒏𝒅𝒆𝒙 (𝑪𝑰𝑰)
𝒇𝒐𝒓 𝒕𝒉𝒆 𝒚𝒆𝒂𝒓 𝒊𝒏 𝒘𝒉𝒊𝒄𝒉 𝒂𝒔𝒔𝒆𝒕 𝒘𝒂𝒔
𝒇𝒊𝒓𝒔𝒕 𝒉𝒆𝒍𝒅 𝒃𝒚 𝒕𝒉𝒆
𝒂𝒔𝒔𝒆𝒔𝒔𝒆𝒆′ 𝒐𝒓 𝟐𝟎𝟎𝟏 − 𝟎𝟐,
𝒘𝒉𝒊𝒄𝒉𝒆𝒗𝒆𝒓 𝒊𝒔 𝒍𝒂𝒕𝒆𝒓

Indexed cost of improvement is calculated as follows

𝑪𝒐𝒔𝒕 𝒐𝒇 𝒊𝒎𝒑𝒓𝒐𝒗𝒆𝒎𝒆𝒏𝒕
𝑿 𝑪𝒐𝒔𝒕 𝒊𝒏𝒇𝒍𝒂𝒕𝒊𝒐𝒏 𝒊𝒏𝒅𝒆𝒙 𝒇𝒐𝒓 𝒕𝒉𝒆 𝒚𝒆𝒂𝒓 𝒊𝒏 𝒘𝒉𝒊𝒄𝒉 𝒕𝒉𝒆 𝒂𝒔𝒔𝒆𝒕 𝒊𝒔 𝒕𝒓𝒂𝒏𝒔𝒇𝒆𝒓𝒓𝒆𝒅
𝑪𝑰𝑰 𝒇𝒐𝒓 𝒕𝒉𝒆 𝒚𝒆𝒂𝒓 𝒊𝒏
𝒘𝒉𝒊𝒄𝒉 𝒊𝒎𝒑𝒓𝒐𝒗𝒆𝒎𝒆𝒏𝒕 𝒕𝒐𝒐𝒌 𝒑𝒍𝒂𝒄𝒆

Cost inflation index for different previous years

Cost of Inflation Cost of Inflation

Previous Year index Previous Year index
(CII) (CII)
2001-02 100 2012-13 200
2002-03 105 2013-14 220
2003-04 109 2014-15 240
2004-05 113 2015-16 254
2005-06 117 2016-17 264
2006-07 122 2017-18 272
2007-08 129 2018-19 280
2008-09 137 2019-20 259
2009-10 148 2020-21 301
2010-11 167 2021-22 317
2011-12 184 2022-23 331
Financial Assets:
It means the capital assets which comprises of securities, bonds, shares, mutual funds.
Etc.
Short Term Capital Gain: Any gains arising from transfer of Short-term capital asset is
known as short term capital gain.
Long term Capital Gain:
Any again arising from transfer of Long-term capital asset is known as Long- germ capital
gains

a) Indexed cost of Acquisition (If the Assessee acquires the property before 01-04-
2001)

It means inflating the cost of an asset acquired to the present value. Indexation
benefits are available only for long term capital assets. However, the indexation

FOR PRIVATE CIRCULATION ONLY 100

benefits is a not available in case of debentures, goodwill, intangible assets, bonus
shares and depreciable assets even it is a long term assets.

If the Assessee acquires the property before 01-04-2001

𝐀𝐜𝐭𝐮𝐚𝐥 𝐜𝐨𝐬𝐭 𝐨𝐫 𝐅𝐚𝐢𝐫 𝐌𝐚𝐫𝐤𝐞𝐭 𝐕𝐚𝐥𝐮𝐞 𝐚𝐬 𝐨𝐧 𝟎𝟏−𝟎𝟒−𝟐𝟎𝟎𝟏 (𝐖𝐄𝐇)

ICOA=
𝟏𝟎𝟎

Summary of the period of holding:

4.4 Brokerage or Selling expenses:

It is the expenses incurred for transferring the capital asset, the expenses includes,
brokerage, commission and other expenses related to transfer.

4.5 Cost of acquisition:

It refers to the cost incurred by an assessee to acquire the capital asset. It includes all
capital expenses incurred in acquiring the assets.

Cost of Acquisition of certain assets

Asset Cost of Acquisition
Goodwill, if self-generated NIL

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Goodwill, if acquired Purchase Price
On Gift / inheritance / distribution of assets of
HUF on partition Cost to the previous owner
Bonus Shares allotted prior to 1st Apr’01 FMV (1st Apr’01)
Bonus Shares allotted post 1st Apr’01 NIL
Rights Shares Amount paid to acquire the shares
Rights shares which are purchased by person in
whose favor the assessee has renounced the Purchase price paid to the renouncer + Price
rights paid for acquiring rights shares

Cost of acquisition shall have to be adjusted by the Cost Inflation Index to arrive at the
indexed cost of acquisition.

Note: Base year for the purpose for calculation of Indexed cost of acquisition or
improvement has been shifted from 1981-82 to 2001-2002. Accordingly, if any
assessee/previous owner has acquired capital asset prior to 1-4-2001 then he will have
option to choose actual cost of acquisition or FMV as on 1-4-2001 as his cost of
acquisition. Cost of improvement incurred by assessee or previous owner prior to 1-4-
2001 shall be taken as NIL.

b) If the Assessee acquires the property after 01-04-2001

Situation 1: (Before – Before, that is both the previous owner and present owner
acquired the property before 1st April 2001)

Situation 2: (Before – After, that is that the previous owner acquired the property before
1st April 2001 and the present owner acquired the property after 1st April 2001)

Situation 3: (After – After, that is both the previous owner and the present owner
acquired the property after 1st April 2001)

4.7 Indexed Cost of Improvements:

It is the cost incurred by the assessee for improving the utility of the asset or enhancing
the value of the asset.
- Any cost incurred by the assessee or by the previous owner before 01-04-2001 is to
be ignored and should not be considered for deduction.
- The cost incurred on or after 01-04-2001 will be allowed as deduction.
a) For the Short them capital asset the actual cost of improvement is allowed as
deduction.
b) For Long term capital asset, it will be indexed and allowed as deduction

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 Exemptions u/s 54 TO 54 G
House property ………1cr
Farm land.……….5cr

A. Section 54:

1. Eligible assessee: Individual and HUF

2. Type of asset: The house property transferred should be a long-term capital asset.
3. Transfer(sale) of: Residential house2021-22
4. Purchase or construction of: Residential house
5. Time limit:
a. For purchase: Within 1 year before or within 2 years after the date of transfer
of residential house.
b. For construction: within 3 years after the date of transfer of residential house.
6. Other conditions:
i. Construction should be complete within 3 years from the date of transfer (Date
of commencement of construction, being irrelevant).
ii. No limit on number of properties that can be acquired.
iii. Amount of exemption u/S 54 is:
DETAILS AMT (₹) AMT (₹)
Section 54:

Amount of capital gain XXX

Amount invested in purchase or
construction of residential house XXX
Whichever is less is exempt u/s 54 XXX

i. The new residential property shall not be transferred within a period of 3 years from
the date of its purchase or completion of construction. If transferred (sold) then
exemption given earlier shall be taxable in the previous year of such transfer.
ii. Amount deposited in capital gain account scheme shall also be exempted. however the
deposit amount shall be utilized for the said purpose within the time limit .If not ,then it
shall be taxable in the P.Y in which it was utilized for other purposes or on the expiry of
time limit. If the assessee is not utilizing the amount till the expiry of 3 years, if he
withdraws after three years for the said purpose or for other purpose is taxable.

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Note: From the AY 2021-22 in order to save tax on long-term capital gains on the sale
of house property one can invest capital gains in two house properties instead of one but
this benefit is available once in a lifetime only if capital gains do not exceed Rs 2 crore.

