Suraj Agrawal Tax 1 Notes

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CA INTERMEDIATE
19th Edition
A.Y. 2022-23
INCOME TAX
Volume-I
Introduction
Tax Rates
Agriculture Income
Tax Planning
Residential Status
House Property
Salary
IFOS
Gift
Dividend
Undisclosed Income
Capital Gains
Deduction under Chapter VI-A
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32
Parveen Dutt Sharma Mohit Garg Firoz Khan Pragati Agrawal Megha Singhal Om Prakash Jha Arun Shekher
Sachin Arora Sonali Agrawal Neeraj Pradeep Anurag Pant Mohit Garg Vivek Sharma
AIR-37
Priyansh Sodhani
AIR-43 AIR-46
Varshit Sharma Ayush Khandelwal
600/-

THIS BOOK HAS BEEN A REALITY

ONLY BECAUSE OF MY FAMILY &
STUDENTS.
CA SURAJ AGRAWAL
Income Tax - Volume I (19th Edition – 2nd Print) for CA INTERMEDIATE – MAY & NOV 2022 Exam
Assessment Year 2022-23 (updated with Finance Act 2021)
Updated as on 25.04.2022


PREFACE
Taxation is a dynamic subject, which is not only a vast subject but also difficult to
comprehend in view of frequent amendments. Yet it is the scoring subject of your
syllabus. In addition, practice in the field of Taxation is also highly remunerative.
My association with the students has helped me to bring this book in its present form –
simplified, comprehensive and easy to understand.
The present edition of this book (VOLUME I) is designed to bridge the gap between
theory & applications and incorporates the following:
 Updated with Finance Act 2021 (AY 2022-23)

 Covers entire syllabus with theoretical concepts, examples etc
 Contains more than 1000 practical problems with solutions
 Chapter-wise short notes (separate volume) for revision purpose.
Hope this book serves the purpose of the students. I shall be thankful to the readers for
their suggestions, criticism and feedback if any.
Email: [email protected]
Contact: 8527230445 (11am to 6pm)
ACKNOWLEDGEMENT
This book is a result of sincere efforts of our family members, colleagues, associates,
well-wishers and students, whose contribution cannot go unacknowledged.
Master Reyaan, my wife CA Monika Agrawal and my mother deserve special mention
for the time (on which they had the first right) they allowed me for this book.
I dedicate this book to my beloved late grandparents & Papa.
CA Suraj Agrawal
Income Tax - Volume I (19th Edition - 2nd Print) for CA INTERMEDIATE – MAY & NOV 2022 Exam
Assessment Year 2022-23 (updated with Finance Act 2021)
Updated as on 25.04.2022
“One more step towards success”


PROFILE – CA SURAJ AGRAWAL

CA Suraj Agrawal is a Commerce Graduate [B.Com (H)] from Kolkata University and has
qualified CA in November 2005 in First Attempt from Kolkata. He has also secured All India
27th Rank in CA-Foundation – 1st level (First Attempt – 70% marks).
Besides CA, he has completed Certification Course of International Taxation of the ICAI in
2009. He has also qualified CPA (Certified Public Accountant) examination from AICPA
(USA) in 2009 with more than 90 Marks in each of four papers in First Attempt [Presently, he is
inspired to complete CIMA, London as well as LLM in International Taxation (UK) by Year
2024]
He has started his career by joining Direct Tax Department of Reliance Industries Limited,
Mumbai and worked for near 2 years in core tax team. He has also worked in Taxation Division
of Chaturvedi & Shah (Chartered Accountants), Delhi followed by Tax Division of Ernst &
Young, Gurgaon, India (A Leading Big 4 Firm having International Presence). During the
working tenure of more than 4 years, he is exposed to in-depth theoretical and practical
knowledge of Direct Taxation & has a consultancy exposure in various industries including
Energy - Oil & Gas, Airlines, Retail, Infrastructure and Shipping Industries.
With the above academic and practical knowledge, he is in teaching profession from more than
12 years to serve professional students (taught 20,000 CA/CMAs Students till date). His in-
depth coverage of legal provisions in Tax with practical approach is very well recognized
among the students. He is also an associate member of ICAI and is also providing services as
Tax Consultant to various organisations.
He was also a member in WTO, FEMA & International Tax Study Group of the NIRC of the
ICAI for the year 2011-12 and was member of International Taxation & FEMA Research
Study Group of NIRC of the ICAI for the year 2010-11. He is regularly contributing tax articles
and various opinions on subjects of Direct Taxation including International Taxation in various
leading magazines [Taxmann] and professional forums.
CA Suraj Agrawal
“CA Rank Holder, Qualified CPA (USA), B.Com (H)”
Email: [email protected]
Contact: +91 85272 30445
Subjects: DIRECT TAX (INTER & FINAL)
FB: http://www.facebook.com/suraj.agrawal.564
https://www.youtube.com/c/CASURAJAGRAWALSATC/videos
https://www.facebook.com/Surajagrawaltaxationclasses.satc


VOLUME I – INDEX
FROM 19th EDITION – CA INTERMEDIATE EXAM (MAY & NOV 2022)
S. No. Particulars Page No.
1. Introduction to Income Tax 1.01 – 1.20
2. Tax Rates 2.01 – 2.12
3. Agriculture Income 3.01 – 3.08
Practical Questions & Solution 3A.01 – 3A.02
4. Residential Status 4.1 – 4.24

Practical Questions - SET A 4A.1 – 4A.4
Solutions (SET A) 4B.1 – 4B.4
Practical Questions with Solution - SET B 4C.1 – 4C.14
5. Income from House Property 5.1 – 5.32

6. Income under the head “Salaries” 6.1 – 6.78

7. Income from Other Sources 7.01 – 7.26

8. Capital Gains 8.01 – 8.58

9. Deduction [Section 80C to Section 80U] 9.01 – 9.34



INTRODUCTION TO INCOME TAX SATC 1.1
INTRODUCTION & OVERVIEW

Assessment Year 2022-23 (Amended with Finance Act 2021)
CA Intermediate Students [May & Nov 2022 Exam]
Taxes are levied by the Governments to meet the common welfare expenditure of the society.
There are two types of taxes - direct taxes and indirect taxes.
Direct Taxes: If tax is levied directly on the income or wealth of a person, then, it is a direct tax. The
person who pays the tax to the Government cannot recover it from somebody else i.e. the burden
of a direct tax cannot be shifted. e.g. Income-tax.
Indirect Taxes: If tax is levied on the price of a good or service, then, it is an indirect tax e.g. Goods
and Services Tax (GST) or Custom Duty. In the case of indirect taxes, the person paying the tax
passes on the incidence to another person.
Why are taxes Levied?

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

The Constitution of India, in Article 265 lays down that “No tax shall be levied or collected except by
authority of law.” Accordingly for levy of any tax, a law needs to be framed by the government.
Constitution of India gives the power to levy and collect taxes, whether direct or indirect, to the Central
and State Government. The Parliament and State Legislatures are empowered to make laws on
the matters enumerated in the Seventh Schedule by virtue of Article 246 of the Constitution of
India.
Seventh Schedule to Article 246 contains three lists which enumerate the matters under which the
Parliament and the State Legislatures have the authority to make laws for the purpose of levy of taxes.
The following are the lists:
(i) Union List: Parliament has the exclusive power to make laws on the matters contained in Union
List.
(ii) State List: The Legislatures of any State has the exclusive power to make laws on the matters
contained in the State List.
(iii) Concurrent List: Both Parliament and State Legislatures have the power to make laws on the
matters contained in the Concurrent list.
Income-tax is the most significant direct tax. Entry 82 of the Union List i.e., List I in the Seventh
Schedule to Article 246 of the Constitution of India has given the power to the Parliament to
make laws on taxes on income other than agricultural income.
SURAJ AGRAWAL TAX CLASS | NEW DELHI | 8527230445

COMPONENTS OF INCOME TAX

LAW
INCOME TAX ACT’ 1961
 The levy of income-tax in India is governed by the Income-tax Act, 1961 (‘Act”).
 It extends to the whole of India.
 This Act came into force on 1st April, 1962.
 The Act contains XXIII Chapters divided into 298 Sections and XIV Schedules.
 Each Section is further divided into sub-section, clauses and sub-clauses
which further clarify the provisions contained in section with explanations and
Proviso.
 When each part of the section is independent of each other and one is not related
with other, such parts are called a “Clause”.
 “Sub section”, on the other hand refers to such parts of a section where each part
is related with other and all sub sections taken together completes the concept
propounded in that section.
 The Proviso(s) to a section/sub-section/clause spells out the

exception(s)/condition(s) to the provision contained in the respective section/sub-
section/clause, i.e., the proviso spells out the cases where the provision contained
in the respective section/sub-section/clause would not apply or where the provision
would apply with certain modification.
 The Explanation to a section/sub-section/clause gives a clarification relating to the
provision contained in the respective section/sub-section/clause.
The Income-tax Act, 1961 undergoes change every year with additions and changes brought in by the
Annual Finance Act passed by Parliament. Sometimes, legislative amendments are made for amending
the provisions of the Income-tax Act, 1961 through legislations like The Taxation Laws (Amendment)
Act, 2021; The Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act,
2020 (TOLA, 2020).
The Finance Act [or, Finance Act 2021]

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


Income-tax Rules, 1962
The administration of direct taxes is looked after by the Central Board of Direct Taxes (CBDT).
 The CBDT is empowered to make rules for carrying out the purposes of the Act.
 For the proper administration of the Income-tax Act, 1961, the CBDT frames rules from time to
time. These rules are collectively called Income-tax Rules, 1962.
 Rules also have sub-rules, provisos and Explanations.
Circulars
 Circulars are issued by the CBDT from time to time to deal with certain specific problems and to
clarify doubts regarding the scope and meaning of certain provisions of the Act.
 Circulars are issued for the guidance of the officers and/or assessees.
 The department is bound by the circulars. While such circulars are not binding on the
assessees, they can take advantage of beneficial circulars.
Notifications
 Notifications are issued by the Central Government to give effect to the provisions of the Act.
 The CBDT is also empowered to make and amend rules for the purposes of the Act by issue of
notifications which are binding on both department and assessees.
Case Laws
Case Laws refer to decision given by courts. The study of case laws is an important and unavoidable
part of the study of Income-tax law. It is not possible for Parliament to conceive and provide for all
possible issues that may arise in the implementation of any Act. Hence the judiciary will hear the
disputes between the assessees and the department and give decisions on various issues.
The Supreme Court is the Apex Court of the Country and the law laid down by the Supreme Court is
the law of the land. The decisions given by various High Courts will apply in the respective states in
which such High Courts have jurisdiction.


Class Notes


BASIS OF CHARGE [Charge of income-tax (Section 4)]
1. Where any Central Act enacts that income-tax shall be charged for any assessment year at any
rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance
with, and subject to the provisions (including provisions for the levy of additional income-tax) of, this
Act in respect of the total income of the previous year of every person :
Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of
the income of a period other than the previous year, income-tax shall be charged accordingly.
2. In respect of income chargeable under sub-section (1), income-tax shall be deducted at the source
or paid in advance, where it is so deductible or payable under any provision of this Act.
Note:
Section 4 of the Income-tax Act, 1961 is the charging section which provides that:
i. Tax shall be charged at the rates prescribed for the year by the Annual Finance Act or the
Income-tax Act, 1961 or both.
ii. The charge is on every person specified under section 2(31);
iii. Tax is chargeable on the total income earned during the previous year and not the assessment
year. (There are certain exceptions);
iv. Tax shall be levied in accordance with and subject to the various provisions contained in the
Act.
This section is the back bone of the law of income-tax in so far as it serves as the most
operative provision of the Act. The tax liability of a person springs from this section.


TOTAL INCOME
Total income has to be computed as per the provisions contained in the Income-tax Act, 1961.
The following steps has to be followed for computing the total income of an assessee:
Step 1: Determination of residential status
Step 2: Classification of income under different heads
Step 3: Computation of income under each head after providing for permissible deductions /
exemptions
Step 4: Clubbing of income of spouse, minor child etc.
Step 5: Set-off or carry forward and set-off of losses
Step 6: Computation of Gross Total Income
Step 7: Deductions from Gross Total Income
Step 8: Computation of Total income
TAX LIABILITY
Tax has to be computed by applying the rates of tax mentioned in the Annual Finance Act and the rate
specified under the Income-tax Act, 1961, as the case may be.
Rates of Tax
Income-tax is to be charged at the rates fixed for the year by the Annual Finance Act.
Section 2 of the Finance Act, 2021 read with Part I of the First Schedule to the Finance Act, 2021,
seeks to specify the rates at which income-tax is to be levied on income chargeable to tax for the
assessment year 2021-2022.
Part II lays down the rate at which tax is to be deducted at source during the financial year 2021-22
from income subject to such deduction under the Income-tax Act, 1961;
Part III lays down the rates for charging income-tax in certain cases, rates for deducting income-tax
from income chargeable under the head "salaries" and the rates for computing advance tax for the
financial year 2021-22.
Part III of the First Schedule to the Finance Act, 2021 will become Part I of the First Schedule to
the Finance Act, 2022 and so on.


HEADS OF INCOME [SEC. 14]
According to Sec.14 of the Act, all income of a person shall be classified under the following
five heads:
1. Salaries;
2. Income from house property;
3. Profits and gains of business or profession;
4. Capital gains;
5. Income from other sources.
[For computation of income, all taxable income should fall under any of the five heads of income as
mentioned above. If any type of income does not become part of any one of the above mentioned
first four heads, it should be part of the fifth head, i.e. Income from other sources, which may be
termed as the residual head.]
Discuss the significance of Heads of Income

1. Significance of Heads of income:
(a) Income chargeable under a particular head cannot be charged under any other head.
(b) The Act has self contained provisions in respect of each head of income.
(c) If any income is charged under a wrong head of income, the assessee will lose the benefit of
deduction available to him under that head.
2. Relevance of method of accounting for heads of income:

Heads of Income Relevance of Method of Accounting
Chapter IV-A (a) Taxable on due basis or on receipt basis, whichever is earlier.
Salaries (b) The Method of accounting is not relevant.
[Section 15 -17]
Chapter IV-C (a) Income from house property is taxable only on accrual basis.
House Property (b) The Method of accounting is not relevant.
[Section 22 - 27]
Chapter IV-D The assessee may follow either Cash or Mercantile system of
Business Income accounting
[Section 28 - 44DB]
Chapter IV-E a. Income from Capital Gains shall be taxable during the previous
Capital Gains year in which the Capital Asset is transferred.
[Section 45 - 55A] b. The method of accounting is not relevant.
Chapter IV-F The assessee may follow either Cash or Mercantile system of
Other Sources accounting
[Section 56 - 59)


MEANING OF ASSESSMENT YEAR AND PREVIOUS YEAR
Assessment year [Section 2(9)]

“This means a period of 12 months commencing on 1st April every year”.
SATC NOTE: The year in which tax is paid is called the assessment year while the year in respect
of the income of which the tax is levied is called the previous year. For example, for the AY 2022-
23, the relevant PY is 2021-22 (1.4.2021 to 31.3.2022).
Assessment year always starts from 1st April and it is always a period of 12 months
Previous year [Section 3]

For the purposes of this Act, "previous year" means the financial year immediately preceding the
assessment year.
[2 marks] - Provided that, in the case of a business or profession newly set up, or a source of
income newly coming into existence, in the said financial year, the previous year shall be the
period beginning with the date of setting up of the business or profession or, as the case may
be, the date on which the source of income newly comes into existence and ending with the
said financial year.


CERTAIN CASES WHEN INCOME OF A PREVIOUS YEAR WILL BE ASSESSED IN THE
PREVIOUS YEAR ITSELF [EXCEPTION TO SECTION 4] – 5 Marks
The income of an assessee for a previous year is charged to income-tax in the assessment year
following the previous year. However, in a few cases, this rule does not apply and the income is taxed
in the previous year in which it is earned. The exceptions are as follows:
Shipping business of non-resident [Section 172]

Where a ship, belonging to or chartered by a non-resident, carries passengers, livestock, mail or
goods shipped at a port in India, the ship is allowed to leave the port only when the tax has been paid
or satisfactory arrangement has been made for payment thereof. 7.5% of the freight paid or payable
to the owner or the charterer or to any person on his behalf, whether in India or outside India on
account of such carriage is deemed to be his income which is charged to tax in the same year in
which it is earned.
Persons leaving India [Section 174]

Where it appears to the Assessing Officer that any individual may leave India during the current
assessment year or shortly after its expiry and he has no present intention of returning to India, the total
income of such individual for the period from the expiry of the respective previous year up to the
probable date of his departure from India is chargeable to tax in that assessment year.
Example
Suppose Mr. X is leaving India for USA on 10.6.2021 and it appears to the Assessing Officer
that he has no intention to return. Before leaving India, Mr. X may be asked to pay income-tax
on the income earned during the P.Y. 2020-21 as well as on the total income earned during the
period 1.4.2021 to 10.06.2021.
AOP/BOI/Artificial Juridical Person formed for a particular event or purpose [Section 174A]
If an AOP/BOI etc. is formed or established for a particular event or purpose and the Assessing Officer
apprehends that the AOP/BOI is likely to be dissolved in the same year or in the next year, he can
make assessment of the income up to the date of dissolution as income of the relevant assessment
year.
Persons likely to transfer property to avoid tax [Section 175]

During the current assessment year, if it appears to the Assessing Officer that a person is likely to
charge, sell, transfer, dispose of or otherwise part with any of his assets to avoid payment of any liability
under this Act, the total income of such person for the period from the expiry of the previous year to the
date, when the Assessing Officer commences proceedings under this section is chargeable to tax in
that assessment year.
Discontinued business [Section 176]

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


Class Notes


PERSON [Section 2(31)] – 4 Marks
Section 2(31) - The definition is inclusive i.e. a person includes,
(A) An Individual
(B) A Hindu Undivided family [HUF]
(C) A Company
(D) A Firm (including LLP)
(E) An AOP or a BOI, whether incorporated or not
(F) A local authority
(G) Every artificial juridical person, not covered above, but which are separate entities in the eye of law
DOMESTIC COMPANY [Section 2(22A)]

Domestic Company means an Indian company or any other company which, in respect of its income liable to
income-tax, has made the prescribed arrangements for the declaration and payment of dividends (including
dividends on preference shares) within India, payable out of such income.
As per Rule 27, the prescribed arrangements are:
(a) The share register of the company for all its shareholders must be kept and maintained at its principle
place of business in India.
(b) The general meeting for passing of the accounts for the PY and declarations of dividends shall be held at
any place within India
(c) Dividends declared in India shall be payable within India.
INDIAN COMPANY [Section 2(26)]:
Two conditions should be satisfied so that a company can be regarded as an Indian company:
(a) the company should have been formed and registered under any law relating to companies which was or
is in force in any part of India, and
(b) the registered office or the principal office of the company should be in India.
FOREIGN COMPANY [SECTION 2(23A)]:

Foreign company means a company which is not a domestic company.
Definition of “Assessee” – 4 Marks
As per Section 2(7), “assessee” means a person by whom any tax or any other sum of money is payable
under the Income-tax Act, 1961. In addition, the term includes –
 Every person in respect of whom any proceeding under the Income-tax Act, 1961 has been taken for the
assessment of –
 his income; or
 the income of any other person in respect of which he is assessable; or
 the loss sustained by him or by such other person; or
 the amount of refund due to him or to such other person.
 Every person who is deemed to be an assessee under any provision of the Income-tax Act, 1961;
 Every person who is deemed to be an assessee-in-default under any provision of the Income-tax Act,
1961.


Income [Section 2(24)] - FOR READING ONLY
According to the definition given by Section 2(24), Income includes-
a) profits and gains of business or profession ;
b) dividend ;
c) voluntary contributions received by a Charitable Trust/Religious Trust or University/Educational
Institution or Hospital
d) the value of any perquisite or profit in lieu of salary taxable u/s 17 and any special allowance or benefit,
specifically granted either to meet personal expenses or for performance of duties of an office or an
employment of profit.
e) the value of any benefit or perquisite, whether convertible into money or not, received by a director or any of
his relatives including the sums paid by the company which otherwise would have been payable by those
persons;
f) the value of any benefit or perquisite, whether convertible into money or not, obtained by a representative
assessee or by any person on whose behalf or for whose benefit any income is received by the
representative assessee, including any sum paid by the representative assessee, which would otherwise
have been payable by the beneficiary;
g) any sum chargeable to tax under sub-clauses (ii),(iii),(iiia),(iiib),(iiic),(iv),(v),(va) of Sec 28, Sec, 41 or Sec.
59;
h) the fair market value of inventory referred to in clause (via) of section 28
i) any capital gains chargeable under Section 45;
j) the profits and gains of business of insurance carried on by a mutual insurance company or by a co-
operative society, computed in accordance with Section 44;
k) The profits and gains of any business of banking (including providing credit facilities) carried on by a co-
operative society with its members;
l) any winnings from lotteries, crossword puzzles, races including horse races, card games and other games
of any sort or from gambling or betting of any form or nature whatsoever ;
m) any sum received by the assessee from his employees towards welfare fund contributions such as
Provident Fund, Superannuation Fund etc.
n) any sum received under a Keyman insurance policy including the sum allocated by way of bonus.
o) any sum referred to in Section 56(2)(vii)/(viia)/(viib)/(x).
p) any sum of money referred to in clause (ix) of sub-section (2) of section 56.
q) any compensation or other payment referred to in clause (xi) of sub-section (2) of section 56
r) assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or
concession or reimbursement (by whatever name called) by the Central Government or a State
Government or any authority or body or agency in cash or kind to the assessee other than
(i) the subsidy or grant or reimbursement which is taken into account for determination of the actual
cost of the asset in accordance with the provisions of Explanation 10 to Section 43(1) or
(ii) FA16: the subsidy or grant by the CG for the purpose of the corpus of a trust or institute
established by the CG or a SG, as the case may be.
It may be noted that the above mentioned definition merely describes certain receipts as being income. This does
not define the term income itself. Judicial pronouncements, however, have held that the term income is of
widest connotation. Therefore, any other receipts that fall within the natural meaning of the term may also
be included for this purpose.