Section 54B:

1. Eligible Assessee: Individual

2. Type of Asset: Short term or long-term capital asset being transferred which
is an agricultural land.
3. Transfer of: Agricultural land
4. Purchase of: Agricultural land
5. Time limit: The assessee can purchase another agriculture land within 2 years
from the date of transfer.
6. Other conditions:
i. The agricultural land was used by the assessee or his parents for a period
of 2 years immediately before the date of transfer.
ii. The new agricultural land purchased may be in rural or urban area.
However, the transfer (sale) of agricultural land shall be situated only in
urban area (since agricultural land in rural area is not a capital asset U/S
2(14).

i. Amount of exemption u/s 54B is,

DETAILS AMT(₹) AMT(₹)

Amount of exemption U/ S 54B
Amount of capital gain XXX
Amount invested in purchase of new agricultural land
/Amount Invested in capital gain A/c Scheme XXX
Whichever is less is exempt u/s 54B XXX

i. The new agricultural land shall not be transferred within a period of 3 years from the
date of its purchase. If transferred, the exemption given earlier shall be taxable in the
previous year of such transfer.

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ii. Amount deposited in capital gain account scheme shall also be exempted. however,
the deposit amount shall be utilized for the said purpose within the time limit. if not, then
it shall be taxable in the P.Y in which it was utilized for other purposes or on the expiry of
time limit. If the assessee is not utilizing the amount till the expiry of 2 years, if he
withdraws after three years for the said purpose or for other purpose is taxable. (Capital
gain A/c scheme shall be maintained by nationalized bank).

C. Capital gains on compulsory acquisition of land and building forming part of

industrial undertaking (Sec 54 D):
Section 54D:

1. Eligible Assessee: All persons

2. Type of Asset: Short term or long-term capital asset
3. Transfer of: Compulsory acquisition of land or building forming part of Industrial
undertaking which is compulsorily acquired by Government.
4. Purchase of: Land or building forming part of industrial undertaking
5. Time limit: Within a period of 3 years after the date transfer
6. Other conditions:
i. Such land or building forming part of industrial undertaking was used by the
assessee for at least 2 years before the date compulsory acquisition (Transfer)
ii. Amount of exemption U/S 54D:

DETAILS AMT(₹) AMT(₹)

Amount of exemption U/ S 54D
Amount of capital gain XXX
The amount invested in purchase or construction of new
land or building forming part of industrial undertaking
XXX
Whichever is less is exempt u/s 54B XXX

i. The new land or building purchased or constructed shall not be transferred within a
period of 3 years from the date of its purchase or construction. If transferred the
exemption given earlier shall be taxable in the previous year of such transfer.

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ii. Amount deposited in capital gain account scheme shall also be exempted. However,
the deposit amount shall be utilized for the said purpose within the time limit. If not, then
it shall be taxable in the P.Y in which it was utilized for other purpose or on the expiry of
time limit.
D. Capital gain on transfer of any long-term capital asset and invested in specified
assets (Sec 54 EC):
1. Eligible Assessee: All persons
2. Type of Asset: long-term capital asset
3. Transfer of: Any long-term capital asset
4. Investment in: Long- term specified capital asset
5. Time limit: Within 6 months from the date of transfer
6. Other conditions:
i. Long -term specified capital assets
a) National Highway Authority of India (NHAI)
b) Rural Electrification Corporation (REC)
ii. Amount of exemption u/s 54EC:
DETAILS AMT(₹) AMT(₹)
Amount of exemption U/ S 54EC
Amount of capital gain XXX
The amount invested in long term specified capital asset XXX
Whichever is less is exempt u/s 54EC XXX

i. Maximum amount that can be invested during any financial year is Rs.50,00,000
ii. The investment made in long term specified capital asset shall not be transferred or
liquidated within a period of 3 years from the date of making investment. If transferred,
the exemption given earlier shall be taxable in the previous year of such transfer.
iii. The above investments in specified capital assets are not eligible for deduction U/S
80C.
iv. Amount deposited in capital gain account scheme shall also be exempted.
However, the deposit amount shall be utilized for the said purpose within the time limit.
If not then it shall be taxable in the P.Y in which it was utilized for other purposes or on
the expiry of time limit.

E. Capital gains on transfer of a long-term capital asset other than a house

property, but invested in residential house (Sec 54 F):
Section 54 F:
1. Eligible Assessee: Individual and HUF
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2. Type of asset: Long-term capital asset.
3. Transfer (sale) of: Any long-term capital asset other than residential house
4. Purchase or construction of: Residential house
5. Time limit:
a. For Purchase: Within 1 year before or within 2 years after the date of
transfer.
b. For construction: within 3 years after the date of transfer.
6. Other conditions:
i. Construction should be complete within 3 years from the date of transfer.
(Date of commencement of construction, being irrelevant).
ii. The assessee owns not more than 1 residential house on the date of
transfer (other than new residential house)
ii. Amount of exemption U/S 54 F is:

DETAILS
AMT(₹) AMT(₹)
Amount of exemption U/ S 54F

Amount of capital gain XXX

Capital gain x cost of new house /Net sale
consideration XXX

Whichever is less is exempt XXX

(Note: Net sale consideration= Full value consideration - Expenses related to

transfer)
i. The new residential property shall not be transferred within a period of 3 years from
the date of its purchase or completion of construction. If transferred (sold) then
exemption given earlier shall be taxable in the previous year of such transfer.
ii. Amount deposited in capital gain account scheme shall also be exempted .however
the deposit amount shall be utilized for the said purpose within the time limit .If not ,then
it shall be taxable in the P.Y in which it was utilized for other purposes or on the expiry of
time limit (i.e. Above the time limit) .

F. Capital gain on shifting of industrial undertaking from urban to non-urban areas

(Sec 54 G):
Section 54G:
1. Eligible Assessee: All persons

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2. Type of Asset: Short-term or long-term capital asset
3. Transfer of: Land, Building, Plant or Machinery used for the purpose of an
industrial undertaking situated in urban area.
4. Purchase of: Land or building or Plant or Machinery used for the purpose of an
industrial undertaking shifted from urban area to any area other than an urban area
(Rural area or semi urban area).
5. Time limit: Within a period of 1 year before or 3 years after the date transfer

6. Other conditions:
i. Amount of exemption u/s 54GA:

DETAILS
AMT(₹) AMT(₹)
Amount of exemption U/ S 54GA

Amount of capital gain XXX

The amount invested in purchase or construction of new
land or building, Plant or Machinery forming part of
industrial undertaking
XXX

Whichever is less is exempt U/S 54GA XXX

ii. The new land or building or plant, machinery purchased or constructed shall not be
transferred within a period of 3 years from the date of its purchase or construction. If
transferred the exemption given earlier shall be taxable in the previous year of such
transfer.
iii. Amount deposited in capital gain account scheme shall also be exempted.
however, the deposit amount shall be utilized for the said purpose within the time limit.
If not, then it shall be taxable in the P.Y in which it was utilized for other purpose or on
the expiry of time limit.

G. Investment on compensation received (Sec 54 H):

In case any asset was taken over by Govt. and additional compensation is received it will
be deemed as income of the year in which it is received and period for reinvestment will
be counted from the date of receipt of such additional compensation.

Illustration: 1
Q1. Ms. Divya residing in Chennai acquired a residential house on 28th May 2003 for Rs.
30,00,000. This house was sold for a consideration of Rs. 2 crores in May, 2021. Brokerage

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and other expenses in connection with transfer amounting to Rs. 3 lakhs were spent. In
March 2022, the sale consideration was invested in a residential property for Rs. 60 lakhs
and at the same time a sum of Rs. 25 lakhs were invested in the bonds issued by NHAL A
sum of Rs. 40 Lakhs was invested in long term specified units in July 2021. Compute the
taxable Capital gain for the AY 2022-23.

AY 2022-
Computation of taxable Capital gains 23
Particulars Rs. Rs.
Sale consideration 2,00,00,000
Less: Expenses incurred 3,00,000
Net consideration 1,97,00,000
Less: Indexed cost of acquisition (30,00,000
x301/105) 86,00,000
Gross capital gains 1,11,00,000
Less: Exempt - u/s. 54 Cost of the new house 60,00,000
- u/s. 54EC-NHAI - invested beyond 6 months
- not eligible Nil
- u/s 54EE-specified long term units - invested
within 6 months 40,00,000 1,00,00,000
Taxable Capital gains 11,00,000

Note: Since the amount of Capital gains is less than 2 crores, the assessee has an option
to invest in two residential house properties in India. (This option can only be exercised
once in a lifetime for an assessee).

Illustration: 2
Mr. Adhisesha sells his house property, acquired in 2001 for Rs. 15 lakhs, for a
consideration of Rs. 107 lakhs in September 2021. Cost of improvement incurred for
this property in June 2001 was Rs. 3 lakhs and in July 2005 Rs. 2.8 lakhs. Expenses
incurred for effecting sale is Rs. 1 Lakhs. He acquired a new house property during
January 2022 for a consideration of Rs. 15 lakhs. Compute the taxable Capital gains by

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assuming that the fair market value as on 01.04.2002 at Rs. 28 lakhs and the SDV as on
01.04.2002 is Rs. 30,00,000.

AY 2022-
Computation of taxable Capital gains 23
Particulars Rs. Rs.
Sale consideration 1,07,00,000
Less: Expenses incurred 1,00,000
Net consideration 1,06,00,000
Less: Indexed cost of acquisition (28,00,000
x301/100) - Note 1 84,28,000
Less: Indexed cost of acquisition (2,80,000
x301/113) - Note 1 7,45,841 91,73,841
Long term capital gains 14,26,159
Less: Exempt - u/s. 54 Cost of the new house -
15,00,000 or Capital gain - 14,26,159
whichever is less 14,26,159
Taxable Capital gains Nil

Notes: 1. Cost of acquisition can be adopted as Actual Cost or (Fair Market Value as on
01.04.2002(or) SDV as on 01.04.2002, whichever is lower), whichever is beneficial to
the assessee and accordingly Rs. 28 lakhs are taken.

2. Cost of improvement incurred prior to 01.04.2002 is not allowed to be deducted in

the computation of Capital gains - (Sec. 55).

3. Since the amount of Capital gains is less than 2 crores, the assessee has an option to
invest in two residential house properties in India. (This option can only be exercised
once in a lifetime for an assessee).

Illustration: 3
Following are the details of income provided by Mr. Padmanabhan for the year ending
31.03.2021

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i) Rental income from property at Chennai - Rs. 3 Lakhs; Standard rent- Rs. 2,50,000;
Fair rent-Rs. 2,80,000.

ii) Municipal and water tax paid to Municipality; Current year - Rs. 35,000; Arrears - Rs.
1,50,000.

iii) Interest on loan borrowed towards major repairs to the property - Rs. 1,50,000.

iv) Arrears of rent from property at Hyderabad which was sold on 10.04.2017 Rs.
20,000. Assessee furnishes the following additional information regarding sale of a
property in Delhi:

a. Assessee's father acquired a property in April 2010 for Rs. 1,00,000. Assessee
acquired this property by inheritance on 1st December, 2011 after the demise of his
father.

b. Fair Market Value as on 01.12.2011 was Rs. 80,000.

c. Sale consideration received is Rs. 25,00,000.

d. Stamp duty charges paid by the purchaser at the time of registration @ 13% (on
guideline value) is Rs. 3,90,000 without any protest.

e. The Assessee has invested the sale consideration in a residential flat for Rs 15 Lakhs
out of the sale proceeds. A sum of Rs. 10 Lakhs was invested in Capital gains Bonds
issued by Power Finance Corporation Ltd (PFCL).

Compute his taxable income for the AY 2022-23.

Computation of taxable Capital gains AY 2022-23

I. Income from House Property Rs. Rs.
i) Gross Annual Value of Property in Chennai 3,00,000
Less: Municipal taxes paid (35,000+1,50,000) 1,85,000
Net Annual Value (NAV) 1,15,000
Less: Deduction u/s.24
(-)30% of NAV 34,500
(-)Interest on loan 1,50,000 1,84,500 (69,500)

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 ii) Arrears of Rent received from Property in
Hyderabad 20,000
Less: Deduction u/s. 25A-30% of Arrears rent 6,000 14,000
Loss from House Property (A) (55,000)
II. Capital Gains Rs. Rs.
Sale value as per Sec. 50C (Note 1) 30,00,000
Less: Indexed cost of acquisition (1,00,000 x
301/148) 2,03,378
Long Term Capital Gains 27,96,622
Less: Exemptions
-u/s. 54 Residential Flat 15,00,000
-u/s. 54EC - PFCL 10,00,000 25,00,000
Taxable Capital Gain (B) 2,96,622
Taxable Income (A+B) 2,41,122

Notes: 1. As per Sec. 50C, the higher of the following amounts shall be deemed to be the
sale value for computation of capital gains, provided the stamp duty value exceeds
110% of the consideration. a) Guideline value for stamp duty - 3,90,000/13% =
30,00,000

b) Actual sale consideration = 25,00,000

Therefore, Rs. 30,00,000 shall be deemed to be the sale value.

2. According to Sec. 50C, the stamp duty value 'assessable', shall be considered as sale
value, even if the transaction has not been actually assessed to stamp duty.

3. Indexation shall be available from the year in which the previous owner acquired the
asset in view of the decision of the Bombay High Court in CIT vs. Manjula J Shah.

4. The assessee has an option to invest in 2 residential houses in India; since the amount
of CG is less than Rs. 2 crores.

Illustration: 4

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Sadiq Ltd. located within the corporation limits decided in December, 2020 to shift its
industrial undertaking to non-urban area. The company sold some of the assets and
acquired new assets in the process of shifting. The relevant details are as follows:

Plant &
Land Building Machinery Furniture
Particulars (Rs. in lakhs)
Sale proceeds (Sale effected in March,
2022) 8 18 16 3
Indexed cost of acquisition 4 10 12 2
Cost of acquisition in terms of Sec.50 - 4 5 2
Cost of new assets purchased in July,
2022 for the purpose of business in
the new place 4 7 17 2

Compute the capital gains of Sadiq Ltd. for the AY 2022-23.

Ans: Furniture: Sale of furniture in March 2022 would result in short term capital gain
of Rs. 1 lakh and the new acquisition in July 2022 will not help the assessee as the
capital gain there from is not eligible for deduction u/s. 54G. It applies only to
machinery, plant, buildings or land.

Land Rs.
8,00,00
Sale proceeds on sale of Land 0
4,00,00
Less: Indexed cost of acquisition 0
4,00,00
Long term capital gain (A) 0
The long-term capital gain of Rs. 4,00,000 has to be invested within a period of 1 year
before or 3 years after the date of transfer. However, reinvestment again only in land is
not mandatory.

Building, Plant & Machinery Rs. Rs.

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 Sale proceeds of Building 18,00,000
Less: W.D.V. of building 4,00,000 14,00,000
Sale proceeds of Plant and machinery 16,00,000
Less: W.D.V. of Plant and Machinery 5,00,000 11,00,000
Short term Capital Gain (B) 25,00,000

Particulars Rs. Rs.

Short term capital gain from depreciable assets (B) 25,00,000
Long term capital gain from land (A) 4,00,000
Gross capital gains 29,00,000
Less: Eligible deduction u/s. 54G for the investments made
Land 4,00,000
Building 7,00,000
Plant & Machinery 17,00,000 28,00,000
Taxable long-term capital gain (See Note) 1,00,000

Notes: 1. Sale proceeds of plant & machinery, building and land can be diverted inter se
for availing deduction u/s. 54G. Since short term capital gains are taxed at a higher rate,
the exemption is first availed against short-term capital gains and the balance utilized
towards long term capital gains.

2. It is assumed that the unit has been in existence for more than 3 years since the
question is silent on the same.

3. The taxable capital gains would be:

Long term capital gain Rs. 1,00,000

Short term capital gain (furniture) Rs. 1,00,000

Total Rs. 2,00,000

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TERMINAL QUESTIONS
Section A – 2 Marks Question
1. Define capital gain.
2. What do you mean by short-term capital asset and long-term capital asset?
3. Give the meaning of capital asset.
4. Define transfer.
5. How will you treat advance money received and forfeited by the assessee?
6. What do you mean by indexed cost of acquisition?
7. What do you mean by indexed cost of improvement?
8. Mention the assets which are not considered as capital asset?

Section B – 5 Marks Questions

1. Explain the provisions of section 54 of income tax Act under the head capital gain
2. Bring out the difference between exemption u/s 54 and 54F

Section C – 14 Marks Questions

Practical Questions
1. Mr. Rama Krishna owner of a residential house sold it for ₹.15,40,000 in October
2021, which was actually purchased for Rs.1,00,000 in 2007-08. He spent
₹.10,000 for the construction of another room in 2011-12. Expenses incurred in
the execution of sale deed were ₹.10, 000 that were borne by him.