Concept of Income under the Income-tax Act, 1961
Regular receipt vis-a-vis casual receipt: Income, in general, means a periodic monetary return which
accrues or is expected to accrue regularly from definite sources. However, under the Income-tax Act,
1961, even certain casual receipts which do not arise regularly are treated as income for tax purposes
e.g. Winnings from lotteries, crossword puzzles.
Revenue receipt vis-a-vis Capital receipt: Income normally refers to revenue receipts. Capital
receipts are generally not included within the scope of income in general parlance. However, the
Income-tax Act, 1961 has specifically included certain capital receipts within the definition of income
e.g., Capital gains i.e., gains on sale of a capital assets like land.
Net receipt vis-a-vis Gross receipt: Income means net receipts and not gross receipts. Net receipts
are arrived at after deducting the expenditure incurred in connection with earning such receipts. The
expenditure which can be deducted while computing income under each head is prescribed under the
Income-tax Act, 1961. Income from certain eligible businesses/ professions is also determined on
presumptive basis i.e., as a certain percentage of gross receipts.
Due basis vis-a-vis receipt basis: Income is taxable either on due basis or receipt basis. For
computing income under the heads “Profits and gains of business or profession” and “Income from
other sources”, the method of accounting regularly employed by the assessee should be considered,
which can be either cash system or mercantile system. Some receipts are taxable only on receipt basis,
like, income by way of interest received on compensation or enhanced compensation.
DIVERSION & APPLICATION OF INCOME

There is a very thin line of difference between Diversion of income & Application of income.
Diversion of income:
Where by virtue of an obligation, income is diverted before it reaches to the assessee, it is known as
diversion of income & it is not taxable (i.e. even if the assessee were to collect the income he does so on behalf of
the person to whom it is payable).
Example: A, B and C are co-authors of a book. The publisher of the book gave the whole royalty of ₹ 6,00,000 to
A. A paid ₹ 2,00,000 to B and C each. Such payment is not application of income but diversion of income.
Application of income:
Whereas, application of income means to discharge an obligation (which is gratuitous or self-imposed) after such
income reaches the assessee & hence it is taxable.


TAX PLANNING, TAX AVOIDANCE AND TAX EVASION
 There are three methods which are commonly used by the taxpayers to reduce their tax liabilities:
 Tax Planning;
 Tax Avoidance; and
 Tax Evasion
 The issue involving the distinction among tax planning, tax avoidance and tax evasion is a debatable one
that has resulted into diverse legal judgments in the past.
 The income-tax law provides for a tax-payer to plan his taxes so that his tax liability is minimal. Thus,
when a person arranges his financial affairs within the scope of the law in a manner that would give him the
maximum benefit of the various exemptions, deductions, rebates and reliefs to reduce his tax liability, it
would be called tax planning.
 Nevertheless, the distinction between tax planning and tax avoidance is extremely thin and can be made
only with respect to the intention of the tax-payer.
Any device that twists the law or purports to defeat the spirit of the law, may be called tax avoidance. Tax
avoidance is illegal.
 Tax evasion, on the other hand is taking resort to various means such as suppression of facts and figures,
furnishing false details, etc., with a clear intention to deceive. It is a crime against society and is
punishable under the law.


DISTINGUISH BETWEEN TAX PLANNING, TAX AVOIDANCE, TAX EVASION & TAX
MANAGEMENT
Points of Tax planning Tax Avoidance Tax Evasion Tax Management

distinction
Definition It is a way to It is an exercise by It is the illegal way It is a procedure to

reduce tax liability which the assessee to reduce tax comply with the
by taking full legally takes liability by provisions of the
advantages advantage of the deliberately law.
provided by the Act loopholes in the suppressing
through various Act. income or sale or
exemptions, by increasing
deductions, rebates expenses, etc.,
& relief. which results in
reduction of total
income of the
assessee
Feature Tax planning is a Tax avoidance is a Tax evasion is It is implementation

practice to follow practice of bending illegal, both in script or execution part of
the provisions of the law without & moral taxation
law within the moral breaking it department of an
framework. organisation
Object To reduce tax To reduce the tax To reduce tax To comply with the
liability by applying liability to the liability by applying provisions of laws.
script & moral of minimum by unfair means
law. applying script of
law only
Approach It is futuristic and It is futuristic but It is concerned with It is a continuous

positive in nature. short term in past and applied approach, which is
The planning is nature, as loophole after the liability of concerned with
made today to avail of the law will be tax has arisen. It is past (rectification,
benefits in future. corrected in future done with negative revisions etc.),
by amendments of approach to avail present (filing of
the law. benefits by killing return, etc.) &
the moral of law. future (corrective
action).
Benefit Generally, arises in Generally, arises in Generally, benefits Penalty, interest &
long run. short run. do not arise but it prosecution can be
causes penalty and avoided.
prosecution.
Treatment It uses benefits of It uses loopholes in It overrules the law. It implements the
of Law the law. the law. law
Practice It is tax saving. It is tax hedging It is tax It is tax

concealment administration.
Need It is desirable It is avoidable It is objectionable It is essential
Morality It is moral in nature It is immoral in It is illegal. It is duty

nature


DISTINCTION BETWEEN CAPITAL EXPENDITURES AND REVENUE EXPENDITURES
The distinction between capital expenditure and revenue expenditure is of utmost importance, because
the Income-tax Act normally allows revenue expenditure, while capital expenditures are by and
large disallowed.
For example, lump sum and periodic payment or the magnitude of payment or treatment in the books of
account is not the material consideration for distinguishing between capital and revenue expenditures.
Further, in distinguishing between capital and revenue expenditures, it does not matter whether the
amount is paid voluntarily or involuntarily.
A few distinguishing tests for capital and revenue expenditures are discussed below:
a. Acquiring asset or advantage of enduring nature: When a expenditure is made for the purpose
of bringing into existence an asset or an advantages of enduring nature, such expenditure is to be
regarded as capital expenditure.
b. Capital assets belonging to third parties: Even though a expenditure results in the creation of a
capital asset, if the capital asset belongs to a third party, such expenses will be treated as revenue
expenditure.
c. Expenditure which facilitates assessee‘s business: If a expenditure facilitates the assessee‘s

trading operations or helps the assessee to carry out business more efficiently, then irrespective of
the consideration that the benefit may be of enduring nature, it will be treated as revenue
expenditure.
d. Expenditure related to fixed capital and circulating capital: Any expenditure in relation to fixed
capital or capital asset is capital expenditure. Expenditure related to stock-in-trade or circulating
capital is revenue in character.
e. Initial expenditure: Expenditure connected with the basic framework of business, or incurred in
connection with the extension of business or for substantial replacement of equipment are capital in
nature.
f. Expenditure for goodwill, route permits, etc.: Expenditure incurred for acquiring goodwill is
capital expenditure. Similarly, amount paid by a transport operator for route permit is also capital
expenditure.
g. Buying off competition: Any payment made to a competitor so as to prevent them to compete, is
a benefit of enduring nature. It is, therefore, capital expenditure.
Legal expenses for maintenance of asset: Expenditure incurred by the assessee to maintain the
asset in good conditions or legal expenses incurred to defend assessee’s title to the assets is held to be
revenue expenditure.


Concept of revenue and capital receipts
The Act contemplates a levy of tax on income and not on capital and hence it is very essential to
distinguish between capital and revenue receipts. Capital receipts cannot be taxed, unless they fall
within the scope of the definition of “income” and so the distinction between capital and revenue
receipts is material for tax purposes.
Certain capital receipts which have been specifically included in the definition of income are
compensation for modification or termination of services, income by way of capital gains etc.
It is not possible to lay down any single test as infallible or any single criterion as decisive, final
and universal in application to determine whether a particular receipt is capital or revenue in
nature.
Hence, the capital or revenue nature of the receipt must be determined with reference to the facts and
circumstances of each case.
Criteria for determining whether a receipt is capital or revenue in nature

The following are some of the important criteria which may be applied to distinguish between capital
and revenue receipts.
Fixed capital or Circulating capital: A receipt referable to fixed capital would be a capital receipt
whereas a receipt referable to circulating capital would be a revenue receipt. The former is not taxable
while the latter is taxable.
Tangible and intangible assets which the owner keeps in his possession for making profits are in the
nature of fixed capital. The circulating capital is one which is turned over and yields income or loss in
the process.
Income from transfer of capital asset or trading asset:

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

(1) Transaction entered into the course of business: Profits arising from transactions which are
entered into in the course of the business regularly carried on by the assessee, or are incidental to,
or associated with the business of the assessee would be revenue receipts chargeable to tax.
Example: A banker’s or financier’s dealings in foreign exchange or sale of shares and securities, a
shipbroker’s purchase of ship in his own name, a share broker’s purchase of shares on his own
account would constitute transactions entered and yielding income in the ordinary course of their
business.
Whereas building and land would constitute capital assets in the hands of a trader in shares, the
same would constitute stock-in-trade in the hands of a property dealer.
(2) Profit arising from sale of shares and securities: In the case of profit arising from the sale of
shares and securities, the nature of the profit has to be ascertained from the motive, intention or
purpose with which they were bought.
If the shares were acquired as an investor or with a view to acquiring a controlling interest or for
obtaining a managing or selling agency or a directorship, the profit or loss on their sale would be of
a capital nature; but if the shares were acquired in the ordinary course of business as a dealer in
shares, it would constitute his stock-in-trade.
If the shares were acquired with speculative motive, the profit or loss (although of a revenue nature)
would have to be dealt with separately from the profit or loss of other businesses.


Note: However, securities held by Foreign Institutional Investor which has invested in such
securities in accordance with the regulations made under the SEBI Act, 1992 would be treated as a
capital asset. Even if the nature of such security in the hands of the Foreign Portfolio Investor is
stock-in-trade, the same would be treated as a capital asset and the profit on transfer would be
taxable as capital gains.
(3) A single transaction - Can it constitute business? Even a single transaction may constitute a
business or an adventure in the nature of trade even if it is outside the normal course of the
assessee’s business. Repetition of such transactions is not necessary. Thus, a bulk purchase
followed by a bulk sale or a series of retail sales or bulk sale followed by a series of retail purchases
would constitute an adventure in the nature of trade and consequently, the income arising therefrom
would be taxable.
Purchase of any article with no intention to resell it, but resold under changed circumstances would
be a transaction of a capital nature and capital gains arise.
However, where an asset is purchased with the intention to resell it, the question whether the profit
on sale is capital or revenue in nature depends upon
(i) the conduct of the assessee,
(ii) the nature and quantity of the article purchased,
(iii) the nature of the operations involved,
(iv) whether the venture is on capital or revenue account, and
(v) other related circumstances of the case.
(4) Liquidated damages: Receipt of liquidated damages directly and intimately linked with the
procurement of a capital asset, which lead to delay in coming into existence of the profit-making
apparatus, is a capital receipt.
The amount received by the assessee towards compensation for sterilization of the profit earning
source is not in the ordinary course of business. Hence, it is a capital receipt in the hands of the
assessee.
(5) Compensation on termination of agency:

Where an assessee receives compensation on termination of the agency business being the only
source of income, the receipt is of capital nature, but taxable under section 28(ii)(c).
However, where the assessee has a number of agencies and one of them is terminated and
compensation is received therefor, the receipt would be of a revenue nature since taking up an
agency and exploiting the same for earning income is in the ordinary course of business. The loss
of one agency would be made good by profit from another agency.
Compensation received from the employer or from any person for premature termination of the
service contract is a capital receipt, but is taxable as profit in lieu of salary under section 17(3) or as
income from other sources under section 56(2)(xi), respectively.
Compensation received or receivable in connection with the termination or the modification of the
terms and conditions of any contract relating to its business shall be taxable as business income.
(6) Gifts: Normally, gifts constitute a capital receipt in the hands of the recipient. However, certain gifts
are brought within the purview of income-tax, for example, receipt of property without consideration
is brought to tax under section 56(2)(x).
For example, any sum of money or value of property received without consideration or for
inadequate consideration by any person, other than a relative, is chargeable under the head
“Income from Other Sources.


Class Notes


Class Notes

TAX RATES SATC 2.1
APPLICABLE RATE OF TAX

(A) Individuals [except (B) & (C)], HUF, AOP’s & BOI’s & every Artificial Juridical Person:
TOTAL INCOME AMOUNT OF TAX
Up to ₹ 2,50,000 NIL
On next ₹ 2,50,001 - 500,000 5%
On next ₹ 5,00,001 – 10,00,000 20%
On the balance amount [Above ₹ 10,00,000] 30%
(B) For a Resident individual, being a Sr. Citizen, Age  60 yrs (but less than 80 years) at any
time during the PY.
Up to ₹ 3,00,000 NIL
On next ₹ 300,001 - ₹ 500,000 5%
On next ₹ 500,001 - ₹ 10,00,000 20%
On the balance amount [Above ₹ 10,00,000] 30%
(C) For a resident individual, being a Very Sr. Citizen, Age  80 yrs at any time during the PY.
Up to ₹ 5,00,000 NIL
On next ₹ 500,001 – ₹10,00,000 20%
On the balance amount ₹ 10,00,001 & above 30%
Note:
Above rate is normal rate or slab rate for Individuals/HUFs. It is applicable when Individuals/HUF
has not opted for the provisions of Section 115BAC (Alternate tax regime).
Further, concept of Alternate Tax Regime under Section 115BAC & Alternate Minimum Tax
(AMT) is considered separately.

TAX RATES SATC 2.2

Surcharge on Individual / HUF / AOP / BOI / Artificial Juridical Person
Total Income Surcharge Rate

Total Income (including dividend income & capital gains chargeable to 10% of income-tax
tax under Section 111A & 112A) exceeds ₹ 50 Lakhs but not exceeding
₹ 1 crores
tax under Section 111A & 112A) exceeds ₹ 1 crores but not exceeding
₹ 2 crores
Or Total Income (including dividend income & capital gains chargeable
to tax under Section 111A & 112A) exceeds ₹ 2 crores but not covered
below
Total Income (excluding dividend income & capital gains chargeable to 25% of income-tax
(15% of income tax
₹ 5 crores
related to dividend
income & Income
covered u/s 111A &
112A)
tax under Section 111A & 112A) exceeds ₹ 5 crores (15% of income tax
related to dividend
income & Income
covered u/s 111A &
112A)
“Health and Education cess” on Income-tax

The amount of income-tax as increased by the union surcharge, if applicable, should be further
increased by an additional surcharge called the “Health and Education cess on income-tax”,
calculated at the rate of 4% of such income-tax and surcharge, if applicable.
Health and education cess is leviable in the case of all assessees i.e. individuals, HUF, AOP/BOI,
firms, local authorities, co-operative societies and companies.
It is leviable to fulfill the commitment of the Government to provide and finance quality health
services and universalised quality basic education and secondary and higher education.

TAX RATES SATC 2.3

Clarification regarding attaining prescribed age of 60 years/80 years on 31st March itself, in case
of senior/very senior citizens whose date of birth falls on 1st April
An individual who is resident in India and of the age of 60 years or more (senior citizen) and 80 years or
more (very senior citizen) is eligible for a higher basic exemption limit of ₹ 3,00,000 and ₹ 5,00,000,
respectively.
The CBDT has clarified that a person born on 1st April would be considered to have attained a particular
age on 31st March, the day preceding the anniversary of his birthday. In particular, the question of
attainment of age of eligibility for being considered a senior/very senior citizen would be decided on the
basis of above criteria.
Therefore, a resident individual whose 60th birthday falls on 1st April, 2022, would be treated as having
attained the age of 60 years in the P.Y. 2021-22, and would be eligible for higher basic exemption limit
of ₹ 3 lakh in computing his tax liability for A.Y. 2022-23.
Likewise, a resident individual whose 80th birthday falls on 1st April, 2022, would be treated as having
attained the age of 80 years in the P.Y. 2021-22, and would be eligible for higher basic exemption limit
of ₹ 5 lakh in computing his tax liability for A.Y. 2022-23.

TAX RATES SATC 2.4

CONCEPT OF MARGINAL RELIEF – Applicable in case of all assessee
Total amount of income-tax payable (together with surcharge) on such income should not exceed the
amount of income-tax and surcharge payable on total income of ₹ 1 Crores by more than the amount of
income that exceeds ₹ 1 Crores. [refer class examples]
Calculation of Marginal Relief:
Marginal Relief Tax on Total Income including Surcharge XXXXXXX

Less:
A. Total Income - ₹ 1 Crore XXXXXXX
B. Tax on ₹ 1 Crore including surcharge if applicable XXXXXXX
Marginal Relief XXXXXXX
Tax Payable Tax on Total Income including Surcharge XXXXXXX
Less: Marginal Relief as computed above XXXXXXX
Tax before Cess XXXXXXX
Add: H&EC XXXXXXX
Total tax Payable XXXXXXX
Note: Marginal Relief is available at all levels – ₹ 50 Lakhs / ₹ 1 Crores / ₹ 2 Crores / ₹ 5 Crores /
₹ 10 Crores
Rounding-off of Income [Section 288A]:

The Total Income computed under this Act, shall be rounded off to the nearest multiple of ₹ 10.
Rounding-off of Tax [Section 288B]:

The amount of tax including Tax Deducted at Source (TDS) and advance tax, interest, penalty, fine or
any other sum payable, and the amount of refund due under the Income Tax Act, shall be rounded off
to the nearest multiple of ₹ 10.
Rebate of ₹ 12,500 for Resident Individuals [Sec. 87A]
With a view to providing tax relief to the individual taxpayers who are in lower income bracket, a rebate
is provided for under section 87A.
Conditions - This rebate will be available if the following two conditions are satisfied -
a) Taxpayer is a Resident Individual (he may be ordinarily resident or not ordinarily
resident).
b) His total income or net income or taxable income (i.e., GTI minus deduction under
sections 80C to 80U) is ₹ 5,00,000 or less
Amount of Rebate: If the above two conditions are satisfied, the resident individual can claim rebate
under section 87A. The amount of rebate is 100 per cent of income-tax payable on total income or
₹ 12,500, whichever is less. This rebate will be available from income-tax (before adding Health &
Education Cess).
Note: Rebate under section 87A is, however, not available in respect of tax payable @10% on
long-term capital gains taxable under section 112A.

TAX RATES SATC 2.5

In case of other category of Persons (Assessment Year 2022-23)
OTHERS AMOUNT OF TAX SURCHARGE
FIRM & LLP @30% @ 12% of Tax Payable if TOTAL
INCOME > ₹ 1 Crore
Local Authority @30% @ 12 % of Tax Payable if TOTAL
Co-operative On first ₹ 10,000 @10% @ 12 % of Tax Payable if TOTAL
Societies On next ₹ 10,000 @20% INCOME > ₹ 1 Crore
(Not opting for For the Balance @30%
the provisions of
Section 115BAD)
Company Domestic Company : @30% @ 7 % of Tax Payable if TOTAL
(Not opting for (If Total Turnover / Gross INCOME > ₹ 1 Crore
the provisions of receipts during PY 19-20 does
Section 115BA / not exceeds ₹ 400 Crore then @ 12 % of Tax Payable if TOTAL
115BAA / Tax rate is 25%) INCOME > ₹ 10 Crore
115BAB)
Foreign Company: @40% @ 2 % of Tax Payable if TOTAL

@ 5 % of Tax Payable if TOTAL

In all above cases, Income Tax (including surcharge, if any) shall be further increased by
Health and Education Cess @ 4%.

TAX RATES SATC 2.6

Class Notes

TAX RATES SATC 2.7

ALTERNATIVE TAX REGIME FOR INDIVIDUAL & HUF
SECTION 115BAC - INSERTED BY FINANCE ACT 2020
Applicable FROM Assessment Year 2021-22
(A) Option to pay income-tax at concessional tax slab rates: [OPTIONAL SCHEME]
As per Section 115BAC, individuals or HUFs have an option to pay tax in respect of their total
income (other than income chargeable to tax at special rates under “Chapter XII – SETION
111A to SECTION 115BBG” such as section 111A, 112, 112A, 115BB, 115BBE etc.) at the
following concessional rates, subject to certain conditions specified under section 115BAC(2) –
S. NO. Total Income Rate of Tax
1 Upto ₹ 2,50,000 NIL
2 From ₹ 2,50,001 to ₹ 5,00,000 5%
3 From ₹ 5,00,001 to ₹ 7,50,000 10%
4 From ₹ 7,50,001 to ₹ 10,00,000 15%
5 From ₹ 10,00,001 to ₹ 12,50,000 20%
6 From ₹ 12,50,001 to ₹ 15,00,000 25%
7 Above ₹ 15,00,000 30%
(B) Conditions to be satisfied for availing concessional rates of tax:
(1) Certain deductions/exemptions not allowable: Section 115BAC(2) provides that while
computing total income, the following deductions/exemptions would not be allowed, if
an individual or HUF opts for concessional rates of taxes under section 115BAC(1):
Section Exemption/Deduction SATC Hint

(related
Chapters)
10(5) Leave Travel Concession Salary
10(13A) House Rent Allowances Salary
10(14) Special Allowances (other than those as may be Salary

prescribed) – few is permitted
10(17) Allowances to MP/MLA IOS
10(32) Exemption in respect of income of minor child included in Clubbing

the income of parent
10AA Deduction to units in SEZ (Tax holiday) SEZ Unit

TAX RATES SATC 2.8

16 Deduction against Gross Salary Salary
Section 16(ia) - Statutory Deduction of ₹ 50,000
Section 16(ii) - Entertainment allowances deduction
Section 16(iii) - Professional Tax deduction
24(b) Interest on Housing Loan in respect of one or two self- House

occupied properties Property
32(1)(iia) Additional Depreciation Depreciation/

PGBP
32AD Investment Allowances (Investment in notified Backward Depreciation/

Area) PGBP
33AB Tea/Rubber/Coffee development Account PGBP
33ABA Site Restoration Fund PGBP
35(1)(ii), Deduction in respect to contribution to Notified/Approved PGBP

(iia), (iii) & institutes etc for Scientific Research etc
35(2AA)
35AD Capital Expenditure related to Specified Business PGBP
35CCC Deduction in respect of expenditure incurred on notified PGBP

agriculture project
57(iia) Deduction in respect of Family Pension IOS
80C to Deduction under chapter VI-A except Deduction

80U under
Section 80CCD(2) : Employer’s contribution to NPS
Chapter VI-A
Section 80JJAA : Employment of New Employee
Section 80LA(1A): Units in IFSC
(2) Certain losses not allowed to be set-off:

While computing total income, set-off of any loss -
i. carried forward or depreciation from any earlier assessment year, if such loss or
depreciation is attributable to any of the deductions referred to in (1) above; or
ii. under the head house property with any other head of income;
would not be allowed. [Carry forward of such losses are also not allowed]
(3) Depreciation or additional depreciation:

Depreciation u/s 32 is to be determined in the prescribed manner. Depreciation in respect
of any block of assets entitled to more than 40%, would be restricted to 40% on the written
down value of such block of assets.
Additional depreciation u/s 32(1)(iia), however, cannot be claimed.