2. From the following information compute the taxable capital gains.

a. Sold a residential house property for Rs. 16,00,000 on 28-03-2021. It was
purchased on 15-03-2000 for Rs.18,400. F.M.V. on 01-04-01 was Rs. 31,000.
The ground floor was constructed on 30-06-07 for Rs. 48,000. First floor was
constructed in 2010 June at a cost of Rs. 1,45,000. Brokerage of Rs. 14,000 was
paid.
b. Sold an agricultural land for Rs. 3,45,500 on 30-06-2020, which was purchased
in October 2006 for Rs. 90,000.

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 c. Ancestral Jewellery sold on 30-09-2020 for Rs. 4,50,000. It was purchased by
Assessee’s grandmother for Rs. 4000 in 1985. F.M.V. on 01-04-01 was Rs
30,000.

3. Mr. Mohan submits the following particulars of his income for the P.Y
a) He is the owner of two residential houses. He sold one of them costing ₹.2,61,000
on August 16, 2020 and paid brokerage etc. ₹.20,000, it was acquired in the year
2006-07 for ₹.6,50,000.
b) He had shares of the face value of ₹.1,50,000 of a limited company that were
purchased for Rs.2,59,000 in May 2010. He sold them for ₹.5,20,000 on 30 th
September 2020 (Securities transactions tax paid) and also paid brokerage @ 1%
on the face value of shares.
c) On 30th November 2019, he sold his personal car for ₹.90,000 that was purchased
four years back for ₹.60,000.
d) He sold the listed debentures of a company on 1st August 2021, for ₹.1,71,000,
which were purchased by him for ₹.1,29,000 on 1st February 2020.
e) He sold ancestral ornaments on 1st July 2021 for ₹.28,50,000, which had costed his
grandfather Rs.50,000 in 1986 and whose market value on 1st April 2002 was
₹.2,50,000.

4.From the following data, you are required to calculate the capital gains for assessment
year 2022-23:
₹
Site purchased in 1995 value ₹.33,000
Market value of site on 1.4.02 ₹.75,000
Ground floor-cost of construction in 1997-98 ₹.1,50,000
First floor cost of construction in 2003-04 ₹.2,66,000
Sale consideration received in 21-22 ₹.55,00,000
Investment in new property ₹.10,00,000
Assume that the property being sold and the new property being acquired are both
residential.

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5.Determine the amount of exemption under Sec 54 and capital gains chargeable to tax
in respect of the following transactions:
• Bharath sells a residential house property in Bangalore for Rs 28,40,000 on
April, 23, 2020 which was purchased by him on April 20, 2001 for Rs 2,90,000.
• On June 16, 2020, he purchased a house in Mysore for Rs 12, 70,000 for the
purpose of residence of his daughter.
• On July 18, 2020, he sells the house property in Mysore for Rs 16, 90,000.

6.Mr. Mahindra had two houses. He occupied the first house for residence. He got this
house from his uncle as a gift on 15th July 2003. His uncle purchased this house in 1999
for Rs.56,000. Its fair market value on 1st April 2001 was Rs. 70,000. Mahesh spent
Rs.5,000 on its improvement on 10-9-2013 and sold it on 30th November 2020 for
Rs.12,00,000. He purchased another house for his residence on 25th February 2020
for Rs.2,00,000.

He had purchased the second house for Rs.60,000 in 1992-93 and had let out for
residential purpose. He sold this house on 15th June 2020 for Rs.3,80,000.

He had purchased some jewelry in 1992-93 for Rs.75,000. On 22nd February 2021 he
sold this jewelry for Rs.4,50,000 and purchased on 15th March 2021 new jewelry for
Rs.75,000. Determine the taxable capital gains of for the assessment year 2021-22.

7.From the following information relating to previous year 2020-21, compute taxable
capital gains of for the Assessment year 2021-22:
Rs.
Purchased agricultural land (Agra city) in 01-02
(Self-cultivated) 1,54,000
Sold the land on 10-8-2019 for 12,00,000
Purchased another piece of agricultural land on 10-10-2020 1,00,000

8.Mr. Suresh owns many properties in India. He sold some of these during the previous
year
a) Jewelry costing Rs.80,000(which was acquired in June 2010) was sold for Rs.

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5,00,000 in May 2020.
b) House at Calcutta: Let-out for residential purposes. He inherited it in 1994: Sale price
on 31-10-2020 Rs.17,00,000. FMV as on 01-04-01 Rs. 1,00,000. Cost of improvement
made during 2011-12 Rs.25,000. Expenses on transfer are Rs. 25,000
c) Household furniture costing Rs.14, 000 in 2002 was sold in March, 2021 for Rs.26, 000.
d) Sale price of Personal car, which was purchased by him in Jan, 2007 for Rs.72,000 was
sold on 1-12-2020 for Rs.45,000. Written down value on 01-04-2020 was Rs.38, 000.
e) Self-cultivated land was sold for Rs.9,40,000 on 01-01-2021 and its cost in 2004-05
was Rs.80,000. He purchased a new piece of land for his own cultivation for Rs.1,50,000
in June 2020.
Compute taxable capital gains for the A.Y. 2021-22.

9.Mr. Balaji, a rich man of Bangalore has sold the following properties during the year
ended on 31-03-2021
a) A house property sold for Rs. 13,80,000 in October 2020 which was actually purchased
for Rs 1,00,000 in 2004-05. He spent Rs. 10,000 for the construction of another room
in 2007-08. Expenses incurred in the execution of sale deed were Rs. 10,000, which
was borne by him.
b) On the death of his father in November 2009, few shares were transferred to him that
he sold in February 2020 for Rs.85, 000. His father purchased these shares for Rs
10,000 in May 07.
c) He also sold an agricultural land at Kanakpura in Oct, 2020 for Rs.2,50,000, which was
purchased for Rs. 30,000 in Dec, 2019 and invested full sale price within 6 months to
buy another agricultural land at Hassan.
d) He sold his jewelry for Rs. 8,50,000 on Oct, 2020, which was purchased in June 09 for
Rs.40,000
e) He sold his household fridge and furniture for Rs. 10,000 in December 2020. The
original cost of furniture and fridge was Rs. 28,000 purchased in 1999.

10.Mrs. Akash purchased one residential flat at Mumbai in 98-99 at the cost of Rs.60,000.
She sold the same during the financial year 2020-21 for Rs.12,50,000. She did not own
any other house. Out of the sale proceeds she bought another house for Rs.3,28,000 and

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invested Rs.2,00,000 in bonds issued by National Highway Authority of India within six
months from the date of sale of house u/s 54EC.
i. Is she liable to capital gains tax? And
ii. If yes, how much more she should invest in bonds to avoid payment of any tax?

11.Mr. Chandrashekar sold a house property for a sum of Rs.45,00,000 on 25-12-2020.

He got this property as a gift from his uncle Mr. Krishnamurthy on 15-02-95. His uncle
purchased this house property during 82-83 for a sum of Rs. 28,000. He made an
improvement to the property at a cost of Rs. 35,000 during the year 1989. It’s F.M.V. as
on 01-04-01 was Rs. 2,35,000.
Mr. Krishnamurthy had agreed to sell this property to Mr. Ravi for a sum of Rs 1, 10,000
during the year 2001-02 and received a sum of Rs 10,000 as advance money. Mr. Ravi
failed to pay the balance amount within the agreed period and Mr. Krishnamurthy
forfeited the advance money paid by Mr. Ravi.
Mr. Chandrashekar after becoming the owner made an improvement to the property at
the cost of Rs. 1,00,000 during the year 12-13.
He wanted to sell the property during the year 2020 and received advance money of Rs
1,00,000 and forfeited it when the buyer failed to pay the balance amount due. He paid a
brokerage of Rs. 25,000 to sell the property.
Mr. Chandrashekar purchased a new house property for a sum of Rs. 6,00,000 and also
invested a sum of Rs. 3,00,000 in NHAI bonds on 1-2-2021.
Compute the amount of taxable capital gain for the A.Y.2021-22.

12.M/s P.Bros., Ludhiana running an industrial unit were absorbed by Municipal

Corporation to shift their concern from urban area. They shifted their concern during
2021-22 and in this process sold some of the assets whose details are given below:

Asset P&M Land Building

Acquired in 2008 2004 2009
Sale proceeds 11,00,000 16,00,000 14,00,000
WDV on 01-04-2020 4,40,000 - 7,32,500
Cost of acquisition 6,00,000 1,40,000 10,00,000
8,00,000 2,00,000 5,00,000

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 Amount invested during Dec, 2020 due to
shifting
Compute the taxable capital gains for the A.Y. 2022-23.

13.Mr. Chandran sold the following assets in the PY 2021-22:

a. Agriculture land situated at Mysore was sold for ₹.6, 50,000. It was purchased in
2010-11 for ₹.50, 000.
b. Personal car sold for Rs.60,000 which was purchased in 2002-03 for ₹.2, 10,000.
WDV as on 1.04.2020 ₹.30, 000
c. Jewelry sold for Rs.32,00,000 was purchased on 15th October 1992 for ₹.1,20,000
and its FMV as on 01-04-02 was 2,50,000.
d. Office furniture sold for Rs.50,000 purchased in December 1994 for ₹.20,000 and
WDV as on 1.04.2020 Rs.60,000.
e. Listed debenture sold for Rs.50,000 was purchases on 15th October 1997 for
₹.45,000
f. Shop located near Mangalore sold for ₹.13,00,000 was purchased for 2,00,000 in
November 04.
The Assessee purchased a new Residential house for Rs.10,00,000. Compute amount of
taxable capital gains.

14.A building of Mr. Akshay is compulsorily acquired by U.P Government. Its cost of
acquisition to the assessee was ₹. 1,72,000 in August 2007. The U.P. Government pays Rs.
8,75,000 as compensation on 25-05-2020. Mr. Akshay purchased another building for
industrial undertaking for ₹. 2,00,000 on 24-04-2021. Compute the taxable capital gain
for the A.Y. 2022-23.

15.Mr. Ganesh sold some of his properties during the year 21-22:
1) Household furniture and music system costing ₹. 15,000 in 2005 was sold in
March 2022 for ₹. 20,000
2) Business and profession income .₹ 50,000.
3) Machinery was sold on 01-12-2020 for ₹. 50,000 which was purchased on January
2008 for ₹. 80,000 and its WDV on 01-04-20 was ₹. 40,000.

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 4) Self-cultivated land was sold for ₹. 6,50,000 and its cost in 1999-2000 Rs. 1,00,000.
He purchased a new piece of land for his own cultivation for Rs. 1,20,000 June
2021.
5) He sold ornaments for ₹. 40,00,000 which was purchased by his Grand-father for
Rs. 60,000 in 1985 and market value as on 01-04-01 was r₹. 3,00,000
6) Sold 200 bonus shares of a company on 01-09-2021 for ₹. 250/- per share by
paying a brokerage of 1% on selling price. These bonus shares were issued on 01-
04-2004 and the market price of these shares on the date of issue were ₹. 100 per
share.

Chapter V
Income from Other sources

Income from other sources is the fifth and last head of income. Any source of income which
doesn’t fall under any of the other heads of income is chargeable to tax under the head income
from other sources. Examples:
a) Fee, commission and remuneration received by an employee form other than his own
employer.
b) Salary or pension received by an MLA, MP and MLC
c) Income from guest lectures
d) Remuneration received from universities for examination work by a non-employee of the
university.
e) Director’s fee
f) Interest from foreign securities
g) Income from undisclosed sources
h) Composite rent received for letting building along with plant and machinery and
furniture.
i) Rent from letting vacant plot
j) Dividends from Mutual funds, companies etc.
k) Interest on securities
l) Interest on bank deposits
m) Gift received
n) Insurance Commission received
o) Casual income received

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p) Family pension received
q) Agriculture income from land situated outside India etc.
r) Any income from paying guest accommodation, sub-letting etc.,
s) Royalty received by the owner of an asset
t) Directors commission for underwriting of shares of new company
u) Gratuity received by the directors, who is not an employee of a company
v) Interest on income tax refunds
w) Rent of subletting
x) Withdrawal of amount under NSS including interest thereon

Securities:
The term security is defined as the document held by a creditor as guarantee of his right to
payment.
It means all the debt should be secured in some way or other. The borrower issues the investor
some document as acknowledgement of debt this called as security.

Types of Securities

1. Tax Free Government Securities:

These are securities issued either by state or central government. They are exempted from tax
under 10(15) and it should not include in total income.
2. Less Tax Government Securities:
These are security issued by the government and interests on these securities are fully taxable
without deducting tax at source.

3. Tax Free Commercial Securities:

These are securities issued by Local authority, Statutory Corporation or a company in a form of
Bonds and Debentures. The tax on interest paid by company, hence it is called as tax-free
securities.
4. Less Tax Commercial Securities:
These are the securities issued by the company and tax will be deducted at source before paying
any interest to the investors.

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Bond Washing Transactions:
It refers to selling of a security to friend or relative immediately before the due date for accrual
or receipt of interest and acquiring the securities back after the due date. This practice is usually
adopted by high income class assessee to escape from paying tax, by transferring the securities
to a low-income class assessee.

Cum- Interest Securities:

It is the amount of interest accrued in the duration between the last coupon date and the
settlement date or transaction date. Hence cum interest refers to ‘with interest’.

Ex – Interest Securities:
It is the amount of coupon interest between transaction date or settlement date and the next
coupon date. Hence, it is also known as ‘without interest’.

Deduction available under income from other sources

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1. Family pension: 15,000 or 1/3rd of the amount received whichever is less will be allowed
as deduction.
2. Collection charges paid for collecting dividend and interest is deducted provided such
income is chargeable to tax.
3. Any other expenses incurred to earn an income will be allowed as deduction. For example,
depreciation, repairs, insurance etc. incurred on letting out building with plant, machinery and
furniture, expenses on sub-letting, expenses relating to owning and maintain the race horse etc
(except the expenditures incurred for purchasing the lottery tickets)

Tax free Government Securities:

a) Post office Cash Certificates (5 years)
b) Post Office National Saving Certificates (12 years)
c) Post Office Saving Bank A/c, exempted up to Rs. 3,500 and in case of Joint A/c Rs. 7,000 is
exempted.
d) Post office cumulative time deposit A/c
e) Public Account of Post Office Saving A/c (Interest up to Rs. 5,000)
f) Fixed Deposit in Post Office
g) National Plan Certificates (10 years)
h) 12 years National Saving Certificates
i) National Plan Saving Certificates (12 years)
j) National Defense Gold Bonds 1980
k) Special Deposit Scheme 1981
l) Special Bearer Bonds 1991
m) Treasury Saving Deposit Certificate (10 years)
n) Interest on 7% capital Investment Bonds
o) Notified NRI Bonds
p) Interest on Bonds Issued by Local Authority of State Finance Entity notified by Central
Government
q) Interest on Relief Bonds and Saving Bonds

Rates of TDS

Income Rate of TDS

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 Interest on debentures/securities issued by or on behalf of any local 10%
authority/statutory corporation, listed debentures of a company, any
security of the Central or State Government

Any other interest on securities (including interest on non-listed 10%

debentures

Interest other than interest on securities to a resident 10%

Winning from lottery, horse race or crossword puzzle or card game or other 30%
game of any sort to a resident/ non –resident

Insurance commission to a resident 10%

Frees for professional or technical services to a resident 10%

Tax shall not be deducted at source for the following

a) 4.25% National Defense Bonds

b) National Development Bonds
c) 7 years National Saving Certificate
d) Debentures issued by Co-operative Society or a Public Sector Company or any Institution
notified by Central Government.
e) 6.5% Gold Bonds 1980
f) Any Security of Central or State Government
g) Debentures issued by the company or recognized Stock Exchange provided that the
interest is payable by Account Payee Cheque and the aggregate amount doesn’t exceed Rs. 2,500.