TAX RATES SATC 2.9

Additional points:
In case of an individual or HUF opting for section 115BAC, total income should be computed
without set-off of any loss under the head House Property or any loss brought
forward or depreciation from any earlier assessment year, where such loss or
depreciation is attributable to any of the deductions listed in (1) above [Such loss and
depreciation would be deemed to have been already given effect to and no further
deduction for such loss or depreciation shall be allowed for any subsequent year]
Where there is a depreciation allowance in respect of a block of asset from an earlier

assessment year attributable to additional depreciation u/s 32(1)(iia), which has not been
given full effect to prior to A.Y. 2021-22 and which is not allowed to be set-off in the A.Y.
2021-22 due to exercise of option u/s 115BAC from that year, corresponding adjustment
shall be made to the WDV of such block of assets as on 1.4.2020 in the prescribed manner
i.e., the WDV as on 1.4.2020 will be increased by the unabsorbed additional
depreciation not allowed to be set-off.
(C) Time limit for exercise of option [Section 115BAC(5)]:
(1) In case of an individual or HUF having no income from business or profession: Where
such individual or HUF has no business income, the option has to be exercised along with
the return of income to be furnished under section 139(1) for a previous year relevant to the
assessment year.
[In effect, such individual or HUF can choose whether or not to exercise the option in
each previous year. He may choose to exercise the option in one year and not to
exercise the option in another year.]
(2) In case of an individual or HUF having income from business or profession: The
option has to be exercised on or before the due date specified under section 139(1) for
furnishing the return of income for any previous year relevant to assessment year 2021-22
or any later assessment year and once such option is exercised, it would apply to
subsequent assessment years.
The option can be withdrawn only once where it was exercised by the individual or HUF
having business income for a previous year other than the year in which it was exercised.
Thereafter, the individual or HUF shall never be eligible to exercise option under this section,
except where such individual or HUF ceases to have any business income in which
case, option under (i) above shall be available.
(D) Consequences for failure to satisfy conditions mentioned in section 115BAC(2):
(1) In case of an individual or HUF having no income from business or profession: On

failure to satisfy the conditions mentioned in point B above in any previous year, the
option exercised would be invalid in respect of the assessment year relevant to that
previous year.
Consequently, the other provisions of the Income-tax Act, 1961 would apply as if the option
had not been exercised for the assessment year relevant to that previous year.

TAX RATES SATC 2.10

(2) In case of an individual or HUF having income from business or profession: On failure
to satisfy the conditions mentioned in point B above in any previous year, the option
exercised would be invalid in respect of the assessment year relevant to that previous year
and subsequent assessment years.
Consequently, the other provisions of the Income-tax Act, 1961 would apply to the person as
if the option had not been exercised for the assessment year relevant to that previous year
and subsequent assessment years.
(E) AMT liability not attracted:

Individuals or HUFs exercising option u/s 115BAC are not liable to alternate minimum tax u/s
115JC.
(F) Other Points:

(1) It may be noted that in case of individuals or HUFs not having income from business or
profession, the total income and tax liability (including provisions relating to AMT, if
applicable under normal provisions) may be computed every year both in accordance
with normal provisions of the Income-tax Act, 1961 and in accordance with the
provisions of section 115BAC, in order to determine which is more beneficial and
accordingly decide whether or not to opt for section 115BAC for that year.
(2) For the purpose of tax deduction at source, the CBDT has clarified that an employee,
having income other than income under the head "Profits and gains of business or
profession" and intending to opt for the concessional rate under section 115BAC, is
required to intimate to the deductor, being his employer, of such intention for each
previous year and upon such intimation, the deductor shall compute his total income, and
make TDS thereon in accordance with the provisions of section 115BAC. If such intimation
is not made by the employee, the employer shall make TDS without considering the
provisions of section 115BAC.
It is also clarified that the intimation so made to the deductor shall be only for the
purposes of TDS during the previous year and cannot be modified during that year.
However, the intimation would not amount to exercising option in terms of section 115BAC
and the person shall be required to do so along with the return to be furnished under section
139(1) for that previous year.
Thus, option at the time of filing of return of income under section 139(1) could be
different from the intimation made by such employee to the employer for that
previous year.
Further, in case of a person who has income under the head "Profit and gains of business or
profession" also, the option for taxation under section 115BAC once exercised for a
previous year at the time of filing of return of income under section 139(1) cannot be
changed for subsequent previous years except in certain circumstances.
Accordingly, a person having income under the head “Profits and gains from business or
profession” also shall also intimate to his employer. However, the intimation to the
employer in his case for subsequent previous years must not deviate from the option
under section 115BAC once exercised in a previous year.

TAX RATES SATC 2.11

(3) Exemption provided in respect of free food and non-alcoholic beverage provided by
employer through paid voucher shall not apply to an employee, being an assessee, who
has exercised option under sub-section (5) of section 115BAC.”
(4) Rule 2BB is amended (Section 10(14) – Salaries Head)
a) An employee, being an assessee, who opts for the provisions of section 115BAC would be
entitled for exemption only in respect of travelling allowance, daily allowance and
conveyance allowance.
b) An employee, being an assessee, who opts for the provisions of section 115BAC would be
entitled for exemption only in respect of transport allowance granted to an employee
who is blind or deaf and dumb or orthopedically handicapped with disability of the
lower extremities of the body to the extent of ₹ 3,200 p.m.
Section 115JC (AMT) - Special provisions for payment of tax by certain persons other than a
company
The provisions of this section shall not apply to a person who has exercised the option referred to
in Section 115BAC or Section 115BAD.
[SATC Note – AMT is not applicable to Individual or HUF opting for Section 115BAC]
Section 115JD - Tax credit for Alternate Minimum Tax
The provisions of this section shall not apply to a person who has exercised the option referred to
in Section 115BAC or Section 115BAD.

TAX RATES SATC 2.12

Class Notes

AGRICULTURE INCOME SATC 3.1
AGRICULTURAL INCOME
AGRICULTURE INCOME - Exempt u/s Section 10(1)
Section 10(1) provides that agricultural income is not to be included in the total income of the
assessee.
CONCEPT OF TAXATION OF THE AGRICULTURE INCOME

Agriculture Income is totally exempt under the Act, but shall be included in the total income in case
of certain assessee for the purpose of determining the rate of tax on the non-agriculture income
known as partial integration of taxes. It is applicable to Individuals, HUF, AOP, BOI and
Artificial Juridical Persons.
Two conditions which need to satisfied for partial integration are:
1. The Net Agricultural Income should exceed ₹ 5,000 p.a., AND
2. Non-Agricultural Income should exceed the maximum amount not chargeable to tax.
(i.e. ₹ 500,000 for Very Senior Citizen, ₹ 3,00,000 for Senior Citizens, ₹ 2,50,000 for all other
individuals.)
It may be noted that aggregation provisions do not apply to company, firm, co-operative society and
local authority. The object of aggregating the net agricultural income with non-agricultural income is to
tax the non-agricultural income at higher rates.
Tax calculation in such cases is as follows:

Step 1: Add non-agricultural income with net agricultural income. Compute tax on the aggregate
amount.
Step 2: Add net agricultural income and the maximum exemption limit available to the assessee
(i.e. ₹ 2,50,000 / ₹ 3,00,000 / ₹ 500,000). Compute tax on the aggregate amount.
Step 3: Deduct the amount of income tax calculated in step 2 from the income tax calculated in step 1
i.e. Step 1 – Step 2.
Step 4: The sum so arrived at shall be increased by Health & Education Cess @4%. [Deduct
Rebate u/s 87A before cess if applicable]
[Note: In case TOTAL INCOME excluding LTCG/STCG(111A)/Casual Income does not

exceeds the maximum exemption limit, partial integration of tax will not be applicable.
Example:
Mr. X, a resident, has provided the following particulars of his income for the P.Y. 2021-22
i. Income from PGBP - ₹ 2,80,000
ii. Income from house property - ₹ 5,00,000
iii. Agricultural Income - ₹ 1,90,000
iv. Expenses incurred for earning above agricultural income - ₹ 1,20,000
Compute his tax liability assuming his age is 45 years.


Solution:
Computation of total income of Mr. X for the A.Y. 2022-23
Particulars Amount (₹)
Income from PGBP 2,80,000
Income from house property 5,00,000
Net agricultural income [₹ 1,90,000 – ₹ 1,20,000] 70,000
Less: Exempt under section 10(1) (70,000) NIL .
Gross Total Income 7,80,000
Less: Deductions under Chapter VI-A -
Total Income 7,80,000
(a) Computation of tax liability (age 45 years)
For the purpose of partial integration of taxes, Mr. X has satisfied both the conditions:
1. Net agricultural income exceeds ₹ 5,000 p.a., and
2. Non agricultural income exceeds the basic exemption limit of ₹ 2,50,000.
His tax liability is computed in the following manner:

Step 1: ₹ 7,80,000 + ₹ 70,000 = ₹ 8,50,000.
Tax on ₹ 8,50,000 = ₹ 82,500
Step 2: ₹ 70,000 + ₹ 2,50,000 = ₹ 3,20,000.

Tax on ₹ 3,20,000 = ₹ 3,500 (i.e. 5% of ₹ 70,000)
Step 3 : ₹ 82,500 – ₹ 3,500 = ₹ 79,000.
Step 4 : Total tax payable = ₹ 79,000 + 4% of ₹ 79,000

= ₹ 82,160.


DEFINITION OF AGRICULTURAL INCOME [Section 2(1A)]
Agricultural income may arise in any one of the following three ways:-
(1) It may be Rent or Revenue derived from land situated in India and used for agricultural
purposes.
(2) It may be income derived from such land
a. through agriculture or
b. through the performance of a process ordinarily employed by a cultivator or receiver of rent
in kind to render the produce fit to be taken to the market or
c. through the sale of such agricultural produce in the market.
(3) It may be derived from any Farm Building required for agricultural operations
Further, Income derived from saplings or seedlings grown in a nursery would be deemed to be
agricultural income, whether or not the basic operations were carried out on land.
SOME IMPORTANT ASPECTS
1. “AGRICULTURE” and “AGRICULTURE PURPOSES”:
(a) “Agriculture” means tilling of the land, sowing of the seeds and similar operations. These are
basic operations and require the expenditure of human skill and labour on land itself.
(b) Operations to be performed after the produce sprouts from the land (e.g., weeding, digging etc.)
are subsequent operations. These subsequent operations would be agricultural
operations only when taken in conjunction with and as a continuation of the basic
operations.
(c) However, the term ‘agriculture’ cannot be extended to all activities which have some distant
relation to land like dairy farming, breeding and rearing of live stock, butter and cheese making
and poultry farming.
(d) Income derived from cultivation is agricultural income. Even when income derived is rental
income, it should be in the nature of rent for the use of such land for agricultural purposes.
(e) Assessee growing mulberry leaves, feeding them to silk worms and obtaining silk
cocoons; will not result in agricultural income. Section 2(1A), which defines the term
agricultural income, does not contemplate sale of commodity different from what is for market
and not to bring about an altogether new commodity. Income attributable to growing
mulberry leaves alone shall be treated as agricultural income.
2. GAIN ARISING ON TRANSFER OF URBAN AGRICULTURE LAND:

The capital gains arising from the transfer of such urban agricultural land would not be treated as
agricultural income under section 10 but will be taxable under section 45.


INCOME WHICH IS NOT REGARDED AS AGRICULLTURAL INCOME
1. Income from butter and cheese making 6. Income from fisheries, poultry farming, dairy
farming and animal husbandry.
2. Commission as a percentage of Agriculture
Income: 7. Income from supply of water for irrigation
purposes is not an agriculture income.
3. Dividend from a company engaged in
Agriculture Activity 8. Income from Brick Making
4. Income from sale of forest trees of

spontaneous growth. 9. Income from land used for storing agriculture
produce
5. Royalties Income of mines.
Instances of agricultural income: The following are some examples of incomes which
have been held to be agricultural income:
 Profit on sale of crops after harvest, made by cultivator or receiver of rent-in-kind.

 Compensation received from insurance company for damage caused to the crops by hailstorm or
flood.
 Salary, interest on capital, share of profits, etc., received by a partner of a firm having agricultural
income.
 Income from running a dairy which is purely incidental to agriculture
 Income from growing flowers and creepers.
 Income from saplings and seedlings grown in nursery
Instances of non-agricultural income: The following are some examples of incomes

which have been held to be non-agricultural income:
 Income from sale of trees, flowers and fruits growing spontaneously in forests
 Profits arising from purchase and sale of standing crops
 Remuneration received by a manager as a percentage of profit from a firm having agricultural
income
 Annuity received for transfer of agricultural land
 Interest on arrears of rent payable in respect of agricultural land
 Interest received by a money lender in the form of crops


INCOME FROM COMPOSITE ACTIVITY OF AGRICULTURE AND BUSINESS
Where the agricultural produce like tea, cotton, tobacco, sugarcane etc. are subjected to a
manufacturing process and the manufactured product is sold, the profit on such sales will consist of
agricultural income as well as business income. That portion of the profit representing agricultural
income will be exempted. For this purpose, Rules 7, 7A, 7B & 8 of Income-tax Rules, 1962 provides
the basis of apportionment.
Amount of Non-agricultural
Nature of Income Agricultural Income i.e.
Income business income
1. Income from sale of TEA Grown and
Manufactured by the assessee in India
60% 40%
2. Income from RUBBER plants Grown by the seller
in India
65% 35%
3. Income derived from the sale of COFFEE Grown
and Cured by the seller in India
75% 25%
4. Income derived from the sale of COFFEE Grown,
Cured, Roasted and Grounded by the seller in 60% 40%
India
Rule 7 - Agricultural produce other than Tea, rubber etc. used as Raw
Material in a Manufacturing Concern
Where income is partially agricultural income and partially income chargeable to income-tax under the
head ‘profits and gains of business’, the market value of any agricultural produce which has been
raised by the assessee or received by him as rent in kind and which has been utilised as raw material in
such business or the sale receipts of which are included in the accounts of the business shall be
deducted. No further deduction shall be made in respect of any expenditure incurred by the
assessee as a cultivator or receiver of rent in kind.
Question:
Mr. B grows sugarcane and uses the same for the purpose of manufacturing sugar in his factory.
30% of sugarcane produce is sold for ₹10 lacs, and the cost of cultivation of such sugarcane is ₹ 5
lacs. The cost of cultivation of the balance sugarcane (70%) is ₹ 14 lacs and the market value of the
same is ₹22 lacs. After incurring ₹ 1.5 lacs in the manufacturing process on the balance sugarcane,
the sugar was sold for ₹ 25 lacs. Compute B’s business income and agricultural income.


Rule: 7A – Income from the Growing & Manufacturing of Rubber in India
This rule is applicable when income derived from the sale of latex or cenex or latex based crepes or
brown crepes manufactured from field latex or coagulum obtained from rubber plants grown
by the seller in India.
Income derived from the sale of rubber obtained from rubber plants grown in India shall be
computed as under:
Step: 1 – Compute the income u/h. PGBP after allowing deduction u/s. 33AB
Step: 2 – Computation of agriculture and non-agriculture income in the following manner:
 35% of such income is liable to tax
 65% (balance) of such income is exempt from tax
Illustration:
Mr. C manufactures latex from the rubber plants grown by him in India. These are then sold
in the market for ₹30 lacs. The cost of growing rubber plants is ₹ 10 lacs and that of
manufacturing latex is ₹ 8 lacs. Compute his total income.
Solution:
The total income of Mr. C comprises of agricultural income and business income. Total profits from
the sale of latex = ₹ 30 lacs – ₹ 10 lacs – ₹ 8 lacs. = ₹ 12 lacs.
Agricultural income = 65% of ₹ 12 lacs. = ₹ 7.8 lacs
Business income = 35% of ₹ 12 lacs. = ₹ 4.2 lacs
Rule: 7B – Income from the Growing & Manufacturing of Coffee in India

 Income derived from the sale of COFFEE GROWN AND CURED in India shall be computed as
under:
Step: 1 – Compute the income under head PGBP after allowing deduction under section 33AB
Step: 2 – Computation of agriculture and non-agriculture income in the following manner:
 Income derived from the sale of COFFEE GROWN, CURED, ROASTED AND GROUNDED in
India shall be computed as under:
Step: 1 – Computer the income under head PGBP after allowing deduction under section 33AB
Step: 2 – Computation of agriculture and non-agriculture income in the following manners:
Rule: 8 – Income from the Growing & Manufacturing of Tea in India

This rule applies only in cases where the assessee himself grows tea leaves and manufactures tea in
India. Income derived from the sale of tea grown and manufactured in India shall computed as
under
Step: 1 – Compute the income under head PGBP after allowing deduction under section 33AB
Step: 2 – Computation of agriculture and non-agriculture income in the following manners:
 40% of such income is liable to tax as business income under the head “PGBP”
 60% (balance) of such income is exempt from tax.


Class Notes


Class Notes

AGRI INCOME SATC 3A.1
Practical Questions
1) Coimbatore Cotton Mills is engaged in the business of growing cotton and manufacturing thread.
For the financial year 2021-22, the company manufactured 5000 spools of thread and sold them
for a value of ₹ 60,00,000/-. They used 2000 bales of cotton grown by them. The market price per
bale of cotton is ₹ 1,500/-. Cultivation expenses incurred for producing 2000 bales of cotton was
₹ 38,00,000/-. Determine the business income chargeable to tax for AY 2022-23.
2) Mr. Raman derived income of ₹ 10,00,000/- from the activity of sale of coffee grown and cured by
him for the year ended 31.03.2022. Compute the tax liability for the AY 2022-23.
3) In Question No. 2, in case Mr. Raman is engaged in roasting and grounding of coffee apart from
growing and curing what will be the tax liability for the AY 2022-23.
4) Hind Latex Ltd. derived an income of ₹ 12 crores from sale of centrifuged latex for the year ending
31.03.2022, Compute the taxable income of the assessee for the AY 2022-23.
5) Mr. Tony had estates in Rubber, Tea and Coffee. He derives income from them. He has also a
nursery wherein he grows plants and sells. For the previous year ending 31-3-2022, he furnishes
the following particulars of his sources of income from estates and sale of plants (all amounts in ₹)
-
(a) Manufacture of Rubber 500000
(b) Manufacture of Coffee grown and cured 350000
(c) Manufacture of Tea 700000
(d)Sale of plants from nursery 100000
You are requested to compute the taxable income for the AY 2022-23
6) Miss Vivitha, a resident and ordinarily resident in India, has derived the following income
from various operations (relating to plantations and estates owned by her) during the year
ended 31-3-2022 (amounts in ₹) :
(i) Income from sale of centrifuged latex processed from rubber plants grown in Darjeeling. 3,00,000
(ii) Income from sale of coffee grown and cured in Tamil Nadu. 1,00,000
(iii) Income from sale of coffee grown, cured, roasted and grounded, in Colombo.
(Sale consideration was received at Chennai.) 2,50,000
(iv) Income from sale of tea grown and manufactured in Simla. 4,00,000
(v) Income from sapling and seedling grown in a nursery at Cochin. 80,000
(Basic operations were not carried out by her on land)
You are required to compute the business income and agricultural income of Miss Vivitha for the
AY 2022-23.
SURAJ AGRAWAL TAX CLASS, NEW DELHI I 8527230445

AGRI INCOME SATC 3A.2
SOLUTION
Answer 5:
Computation of taxable income of Tony for the Assessment Year 2022-23
Business Agricultural
income (₹) income (₹)
Income from growing and manufacturing rubber (Rule 7A) -35% : 65% 175,000 325,000
Income from growing and curing coffee (Rule 7B) -25% : 75% 87,500 262,500
Income from growing and manufacturing tea (Rule 8) - 40% : 60% 280,000 420,000
Sale of plants from nursery (It is an agricultural income) 0 100,000
TOTAL 542,500 1,107,500
Hence, total income of Mr. Tony = ₹ 5,42,500.
Answer 6:
Computation of taxable income of Miss Vivitha (amounts in ₹)
Particulars Business Agricultural

income income
Income from growing & manufacturing rubber in India (Rule 7A)-35% : 65% 105,000 195,000
Income from growing and curing coffee in India (Rule 7B) -25% :75% 25,000 75,000
Income from growing/curing/roasting etc. coffee out of India in Columbo 250,000 0
(Sri Lanka) - Since the operations have taken place outside India, hence, no
part of such income can be regarded as agricultural income (Rule 7B will not
apply). Since Miss Vivitha is resident in India, hence, this income will be taxed
in India.
Income from growing and manufacturing tea in India (Rule 8) - 40% : 60% 160,000 240,000
Sale of plants from nursery (It is deemed agricultural income even if no 0 80,000
basic operations have been carried out as per explanation)
TOTAL (Amount in ₹) 540,000 590,000
Always discuss about the Rule 7A, 7B & 8 regarding nature of business and percentage in working note.
Solution of Illustration:
Income from sale of sugarcane gives rise to agricultural income and from sale of sugar gives rise to
business income.
Business income = Sales – Market value of 70% of sugarcane produce – Manufacturing
expenses
= ₹ 25 lacs – ₹ 22 lacs - ₹ 1.5 lacs
= ₹ 1.5 lacs.
Agricultural income = Market value of sugarcane produce – Cost of cultivation

= [₹ 10 lacs + ₹ 22 lacs] – [₹ 5 lacs + ₹ 14 lacs]
= ₹ 32 lacs – ₹ 19 lacs = ₹ 13 lacs.
SURAJ AGRAWAL TAX CLASS, NEW DELHI I 8527230445

Residential Status SATC 4.1
RESIDENTIAL STATUS
IMPORTANCE OF RESIDENTIAL STATUS

1. The incidence of tax on any assessee depends upon his Residential Status.
2. If any receipt is chargeable to tax, it has to be seen whether the assessee is liable to tax in respect
of that income or not considering his Residential Status.
The taxability of a particular receipt would thus depend upon not only the nature (Capital or
Revenue) of the income and the place of its accrual or receipt but also upon the assessee’s
residential status.
Broad Category of Tax-Payers
Taxpayers are classified into three broad categories on the basis of their residential
status:
1. Resident and Ordinarily Resident [“ROR”]

2. Resident but Not Ordinarily Resident [“RNOR”]
3. Non-Resident [“NR”]
SURAJ AGRAWAL TAX CLASS | NEW DELHI | +91 85272 30445


Important Points:
1. Year-wise Status: Residential Status is always determined for the previous year because we
have to determine the Total Income of the previous year only.
2. Continuity not required: It is not necessary that he stay should be for a continuous period or at
any one place in India.
3. India includes its territorial waters and therefore Presence in territorial waters of India would
also be regarded as presence in India. [up-to 12 Nautical Miles from Sea-base]
4. For the purpose of counting the number of days stayed in India, both the date of departure as
well as the date of arrival are considered to be in India.
5. Resident of many countries: A person may be resident of more than one country for any
previous year.
6. Citizenship Vs Residential Status:

Citizenship of a country and Residential Status of that country are separate concepts. The
residence of an individual for income-tax purpose has nothing to do with citizenship, place of
birth or domicile. A person may be an Indian National / Citizen, but he may not be a Resident of
India and vice-versa.
RESIDENTIAL STATUS OF AN INDIVIDUAL [Section 6(1)]

Clause 1 of Section 6 [It is not a sub-section (1)]
Under Section 6(1), an individual is said to be Resident in India in any previous year, if he satisfies
any one of the following BASIC conditions:
1. He has been in India during the previous year for a total period of 182 days or more,
OR
2. He has been in India during the 4 years immediately preceding the previous year for a total
period of 365 days or more AND has been in India for at least 60 days in the relevant PY.
Exceptions:
The following categories of individuals will be treated as Residents only if the period of their stay
during the relevant previous year amounts to 182 days or more.
[In other words even if such persons were in India for 365 days during the 4 preceding years and 60
days in the relevant previous year, they will not be treated as resident.]
1. Indian Citizen who leaves India as a member of the crew of an Indian ship,
2. Indian Citizen who leaves India for the purpose of employment outside India OR


3. Indian Citizen or Person of Indian origin engaged outside India coming on a visit to India.
Note: A person is said to be of Indian origin if he or either of his parents or either of his
grandparents were born in undivided India.
However, such person (Indian citizen or person of Indian origin) having total income, other
than the income from foreign sources exceeding ₹15 lakhs during the previous year will be
treated as resident in India if -
1. the period of his stay during the relevant previous year amounts to 182 days or more,
or
2. he has been in India during the 4 years immediately preceding the previous year for a
total period of 365 days or more and has been in India for at least 120 days in the
previous year.
Note: "Income from foreign sources" means income which accrues or arises outside India
(except income derived from a business controlled in or a profession set up in India) and which is
not deemed to accrue or arise in India.