1. Bank Interest on Fixed Deposit: is fully taxable by deducting TDS if it exceeds Rs. 40,000
p.a.
Gross Interest = Net Interest Received x 100/90
2. Gifts received: gifts received from a relative are not taxable and gifts received from
friends or non-relatives exceeding Rs. 50,000 is fully taxable.
3. Insurance Commission Received: is fully taxable. If it is more than Rs. 15,000 it is subject
to TDS.
Gross Commission = Net Amount x 100/90

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4. Casual Income: Income from crossword puzzle, lottery, card games if it exceeds Rs. 10,000
and Horse race Exceeds Rs. 10,000 it is subjected to TDS. No expense is allowed as deduction from
these incomes.
Gross Winnings =Net Winning x 100/70
Illustration1

X a resident individual, submits the following particulars of his income for

the previous year ending March31,2022
Interest paid by X
on capital
Date of declaration Amount paid to
Name of the company borrowed
of dividend X
to invest in
shares
A Ltd a foreign company July15,2021 90,000 14,000
B Ltd a foreign company April1, 2021 43,000 50,000
C Ltd an Indian
company October 31,2021 4,00,000 Nil
Rent from letting a factory along with plant and machinery (letting out of plant and machinery):
₹30,600. Collection charges in respect of rent: ₹400. Fire insurance premium in respect of
building ₹600. Fire insurance premium in respect of plant & machinery: 750. Repairs in respect
of building ₹ 4,600. Depreciation of building, plant and machinery ₹ 18,600.
Winnings from lottery on December 1,2021 net amount ₹70,000 Tax deducted at sources ₹30,000
Winning from card game ₹ 13,500(gross) ( Tax deducted by the payer)
Interest on securities issued by the, Government of Japan ₹ 30,670
During the previous year, X has received the following gift:
Amount
Gift from whom Date of Gift (₹)
Gift received from a friend August20,2021 1,00,000
Gift received from friend september10,2021 60,000
Gift from a brother December 30,2021 90,000
Gift received at the time of marriage of X October10, 2021 1,35,000
Gift from grandfather received by will October1, 2021 1,40,000
Gift received from friend september20,2021 20,000

Computation of income from other sources

Previous year-2021-22
Name of the Assessee: Mr.X Assessment Year-
Status: Resident 2022-23
Dividend

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 A Ltd 90,000
B Ltd 43,000
C Ltd 4,00,00
Total 5,33,000

Less: Interest on borrowed capital

( 14000+50,000+Nil) (deductible doesn’t exceed
20% of ₹5,33,000) -64,000 4,69,000
Rent received 30,600
Less expenses
Collection charges 400
Insurance (600+750) 1,350
Repairs 4,600
Depreciation 18,600
Total -24,950 5,650
Winning from lottery
Net Amount 70,000
AddTax deducted at sources: 30,000 1,00,000
Winning from card games 13,500 1,13,500
Interest on securities of a foreign government 30,670
GIFT
Gift received from August20,2021 1,00,000
Gift received from friend on september10,2021 60,000
Gift from a brother ( gift received from a relative
is not taxable) Nil
Gift received at the time of marriage ( Not taxable) Nil
Gift received by will ( Not Taxable) Nil
Gift received from friend 20,000
Total ( Amount exceeds 50,000 is taxable) 1,80,000
Income from other sources 7,98,820

Terminal Questions

Section A – 2 Marks Questions

1. What is casual income?
2. Mention the various kinds of securities
3. What are bond-washing transactions?
4. State the standard deduction for family pension
5. What are tax free commercial securities?
6. What is the rate of TDS for casual income?

Section B – 5 Marks Questions

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 1. State the income which is chargeable under the head income from other sources
2. Explain the various kinds of securities

Sections C – 14 Marks Questions

1. From the following particulars compute the income taxable under income from other sources
of Mr. Kiran, compute is taxable income for the A.Y. 2022-23
i. Interest on PO SB a/c Rs.5,000
ii. Interest from National Relief Bonds Rs10,000
iii. Family Pension received Rs. 3,500 per month
iv. Winnings from horse race Rs.1,00,000
v. Lottery won from play win Rs.20,000
vi. Prize amount received from Sikkim lottery Rs. 70,000
vii. Dividend from Reliance ltd Rs.12,000
viii. Dividend from foreign company Rs. 2,500
ix. Dividend from Cooperative society Rs. 5,000
x. Interest on F.D. with State Bank of Mysore Rs.10,000
xi. Interest received on listed bonds of Birla ltd Rs 9,000
xii. Amount invested in 8%, Karnataka govt securities Rs.10,000
xiii. Rs. 20,000 invested in 11.5% tax free securities of Mudra ltd. (unlisted)
xiv. Fees Rs. 12,500
xv. She lives in a house taken on rent for Rs. 9,000 p.m. she had sub-let 1/3rd of the house to Kavitha
on a monthly rent of Rs. 5,000
xvi. She had written some articles in Times of India for which she received Rs 20,000
xvii. She is the author of a text book titled “Art of Cooking” published by Banashankari publishers
amount received Rs18, 000. Amount spent on typing books and telephone Rs. 300, & 1,200
respectively.

1. From the following particulars calculate income from other sources

i. Rs. 25,000,8% Govt. of Karnataka securities
ii. Rs. 10,000,10% KPTCL Bonds
iii. Rs. 1,00,000,12% B.D.A. Bonds
iv. Rs. 12,000, 8% Jaipur Municipal Corporation Bonds
v. Rs. 70,000, invested in equity shares of Birla cements ltd. The Company declared 12% interim
dividend on 01-10-2019 and 18% final dividend on 31-03-2020
vi. Dividend received from Colgate- India ltd Rs. 12,000
vii. Dividend received from Castrol India ltd Rs. 10,000

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 viii. Dividend received from foreign company Rs. 18,000
ix. Dividend received from cooperative society Rs. 8,000
x. Interest received from Aditya technologies Tax free bonds (listed) Rs. 9,000
xi. Interest received from Chota biscuits ltd, tax-free commercial securities, Rs.8,000(unlisted)
xii. Family pension received Rs. 5,000 p.m.
xiii. Rent received from letting of vacant plot Rs. 1,250 p.m
xiv. Composite rent received for letting factory 7,500 p.m. expenses incurred, repairs and
maintenance Rs 25,000, allowable depreciation Rs. 28000, Municipal taxes Rs7,000
xv. Tips received for working as bar tender Rs. 12,650
xvi. Agricultural income from India Rs.1,25,000
xvii. Agricultural income from Punjab (Pakistan) Rs. 22,500
xviii. Royalty income from stone quarry Rs. 27,500. Expenses incurred Rs. 2,200.
xix. The assessee lives in a rented house taken on a monthly rent of Rs. 6,000 and sublets one -third
(1/3rd) for a monthly rent of Rs. 3,000 expenses incurred are repairs and maintenance Rs 1,500,
Collection charges Rs. 150, and municipal taxes Rs. 1,500
xx. Winnings from cross-word puzzle Rs. 10,000
xxi. Received winnings from horse race Rs. 70,000
xxii. Winnings received from Play-win Rs. 50,000
xxiii. Income from undisclosed sources Rs.10,000

2. Mr. Rama submits the following particulars of his income from other sources for the
previous year ended 31-3-2022
i. Royalty from books written Rs. 40,000 (expenses incurred for this purpose Rs. 4,000).
ii. Interest on fixed deposits in a Bank Rs. 30,000 (gross)
iii. Family pension form Government of Karnataka annually Rs. 48,000.
iv. Winning from horse race Rs. 70,000 (net)
v. Rent from subletting of house Rs. 3,000 per month (Rent paid to owner Rs. 2,000 p.m. and repair
expenses Rs. 400).
vi. Cash worth Rs. 90,000 was found in his private locker. The source of which could not be explained
by him.
vii. Winning from lottery net Rs. 1,40,000 (purchase of lottery Rs. 150)
viii. Remuneration from articles published in a magazine Rs. 4,000.
ix. Directors fees Rs. 10,000
x. Dividend from Co-operative society Rs. 5,000
xi. Dividend from ABC Ltd. Rs. 5,500

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xii. Interest on bank deposits Rs. 7,000
xiii. Interest on Central Government Securities Rs. 2,000

3. Mr. Rajesh has received the following incomes during the previous year 2021-22.
Compute taxable income from other sources for the A.Y. 2022-23.
i. Interest received (Net) on listed debentures of UR limited Rs. 5,760.
ii. Winnings from Karnataka State Lottery (Gross) Rs. 1,20,000.
iii. Interest received on Post Office Saving Bank A/c Rs. 3,500.
iv. Dividend received on Shares of SRM Ltd. Rs. 3,500.
v. Dividend (Gross) received from Janata Seva Co-operative Society Rs. 2,500.
vi. Family pension received Rs. 30,000 per annum.
vii. Dividend received on preference shares Rs. 10,000 per annum.
viii. Insurance commission received Rs. 13,500 (expenses incurred in earning Insurance Commission
Rs. 2,500).
ix. Interest on securities Rs. 10,000.