Period of stay of Crew Member (Indian Citizen) of Foreign Bound Ship
“In case of an Individual, being a citizen of India and a member of the crew of a foreign bound ship
leaving India, the period or periods of stay in India shall, in respect of such voyage, be determined in the
prescribed manner and subject to the prescribed conditions”
Rule 126
For the purposes of Section 6(1), in case of an individual, being a citizen of India and a member of the crew of a
ship, the period or periods of stay in India shall, in respect of an eligible voyage, not include the period
beginning on the date entered into the Continuous Discharge Certificate in respect of joining the ship by the
said individual and ending on the date entered into the Continuous Discharge Certificate in respect of
signing off by that individual from the ship.
"Eligible voyage" shall mean a voyage undertaken by a ship engaged in the carriage of passengers or freight in
international traffic where
i. For the voyage having originated from any port in India, has as its destination any port outside India; and
ii. For the voyage having originated from any port outside India, has as its destination any port in India.'
Question
Mr. Anand is an Indian Citizen and a member of the crew of a Singapore bound Indian Ship engaged in
carriage of passengers in international traffic departing from Chennai Port on 6 th June, 2021. From the
following details for the PY 2021-22, determine the residential status of Mr. Anand for A.Y. 2022-23,
assuming that his stay in India in the last 4 previous years (preceding P.Y. 2021-22) is 400 days and last
seven previous years (preceding P.Y. 2021-22) is 750 days:
Particulars Date
Date entered into the Continuous Discharge Certificate in respect of Joining 6th June, 2021
the ship by Mr. Anand
Date entered into the Continuous Discharge Certificate in respect of Signing 9th December, 2021
off the ship by Mr. Anand
Answer
As per Section 6, an individual is treated as resident if he has stayed for 182 days in India during the previous
year or if he has stayed for 60 days in the current previous year and 365 days in total during the four preceding
previous years. However, where an Indian citizen leaves India as a member of crew of an Indian ship or for the
purpose of employment outside India, he will be resident only if he stayed for atleast 182 days during the previous
year.
Further, For the purposes of Section 6(1), in case of an individual, being a citizen of India and a member of the
crew of a ship, the period or periods of stay in India shall, in respect of an eligible voyage, not include the period
beginning on the date entered into the Continuous Discharge Certificate in respect of joining the ship by the
said individual and ending on the date entered into the Continuous Discharge Certificate in respect of
signing off by that individual from the ship
In this case, the voyage is undertaken by an Indian ship engaged in the carriage of passengers in international
traffic at a port outside India (i.e., the Singapore port). Hence, the voyage is an eligible voyage for the purposes of
Section 6(1). Therefore, the period beginning from 6th June, 2021 and ending on 9th December, 2021, being the
dates entered into the Continuous Discharge Certificate in respect of joining the ship and signing off from the ship
by Mr. Anand , an Indian citizen who is a member of the crew of the crew of the ship, has to be excluded for
computing the period of his stay in India. Accordingly, 187 days [25+31+31+30+31+30+9] have to be excluded
from the period of his stay in India. Consequently, Mr. Anand’s period of stay in India during the P.Y. 2021-22
would be 178 days [i.e., 365 days – 187 days]. Since his period of stay in India during the P.Y. 2021-22 is less
than 182 days, he is not a resident for AY 2022-23.


Deemed resident in India [Section 6(1A)] – Clause 1A of Section 6
An individual, being an Indian citizen, having total income, other than the income from foreign
sources, exceeding ₹15 lakhs during the previous year would be deemed to be Resident in India in
that previous year, if he is not liable to pay tax in any other country or territory by reason of his
domicile or residence or any other criteria of similar nature.
This provision would not apply in case of an individual who is said to be resident in India in the
previous year under section 6(1).
Note: "income from foreign sources" means income which accrues or arises outside India (except
income derived from a business controlled in or a profession set up in India) and which is not deemed
to accrue or arise in India.
Meaning of “liable to tax” [Section 2(29A)] – Liable to tax, in relation to a person and with reference
to a country, means that there is an income-tax liability on such person under the law of that country
for the time being in force. It also includes a person who has subsequently been exempted from such
liability under the law of that country.
[Inserted by Finance Act 2021, effective from AY 2021-22]
ADDITIONAL CONDITION [Section 6(6)]: Resident but Not-Ordinarily Resident
A Not-Ordinarily Resident person is one who satisfies any one of the conditions specified under
section 6(6) which are:
1. (a) If such individual has been Non-Resident in India in any 9 out of the 10 previous years
immediately preceding the relevant previous year,
OR
(b) If such individual has during the 7 previous years immediately preceding the relevant previous
year been in India for a period of 729 days or less.
In other words, an Individual has to satisfy the both additional conditions in order to
become Ordinarily Resident (ROR) in India:-
(a) Resident in India in any 2 out of the last 10 previous years immediately preceding the
relevant previous year
AND
(b) Total stay in India for 730 days or more during 7 previous years immediately
preceding the relevant previous year.
OR
2. a citizen of India, or a person of Indian origin, having total income, other than the income
from foreign sources, exceeding ` 15,00,000 during the previous year, who has been in India
for a period or periods amounting in all to 120 days or more but less than 182 days
OR
3. a citizen of India who is deemed to be resident in India under clause (1A).



Resident but not ordinarily resident [Final Points] [Section 6(1) read with Section 6(6)]
A not-ordinarily resident person is one who satisfies any one of the conditions specified u/s
6(6):
(i) If such individual has been non-resident in India in any 9 out of the 10 previous years preceding
the relevant previous year; OR
(ii) If such individual has during the 7 previous years preceding the relevant previous year been in
India for a period of 729 days or less; OR
(iii) If such individual is

 an Indian citizen or person of Indian origin
 who, being outside India, comes on a visit to India in any previous year
 having total income, other than the income from foreign sources exceeding ₹ 15 lakhs during
the previous year,
 who has been in India for 120 days or more but less than 182 days during that previous year
AND for 365 days (or more) during 4 years immediately preceding the relevant previous
year.
OR
(iv) If such individual is an Indian citizen who is deemed to be resident in India under section 6(1A)
[It may be noted that a Deemed Resident will always be a resident but not ordinarily
resident].


RESIDENTIAL STATUS OF HINDU UNDIVIDED FAMILY (HUF) [Section 6(2)]
A HUF would be Resident in India if the control and management of its affairs is situated wholly or
partly in India. If the control and management of the affairs is situated wholly outside India it would
become a non-resident.
STATUS
If Control & Management of its affairs is wholly / partly situated in India - Resident
If Control & Management of its affairs is wholly situated outside India - Non-Resident
Resident and Ordinarily Resident (HUF)
If the HUF is Resident, then the status of the Karta determines whether it is ROR or RNOR. For
this purpose, additional conditions of Section 6(6) are relevant.
If Karta of resident HUF satisfies both the following additional conditions (as applicable in case
of individual) then, resident HUF will be Resident and ordinarily resident, otherwise it will be
Resident but not ordinarily resident.
1. Karta of resident HUF should be resident in at least 2 previous years out of 10 previous years
immediately preceding relevant previous year.
and
2. Stay of Karta during 7 previous years immediately preceding relevant previous year should be 730
days or more.
RESIDENTIAL STATUS OF A COMPANY [Section 6(3)]
IF PERSON IS: STATUS
An Indian Company [as defined under section 2(26)] - Resident
Company other than Indian Company will be Resident in India in any previous year if its Place of
Effective Management [POEM], in that year, is in India.
“POEM” to mean a place where key management and commercial decisions that are necessary for the
conduct of the business of an entity as a whole are, in substance made.
RESIDENTIAL STATUS OF PERSONS OTHER THAN ABOVE [Section 6(2) & Section 6(4)]
(FIRMS/AOP/BOI/Local Authority/Artificial Judicial Persons)
STATUS
If Control & Management of its affairs is wholly / partly situated in India - Resident
If Control & Management of its affairs is wholly situated outside India - Non-Resident


Example
ABC Inc., a Swedish company headquartered at Stockholm, not having a permanent
establishment in India, has set up a liaison office in Mumbai in April, 2021 in compliance with
RBI guidelines to look after its day to day business operations in India, spread awareness about
the company's products and explore further opportunities. The liaison office takes decisions
relating to day to day routine operations and performs support functions that are preparatory
and auxiliary in nature. The significant management and commercial decisions are, however, in
substance made by the Board of Directors at Sweden. Determine the residential status of ABC
Inc. for AY 2022-23.
Answer
Section 6(3) provides that a company would be resident in India in any previous year, if
(i) it is an Indian company; or
(ii) its place of effective management, in that year, is in India.
In this case, ABC Inc. is a foreign company. Therefore, it would be resident in India for P.Y. 2021-22
only if its place of effective management, in that year, is in India.
Explanation to Section 6(3) defines "place of effective management" to mean a place where key
management and commercial decisions that are necessary for the conduct of the business of an entity
as a whole are, in substance made.
In the case of ABC Inc., its place of effective management for P.Y. 2021-22 is not in India, since the
significant management and commercial decisions are, in substance, made by the Board of Directors
outside India in Sweden.
ABC Inc. has only a liaison office in India through which it looks after its routine day to day business
operations in India. The place where decisions relating to day to day routine operations are taken and
support functions that are preparatory or auxiliary in nature are performed are not relevant in
determining the place of effective management.
Hence, ABC Inc., being a foreign company is a non-resident for A.Y. 2022-23, since its place of
effective management is outside India in the P.Y. 2021-22.


SCOPE OF TOTAL INCOME [Section 5] – Tax Incidence vs Residential Status
Section 5 provides the scope of total income in terms of the residential status of the assessee because
the incidence of tax on any person depends upon his residential status.
The scope of Total Income of an assessee depends upon the following three important
considerations:
 The Residential Status of the assessee;

 The place of accrual or receipt of income, whether actual or deemed; and
 The point of time at which the income had accrued to or was received by or on behalf of the
assessee.
1) Resident and Ordinarily Resident [ROR]
The total income of a resident assessee would, under section 5(1), consists of:
a) income received or deemed to be received in India during the previous year;
b) income which accrues or arises or is deemed to accrue or arise in India during the previous
year; and
c) income which accrues or arises outside India even if it is not received or brought into India
during the previous year.
In simpler terms, a ROR has to pay tax on the total income accrued or deemed to accrue,
received or deemed to be received in or outside India.
2) Resident but Not Ordinarily Resident [RNOR]
Under section 5(1), the computation of total income of RNOR is the same as in the case of ROR
stated above except for the fact that the income accruing or arising to him outside India is not to be
included in his total income.
However, where such income is derived from a business controlled from or profession set
up in India, then it must be included in his total income even though it accrues or arises
outside India.
3) Non-Resident [NR]
A Non-Resident’s total income under section 5(2) includes:

a) Income received or deemed to be received in India in the previous year; and
b) Income which accrues or arises or is deemed to accrue or arise in India during the previous
year.


A Tabular Presentation:
NATURE OF INCOME R & OR RNOR NR
a) Income received or deemed to be received in Taxable Taxable Taxable

India during the year
(whether accrues in India or not)
[Indian Income]
b) Income accrues/arises or deemed to accrue/ Taxable Taxable Taxable

arise in India during year - whether received
in India or not
[Indian Income]
(c) Income accrues/arises and received outside

India and derived from:
[Foreign Income]
(i) A business / Profession controlled/ Taxable Taxable Not Taxable

setup in India
(ii) A business / Profession controlled/ Taxable Not Taxable Not Taxable

setup from outside India
(d) Past income (earned and received abroad) Not Taxable Not Taxable Not Taxable
remitted to India in Previous year
Explanation 1 to Section 5 specifically provides that an item of income accruing or arising outside
India shall not be deemed to be received in India merely because it is taken into account in a balance
sheet prepared in India.
Further, Explanation 2 to Section 5 makes it clear that once an item of income is included in the
assessee’s total income and subjected to tax on the ground of its accrual/deemed accrual or receipt, it
cannot again be included in the person’s total income and subjected to tax either in the same or in a
subsequent year on the ground of its receipt – whether actual or deemed.
CBDT Circular: CBDT has clarified that salary accrued to a non-resident seafarer for services
rendered outside India on a foreign going ship (with Indian Flag or foreign flag) shall not be included in
the Total Income merely because the said salary has been credited in the NRE account maintained
with an Indian bank by the seafarer.


MEANING OF “INCOME RECEIVED OR DEEMED TO BE RECEIVED”
All assessees are liable to tax in respect of the income received or deemed to be received by
them in India during the previous year irrespective of –
A. their residential status, and
B. the place of its accrual.
Income is to be included in the total income of the assessee immediately on its actual or deemed
receipt. The receipt of income refers to only the first occasion when the recipient gets the money
under his control.
Therefore, when once an amount is received as income, remittance or transmission of that amount from
one place or person to another does not constitute receipt of income in the hands of the
subsequent recipient or at the place of subsequent receipt.
Income Deemed to be Received [Section 7]

The following shall be deemed to be received by the assessee during the previous year
irrespective of whether he had actually received the same or not:
a) Annual accretion to the credit of Recognized Provident Fund:
- Interest credited to recognized provident fund account of an employee in excess of 9.5% p.a.
- Excess contribution of employer in RPF (i.e. the amount contributed in excess of 12 percent of
salary)
b) The taxable transferred balance from URPF to RPF (being the employer’s contribution and
interest thereon).
c) The contribution made by the CG or any other employer to the account of an employee under a
pension scheme u/s 80CCD.


Class Notes


INCOME DEEMED TO ACCURE OR ARISE IN INDIA [Section 9]
Section 9 applies to all assesses irrespective of their residential status and place of business. The
categories of income which are deemed to accrue or arise in India are as under:
Income Accruing/Arising from Business Connection etc. [Section 9(1)(i)]
All income accruing or arising, whether directly or indirectly,
 through or from any Business Connection in India, or
 through or from any property in India, or
 through or from any asset or source of Income in India, or
 through the transfer of a capital asset situated in India
shall be deemed to accrue or arise in India
Note:
1. Existence of Professional connection amounts to existence of business connection. (for
example when foreign lawyer is called upon in India to plead the case in Indian courts.
2. In the case of a business, other than the business having business connection in India on
account of significant economic presence, where all operations are not carried out in India,
only such part of the income as is reasonably attributed to the operations in India shall be deemed
to arise or accrue in India.
It shall include income from

(i) advertisement targeting customers residing in India or accessing advt. thro IPA (Internet
Protocol Address) located in India
(ii) sale of data collected from persons residing in India or using IPA located in India
(iii) sale of goods and services using data collected from persons residing in India or using
IPA located in India


Income through transfer of a capital asset situated in India - REDRAFTED
Capital gains arising through the transfer of a capital asset situated in India would be deemed to
accrue or arise in India in all cases irrespective of the fact whether
a. the capital asset is movable or immovable, tangible or intangible;
b. the place of registration of the document of transfer etc., is in India or outside; and
c. the place of payment of the consideration for the transfer is within India or outside.
Accordingly, the expression “through” shall mean and include and shall be deemed to have always
meant and include “by means of”, “in consequence of” or “by reason of”.
Further, an asset or a capital asset being any share or interest in a company or entity registered or
incorporated outside India shall be deemed to be and shall always be deemed to have been situated
in India, if the share or interest derives, directly or indirectly, its value substantially from the
assets located in India.
Declaration of dividend by a foreign company outside India does not have the effect of transfer
of any underlying assets located in India. CBDT Circular, therefore, clarifies that the dividends
declared and paid by a foreign company outside India in respect of shares which derive their value
substantially from assets situated in India would NOT be deemed to be income accruing or arising
in India by virtue of the provisions of section 9(1)(i).


Salaries Earned in India [Section 9(1)(ii)]
Any income under the head “Salaries”, for services rendered in India, whether such salary income
payable for the rest period or leave period and forms part of the service contract of employment shall be
deemed to accrue or arise in India. Salary includes pension.
Salaries Payable by Indian Govt. [Section 9(1)(iii)]
Any income chargeable under head “salaries” payable by the Indian Govt. to a citizen of India
for service rendered outside India shall be deemed to accrue or arise in India.
Foreign Allowances by the Govt. Employer - Section 10(7) –Exempted

Any allowance or perquisite paid or allowed outside India, by the Indian Govt. to a citizen of India, for
rendering service outside India is fully exempt.
DIVIDEND PAID OUTSIDE INDIA BY AN INDIAN COMPANY [Section 9(1)(iv)]
Dividends paid by an Indian company outside India is deemed to be accrue or arise in India and
would be taxable in the hands of shareholders at normal slab rates.


INTEREST [Section 9(1)(v)]
Under section 9(1)(v), an interest is deemed to accrue or arise in India [Taxable in the
hands of recipient] if it is payable by:
1) the Government; or
2) a person resident in India except where it is payable
a) in respect of any money borrowed and used for the purposes of a business or profession carried
on by him outside India OR
b) for the purposes of making or earning any income from any source outside India) ; or
3) a Non-Resident when it is payable in respect of any debt incurred or moneys borrowed and used
for the purpose of a business or profession carried on in India by him. (Only Business)
IMP: Interest on money borrowed by the non-resident for any purpose other than a business or
profession, will not be deemed to accrue or arise in India.
Thus, if a non-resident ‘A’ borrows money from a non-resident ‘B’ and invests the same in shares of an
Indian company, interest payable by ‘A’ to ‘B’ will not be deemed to accrue or arise in India.


ROYALTY [Section 9(1)(vi)]
Royalty will be will be deemed to accrue or arise in India when it is payable by –
2) a person who is a resident in India except in cases where it is payable
a) for the transfer of any right or the use of any property or information or for the utilization of
services for the purposes of a business or profession carried on by such person outside India
OR
b) for the purposes of making or earning any income from any source outside India; or
3) a non-resident only when the royalty is payable
a) in respect of any right, property or information used or services utilised for purposes of a
business or profession carried on in India OR
b) for the purposes of making or earning any income from any source in India.
Important points: REDRAFTED

1. Lumpsum royalty not deemed to accrue arise in India: Lumpsum royalty payments made by a
resident for the transfer of all or any rights (including the granting of a licence) in respect of
computer software supplied by a non-resident manufacturer along with computer hardware
under any scheme approved by the Government under the Policy on Computer Software Export,
Software Development and Training, 1986 shall not be deemed to accrue or arise in India.
2. Meaning of Royalty: The term ‘royalty’ means consideration (including any lumpsum consideration
but excluding any consideration which would be the income of the recipient chargeable under the
head ‘Capital gains’) for:
i. the transfer of all or any rights (including the granting of licence) in respect of a patent,
invention, model, design, secret formula or process or trade mark or similar property;
ii. the imparting of any information concerning the working of, or the use of, a patent, invention,
model, design, secret formula or process or trade mark or similar property;
iii. the use of any patent, invention, model, design, secret formula or process or trade mark or
similar property;
iv. the imparting of any information concerning technical, industrial, commercial or scientific
knowledge, experience or skill;
v. the use or right to use any industrial, commercial or scientific equipment but not
including the amounts referred to in section 44BB containing presumptive tax provisions
relating to non-resident engaged in the business of exploration, etc., of mineral oils;


vi. the transfer of all or any rights (including the granting of licence) in respect of any copyright,
literary, artistic or scientific work including films or video tapes for use in connection with
television or tapes for use in connection with radio broadcasting.
Note: Consideration for sale, distribution or exhibition of cinematographic films is covered
within the scope of royalty.
vii. the rendering of any service in connection with the activities listed above.
The definition of ‘royalty’ for this purpose is wide enough to cover both industrial royalties
as well as copyright royalties. The definition specially excludes income which should be
chargeable to tax under the head ‘capital gains’.
3. Consideration for use or right to use of computer software is royalty within the meaning of
section 9(1)(vi)
The consideration for use or right to use of computer software is royalty by clarifying that, transfer of
all or any rights in respect of any right, property or information includes and has always included
transfer of all or any right for use or right to use a computer software (including granting of a
licence) irrespective of the medium through which such right is transferred.
4. Consideration in respect of any right, property or information – Is it royalty?

Royalty includes and has always included consideration in respect of any right, property or
information, whether or not,
a. the possession or control of such right, property or information is with the payer;
b. such right, property or information is used directly by the payer;
c. the location of such right, property or information is in India.
5. Meaning of Process: The term “process” includes and shall be deemed to have always included
transmission by satellite (including up-linking, amplification, conversion for downlinking of
any signal), cable, optic fibre or by any other similar technology, whether or not such
process is secret.


FEES FOR TECHNICAL SERVICES [Section 9(1)(vii)]
Any fees for technical services will be deemed to accrue or arise in India if they are payable by:
2) a person who is resident in India, except in cases where the fees are payable
a) in respect of technical services utilised in a business or profession carried on by such person

outside India OR
b) for the purpose of making or earning any income from any source outside India; or
3) a person who is a non-resident, only where the fees are payable in respect of
a) services utilised in a business or profession carried on by the non-resident in India OR
b) where such services are utilised for the purpose of making or earning any income from
any source in India.
Note: Fees for technical services means any consideration (including any lumpsum consideration)
for the rendering of any managerial, technical or consultancy services (including providing the services
of technical or other personnel). However, it does not include consideration for any construction,
assembly, mining or like project undertaken by the recipient OR consideration which would be
income of the recipient chargeable under the head ‘Salaries’.
GIFT [Section 9(1)(viii)]
Income arising outside India, being any sum of money (not property) referred to in sub-clause (xviia)
of clause (24) of section 2, paid by a person resident in India to a non-resident, not being a
company, or to a foreign company.
Note: Section 2(24)(xviia) – Income includes any sum of money or value of property referred to in
clause (x) of sub-section (2) of section 56.
Explanation to Section 9
Income deemed to accrue or arise in India to a non-resident by way of interest, royalty and fee
for technical services to be taxed irrespective of territorial nexus
Explanation to section 9 clarifies that income by way of interest, royalty or fee for technical services
which is deemed to accrue or arise in India by virtue of clauses (v), (vi) and (vii) of section 9(1), shall be
included in the total income of the non -resident, whether or not:
(i) the non-resident has a residence or place of business or business connection in India; or
(ii) the non-resident has rendered services in India.


Business Connection in India shall include [Redrafted]
Explanation 2 to Clause (i) of Sub-section (1) of Section 9
Any business activity carried out through a person acting on behalf of the non-resident and such
person
a) has and habitually exercises in India, an authority to conclude contracts on behalf of the
non-resident or habitually concludes contracts or habitually plays the principal role leading to
conclusion of contracts by that non-resident and the contracts are-
(i) in the name of the non-resident; or
(ii) for the transfer of the ownership of, or for the granting of the right to use, property owned
by that non-resident or that non-resident has the right to use; or
(iii) for the provision of services by the non-resident;
b) has no such authority, but habitually maintains in India a stock of goods or merchandise
from which he regularly delivers goods or merchandise on behalf of the non-resident; or
c) habitually secures orders in India, mainly or wholly for the non-resident or for that non-
resident and other non-residents controlling, controlled by, or subject to the same common
control, as that non-resident:
However, business connection shall not include any business activity carried out through a
broker, general commission agent or any other agent having an independent status, if such
broker, general commission agent or any other agent having an independent status is acting in
the ordinary course of his business.
Further, where such broker, general commission agent or any other agent works mainly or wholly
on behalf of a non-resident (hereafter in this proviso referred to as the principal non-resident) or on
behalf of such non-resident and other non-residents
- which are controlled by the principal non-resident or
- have a controlling interest in the principal non-resident or
- are subject to the same common control as the principal non-resident,
he shall not be deemed to be a broker, general commission agent or an agent of an independent
status.
Independent status: Where a broker, general commission agent or any other agent not works
mainly or wholly on behalf of a NR or other non-residents under the same common control &
management.
Note: Where a business is carried on in India through a person referred to in clause (a) or clause
(b) or clause (c) above, only so much of income as is attributable to the operations carried out
in India shall be deemed to accrue or arise in India.


Following cases shall not be treated as Business connection in India:
Explanation 1 to Clause (i) of Sub-section (1) of Section 9
1) No income shall be deemed to accrue or arise in India to NR, through or from operations,
which are confined (limited) to the purchase of goods in India for the purpose of export.
2) No income shall be deemed to accrue or arise in India to NR, engaged in the business of
running a news agency or publishing newspapers, magazines or journals, through or from
activities which are confined to the collection of news and views in India for transmission
out of India.
3) No income shall be deemed to accrue or arise in India to a non-resident if the operations is

confined to shooting of cinematography films in India but if NR is
(i) An Individual - He should not be citizen of India.
(ii) A Firm- No partner should be citizen of India or Resident in India.
(iii) A Company - None of the shareholder should be citizen of India or Resident in India.
4) In the case of a foreign company engaged in the business of mining of diamonds, no

income shall be deemed to accrue or arise in India to it through or from the activities which are
confined to the display of uncut and unassorted diamond in any special zone notified by
the Central Government in the Official Gazette in this behalf.


Significant economic presence (SEP) of a non-resident in India shall constitute
"business connection" in India
Effective from AY 2022-23
[Explanation 2A to Section 9(1)(i)]
Significant economic presence (SEP) of a Non-Resident in India shall constitute "business
connection" in India and
"Significant Economic Presence" for this purpose, shall mean-
a) transaction in respect of any goods, services or property carried out by a non-resident in India
including provision of download of data or software in India, if the aggregate of payments
arising from such transaction or transactions during the previous year exceeds ` 2 Crores; or
b) systematic and continuous soliciting of business activities or engaging in interaction with

users in India through digital means where number of users should be atleast 300,000.
Further, the transactions or activities shall constitute significant economic presence in India,
whether or not,—
i. the agreement for such transactions or activities is entered in India; or
ii. the non-resident has a residence or place of business in India; or
iii. the non-resident renders services in India:
However, where a business connection is established by reason of significant economic presence in

India, only so much of income as is attributable to the transactions or activities referred to in (a)
or (b) above shall be deemed to accrue or arise in India.
Note: It shall include income from

(i) advertisement targeting customers residing in India or accessing advt. thro IPA (Internet Protocol
Address) located in India
(ii) sale of data collected from persons residing in India or using IPA located in India
(iii) sale of goods and services using data collected from persons residing in India or using IPA
located in India


2) Class Notes


3) Class Notes

Residential Status SATC 4A.1

PRACTICAL QUESTION - SET A
1) Mr. X, an Indian citizen goes to Maldives for employment during the previous year 2021-22 on 1st
September 2021. He was in India from his birth during the year 1978. Identify his Residential
Status for the PY 2021-22. [Note – He has no taxable income in India]
2) Mr. Y was sponsored by his employer in India for training in USA. He left India on 03.06.2021. He
came back to India on 05.04.2022. Determine his residential status for the PY 2021-22
assuming that he did not go out of India previously.
3) A, a British national, comes to India for first time during 2017-18. During financial years 2017-18,
2018-19, 2019-20, 2020-21 and 2021-22 he was in India for 65 days, 60 days, 80 days, 160 days &
70 days respectively. Determine his residential status for the AY 2022-23.
4) Mr. Devendra, an India citizen leaves India for the first time on September 20, 2019 for taking
employment outside India. He comes to visit India for 152 days on April 10, 2020. He comes back
on May 13, 2021 to India. Determine his residential status for the PY 2021-22.
5) Mr. Samuelson, foreign citizen, comes to India for the first time on May 10, 2021. On August 6,
2021, he leaves India for Burma on a business trip. He comes back on January 1, 2022. He
maintains a dwelling place in India from the date of his arrival in India (i.e., May 10, 2021) till
February 15, 2022 when he leaves for Pakistan. Determine his residential status for the PY
2021-22.
6) Mr. Samuel, a foreign citizen (not being a person of India origin) comes to India for first time in last
12 years on March 01, 2021. On 5th September 2021 he leaves India for Singapore on a business
trip. He comes back on March 2, 2022. Determine his residential status for the PY 2021-22.
7) Mr. B, a Malaysian citizen leaves India, after a period of 10 years stay on 1.6.2019. During the
financial year 2020-21, he comes to India for a period of 46 days. Later he returns to India on
10.10.2021. Determine his residential status for the PY 2021-22. Will your answer be different
if his date of departure was 15.5.2019?
8) Andrew Symonds, an Australian cricketer has been coming to India for 100 days every year since
2001-2002 for IPL matches:
a) Determine his residential status for the assessment year 2022-23.
b) Will your answer be different if he has been coming to India for 110 days instead of 100 days
every year.
9) ‘Mr. A’, a citizen of India left India on 16-5-2002 for employment abroad. He did not come to India
upto previous year 2018-19. During 2019-20 and 2020-21, he visited India for 140 days and 200
days respectively. In the previous year 2021-22 he came to India on 6-4-2021 and left on 30-12-
2021. Determine his residential status for the PY 2021-22. [Mr. A has no taxable income in
India’]
10) Ms Herley, a foreign national, comes India every year for 90 days since 2001-02.
i) Determine her residential status for the previous year 2021-22.
ii) Will your answer differ, if she comes India for 100 days instead of 90 days every year.


11) G an American citizen, is appointed by a Multi-national company to its branch in New Delhi
in 2018. G has never been to India before this appointment. He arrives in Mumbai on 15 th April,
2018 and joins the New Delhi office on 20th April, 2018. His wife and children join him in India on
20th October, 2018. The company allotted him a leased residence for the purposes of his stay.
This residence is occupied by him from the beginning of October 2018. On 10th February, 2019,
he is transferred by his employer, on deputation basis, to be the regional chief of his employer’s
operations in South East Asia having headquarters in Hong Kong. He leaves New Delhi, on 11th
February 2019 and arrives in Hongkong on 12th February, 2019. G leaves behind his wife and
children in India till 14th August, 2020, when they leave alongwith him for Hong Kong. G had come
to India earlier on 15th June, 2020 on two months leave. The members of the family occupied the
residence till date of departure to Hongkong. At the end of the period of deputation, G is reposted
to India and joins the New Delhi office of his employer as chief of Indian operations on 31st
January, 2022. In what residential status G will be assessable, for the various years, to
income tax in India?
12) The business of a HUF is transacted from Australia and all the policy decisions are taken there. Mr.
E, the karta of the HUF, who was born in Kolkata, visits India during the P.Y. 2021-22 after 15
years. He comes to India on 1.4.2021 and leaves for Australia on 1.12.2021. Determine the
residential status of Mr. E and the HUF for the PY 2021-22.
13) During the P.Y. 2021-22, the affairs of an HUF are managed partly from India and partly from UK.
Mr. A (Karta) is in India for a period of 192 days in every financial year. Discuss the Residential
status of the HUF for the PY 2021-22.
14) Discuss the Residential Status in the following cases:-
a) Z Ltd. an Indian company situated in Bombay.
b) Y Ltd. a foreign company situated in Delhi, but POEM is in Australia.
c) XYZ Associates a foreign company Registered in UK but POEM is in India.
d) PQR Ltd a foreign company situated USA and POEM is in USA.
e) M/s ABC, a partnership firm, is having its business in Delhi and Assam and controlled partly
from Delhi and partly from Assam.
f) If in above case (e), the firm is wholly controlled from Dubai.
15) During the financial year, Mr. Kumar had the following income:
₹
a) Salary income (computed) received in India for services rendered in Nepal 10,000
b) Income from profession in India, but received in China 3,000
c) Property income in Uganda (out of which ₹ 3,000 was remitted to India). 6,000
d) Profits earned from business in Bangalore 5,000
e) Agricultural income in Canada 10,000
f) Profits from a business carried on at Nepal but controlled from India. 20,000
Compute the income of Anil Kumar for the PY 2021-22 if he is (i) resident and ordinarily
resident, (ii) Not ordinarily resident, and (iii) Non-resident in India.
16) ‘X’ earns the following income during the financial year: ₹
a) Interest from an Indian company received in UK. 1,000
b) Pension from former employer in India received in USA 54,000
c) Profits earned from a business in Paris which is controlled in India,
half of the profits being received in India. 20,000
d) Income from agriculture in Bhutan and remitted to India 5,000
e) Income from property in England received there. 4,000
f) Past foreign untaxed income brought to India. 10,000
Compute his income if he is:
i) Resident and ordinarily resident in India.
ii) Not ordinarily resident in India.
iii) Non-resident in India.


17) X is resident and ordinarily resident in India for the PY 2021-22. He gives the following
information in respect of his income for the previous year: ₹
i) Capital gain on sale of a house situated in Pune 40,000
(sale consideration is received in Nepal)
ii) Salary income received in Sri Lanka for rendering service in Tamilnadu (computed) 50,000
iii) Interest received from Government of India (it is paid to him in Sri Lanka, the money is
utilized by the Government outside India) 60,000
iv) Royalty received from A Ltd. (a foreign company which is non-resident in India) outside
India (royalty is paid for a manufacturing business situated outside India) 70,000
Find out the taxable income of X.
18) X furnished the following particulars of his income earned during the previous year:
₹
i) Interest on German Development Bonds (two-fifths is received in India) 60,000
ii) Income from agriculture in Bangladesh, received there but later on ₹ 50,000 is
remitted to India (agricultural activity is controlled from Bangladesh) 1,81,000
iii) Income from property in Canada received outside India (₹ 76,000 is used in
Canada for meeting educational expenses of X’s daughter in USA and ₹ 10,000
is later on remitted to India) 86,000
iv) Income earned from business in Kampala (Uganda) which is controlled from Delhi
(₹ 15,000 is received in India) 65,000
v) Dividend paid by a foreign company but received in India on April 10, 2021 46,500
vi) Past untaxed profit of 2013-14 brought to India in PY 2021-22 10,43,000
vii) Profits from a business in Madras and managed from outside India 27,000
viii) Profit on sale of a building in India but received in Sri Lanka 14,80,000
ix) Pension from a former employer in India, received in Rangoon 86,000
x) Gift in foreign currency from a friend received in India on January 21, 2022 80,000
Find out the gross total income of X, if he is (i) ROR, (ii) RNOR, or (iii) NR in India.
19) Arun, a citizen of India residing in Germany for the past 10 years, came back to India for the
first time during January 2022. During the financial year 2021-22, he received the following
income-
a) He works in a company in Germany and earns a salary of Euro 1,000 per month;
b) He owns agricultural land near Bangalore and a residential house in Delhi, which has been let-
out.
c) While the agricultural income is being remitted to his account in Germany every year, the rental
income of ₹ 84,000 (Computed) is being deposited in his bank account at Delhi; and
d) He also owns shares in various Indian companies and receives dividend every year, which has
been regularly deposited in his bank account at Delhi.
He seeks your advice as to taxability of the above income under the provisions of the
Income-tax Act, 1961 as he is an Indian citizen and earning income in India.
20) Adarsh had following income during the previous year ended 31st March, 2022: ₹
a) Salary Income (computed) in India for three months 9000
b) Income from house property in India 13470
c) Interest on Fixed Deposit in SBI 1000
d) Amount brought into India out of the past untaxed profits earned in Germany 20000
e) Income from agriculture in Indonesia being invested there 12350
f) Income from business in Bangladesh, being controlled from India 10150
g) Dividends received in France from Belgium companies out of which
₹ 2,500 remitted to India 23000
You are required to compute his total income for the PY 2021-22, if he is a – (a) resident;
(b) not ordinarily resident; and (c) non-resident.


21) Mr. A. a citizen of India, left for UK for the purposes of employment on 1.5.2020. He has not visited
India thereafter. Mr. A borrows money from his friend Mr. B who left India one week before Mr. A’s
departure, to extent of ₹ 20 Lakhs and buys shares in ABC Ltd, an Indian Company. Discuss the
taxability of the interest charged in B’s hands where the same has been received in New
York in respect of AY 2022-23.
22) X, a Non-resident lent ₹ 6 lakhs to Y, resident in India. Y used the money borrowed by him for the
purpose of business on India. Y paid an interest of ₹ 90,000 during the year ended 31st March,
2022 to X in the UK. Discuss the tax liability of such interest in the hands of X in India.
23) Motorola, a South Korean Company, a Non-resident under the Income-tax Act, 1961, had the
following receipts of royalty in AY 2022-23. Indicate whether that will be taxable in India. Give
reasons for your answer:
a) ₹ 50,000 from Govt. of India under an agreement approved by the Govt. of South Korea and
India.
b) ₹ 1,00,000 from Calcutta Co. Ltd., a Resident Indian Co., for import of technical know-how use
in a business in India.
c) ₹ 75,000 from Bombay Co., a Indian Resident, for import of drawings for use in its business in
Singapore & Malaysia.
d) ₹ 50,000 from Keshav, a non-resident under Indian tax law for use of a formula for a business in
India.
e) ₹ 40,000 from X, an Indian NR, for use of drawings and technical know-how for a business in
the UK.
24) A firm of solicitors in Delhi generally engages a barrister of London for arguing their case before
the Supreme Court in India. A payment of $ 50,000 was made to the barrister in London according
to the term of the professional engagement. It is claimed that since the payment is made outside
India, no tax is payable on the fee paid. How should the Assessing Officer proceed in this
matter?

Residential Status SATC 4B.1

SOLUTIONs - SET A
1. NR
2. Since Mr. Y is in India for a period of 64 days (30 + 31 + 3) during the previous year and was in India for all
the preceding 4 years (i.e. 365 days or more), therefore, he satisfies second basic condition and is, therefore,
resident in India. Exception to basic condition will not be applicable here as he is going for training and not for
the purpose of employment. Further, he is Resident & ordinarily resident as additional conditions of
Section 6(6) for being ordinarily resident are satisfied.
3. During the previous year 2021-22, A was in India for 70 days and during 4 years immediately preceding the
previous year, he was in India for 365 days as shown below: -
Year 2017-18 2018-19 2019-20 2020-21 Total
No. of days stayed in India 65 60 80 160 365
Thus, he satisfies the second basic condition and is, therefore, resident in India for the previous year 2021-22.
Further, he (not being an Indian Citizen) satisfies additional conditions to become RNOR as follows -
(a) He was non resident in India in all of the last 10 preceding years;
(b) He resided in India only for 365 days during the 7 preceding previous years.
Accordingly, he is 'Not Ordinarily Resident in India' for the previous year 2021-22.
4. Since Mr. Devendra is in India for a period of 323 days (365 - 30 - 12) during the previous year-ending 31st
March 2022 hence he is a resident. He is also a ROR as he is not satisfying any of additional conditions
of Section 6(6) to become RNOR.
5. Since Mr. Samuelson is in India for a period of 135 days (22 + 30 + 31 + 6 + 31 + 15) during the previous year
ending 31st March 2022 and has come for the first time in India, hence, he is a non resident.
6. Since Mr. Samuel is in India for a period of 188 days (30 + 31 + 30 + 31 + 31 + 5 + 30) during the previous
year ending 31st March 2022, he is a resident as per Section 6(1). Further, he, not being an Indian Citizen,
satisfies additional conditions of Section 6(6) as follows -
1) He was non resident in India in all of the last 10 preceding years;
2) He resided in India only for 31 days (March 2021) during the 7 preceding previous years. Hence, he is a
not ordinarily Resident in India.
7. During the financial year 2021-22, Mr. B stays in India from 10.10.2021 onwards amounting to 173 days.
Therefore, he does not fulfill the first basic condition, but he fulfills the second basic condition as he has
stayed for more than 60 days during 2021-22 and he has stayed for more than 365 days during the preceding
four financial years. Hence he is a resident. He was resident in 9 out of 10 preceding previous years and was
staying for more than 729 days during the 7 preceding previous years. Therefore, he does not satisfy any
of the additional conditions. By fulfilling the second basic condition and not fulfilling any of the
additional conditions, Mr. B is a resident and ordinarily resident for the assessment year 2022-23.
If the date of departure during 2019-20 happens to be 15.05.2019, Mr. B fails to fulfill either of the basic
conditions (since he had stayed only for 45 days in the previous year 2019-20) making him a non-resident,
Besides he does not fulfill any of the basic conditions for the previous year 2020-21 (he has stayed for 46
days in that year). Therefore, Mr. B was a non-resident in only 2 out of the 10 preceding previous years. He
was resident in 8 out of 10 preceding previous years and he stayed for a period of more than 729 days in
seven preceding previous years. Being a resident and by not fulfilling any of the additional conditions,
he becomes resident and ordinarily resident for the assessment year 2022-23. Hence answer remains
the same even if he departs from India on 15.05.2019 instead of 01.06.2019.
8.
1) Andrew Symonds satisfies the second basic condition of Sec. 6(1), because he is in India for more than
60 days during the relevant previous year and for 400 days during four years preceding the relevant
previous year. Therefore, he is a resident.
Further, his stays in India during 7 years proceeding the previous year is only for 700 days. He shall,
therefore, be a resident but not ordinarily resident in India.
2) Yes. He will be resident and ordinarily resident in India. Because, he does not satisfies both the conditions
of Sec. 6(6) as he was in India for 770 days in the last seven years and he was resident in all 10 previous
years immediately preceding the relevant previous year.


9.
Conditions u/s. 6(1)
P/Y: 2021-22: Stay in India is for 269 days (25 + 31 + 30 + 31+ 31 + 30 + 31 + 30+ 30). He is, therefore,
Resident in India.
Conditions u/s. 6(6)

Previous year No. of days' stay Resident/Non-resident
2020-21 200 Resident
2019-20 140 Non-resident
As he is a citizen of India and visits India during the previous years 2020-21 and 2019-20, the period of stay in
India shall be substituted by 182 days instead of 60 days.
As he is resident only for one previous year, out of 10 preceding previous years, he does satisfy the condition
u/s. 6(6)(i) i.e., being non resident in at least 9 out of 10 previous years immediately preceding the relevant
previous year. He is, therefore, "not ordinarily resident in India".
10.
1) Since Miss Herley stayed for 90 days during the previous year 2021-22 and for 360 days (90 days x 4
years) during the 4 years immediately proceeding the previous year, hence, she is not satisfying any of
the conditions of sec. 6(1). Thus, she is a non-resident for the previous year 2021-22.
2) Since Miss Herley stayed for 100 days during the previous year 2021-22 and for 400 days (100 days x 4
years) during the 4 years immediately proceeding the previous year, hence, she is satisfying sec. 6(1).
Thus, she is resident for the previous year 2021-22. Further, she resides for only 700 days (100 days x 7
years) during the 7 years immediately preceding the previous year. Hence, she does satisfy one of the
conditions of sec. 6(6). Thus, she is resident but not ordinarily resident for the previous year 2021-
22.
11.
G's presence in India is given below
Previous Years Presence in India
2018-19 303 days
2019-20 NIL
2020-21 61 days
2021-22 60 days
During P.Y. 2018-19, G was in India for 303 days. He is resident in India. As he comes to India for the first
time on April 15, 2018, he has satisfied one of the additional condition laid down by Section 6(6) [Stay
period is 729 days or less in preceding 7 previous years]. He is therefore, resident but not ordinary
resident in India.
P.Y.-2019-20 to 2021-22: As G satisfied none of the basic conditions, he is non-resident for the previous year
2019-20 to 2021-22.
12. Status of Mr. E – RNOR; HUF - NR.