4. Mr. Balu has the following incomes during year ending 31st March 2020. Compute his
income from other sources for the A.Y. 2022-23.
i. Dividend declared by X company, Bangalore Rs. 12,000.
ii. Interim dividend received on 31-05-2019 Rs. 5,000.
iii. Won Gold worth Rs. 25,00,000 from Rajasthan State Lottery.
iv. Interest received on Government securities Rs. 20,000
v. During March 2020 he earned Rs. 2,00,000 as prize money on Horse race. These horses are owned
by him and the expenses incurred in maintenance of these horse is 2,10,000.
vi. Family pension from Govt. of Karnataka yearly Rs. 42,000.
vii. Remuneration from articles published in magazine Rs. 2,000.
viii. Cash worth Rs. 1,00,000 was found in his private locker. The source of which could not be
explained by him.
ix. Rent from subletting a house Rs. 1,500 p.m. (rent paid to the owner Rs. 1,000 p.m. and repair
expenses Rs. 200.

5. From the following receipts and payment of Mr. Dinesh compute his income under the
head income from other sources.
i. Winnings from MP State Lottery Rs. 28,000.
ii. Winning from Horse Race Rs. 1,000.
iii. Winning from Rajasthan State Lottery Rs. 3,000.

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 iv. Winnings from Horse Race Rs. 49,000.
v. Winnings from Crossword puzzle Rs. 2,500.
vi. Gift received from a friend in London Rs. 1,00,000.
vii. Winnings from Card Games Rs. 2,500.
viii. Purchase of Lottery tickets Rs. 3,000.
ix. Payment for betting Horse Race Rs. 6,000.

6. Mr. Anand, a resident of India has furnished the following income for the previous year
2021-22. Compute his income from other sources for the assessment year 2020-21.
i. Winnings from Crossword Puzzles Rs. 6940.
ii. Royalty from Text Book written by him (Gross) Rs. 45,000 (admissible deduction Rs. 12,500)
iii. 8% Interest on Rs. 40,000 Debentures.
iv. 10% Interest on Rs. 80,000 Karnataka State Govt. Bonds.
v. Rs. 2,000 as interest on Bank Deposits.
vi. Dividends from a Domestic Company Rs. 8,000.
vii. Income from Undisclosed Sources Rs. 10,000.
viii. Interest on Listed Securities (Net) Rs. 8,980.
ix. Dividends from Foreign Company gross Rs. 16,000.
x. Winnings from Horse Race Rs. 17,780 (Net).
xi. Interests on Debentures of a Local Authority gross Rs. 7,200.
xii. Interest on PO Saving Bank A/c Rs. 1,500.

7. Dr. Ashok is a Professor of Economics. He submits the following details and wants you to
compute his taxable income from other sources.
A. He is an author of text and received a royalty of Rs. 45,000. He claims the following
deduction from this amount:
(a) Salary to Clerk for gathering information for him to write the book Rs. 5,000.
(b) Cost of books purchased Rs. 1,000 for reference work in order to write his book.
(c) Telephone expenses of Rs. 800 in connection with printing and publication of the book.

B. Income from articles published in “Economic Times” Rs. 7,000.

C. He lives in rented house paying a rent of Rs. 4,000 p.m. He has sub-let half portion of the
house for a rent of Rs. 3,000 p.m. Dr. Ashok pays the municipal tax for the whole house Rs. 4,000.

D. He received Rs. 200 per lecture delivered at the Economic Institution during the year. He
delivered 22 such lectures.

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 E. As an examiner of various Universities, he received remuneration of Rs. 5,000.
F. His other incomes where:
(a) Winning from Lottery Rs. 21,000 (Net)
(b) Winning from Chess Rs. 1,000.
(c) Interest on Govt. of England bonds Rs. 3,000.
G. Interest on PO Cumulative Time Deposit Rs. 1,000.
H. Interest received on the deposit for a firm Rs. 5,400.
I. Income from agriculture land situated in Sri Lanka Rs. 70,000.
J. Rs. 8,000 p.m. as scholarship for research work from the UGC.

8. Mr. Suresh submits the following details for his income for the year ending 31 st Mach
2022. Compute his taxable income from other sources in A.Y. 2022-23.
i. He lives in a rented house. He pays a rent of Rs. 6,000 p.m. He has sub-let 1/3 portion of the houses
on a rent of Rs. 3,000 per month. He has undertaken the liabilities of paying municipal taxes
Rs.1,500 on the whole house and also repairs whole house amounting to Rs. 6,000.
ii. Income from agriculture land in Bangladesh Rs. 20,000.
iii. Dividend from UTI Rs. 4,000.
iv. He holds the following investments:
(a) Rs. 1,00,000, 8% tax free commercial securities (not listed).
(b) Rs. 30,000, 7% debentures of JCT Mills Ltd.
(c) Rs. 72,000, 10% tax free debentures of LIC of India (Listed).
(d) 10% UP State Electricity Board Bonds Rs. 10,000.
v. Interest on PO SB A/c Rs. 1,000.
vi. Honorarium received for writing articles in magazines Rs. 1,000.
vii. He is an examiner of universities he received Rs. 10,000 as remuneration.

9. Sri. Vishwas has furnished the following particulars of his investments for the P.Y. 2021-
22. Compute taxable income under the head Income from Other Sources.
i. Rs. 10,000 units of UTI (Dividend received Rs. 1,200).
ii. Rs. 10,000 POSB A/c which earns interest at 5% p.a.
iii. Rs. 10,000 in fixed deposit a/c with Karnataka bank on which interest at 10%.
iv. 10% Rs. 20,000 debentures (Listed) of a Tea Co.
v. Rs. 3,000 interests received on the debentures of a cooperative society.
vi. Rs. 1,000 interests on National Development Bonds.
vii. 10% Karnataka Electricity Bonds Rs. 10,000.
viii. Rs. 10,000 in 7 years PO NSC, Interest at 9% p.a. is payable on the same every year.

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 ix. Rs. 36,000 10% tax free debentures of Bangalore Municipal Corporation Interest payable on
March 31st.
x. Interest collected on debentures by an A/c payee cheque Rs. 900 (Gross).

10. Compute the income from Other Sources of Mr. Upendra for the A.Y. 2020-21, who held
the following investments during the previous year 2021-22.
i. Rs. 30,000, 13.5% Securities of a Paper Mill Co., Ltd. (Listed).
ii. Rs. 35,000, 11% Securities of a Paper Mill Co. (Listed).
iii. Rs. 3,350 received as Interest on Deepak Fertilizers (Listed).
iv. Rs. 7,000 received as Interest on Karnataka Govt. Bonds.
v. Rs, 6,000 received as Interest on Tax Free Public Ltd. Co. Securities (Listed).
vi. Rs. 30,000, 10% Tax Free Commercial Securities.
vii. Rs. 10,000, 10% Central Govt. Securities.
viii. Rs. 10,000, 15% Municipal Corp. Bonds.
ix. Dividend from Carona Ltd. Rs. 3,200 (Gross).
x. During the year he also won a Karnataka State Lottery, the net amount received was Rs. 27,600
Interest on all securities is payable on 1st July and 1st January every year, Bank charged Rs. 200 as
collection charges.

11. Sri Raghavendra is MP from Hyderabad. During the year 2021-22, he had the following
income. Compute the taxable income from other sources for the A.Y. 2022-23
i. As a MP he received salary of Rs. 5,000 p.m. and D.A. of Rs. 22,000 for attending various sessions.
ii. He held the following Investments.
iii. 10% Preference Shares in Sugar works Ltd. of Rs. 10,000.
iv. 1,000 Equity Shares of Rs. 10 each in TATA Ltd. declared, Interim dividend at 10% on 15-03-2019
but paid it on 01-06-2019 and paid a final dividend of 10% on 30-06-2019.
v. 5% Fixed deposit of Rs. 20,000 is held by him in Indian Bank, Interest is calculated annually.
vi. He won Rs. 10,000 in Crossword Puzzles.
vii. He purchased a plot of Land for construction but he couldn’t get the house constructed and hence
let out the plot at Rs. 200 p.m. from 01-10-2019.
viii. He had let out Machinery and Furniture and also building at monthly rent of Rs. 10,000. He spent
Rs. 2,000 on repairs of Machinery and depreciation allowed in respect of the above amounted to
Rs. 12,000.

12. From the following particulars of Sri Nagaraj, an ordinary resident of India. Compute the
taxable income under the head Income from Other Sources for the P.Y. 2021-22.