13. ROR
14. (a) Resident (b) Non-Resident (c) Resident (d) Non-Resident (e) Resident (f) Non-Resident.
15. Computation of Taxable Income of Mr. Kumar for the PY
Particulars R&OR R but NOR Non-Resident
(1) Income received in India wherever accrues
Salary income received in India for services rendered in Nepal.
Income accrued in India wherever received 10,000 10,000 10,000
(2) Income accrued in India wherever received
(i) Profit earned from business in Bangalore. 5,000 5,000 5,000
(ii) Income from profession in India but received in Germany. 3,000 3,000 3,000
(3) Income accrued and received outside India
(i) Property income in Uganda. 6,000 — —
(ii) Agricultural income in Canada. 10,000 — —
(iii) Profits of a business carried on in Nepal but controlled from 20,000 20,000 —
India.
Total Income 54,000 38,000 18,000


16. Particulars R&OR RNOR NR
(1) Income deemed to accrue / arise in India
Interest from Indian Company. 1,000 1,000 1,000
Pension from employer in India (54,000 – 50,000) 4,000 4,000 4,000
(2) Income received in India
50% of profits of business in Paris. 10,000 10,000 10,000
(3)Income earned and received outside India, from a business
controlled from India
50%of profits of business in Paris. 10,000 10,000 —
(4) Income earned and received outside India other than (3) above
Income from Agriculture in Bhutan. 5,000 — —
Income from Property in England. 4,000 — —
34,000 25,000 15,000
Note: Past foreign untaxed or taxed income is not to be included because it is not the income of the PY
17. 1. As the house is situated in India, capital gain on its transfer is deemed to accrue or arise in India.
It is Indian income. It is taxable in all cases 40,000
2. As service is rendered in India, income is deemed to be accrued in India. It is Indian
income. It is taxable in all cases 50,000
3. As interest is received from the Government of India, it is deemed to be accrued in India.
It is Indian income. It is taxable in all cases 60,000
4. It is received outside India. It is accrued outside India. It is foreign income. It is taxable in
the case of resident and ordinarily resident 70,000
Total 2,20,000
18.
ROR RNOR NR Reasons
Interest on German Development Bonds :
 Two-fifths is taxable on receipt basis 24,000 24,000 24,000 See Note 1
 Three-fifths is taxable in the case of resident
and ordinarily resident on accrual basis 36,000 — — See Note 2
Income from agriculture in Bangladesh :
 Income accrued and received outside India 1,81,000 — — See Note 3
Income from property in Canada received outside India :
 Income accruing and arising outside India 86,000 — — See Note 2
Income earned from a business in Kampala, controlled from Delhi :
 ₹ 15,000 is taxable on receipt basis 15,000 15,000 15,000 See Note 1
 Balance is not taxable in the case of non
resident 50,000 50,000 — See Note 4
 Dividend paid by a foreign company :
 Income received in India 46,500 46,500 46,500 See Note 1
Past untaxed profit brought to India :
 Not an income of the previous year 2021-22
relevant for the assessment year 2022-23, hence not taxable — — — See Note 5
Profits from a business in Madras and managed from outside India:
Income accrued in India 27,000 27,000 27,000 See Note 6
Profit on sale of a building in India but received in Sri Lanka:
 Income deemed to accrue or arise in India 14,80,000 14,80,00014,80,000 See Note 7
Pension from an Indian former employer received in Rangoon:
 Income deemed to accrue or arise in India 36,000 36,000 36,000 See Note 8
Gift from a friend
 It is taken as an income 80,000 80,000 80,000 See Note 9
Total 20,61,500 17,58,500 17,08,500

Notes —
1) It is Indian income. It is always taxable.
2) It is received as well as accrued outside India, It is foreign income. It is not business income or income
from profession. It is taxable only in the case of resident and ordinarily resident taxpayer.
3) It is received outside India (remittance of ₹ 50,000 to India is not "receipt" of income in India). It is accrued
outside India. It is foreign income from a business, which is controlled from outside India. It is, therefore,
taxable in India only in the case of resident and ordinarily resident taxpayer.
4) It is accrued outside India. It is received outside India. It is foreign income. It is taxable in the case of
resident and ordinarily resident taxpayer. It is not taxable in the case of non-resident. Since it is business
income and business is controlled from India, it is taxable in the hands of resident but not ordinarily


resident taxpayer.
5) It is income of the previous year 2014-15. It cannot be taxed at the time of remittance in 2021-22.
6) As the income is accrued in India, it is Indian income. It is, therefore, taxable in all cases.
7) As the building is situated in India, income is deemed to be accrued in India. Consequently, it is Indian
income and is chargeable to tax in all cases.
8) Service was rendered in India. Pension income is deemed to accrue in India. It is Indian income and is
chargeable to tax in all cases. Deduction u/s 16(ia) is claimed to the extent of ₹ 50,000.
9) If the aggregate amount of gift(s) received by an Individual from all persons (not being relatives) during a
financial year exceeds ₹ 50,000, it is taxable as income.
19. Mr. Arun is Non Resident in India. Hence, his following Income shall be taxable - (₹)
Income from residential House property (Computed) (property situated in India) 84000
Income from Agriculture in India [(Exempt u/s 10(1)] —
Dividend from shares of Indian Company Taxable
Salary from Company in Germany (Not taxable in India as neither earned nor received in India) —
Total Income 84000
20. Computation of Total income of Mr. Adarsh (Amount in ₹)

Resident Not-ordinarily Non
resident resident
Salary Income in India for three months 9000 9000 9000
Income from house property in India 13470 13470 13470
Interest on Fixed Deposit in SBI 1000 1000 1000
Amount brought into India out of the past untaxed profits — — —
earned in Germany (Not taxable as income not of current year)
Income from agriculture in Indonesia being invested there 12350 — —
Income from business in Bangladesh, being controlled from India 10150 10150 —
Dividends received in France from Belgium companies 23000 — —
Total Income 68970 33620 23470
21. U/s. 9(1)(v), Interest paid by Non-resident (Mr. A) to any person (Mr. B) (other than for carrying on business or
profession in India) is not taxable. Hence, interest received by Mr. B from Mr. A is not taxable in India, as the
income is not deemed to accrue or arise in India.
22.
1. U/s 9(1)(v), interest paid by a Resident is deemed to accrue or arise in India in the hands of the
Nonresident if the money borrowed outside India is used to carry on business in India.
2. In the given case, Y is a resident paying interest to X, a Non-resident.
3. Interest received by X from the Resident is deemed to accrue or arise in India & so the sum or ₹ 90,000 is
chargeable to tax in India.
23.
Nature of Income Amount taxable Reasons
Royalty from Government ₹ 50,000 Royalty paid by Govt. is deemed to accrue or arise
in India.
Technical know-how fees ₹ 1,00,000 Technical know how fees paid resident is deemed
received from resident to accrue or arise in India.
Fees paid by Bombay Co. for Technical know how fees paid for usage of
us in its business in Singapore Not taxable drawings outside India is not deemed to accrue or
and Malaysia arise in India.
Technical know-how fees from ₹ 50,000 Know how fees paid by a NR for using the same in
Mr. Keshav business in India is deemed to accrue or arise in
India.
Amount aid by Mr. X, Non- Not taxable Amount paid by a Non-resident for use of drawings
resident, for use of drawings outside India is not deemed to accrue or arise in
India.
24.
1. Income from business connection in India shall be deemed to accrue or arise in India & chargeable to tax.
2. Business connection includes professional connection also.
3. In the given case, the London Barrister has earned $ 50,000 through a Firm of solicitors based at Delhi
and the income has been earned only through the professional connection in India & the same is deemed
to accrue or arise in India & chargeable to tax in India.
4. Hence, the A.O. shall charge the same to tax in the hands of the London Barrister.

Residential Status SATC 4C.1
PRACTICAL QUESTION - SET B

1. Brett Lee, an Australian cricket player (paying tax in Australia) visits India for 100 days in every
financial year. This has been his practice for the past 10 financial years.
(a) Find out his residential status for the assessment year 2022-23.
(b) Would your answer change if the above facts relate to Srinath, an Indian citizen who resides
in Australia and represents the Australian cricket team?
(c) What would be your answer if Srinath had visited India for 120 days instead of 100 days
every year, including P.Y. 2021-22?
Solution:
(a) Determination of Residential Status of Mr. Brett Lee for the A.Y. 2022-23:-
Period of stay during previous year 2021-22 = 100 days
Calculation of period of stay during 4 preceding previous years (100 x 4=400 days)
2020-21 100 days

2019-20 100 days
2018-19 100 days
2017-18 100 days
Total 400 days
Mr. Brett Lee has been in India for a period of 60 days or more during previous year 2021-22 and for
a period of atleast 365 days during the 4 immediately preceding previous years. Therefore, since he
satisfies one of the basic conditions under section 6(1), he is a Resident for the assessment year
2022-23.
Computation of period of stay during 7 preceding previous years = 100 x 7=700 days
2020-21 100 days
2019-20 100 days
2018-19 100 days
2017-18 100 days
2016-17 100 days
2015-16 100 days
2014-15 100 days
Total 700 days
Since his period of stay in India during the past 7 previous years is less than 730 days, he is a not-
ordinarily resident during the assessment year 2022-23. (See Note below)
Therefore, Mr. Brett Lee is a resident but not ordinarily resident during the previous year 2021-22
relevant to the assessment year 2022-23.
Note: [LANGUAGE AS PER IT ACT] An individual, not being an Indian citizen, would be not-
ordinarily resident person if he satisfies any one of the conditions specified under section 6(6),
i.e.
(i) If such individual has been non-resident in India in any 9 out of the 10 previous years
preceding the relevant previous year, or
(ii) If such individual has during the 7 previous years preceding the relevant previous year
been in India for a period of 729 days or less.
In this case, since Mr. Brett Lee satisfies condition (ii), he is a not-ordinarily resident for the A.Y. 2022-
23.
(b) If the above facts relate to Mr. Srinath, an Indian citizen, who residing in Australia, comes on a visit
to India, he would be treated as non-resident in India, irrespective of his total income (excluding
income from foreign sources), since his stay in India in the current financial year is, in any
case, less than 120 days.


(c) In this case, if Srinath’s total income (excluding income from foreign sources) exceeds ₹ 15
lakh, he would be treated as resident but not ordinarily resident in India for P.Y. 2021-22, since his
stay in India is 120 days in the P.Y. 2021-22 and 480 days (i.e., 120 days x 4 years) in the
immediately four preceding previous years.
If his total income (excluding income from foreign sources) does not exceed ₹ 15 lakh, he would be
treated as non-resident in India for the P.Y. 2021-22, since his stay in India is less than 182 days in
the P.Y. 2021-22.
2. Mr. B, a Canadian citizen, comes to India for the first time during the P.Y. 2017-18. During the
financial years 2017-18, 2018-19, 2019-20 2020-21 and 2021-22, he was in India for 55 days, 60
days, 90 days, 150 days and 70 days, respectively. Determine his residential status for the A.Y.
2022-23.
Solution:
During the previous year 2021-22, Mr. B was in India for 70 days and during the 4 years preceding the
previous year 2021-22, he was in India for 355 days (i.e. 55+ 60+ 90+ 150 days).
Thus, he does not satisfy section 6(1). Therefore, he is a non-resident for the previous year 2021-
22.
3. The business of a HUF is transacted from Australia and all the policy decisions are taken there.
Mr. E, the Karta of the HUF, who was born in Kolkata, visits India during the P.Y. 2021-22 after 15
years. He comes to India on 1.4.2021 and leaves for Australia on 1.12.2021. Determine the
residential status of Mr. E and the HUF for A.Y. 2022-23.
Solution:
(a) During the P.Y. 2021-22, Mr. E has stayed in India for 245 days (i.e. 30+31+30+31+31+
30+31+30+1 days). Therefore, he is a resident. However, since he has come to India after 15 years,
he does not satisfy the condition for being ordinarily resident.
Therefore, the residential status of Mr. E for the P.Y. 2021-22 is resident but not ordinarily resident.
(b) Since the business of the HUF is transacted from Australia and policy decisions are taken there, it
is assumed that the control and management is in Australia i.e., the control and management is
wholly outside India. Therefore, the HUF is a non-resident for the P.Y. 2021-22.
4. From the following particulars of income furnished by Mr. Anirudh pertaining to the year ended
31.3.2022, compute the total income for the assessment year 2022-23, if he is:
(i) Resident and ordinary resident;
(ii) Resident but not ordinarily resident;
(iii) Non-resident
Particulars ₹
(a) Short term capital gains on sale of shares of an Indian Company received in 15,000
Germany
(b) Dividend from a Japanese Company received in Japan 10,000
(c) Rent from property in London deposited in a bank in London, later on 75,000
remitted to India through approved banking channels
(d) Dividend from RP Ltd., an Indian Company 6,000
(e) Agricultural income from land in Gujarat 25,000


Solution:
Computation of total income of Mr. Anirudh for the A.Y. 2022-23
Resident & Resident but Non-

Particulars ordinarily not ordinarily Resident
resident resident
₹ ₹ ₹
1. Short term capital gains on sale of shares of an 15,000 15,000 15,000

Indian company, received in Germany
2. Dividend from a Japanese company, received in 10,000 - -
Japan
3. Rent from property in London deposited in a 52,500 - -
bank in London [See Note (i) below]
4. Dividend from RP Ltd., an Indian Company 6,000 6,000 6,000
(taxable from A.Y. 2021-22)
5. Agricultural income from land in Gujarat [See
Note (ii) below] - - -
Total Income 83,500 21,000 21,000
Notes:
(i) It has been assumed that the rental income is the gross annual value of the property. Therefore,
deduction @30% under section 24, has been provided and the net income so computed is taken
into account for determining the total income of a resident and ordinarily resident.
₹
Rent received (assumed as gross annual value) 75,000
Less: Deduction under section 24 (30% of ₹ 75,000) 22,500
Income from house property 52,500
(ii) Agricultural income is exempt under section 10(1).
5. Mr. David, an Indian citizen aged 40 years, a Government employee serving in the Ministry of
External Affairs, left India for the first time on 31.03.2021 due to his transfer to High
Commission of Canada. He did not visit India any time during the previous year 2021-22. He has
received the following income for the Financial Year 2021-22:
S. No. Particulars ₹
(i) Salary (Computed) 5,00,000
(ii) Foreign Allowance 4,00,000
(iii) Interest on fixed deposit from bank in India 1,00,000
(iv) Income from agriculture in Nepal 2,00,000
(v) Income from house property in Nepal 2,50,000
Compute his Gross Total Income for Assessment Year 2022-23.
Solution:
As per section 6(1), Mr. David is not a resident for the A.Y. 2022-23, since he was not present in India at
any time during the previous year 2021-22. He is also not a deemed resident as per Section 6(1A).
As per section 5(2), a non-resident is chargeable to tax in India only in respect of following
incomes:
(i) Income received or deemed to be received in India; and
(ii) Income accruing or arising or deemed to accrue or arise in India.
In view of the above provisions, income from agriculture in Nepal and income from house property in
Nepal would not be chargeable to tax in the hands of David, assuming that the same were received in
Nepal. Income from ‘Salaries’ payable by the Government to a citizen of India for services rendered


outside India is deemed to accrue or arise in India as per section 9(1)(iii). Hence, such income is
taxable in the hands of Mr. David, even though he is a non-resident.
However, allowances or perquisites paid or allowed as such outside India by the Government to a citizen
of India for rendering service outside India is exempt under section 10(7). Hence, foreign allowance of
₹ 4,00,000 is exempt under section 10(7) in the hands of Mr. David.
Gross Total Income of Mr. David for A.Y. 2022-23
Particulars ₹
Salaries (computed) 5,00,000
Income from other sources (Interest on fixed deposit in India) 1,00,000
6. Miss Vivitha paid a sum of 5000 USD to Mr. Kulasekhara, a management consultant practising in
Colombo, specializing in project financing. The payment was made in Colombo. Mr. Kulasekhara
is a non-resident. The consultancy is related to a project in India with possible Ceylonese
collaboration. Is this payment chargeable to tax in India in the hands of Mr. Kulasekhara, since
the services were used in India?
Solution:
A non-resident is chargeable to tax in respect of income received outside India only if such income
accrues or arises or is deemed to accrue or arise to him in India.
The income deemed to accrue or arise in India under section 9 comprises, inter alia, income by way of
fees for technical services, which includes any consideration for rendering of any managerial, technical or
consultancy services. Therefore, payment to a management consultant relating to project financing is
covered within the scope of “fees for technical services”.
The Explanation below section 9(2) clarifies that income by way of, inter alia, fees for technical
services, from services utilized in India would be deemed to accrue or arise in India in case of a non-
resident and be included in his total income, whether or not such services were rendered in India or
whether or not the non-resident has a residence or place of business or business connection in India.
In the instant case, since the services were utilized in India, the payment received by Mr. Kulasekhara,
a non-resident, in Colombo is chargeable to tax in his hands in India, as it is deemed to accrue or arise
in India.
7. Compute the total income in the hands of an individual aged 35 years, being a resident and
ordinarily resident, resident but not ordinarily resident, and non-resident for the A.Y. 2022-23 –
Interest on UK Development Bonds, 50% of interest received in India 10,000
Income from a business in Chennai (50% is received in India) 20,000
Short term capital gains on sale of shares of an Indian company received in 20,000
London
Dividend from British company received in London 5,000
Long term capital gains on sale of plant at Germany, 50% of profits are received 40,000
in India
Income earned from business in Germany which is controlled from Delhi 70,000
(₹ 40,000 is received in India)
Profits from a business in Delhi but managed entirely from London 15,000
Income from house property in London deposited in a Bank at London, brought 50,000
to India (Computed)
Interest on debentures in an Indian company received in London 12,000


Fees for technical services rendered in India but received in London 8,000
Profits from a business in Mumbai managed from London 26,000
Income from property situated in Nepal received there (Computed) 16,000
Past foreign untaxed income brought to India during the previous year 5,000
Income from agricultural land in Nepal, received there and then brought to India 18,000
Income from profession in Kenya which was set up in India, received there but 5,000
spent in India
Gift received on the occasion of his wedding 20,000
Interest on savings bank deposit in State Bank of India 12,000
Income from a business in Russia, controlled from Russia 20,000
Dividend from Reliance Petroleum Limited, an Indian Company 5,000
Agricultural income from a land in Rajasthan 15,000
Solution:
Computation of total income for the A.Y. 2022-23
Resident Resident Non- resident

Particulars and but not
ordinarily ordinarily ₹
resident resident
₹ ₹
Interest on UK Development Bonds, 50% of interest 10,000 5,000 5,000
received in India
Income from a business in Chennai 20,000 20,000 20,000

(50% is received in India)
Short term capital gains on sale of shares of an Indian 20,000 20,000 20,000
company received in London
Dividend from British company received in London 5,000 - -
Long term Capital gains on sale of plant at Germany, 50% of 40,000 20,000 20,000
profits are received in India
Income earned from business in Germany which is 70,000 70,000 40,000

controlled from Delhi, out of which ₹ 40,000 is received in
India
Profits from a business in Delhi but managed entirely from 15,000 15,000 15,000
London
Income from house property in London deposited in a Bank 50,000 - -

at London, later on remitted to India
Interest on debentures in an Indian company received in 12,000 12,000 12,000

London
Fees for technical services rendered in India but received in 8,000 8,000 8,000
London
Profits from a business in Mumbai managed 26,000 26,000 26,000

from London


Income from property situated in Nepal and received there 16,000 - -
Past foreign untaxed income brought to India during the - - -

previous year
Income from agricultural land in Nepal, received there and 18,000 - -
then brought to India
Income from profession in Kenya which was set up in India, 5,000 5,000 -
received there but spent in India
Gift received on the occasion of his wedding [not taxable] - - -
Interest on savings bank deposit in State Bank of India 12,000 12,000 12,000
Income from a business in Russia, controlled from Russia 20,000 - -
Dividend from Reliance Petroleum Limited, an 5,000 5,000 5,000

Indian Company (Taxable from AY 2021-22)
Agricultural income from a land in Rajasthan

[Exempt under section 10(1)] - - -
Gross Total Income 3,52,000 2,18,000 1,83,000
Less: Deduction under section 80TTA
[Interest on savings bank account subject to a maximum of
₹ 10,000] 10,000 10,000 10,000
Total Income 3,42,000 2,08,000 1,73,000
8. Mr. Ram, an Indian citizen, left India on 22.09.2021 for the first time to work as an officer of a
company in Germany (Liable to pay tax in Germany). Determine the residential status of Ram for
the assessment year 2022-23.
Solution:
Under section 6(1), an individual is said to be resident in India in any previous year if he satisfies
any one of the following conditions -
(i) He has been in India during the previous year for a total period of 182 days or more, or
(ii) He has been in India during the 4 years immediately preceding the previous year for a total period
of 365 days or more and has been in India for at least 60 days in the previous year.
In the case of Indian citizens leaving India for employment, the period of stay during the previous year
must be 182 days instead of 60 days given in (ii) above.
During the previous year 2021-22, Mr. Ram, an Indian citizen, was in India for 175 days only (i.e.,
30+31+30+31+31+22 days). Thereafter, he left India for employment purposes.
Since he does not satisfy the minimum criteria of 182 days stay in India during the relevant previous year,
he is not a resident as per Section 6(1) for the A.Y. 2022-23. Further, he is also not a deemed
resident as per Section 6(1A).
9. Mr. Dey, a non-resident, residing in US since 1991, came back to India on 1.4.2020 for permanent
settlement. What will be his residential status for assessment year 2022-23?
Solution:
Mr. Dey is a resident in A.Y. 2022-23 since he has stayed in India for a period of 365 days (more than 182
days) during the P.Y. 2021-22.
[LANGUAGE AS PER IT ACT] As per section 6(6), a person will be “Not ordinarily Resident” in
India in any previous year, if such person, inter alia,:
(a) has been a non-resident in 9 out of 10 previous years preceding the relevant previous year;
or
(b) has during the 7 previous years immediately preceding the relevant previous year been in
India for 729 days or less.
If he does not satisfy either of these conditions, he would be a resident and ordinarily resident.