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 i. Dividend in Equity Shares from an Indian Company Rs. 11,000.
ii. Director setting fees received from Q Ltd. Rs. 2,500.
iii. Income from letting on hire of building and machinery under Lease Rs. 60,00 the allowable
depreciation is Rs. 8,500, repairs Rs. 4,500 and Fire Insurance premium Rs. 500.
iv. Dividend from Foreign Company received in New York Rs. 12,000.
v. Interest on Rs. 27,000, 10% tax free debentures (listed) of M/s M & M Ltd.
vi. Interest on Rs. 12,000, 7% Capital Investment Bonds of Govt. of India.
vii. Rs. 3,000 Interest received from 7% National Plan Certificates.
viii. He has taken a house on rent for Rs. 10,000 p.m. and as Let out 40% portion of the house to a
tenant for Rs. 5,000 p.m. he has paid Municipal taxes of whole property Rs. 2,000 and repairs of
the property Rs. 5,000 under the agreement.
ix. He is an author of a text book which fetched him a gross Royalty of Rs. 75,000. He claims Rs.
25,000 salaries to the Assistant and Rs. 20,000 other Incidental Expenses.
x. Income from Agricultural Land situated in Indonesia received there Rs. 60,000.
xi. Honorarium received for writing articles in Indian Express Rs. 4,000.
xii. Received Rs. 35,000 from recognized Lottery Winnings.

13. Compute the Taxable Income from Other Sources of Ms. Padma for P.Y. 2021-22.
i. She gave management consultancy services to entrepreneurs during the year and received Rs.
55,000 from client. She claims she spent Rs. 5,000 on related travelling.
ii. She held the following investment:
(a) Rs. 1,00,000, 9% tax free commercial securities (not listed).
(b) Rs. 30,000, 7% debentures of Carana Mills Ltd.
(c) Rs. 72,000, 10% tax free debentures of LIC of India (Listed).
iii. Cash received on the occasion of Marriage Rs. 20,000.
iv. A credit in his passbook, the source of which cannot be explained Rs. 10,000.
v. Dividend from a Tea Co. (60%) of Income of the Co. is Agriculture Income).
vi. Refund of Money by LIC under Money Back policy Rs. 12,000.
vii. Rs. 6,000 Interest received on National Development Bonds.
viii. Ground rent for Land received Rs. 12,000.
ix. Income from units of Mutual Funds Rs. 5,000.
x. Income from Non-Agriculture Land Rs, 2,000.
xi. Interest credited to her in PO Cumulative Time Deposit Rs. 2,000.
xii. Agriculture income Rs. 10,000.
xiii. Dividend received from Reliance Industries Limited Rs. 7,000.
xiv. Interest on Kiran Vikas Patra Rs. 7,000.

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 14. Compute income from other sources of Dr. Gokak who held the following investment in
the P.Y. 2021-22.
i. Rs. 1, 10,000, 10% Central Government Securities.
ii. Rs. 4,00,000, 10% Commercial securities on X Co. Ltd.
iii. Rs, 8,000 (Gross) received as interest on Public Ltd. Co., securities (Listed).
iv. Rs. 7,200 received as interest on Karnataka Govt., Securities.
v. Rs. 3,600 received as interest on XYZ Ltd. (Listed)
vi. Rs. 300,000, 13.5% securities on Paper Mill Co., (Listed)
vii. Interest on POSB A/c Rs. 6,500.
viii. For purchasing securities of X. Co., Ltd., he took a loan of Rs. 2,50,000 at 12% p.a. this loan was
taken from his friend in UK. The interest has been paid in UK but no TDS is made. Bank charged
Rs. 2,000 as collection charges.
ix. Interest on all securities is payable on 1st July and 1st January.

15. Mr. Pramod (age 46 years) a Resident of Bangalore provides the following information
for the year ending 31st March 2022.
i.He holds the following investments:
(a) Rs. 2,00,000, 9% tax free commercial securities.
(b) Rs. 1,00,000, 8% listed debentures of SRM Ltd.
(c) Rs. 81,000, 10% tax free debentures of NRM Ltd.
(d) Rs. 40,000, 10% BESCOM, Bonds.
ii.Received dividend on T.C.S Ltd. (Gross) Rs. 30,000.
iii.Received Dividend form UTI Rs. 8,000.
iv.Income from letting out plot of land in Mysore for Rs. 36,000.
v.Composite rent of building along with machinery Rs. 2,50,000.
The following are the expenses on machinery: Depreciation Rs. 6,000 and Repairs Rs. 4,000.
vi.He earned a Royalty of Rs. 40,000 from stone quarry and the expenses to earn this income Rs.
3,000.
vii.Salary as M P Rs. 35,000.
viii.He earned a dividend from foreign companies grossing Rs. 65,000 of which Rs. 15,000 wad
deducted as TDS in that country and the balance was received in India.
ix.Unexplained income Rs. 10,000

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Slab rate of tax for the A.Y. 2022-23
INCOME SLAB AND TAX RATES FOR F.Y. 2020-21/A.Y 2021-22
Income Tax Rate & Slab for Individuals & HUF:

1. Individual (Resident or Resident but not Ordinarily Resident or non-

resident), who is of the age of less than 60 years on the last day of the
relevant previous year & for HUF:

TaxRate TaxRate
Taxable income
(Existing Scheme) (New Scheme)

Up to Rs. 2,50,000 Nil Nil

Rs. 2,50,001 to Rs. 5,00,000 5% 5%

Rs. 5,00,001 to Rs. 7,50,000 20% 10%

Rs. 7,50,001 to Rs. 10,00,000 20% 15%

Rs. 10,00,001 to Rs. 12,50,000 30% 20%

Rs. 12,50,001 to Rs. 15,00,000 30% 25%

Above Rs. 15,00,000 30% 30%

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2. Resident or Resident but not Ordinarily Resident senior citizen, i.e., every individual,
being a resident or Resident but not Ordinarily Resident in India, who is of the age of
60 years or more but less than 80 years at any time during the previous year:

TaxRate TaxRate
Taxable income (Existing Scheme) (New Scheme)

Up to Rs. 2,50,000 Nil Nil

Rs. 2,50,001 to Rs. 3,00,000 Nil 5%

Rs. 3,00,001 to Rs. 5,00,000 5% 5%

Rs. 5,00,001 to Rs. 7,50,000 20% 10%

Rs. 7,50,001 to Rs. 10,00,000 20% 15%

Rs. 10,00,001 to Rs. 12,50,000 30% 20%

Rs. 12,50,001 to Rs. 15,00,000 30% 25%

Above Rs. 15,00,000 30% 30%

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3. Resident or Resident but not Ordinarily Resident super senior citizen, i.e., every
individual, being a resident or Resident but not Ordinarily Resident in India, who is of
the age of 80 years or more at any time during the previous year:

TaxRate TaxRate
Taxable income (Existing Scheme) (New Scheme)

Up to Rs. 2,50,000 Nil Nil

Rs. 2,50,001 to Rs. 5,00,000 5%

Rs. 5,00,001 to Rs. 7,50,000 20% 10%

Rs. 7,50,001 to Rs. 10,00,000 20% 15%

Rs. 10,00,001 to Rs. 12,50,000 30% 20%

Rs. 12,50,001 to Rs. 15,00,000 30% 25%

Above Rs. 15,00,000 30% 30%

Surcharge:
a) 10% of Income tax where total income exceeds Rs.50 lakh
b) 15% of Income tax where total income exceeds Rs.1 crore
c) 25% of Income tax where total income exceeds Rs.2 crore
d) 37% of Income tax where total income exceeds Rs.5 crore
1. Note: Enhanced Surcharge rate (25% or 37%) is not applicable in case of
specified incomes I.e. short-term capital gain u/s 111A, long-term capital
gain u/s 112A & short-term or long-term capital gain u/s 115AD(1)(b).
2. Education cess: 4% of income tax plus surcharge

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Note: A resident or Resident but not Ordinarily Resident individual is entitled to rebate
under section 87A if his total income does not exceed Rs. 5, 00,000. The amount of rebate
shall be 100% of income-tax or Rs. 12,500, whichever is less. rebate under section 87A is
available in both scheme I.e. existing scheme as well as new scheme.

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FOR PRIVATE CIRCULATION ONLY 140