For the previous year 2021-22 (A.Y. 2022-23), his status would be “Resident but not ordinarily resident”
since he was non-resident in 9 out of 10 previous years immediately preceding the P.Y. 2021-22. He can
be resident but not ordinarily resident also due to the fact that he has stayed in India only for 366 days
(i.e., less than 730 days) in 7 previous years immediately preceding the P.Y. 2021-22.
10. Mr. Ramesh & Mr. Suresh are brothers and they earned the following incomes during the financial
year 2021-22. Mr. Ramesh settled in Canada (also paying tax in Canada) in the year 1996 and Mr.
Suresh settled in Delhi. Compute the total income for the A.Y. 2022-23.
Sr. Particulars Mr. Ramesh Mr. Suresh

No. (₹) (₹)
1. Interest on Canada Development Bonds (only 50% of 35,000 40,000

interest received in India)
2. Dividend from British company received in London 28,000 20,000
3. Profits from a business in Nagpur, but managed directly 1,00,000 1,40,000
from London
4. Short term capital gain on sale of shares of an Indian 60,000 90,000
company received in India
5. Income from a business in Chennai 80,000 70,000
6. Fees for technical services rendered in India, but received 1,00,000 ----
in Canada
7. Interest on savings bank deposit in UCO Bank, Delhi 7,000 12,000
8. Agricultural income from a land situated in Andhra 55,000 45,000
Pradesh
9. Rent received in respect of house property at Bhopal 1,00,000 60,000
10. Life insurance premium paid --- 30,000
Solution:
Computation of total income of Mr. Ramesh & Mr. Suresh for the A.Y. 2022-23
S. Particulars Mr. Ramesh (Non- Mr. Suresh

No. Resident) (ROR)
(₹) (₹)
1. Interest on Canada Development Bond (See Note 2) 17,500 40,000
2. Dividend from British Company received in London (See Note - 20,000
3)
3. Profits from a business in Nagpur but managed directly from 1,00,000 1,40,000
London (See Note 2)
4. Short term capital gain on sale of shares of an Indian company 60,000 90,000
received in India (See Note 2)
5. Income from a business in Chennai (See Note 2) 80,000 70,000
6. Fees for technical services rendered in India, but received in 1,00,000 -
Canada (See Note 2)
7. Interest on savings bank deposit in UCO Bank, Delhi (See 7,000 12,000
Note 2)
8. Agricultural income from a land situated in Andhra Pradesh - -
(See Note 4)
9. Income from house property at Bhopal (See Note 5) 70,000 42,000
Gross Total income 4,34,500 4,14,000
Less: Deduction under Chapter VI-A
Section 80C - Life insurance premium - 30,000
Section 80TTA (See Note 6) 7,000 10,000
Total Income 4,27,500 3,74,000


Notes:
1. Mr. Ramesh is a non-resident since he has been living in Canada since 1997. Mr. Suresh, is settled
in Delhi, and thus, assumed as a resident and ordinarily resident.
2. In case of a resident and ordinarily resident, his global income is taxable as per section 5(1).
However, as per section 5(2), in case of a non-resident, only the following incomes are chargeable
to tax:
Therefore, fees for technical services rendered in India would be taxable in the hands of Mr.
Ramesh, even though he is a non-resident.
The income referred to in Sl. No. 3, 4, 5 and 7 are taxable in the hands of both Mr. Ramesh and Mr.
Suresh since they accrue or arise/ deemed to accrue or arise in India.
Interest on Canada Development Bond would be fully taxable in the hands of Mr. Suresh, whereas
only 50%, which is received in India, is taxable in the hands of Mr. Ramesh.
3. Dividend received from British company in London by Mr Ramesh, a non- resident, is not taxable
since it accrued and is received outside India. However, such dividend received by Mr. Suresh is
taxable, since he is a resident and ordinarily resident.
4. Agricultural income from a land situated in India is exempt under section 10(1) in the case of both
non-residents and residents.
5. Income from house property-
Mr. Ramesh Mr. Suresh

(₹) (₹)
Rent received 1,00,000 60,000
Less: Deduction under section 24(a) @30% 30,000 18,000
Net income from house property 70,000 42,000
The net income from house property in India would be taxable in the hands of both Mr. Ramesh and Mr.
Suresh, since the accrual and receipt of the same are in India.
6. In case of an individual, interest upto ₹ 10,000 from savings account with, inter alia, a bank is
allowable as deduction under section 80TTA.
11. Examine the correctness or otherwise of the statement - “Income deemed to accrue or arise in
India to a non-resident by way of interest, royalty and fees for technical services is to be taxed
irrespective of territorial nexus”.
Solution:
This statement is correct.
As per Explanation to section 9, income by way of interest, royalty or fees for technical services which is
deemed to accrue or arise in India by virtue of clauses (v), (vi) and (vii) of section 9(1), shall be included
in the total income of the non- resident, whether or not -
(i) non-resident has a residence or place of business or business connection in India; or
In effect, the income by way of fees for technical services, interest or royalty from services utilised in India
would be deemed to accrue or arise in India in case of a non-resident and be included in his total income,
whether or not such services were rendered in India and irrespective of whether the non-resident has a
residence or place of business or business connection in India.


12. Examine with reasons whether the following transactions attract income-tax in India in the hands
of recipients:
(i) Salary paid by Central Government to Mr. John, a citizen of India ₹ 7,00,000 for the services
rendered outside India.
(ii) Interest on moneys borrowed from outside India ₹ 5,00,000 by a non-resident for the purpose
of business within India say, at Mumbai.
(iii) Post office savings bank interest of ₹ 19,000 received by a resident assessee, Mr. Ram, aged
46 years.
(iv) Royalty paid by a resident to a non-resident in respect of a business carried on outside
India.
(v) Legal charges of ₹ 5,00,000 paid in Delhi to a lawyer of United Kingdom who visited India to
represent a case at the Delhi High Court.
Solution:
Taxable Amount liable Reason

/ Not to tax (₹)
Taxable
(i) Taxable 6,50,000 As per section 9(1)(iii), salaries payable by the Government to a
citizen of India for service rendered outside India shall be deemed to
accrue or arise in India. Therefore, salary paid by Central
Government to Mr. John for services rendered outside India would
be deemed to accrue or arise in India since he is a citizen of India.
He would be entitled to standard deduction of ₹ 50,000 under
section 16(ia).
(ii) Taxable 5,00,000 As per section 9(1)(v)(c), interest payable by a non- resident on
moneys borrowed and used for the purposes of business carried on
by such person in India shall be deemed to accrue or arise in India in
the hands of the recipient.
(iii) Partly 5,500 The interest on Post Office Savings Bank a/c, would be exempt u/s
Taxable 10(15)(i), only to the extent of ₹ 3,500 in case of an individual a/c.
Further, interest upto ₹ 10,000, would be allowed as deduction u/s
80TTA from Gross Total Income. Balance ₹ 5,500 i.e., ₹ 19,000 -
₹ 3,500 - ₹ 10,000 would be taxable in the hands of Mr. Ram, a
resident.
(iv) Not - Royalty paid by a resident to a non-resident in respect of a business

Taxable carried outside India would not be taxable in the hands of the non-
resident provided the same is not received in India. This has been
provided as an exception to deemed accrual mentioned in section
9(1)(vi)(b).
(v) Taxable 5,00,000 In case of a non-resident, any income which accrues or arises in
India or which is deemed to accrue or arise in India or which is
received in India or is deemed to be received in India is taxable in
India.
Therefore, legal charges paid in India to a non- resident lawyer of
UK, who visited India to represent a case at the Delhi High Court
would be taxable in India.
13. Discuss the provisions relating to determination of residential status of Hindu undivided family,
partnership firm and company.
Answer:
Residential status of a HUF:
A HUF would be resident in India if the control and management of its affairs is situated wholly or partly in
India during the relevant previous year. If the control and management of its affairs is situated wholly
outside India during the relevant previous year, it would be considered as a non-resident.
If the HUF is resident, then the status of its Karta determines whether it is resident and ordinarily resident
or resident but not ordinarily resident.


Residential status of a firm:
A firm would be resident in India if the control and management of its affairs is situated wholly or partly in
India during the relevant previous year. Where the control and management of the affairs is situated
wholly outside India during the relevant previous year, the firm would be considered as a non-resident.
Residential status of a company:
A company is said to be resident in India in any previous year if:

(a) it is an Indian company as defined under section 2(26) ,or
(b) its place of effective management, in that year, is in India.
Thus, every Indian company is resident in India. However, a company other than an Indian company,
would become resident in India only in case its place of effective management is situated in India during
the previous year.
14. State the activities and operations, income from which is not deemed to accrue or arise in India.
Answer:
Explanation 1 to section 9(1)(i) lists out income which shall not be deemed to accrue or arise in India.
They are given below:
a) In the case of a business, in respect of which all the operations are not carried out in India
In the case of a business of which all the operations are not carried out in India, the income of the
business deemed to accrue or arise in India shall be only such part of income as is reasonably
attributable to the operations carried out in India. Therefore, it follows that such part of income which
cannot be reasonably attributed to the operations in India, is not deemed to accrue or arise in India.
b) Purchase of goods in India for export

In the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or
from operations which are confined to the purchase of goods in India for the purpose of export.
c) Collection of news and views in India for transmission out of India

In the case of a non-resident, being a person engaged in the business of running a news agency or of
publishing newspapers, magazines or journals, no income shall be deemed to accrue or arise in India
to him through or from activities which are confined to the collection of news and views in India for
transmission out of India.
d) Shooting of cinematograph films in India

In the case of a non-resident, no income shall be deemed to accrue or arise in India through or from
operations which are confined to the shooting of any cinematograph film in India, if such non-resident
is :
(i) an individual, who is not a citizen of India or
(ii) a firm which does not have any partner who is a citizen of India or who is resident in India ; or
(iii) a company which does not have any shareholder who is a citizen of India or who is resident in
India.
e) Business of mining of diamonds

In the case of a foreign company engaged in the business of mining of diamonds, no income shall
be deemed to accrue or arise in India to it through or from the activities which are confined to the
display of uncut and unassorted diamond in any special zone notified by the Central
Government in the Official Gazette in this behalf
15. State with reasons, whether the following statements are true or false, with regard to the
provisions of the Income-tax Act, 1961:
(a) Only individuals and HUFs can be resident, but not ordinarily resident in India; firms can be
either a resident or non-resident.
(b) Income deemed to accrue or arise in India to a non-resident by way of interest, royalty and fee
for technical services is taxable in India irrespective of territorial nexus.
(c) Mr. X, Karta of HUF, claims that the HUF is non-resident as the business of HUF is transacted
from UK and all the policy decisions are taken there.


Answer:
(a) True: A person is said to be “not-ordinarily resident” in India if he satisfies any of the
additional conditions given in sub-section (6) of section 6. This sub-section relates to only
individuals and Hindu Undivided Families. Therefore, only individuals and Hindu Undivided Families
can be resident, but not ordinarily resident in India. All other classes of assessees can be either a
resident or non-resident for the purpose of income-tax. Firms and companies can, therefore, either be
a resident or non-resident.
(b) True: Explanation below section 9(2) clarifies that income by way of interest, royalty or fee for
technical services which is deemed to accrue or arise in India by virtue of clauses (v), (vi) and (vii) of
section 9(1), shall be included in the total income of the non-resident, whether or not :
(i) non-resident has a residence or place of business or business connection in India; or
(c) True: A HUF is considered to be a non-resident where the control and management of its affairs are
situated wholly outside India. In the given case, since all the policy decisions of HUF are taken from
UK, the HUF is a non-resident.
16. Miss Charlie, an American national, got married to Mr. Radhey of India in USA on 2.03.2021 and
came to India for the first time on 16.03.2021. She remained in India up till 19.9.2021 and left for
USA on 19.9.2021. She returned to India again on 27.03.2022.
While in India, she had purchased a show room in Mumbai on 22.04.2021, which was leased out to
a company on a rent of ₹ 25,000 p.m. from 1.05.2021 She had taken loan from a bank for purchase
of this show room on which bank had charged interest of ₹ 97,500 upto 31.03.2022.
She had received the following gifts from her relatives and friends during 1.4.2021 to 30.6.2021:
- From parents of husband ₹ 51,000
- From married sister of husband ₹ 11,000
- From two very close friends of her husband, ₹ 1,51,000 and ₹ 38,000 ₹ 1,89,000
Determine her residential status and compute the total income chargeable to tax along with the
amount of tax payable on such income for the Asst. Year 2022-23.
Answer:
Under section 6(1), an individual is said to be resident in India in any previous year, if he satisfies
any one of the following conditions:
(i) He has been in India during the previous year for a total period of 182 days or more, or
(ii) He has been in India during the 4 years immediately preceding the previous year for a total period of
365 days or more and has been in India for at least 60 days in the previous year.
If an individual satisfies any one of the conditions mentioned above, he is a resident. If both the above
conditions are not satisfied, the individual is a non-resident. Therefore, the residential status of Miss
Charlie, an American National, for A.Y. 2022-23 has to be determined on the basis of her stay in India
during the previous year relevant to A.Y. 2022-23 i.e. P.Y. 2021-22 and in the preceding four assessment
years.
Her stay in India during the previous year 2021-22 and in the preceding four years are as under:
P.Y. 2021-22
01.04.2021 to 19.09.2021 172 days
27.03.2022 to 31.03.2022 5 days
Total 177 days
Four preceding previous years
P.Y. 2020-21 [1.4.2020 to 31.3.2021] - 16 days
P.Y. 2019-20 [1.4.2019 to 31.3.2020] - Nil
P.Y. 2018-19 [1.4.2018 to 31.3.2019] - Nil
P.Y. 2017-18 [1.4.2017 to 31.3.2018] - Nil
Total 16 days
The total stay of the assessee during the previous year in India was less than 182 days and during the
four years preceding this year was for 16 days. Therefore, due to non-fulfillment of any of the two
conditions for a resident, she would be treated as non-resident for the Assessment Year 2022-23.


Computation of total income of Miss Charlie for the A.Y. 2022-23
Particulars ₹ ₹
Income from house property [HP Chapter]
Show room located in Mumbai remained on rent from 01.05.2021 to
31.03.2022 @ ₹ 25,000/- p.m.
Gross Annual Value [25,000 x 11] (See Note 1 below)
Less: Municipal taxes 2,75,000
Net Annual Value (NAV) Nil
Less: Deduction under section 24 2,75,000
30% of NAV 82,500
Interest on loan 97,500 95,000
Income from other sources
Gifts received from non-relatives is chargeable to tax as per section 56(2)(x) 1,80,000
if the aggregate value of such gifts exceeds ₹ 50,000.
 ₹ 50,000 received from parents of husband would be exempt, since
parents of husband fall within the definition of relatives and gifts from a
relative are not chargeable to tax. Nil
 ₹ 11,000 received from married sister of husband is exempt, since
sister-in-law falls within the definition of relative and gifts from a relative
are not chargeable to tax. Nil
 Gift received from two friends of husband ₹ 1,51,000 and ₹ 38,000
aggregating to ₹ 1,89,000 is taxable under section 56(2)(x) since the
aggregate of ₹ 1,89,000 exceeds ₹ 50,000. (see Note 2 below) 1,89,000
Total income 1,89,000
2,84,000
Computation of tax payable by Miss Charlie for the A.Y. 2022-23
Particulars ₹
Tax on total income of ₹ 2,84,000 1,700
Add: Health & Education cess@4% 68
Total tax payable (rounded off) 1,770
Notes:
1. Actual rent received has been taken as the gross annual value in the absence of other information
(i.e. Municipal value, fair rental value and standard rent) in the question.
2. If the aggregate value of taxable gifts received from non-relatives exceeds ₹ 50,000 during the year,
the entire amount received (i.e. the aggregate value of taxable gifts received) is taxable. Therefore,
the entire amount of ₹ 1,89,000 is taxable under section 56(2)(x).
3. Since Miss Charlie is a non-resident for the A.Y. 2022-23, rebate under section 87A would not be
available to her, even though her total income does not exceeds ₹ 5 lacs.
17. Determine the taxability of income of US based company Heli Ltd., in India on entering into the
following transactions during the financial year 2021-22:
(iii) ₹ 5 lacs received from an Indian domestic company for providing technical knowhow in India.
(iv) ₹ 6 lacs from an Indian firm for conducting the feasibility study for the new project in Finland.
The payment for the same was made in Finland.
(v) ₹ 4 lacs from a non-resident for use of patent for a business in India.
(vi) ₹ 8 lacs from a non-resident Indian for use of know-how for a business in Singapore. Such
amount was received in U.S.
(vii)₹ 10 lacs for supply of manuals and designs for the business to be established in Singapore.
No payment for the same was made in India.
Answer:
A non-resident is chargeable to tax in India in respect of following incomes:


In view of the above provisions, taxability of income is determined in following manner:
Particulars ₹ (in lacs)
(i) Amount received from an Indian domestic company for providing technical knowhow 5
in India is deemed to accrue or arise in India and is, therefore, taxable in India.
(ii) Conducting the feasibility study for the new project in Finland for the Indian firm is not Nil
taxable in India as the income accrues outside India since such study is done for a
business outside India.
(iii) Income received from a non-resident for use of patent for a business in India is 4
taxable in India as it is deemed to accrue or arise in India.
(iv) Income received from a non-resident Indian for use of knowhow for a business in Nil
Singapore. It is not taxable in India since it does not accrue or arise in India nor is it
deemed to accrue or arise in India,
(v) Income received for supply of manuals and designs for the business to be Nil
established in Singapore is not taxable in India, since it does not accrue or arise in
India nor is it deemed to accrue or arise in India.
9
Total Income


Class Notes

House Property SATC 5.1

INCOME FROM HOUSE PROPERTY
PARTICULARS SECTION
BASIS OF CHARGES 22
ANNUAL VALUE 23
DEDUCTION 24
INTEREST ON BORROWED CAPITAL (PAYABLE OUTSIDE INDIA) 25
RECOVERY OF UNREALIZED RENT & ARREAR RENT 25A
CO-OWNERSHIP 26
DEEMED OWNER 27
HOW TO COMPUTE INCOME FROM HOUSE PROPERTY

Gross Annual Value [GAV] XXX
Less: Municipal Taxes PAID by owner during the P.Y. XXX
Net Annual Value (Sec 23) [NAV] XXX
Less: Deductions u/s 24
(a) Statutory deduction @ 30% of NAV XXX
(b) Interest on Loan XXX .
Income from House Property (Computed) XXX
NOTE: Deduction under Section 24(b) {in respect of one or two self-occupied properties only}
would not be available in case of an Individual, being an assessee, who opts for the provisions
of Section 115BAC
CHARGEABILITY [SECTION 22]
The annual value of property consisting of any buildings or lands appurtenant thereto of which
the assessee is the owner shall be subject to Income-tax under the head 'Income from house property'
provided such property, or any portion of such property is not used by the assessee for the
purposes of any business or profession, carried on by him, the profits of which are chargeable to
Income-tax.
[The Basis of calculating income from House property is the Annual Value. This is the inherent capacity
of the property to earn income. Income from the head House Property is the only head that is charged
on a notional basis]


Class Notes


CONDITIONS FOR CHARGEABILITY
1) Property should consist of any building or land appurtenant thereto:
(a) Buildings include not only residential buildings, but also factory buildings, offices, shops,
godowns and other commercial premises.
(b) Land appurtenant means land connected with the building like garden, garage etc.
(c) Temporary structures shall not be considered as buildings for the purpose of Income from
House property. Eg. Circus tents, exhibition structures, etc.
(d) Buildings do not include incomplete units or which are in not in a condition to use.
(e) Income from letting out of vacant land is, however, taxable under the head “Income
from other sources”.
2) Assessee must be the owner of the property

a) Owner is the person who is entitled to receive income from the property in his own right.
b) The requirement of registration of the sale deed in the name of owner is not necessary.
c) Ownership includes deemed ownership
d) The person who owns the building need not also be the owner of the land upon which it
stands.
e) Income from subletting is not taxable as income from house property [It will be taxable in
IOS]
3) Property must not be used by the assessee for his own business/profession.


Exceptions:
Annual value of the following properties are chargeable under the head “Profits and gains of
business or profession” –
(i) Portions of property occupied by the assessee for the purpose of any business or profession
carried on by him
(ii) Properties of an assessee engaged in the business of letting out of properties.
Property held as stock-in-trade etc.

Annual value of house property will be charged under the head “Income from house property”,
where it is held by the assessee as stock-in-trade of a business also.
However, the annual value of property being held as stock in trade would be treated as NIL for a period
of two year from the end of the financial year in which certificate of completion of construction of the
property is obtained from the competent authority, if such property is not let-out during such period.
[Section 23(5)]
Letting out is supplementary to the main business:

Where the property is let out with the object of carrying on the business of the assessee in an efficient
manner, then the rental income is taxable as business income. Related expenses are also deductible in
computing such business Income.


No Notional Income for House Property Held as Stock in Trade-Sec 23(5)
Where the property consisting of any building or land appurtenant thereto is held as stock-in-trade
and the property or any part of the property is not let during the whole or any part of the previous year,
the annual value of such property or part of the property, for the period up to TWO year from the end
of the financial year in which the certificate of completion of construction of the property is obtained
from the competent authority, shall be taken to be NIL
[The Delhi High Court in case of CIT v. Ansal Housing & Construction Ltd. held that the assessee
engaged in business of construction and sale of flats is liable to pay tax on notional rent in respect of
unsold flats, owned by the assessee at the end of the relevant financial year if these flats are not let for
the whole of the previous year. Above amendment is introduced to provide relief to builders]
Assessee engaged in the Business of Letting out House Properties

“The income earned by an assessee engaged in the business of letting out of properties on rent would
be taxable as business income”
Recently, the Supreme Court in case of “Rayala Corporation Pvt. Ltd. v. ACIT” held that Income
from Letting out of Property on rent by an assessee engaged in the business of letting is assessable
as “Business Profits” u/s 28 and not as “Income from House Property” u/s 22 and there is no concept of
notional rent under the head “Profits and Gains of Business of profession”
Also, the Supreme Court in case of “Chennai Properties & Investment Ltd. v. CIT” held that where
the assessee company is incorporated with main objective, as stated in the MOA to acquire the
properties in the city & let out those properties and the assessee had rented out such properties, rental
income from such properties is a business income & cannot be taxed as Income from House Property
u/s 22.
CBDT Circular: Lease Rent from letting out buildings/developed space

along with other amenties in Industrial Park/SEZ
In case of an undertaking which develops, develops and operates or maintains and operates a notified
Industrial Park/SEZ, the income from letting out of premises/developed space along with other
amenties/facilities in such park/SEZ is to be charged to tax under the head ‘PGBP’.


Class Notes


COMPOSITE RENT
The owner of a property may sometimes receive rent in respect of building as well as –
1) other assets like say, furniture, plant and machinery.
2) for different services provided in the building, for eg. –
(a) Lifts;
(b) Security;
(c) Power backup;
The amount so received is known as “COMPOSITE RENT”.
TAX TREATMENT OF COMPOSITE RENT

Where composite rent includes rent of building and charges for different services (lifts, security
etc.) / Charges for other assets (furniture) & both are separable, the composite rent is has to be
split up in the following manner:
(a) the sum attributable to use of property is to be assessed under section 22 as “Income
from House Property”;
(b) the sum attributable to use of services/assets is to charged to tax under the head
“PGBP” or under the head “IOS”
If the same is not separable, then whole such sum is taxable either as business income or
income from other sources;
INCOME FROM HOUSE PROPERTY SITUATED OUTSIDE INDIA

1. Taxability of Income from HP will depend upon the Residential Status of the Assessee.
2. In case of a Resident in India (Resident and Ordinarily Resident in case of Individuals and
HUF), Income from property situated outside India is always taxable in India, whether such
income is brought into India or not.
3. In case of a NR or RNOR (in case of Individual/HUF), Income from a property situated outside
India is taxable in India only if Rent is received in India.
4. Any tax or expenditure (prescribed one) incurred towards earning such income shall be allowed
as a deduction.
5. Income accruing or received in Foreign Currency should be converted into Indian Rupees in TT
Buying Rate on the last day of the previous year. [Rule 115]
Question: X, an American national, is a ROR in India during the previous year ending on 31.3.2022. He was
owner of a building located in New York. The same was let out on rent at US $12,500 per month. The Municipal
Corporation of New York was paid taxes on such building of US $ 10,000 on 12.2.2022. Besides the above
property, he purchased a piece of land at Delhi for construction of a house. The said land was given on rent for
running a dairy @ ₹ 3,000 per month with effect from 1.10.2021. The value of one US $ in Indian rupee
throughout the year remained at ₹ 78. X wants to know his taxable income.
Answer: HP Income – ₹ 76,44,000; Income from other Source: ₹ 18,000


Class Notes


DETERMINATION OF ANNUAL VALUE [SECTION 23]
This involves 3 steps:
Step 1: Determination of Gross Annual Value (GAV).
[Tax under the head “Income from House Property” is not a tax upon rent of a
property. It is a tax on inherent capacity of a building to yield income. {Section
23(1)}]
Step 2: From the GAV computed in step 1, we deduct municipal tax paid by the owner during
the previous year.
Step 3: The balance will be the Net Annual Value (NAV), which as per the Income-tax Act is the
annual value.
DETERMINATION OF ANNUAL VALUE IN DIFFERENT SITUATION
(1) Where the property is let out throughout the previous year
[Section 23(1)(a)/(b)]
Where the property is let out for the whole year, then the Gross Annual Value (GAV) would be
the higher of –
(a) Annual Letting Value (ALV) OR EXPECTED RENT and
(b) Actual rent received or receivable during the year as reduced by Unrealised Rent.
ALV (or Expected Rent) means Municipal Valuation or Fair Rent (Market Rent), whichever
is more, subject to maximum of Standard Rent. In brief,
(i) Municipal Valuation

Higher
(ii) Fair Rent
Lower (ALV)
(iii) Std. Rent
Higher will be GAV.
(iv) Actual Rent [Less Unrealised Rent] [VIEW 1]
Note: There is an alternate view as per Income tax Return for treatment of Unrealiased Rent.
Refer Class Discussion for VIEW 2. For Exam – View 1 is relevant.


NOTE:
1) As per section 23(1)(a), the annual value of any property shall be the sum for which the
property might reasonably be expected to be let from year to year.
2) Municipal value is the value determined by the municipal authorities for levying municipal taxes
on house property.
3) Fair Rent means rent which similar property in the same locality would fetch.
4) The Standard Rent is fixed by the Rent Control Act.
5) Municipal Tax paid by Tenant is neither to be added to the Actual Rent, nor to be allowed as
deduction.
6) As per section 23(1)(a), ALV cannot exceed standard rent (SR)
7) Repair Expenses met by the Tenant shall not be added to Actual Rent.
8) Advance rent cannot be rent received / receivable of the year of receipt.
9) Commission paid by owner of a property to a broker for rental income is not deductible.
10) A Non-Refundable Deposit will be included in rent received or receivable on pro-rata basis.
Example 1: Find out the ALV
Municipal Value 50 60 70
Fair Rent 55 58 80
Standard Rent 54 75 50
ALV/Expected Rent
Example 2: Compute the GAV of each house:

Particulars House I House II House III House IV House V
Municipal Value 80,000 55,000 65,000 24,000 75,000

Fair Rent 90,000 60,000 65,000 25,000 80,000
Standard Rent N.A. 75,000 58,000 N.A. 78,000
Actual rent 72,000 72,000 60,000 30,000 72,000
(Received/Receivable)


Class Notes


Class Notes


(2) Where Let Out Property is vacant for part of the year [Section 23(1)(c)]
Where let out property is vacant for part of the year and owing to vacancy, the actual rent is lower
than the ALV, then the actual rent received or receivable will be the GAV of the property.
NOTE:
1. If Actual Rent received or receivable (after Vacancy or Unrealised Rent) is higher than ALV,
than Section 23(1)(c) will not apply and Actual rent received/receivable will be GAV.
2. If Actual Rent received or receivable (After Unrealised Rent) is lower than the ALV, than
Section 23(1)(c) will not apply even if there is Vacancy as lower rent is not due to Vacancy.
Example 3: Compute the Gross Annual Value (Loss Due to Vacancy):

I II III IV
Municipal Value 60 68 70 75
Fair Rent 65 60 64 70
Standard Rent 63 70 45 72
Actual Rent (12 Months) 72 48 60 66
Vacancy 2 Months
GAV
Example 4: Compute the Gross Annual Value:

I II III IV
Municipal Value 60 68 70 75
Fair Rent 65 60 64 70
Standard Rent 63 70 45 72
Actual Rent (12 Months) 72 84 60 66
Unrealised Rent 10 12 14 16
Vacancy 2 Months


Class Notes


(3) In case of Self-Occupied Property or Unoccupied Property [Sec 23(2)]
(a) Where the property is self-occupied for own residence or unoccupied throughout the previous
year, its ANNUAL VALUE WILL BE NIL, provided no other benefit is derived by the owner
from such property.
(b) The benefit of “Nil” Annual Value is available only for upto 2 self-occupied or
unoccupied house properties i.e. for either 1 house property or 2 house properties.
(c) The benefit of exemption is available only to an individual/HUF.
(d) The expression “Unoccupied property” refers to a property which cannot be occupied by the
owner by reason of his employment, business or profession at a different place.
(e) No deduction for municipal taxes is allowed in respect of such property.
(4) Where a house property is Let-out for Part of the year and Self-occupied
for part of the year
(a) If a single unit of a property is self-occupied for part of the year and let-out for the remaining
part of the year, then the ALV for the whole year shall be taken into account for
determining the GAV.
(b) The ALV for the whole year shall be compared with the actual rent for the let out period
and whichever is higher shall be adopted as the GAV.
(c) Further, Property taxes for the whole year is allowed as deduction provided it is paid by the
owner during the previous year.
(5) In case of Deemed to be Let Out Property [Section 23(4)]

(a) Where the assessee owns more than TWO properties for self-occupation, then the income
from any TWO such property, at the option of the assessee, shall be computed under the
self occupied property category and its annual value will be NIL. The other self occupied/
unoccupied properties shall be treated as “deemed let out properties”.
(b) This option can be changed year after year in a manner beneficial to the assessee.
(c) In case of deemed let-out property, the ALV shall be taken as the GAV.
(d) The question of considering actual rent received/receivable does not arise. Consequently, no
adjustment is necessary on account of property remaining vacant or unrealized rent.
(e) Municipal taxes actually paid by the owner during the previous year can be claimed as
deduction.


EXAMPLE:
Mr. Pandey, owner of three houses in Chennai, furnished the following information. Compute his income
from house property for the assessment year 2022-23:
House No. House No. House No.

Particulars 1 2 3
Self-occupied Self-occupied Self-occupied
Standard rent under Rent Control Act 1,50,000 15,00,000 18,00,000
Municipal value 2,00,000 13,00,000 13,50,000
Fair rent 2,50,000 16,00,000 19,00,000
Municipal tax (10% of municipal value) paid
Interest on loan taken for purchases of houses 90,000 1,70,000 1,65,000
(Loan taken in P.Y. 2017-18)
Solution:
Computation of Income from House property of Mr. Pandey for the A.Y. 2022-23
Particulars Details Details Amount

House 1: Deemed to be Let out
Gross Annual Value (Working) 1,50,000
Less: Municipal Tax (10% of ₹ 2,00,000) 20,000
Net Annual Value (NAV) 1,30,000
Less: Deduction u/s
24(a) Standard Deduction (30% of NAV) 39,000
24(b) Interest on loan 90,000 1,29,000 1,000
House 2 & 3: Self-occupied (as ALV is too High)
Net Annual Value Nil
Less: Deduction u/s
24(b) Interest on loan [(₹ 1,70,000 + ₹ 1,65,000), subject to max. of 2,00,000 (2,00,000)
₹ 2,00,000]
Income from House Property (1,99,000)
Working:
Computation of Gross Annual Value of House 1:
Particulars House 1
Municipal Value (A) 2,00,000
Fair Rent (B) 2,50,000
(C) = Higher of (A) and (B) 2,50,000
Standard Rent (D) 1,50,000
Gross Annual Value [Lower of (C) and (D)] 1,50,000


EXAMPLE:
Compute income under the head ‘Income from house property’ of Sri from the following information:
Particulars H1 H2 H3 H4
Used for Self-occupied Self-occupied Self-occupied Own Business
Situated at Mumbai Abu Kolkata Hyderabad
Gross Municipal Value 3,00,000 2,00,000 7,00,000 3,00,000
Fair Rent 2,00,000 2,00,000 6,00,000 1,20,000
Standard Rent 3,00,000 2,40,000 7,00,000 2,00,000
Municipal Tax 15% 15% 15% 15%
Repairs 13,000 4,000 8,000 8,000
Ground Rent 20,000 Nil Nil 6,000
Land Revenue Nil 10,000 Nil Nil
Interest on Loan 40,000 1,00,000 2,10,000 20,000
Loan taken on 1998-99 1998-99 2017-18 2000-01
Solution:
In the given case, there are three options:
Option 1: Take H1 & H3 as Self-Occupied (S/O) and H2 as Deemed to be Let-Out (DLO)
Option 2: Take H1 as Deemed to be Let-Out (DLO) and H2 & H3 as Self-Occupied (S/O)
Option 3: Take H3 as Deemed to be Let-Out (DLO) and H1 & H2 as Self-Occupied (S/O)
Total income under the head house property shall be computed applying each option separately and then
the option, which yields least income under this head, shall be opted.
Particulars Option1 Option2 Option 3

H1 & H3 S/O H2 DLO H1 DLO H2 & H3 S/O H3 DLO H1 & H2 S/O
Gross Annual Value Nil 2,00,000 3,00,000 Nil 7,00,000 Nil
Less: Municipal Tax (15% Nil 30,000 45,000 Nil 1,05,000 Nil
of Municipal value)
Net Annual Value (A) Nil 1,70,000 2,55,000 Nil 5,95,000 Nil
Less: Deduction u/s
24(a) Standard deduction Nil 51,000 76,500 Nil 1,78,500 Nil
(30% of NAV)
24(b) Interest on loan 2,00,000 2 1,00,000 40,000 2,00,000 2 2,10,000 30,000 1
Total deduction (B) 2,00,000 1,51,000 1,16,500 2,00,000 3,88,500 30,000

Income from house (-) 2,00,000 19,000 1,38,500 (-) 2,00,000 2,06,500 (-) 30,000
property [(A) – (B)]
Income from house (-) 1,81,000 (-) 61,500 1,76,500
property
Notes:
1. In case of H1 & H2 loan was taken prior to 1/4/1999.
2. Since loan was taken for construction on or after 1/4/1999.
3. Since H4 is used for own business purpose so it is not taxable under this head.
Total income under the head Income from house property as per option 1 is (-) ₹ 1,81,000


Computation of Income from house property of Sri for the A.Y. 2022-23
Particulars Details Details Amount
H1 & H3: Self-occupied u/s 23(2)(a)
Net Annual Value Nil
Less: Deduction u/s
24(b) Interest on loan
- For H1 (Max Limit) 30,000
- For H2 (Max Limit) 2,00,000
Subject to maximum of ₹ 2,00,000 2,30,000 2,00,000 (2,00,000)
H2: Deemed to be let out u/s 23(4)
Gross Annual Value 2,00,000
Less: Municipal Tax 30,000
Net Annual Value 1,70,000
Less: Deduction u/s
24(a) Standard Deduction (30% of NAV) 51,000
24(b) Interest on loan 1,00,000 1,51,000 19,000
Income from house property (-)1,81,000


Class Notes


Class Notes


(6) In case of a house property, a portion let out and a portion self-occupied
(a) Income from any portion or part of a property which is let out shall be computed separately under
the “let out property” category AND the other portion or part which is self occupied shall be
computed under the “self-occupied property” category.
(b) There is no need to treat the whole property as a single unit for computation of income
from house property.
(c) Municipal valuation/fair rent/standard rent, if not given separately, shall be apportioned between
the let-out portion and self-occupied portion either on plinth area or built-up floor space or on such
other reasonable basis.
(d) Property taxes, if given on a consolidated basis can be bifurcated as attributable to each portion
or floor on a reasonable basis.
PROPERTY TAXES [MUNICIPAL TAXES]

1. Property taxes levied are allowable as deduction from the GAV subject to the following two
conditions:
a) It should be borne by the assessee (owner); and
b) It should be actually paid during the previous year.
2. Deduction if Paid: If property taxes levied by a local authority for a particular previous year is not
paid during that year, no deduction shall be allowed in the computation of income from house
property for that year.
3. However, if in any subsequent year the arrears are paid, then the amount so paid is allowed as
deduction in computation of income from house property for that year.
Thus, we find that irrespective of the previous year in which the liability to pay such taxes arise
according to the method of accounting regularly employed by the owner, the deduction in respect of
such taxes will be allowed only in the year of actual payment.
4. In case of property situated outside India, taxes levied by local authority of the country in which
the property is situated is deductible.
5. Municipal Tax includes services related tax like Water Tax and Sewerage Tax levied by any Local
Authority.
6. Municipal Tax can be claimed as a deduction only in respect of let-out or deemed to be let-out
properties (i.e. more than TWO property self-occupied).


NOTIONAL INCOME Vs REAL INCOME
Under this head of income, there are circumstances where notional income is charged to tax
instead of real income. They are:
1. Where the assessee owns more than TWO house property for the purpose of self
occupation, the annual value of any TWO of those properties, at the option of the
assessee, will be nil and the other properties are deemed to be let-out and income has to
be computed on a notional basis by taking the ALV as the GAV.
2. In the case of let-out property throughout the previous year, if the Expected Rent (ER)
exceeds the actual rent received or receivable, then ER is taken as the GAV.
3. In the case of let-out property which is vacant for part of the year, if the actual rent
received or receivable for let out period is less than the Expected Rent (ER) for whole year
not owing to vacancy, then ER for whole year is taken as the GAV.
4. In case of a house property held as stock-in-trade by assessee (which is not let out),
income has to be computed on a notional basis by taking the Expected Rent (ER) as the
GAV after 2 years from the end of the financial year in which certificate of completion of
construction of the property is obtained from the competent authority.


TREATMENT OF UNREALISED RENT [Explanation to Section 23(1)]
1) The Actual rent received/receivable used in calculating GAV should not include any amount of
rent which is not capable of being realised.
2) RULE – 4: However the conditions prescribed in Rule 4 should be satisfied. They are
(a) the tenancy is bona fide;
(b) the defaulting tenant has vacated, or steps have been taken to compel him to vacate the
property;
(c) the defaulting tenant is not in occupation of any other property of the assessee;
(d) the assessee has taken all reasonable steps to institute legal proceedings for the
recovery of the unpaid rent or satisfies the Assessing Officer that legal proceedings
would be useless.
DEDUCTIONS FROM ANNUAL VALUE [SECTION 24]

There are Two Deductions from Annual Value. They are:
(1) 30% of NAV; and

(2) interest on borrowed capital
(1) 30% of NAV is allowed as deduction under section 24(a)

 This is a flat deduction and is allowed irrespective of the actual expenditure incurred.
 In case of self-occupied property where the annual value is nil, the assessee will not be
entitled to deduction of 30%, as the annual value itself is nil.
 No Deduction will be given in respect of Repairs, Land Revenue, Brokerage, Recovery agent
charges etc.
(2) Interest on borrowed capital is allowed as deduction under section 24(b)

(a) Interest payable on loans borrowed for the purpose of Acquisition, Construction, Repairs,
Renewal or Reconstruction can be claimed as deduction.
(b) Interest payable on a fresh loan taken to repay the original loan raised earlier for the aforesaid
purposes is also admissible as a deduction.
(c) ACCRUAL BASIS: Deduction under section 24(b) for interest is available on accrual basis.
Therefore interest accrued but not paid during the year can also be claimed as deduction.
(d) Where a buyer enters into an arrangement with a seller to pay the sale price in installments
along with interest due thereon, the seller becomes the lender in relation to the unpaid purchase
price and the buyer becomes the borrower. In such a case, unpaid purchase price can be treated
as capital borrowed for acquiring property and interest paid thereon can be allowed as
deduction under section 24.
(e) Interest on unpaid interest is not deductible.
(f) No deduction is allowed for any brokerage or commission for arranging loan.
(g) The Assessee should furnish a certificate from the person from whom the amount is borrowed,
specifying the amount of Interest.


(h) Date of completion not relevant: Interest relating to the year of completion of construction
can be fully claimed in that year irrespective of the date of completion.
(i) Interest may include Interest for the year (Current Year Interest) & 1/5 th of the
interest, if any, pertaining to the pre-acquisition or pre-construction period.
Pre-acquisition/pre-construction period = Period Starting from the date of borrowing and

ending on the,
(i) 31st March immediately prior to the date of completion of construction or acquisition of property,
or,
(ii) Date of repayment of loan, whichever is earlier.
Period of Deduction: 1/5th of the interest of pre-acquisition or pre-construction period, for 5

consecutive years starting from the previous year in which the property is acquired or constructed.
Deduction of 5 installment will be available even if the loan outstanding is repaid before 5
year period
Maximum Limit of deduction in respect of interest on capital borrowed in

case of one/two self-occupied property
In this case, the assessee will be allowed a deduction (or, as the case may be, the aggregate of
the amount of deduction) on account of Interest (including 1/5th of the Accumulated Interest
of Pre-Construction Period) as under –
A Where the property has been acquired, constructed, Actual interest payable in
repaired, renewed or reconstructed with borrowed aggregate for one or two self-
capital before 1.4.99. occupied properties, subject to
maximum of ₹ 30,000.
B Where the property is acquired or constructed with Actual interest payable in aggregate
capital borrowed on or after 1.4.99 and such for one or two self-occupied
acquisition or construction is completed within 5 properties, subject to maximum of
years from the end of the financial year in which the ₹ 2,00,000
capital was borrowed.
C Where the property is repaired, renewed or Actual interest payable in

reconstructed with capital borrowed on or after aggregate for one or two self-
1.4.99. occupied properties, subject to
maximum of ₹ 30,000.
Note: Total deduction for all loans cannot exceeds ₹ 200,000 in case of TWO Self-occupied
Property.


Class Notes


Class Notes


INADMISSIBLE DEDUCTIONS [SECTION 25]
Interest chargeable under this Act which is payable outside India shall not be deducted if tax has not
been paid or deducted from such interest or there is no person in India who may be treated as an agent
under section 163.
TAXABILITY OF RECOVERY OF UNREALISED RENT & ARREARS OF RENT

RECEIVED [SECTION 25A]
(i) Unrealised rent is deducted from actual rent in determination of annual value under section 23,
subject to fulfillment of conditions under Rule 4. Subsequently, when the amount is
realised it gets taxed under Section 25A in the year of receipt.
(ii) If the assessee has increased the rent payable by the tenant and the same has been in dispute and
later on the assessee receives the increase in rent as arrears, such arrears is also assessable
under section 25A.
S. No. Unrealised rent [Section 25A] Arrears of rent [Section 25A]
1 Taxable in the hands of the assessee Taxable in the hands of the assessee
whether he is the owner of that property or whether he is the owner of that property or
not. not.
2 Taxable as income of the previous year in Taxable as income of the year in which he
which he recovers the unrealized rent. receives the arrears of rent.
3 30% of the amount of recovery shall be 30% of the amount of arrears shall be
allowed as deduction. allowed as deduction.
Example
Mr. Anand sold his residential house property in March, 2021. In June, 2021, he recovered rent
of ₹ 10,000 from Mr. Gaurav, to whom he had let out his house for two years from April 2014 to
March 2016. He could not realise two months rent of ₹ 20,000 from him and to that extent his
actual rent was reduced while computing income from house property for A. Y. 2016-17.
Further, he had let out his property from April, 2016 to February, 2021 to Mr. Satish. In April,
2019, he had increased the rent from ₹ 12,000 to ₹ 15,000 per month and the same was a subject
matter of dispute. In September, 2021, the matter was finally settled and Mr. Anand received
₹ 69,000 as arrears of rent for the period April 2019 to February, 2021.
Would the recovery of unrealised rent and arrears of rent be taxable in the hands of Mr. Anand,
and if so in which year?
Solution
Since the unrealised rent was recovered in the P.Y. 2021-22, the same would be taxable in the A.Y.
2022-23 under section 25A, irrespective of the fact that Mr. Anand was not the owner of the house in
that year. Further, the arrears of rent was also received in the P.Y. 2021-22, and hence the same would
be taxable in the A.Y. 2022-23 under section 25A, even though Mr. Anand was not the owner of the
house in that year.


A deduction of 30% of unrealised rent recovered and arrears of rent would be allowed while computing
income from house property of Mr. Anand for A.Y. 2022-23.
Computation of income from house property of Mr. Anand for A.Y. 2022·23
S. No. Particulars ₹
i. Unrealised rent recovered 10,000
ii. Arrears of rent received 69,000
iii. Total 79,000
iv. Less: Deduction@30% 23,700
v. Income from house property 55,300


TREATMENT OF INCOME FROM PROPERTY OWNED BY A PARTNERSHIP
FIRM
1. Where an immovable property or properties is included in the assets of a firm, the income from
such property should be assessed in the hands of the firm only.
2. Hence, the property income cannot be assessed as income of the individual partner in respect
of his share in the firm.
TREATMENT OF INCOME FROM CO-OWNED PROPERTY [SECTION 26]

1. Where property is owned by two or more persons, whose shares are definite and ascertainable,
then the income from such property cannot be taxed as income of an AOP.
2. Where the house property owned by co-owners is self occupied by each of the co-owners, the
annual value of the property of each co-owner will be NIL and each co-owner shall be entitled to a
deduction of ₹ 30,000 or ₹ 2,00,000, as the case may be.
3. Where the house property owned by co-owners is let out, the income from such property shall
be computed as if the property is owned by one owner and thereafter the income so computed
shall be apportioned amongst each co-owner as per their specific share.
Question:
“Mr. Raman is a co-owner of a house property alongwith his brother:
Municipal value of the property ₹ 1,60,000
Fair Rent ₹ 1,50,000
Standard Rent under the Rent Control Act ₹ 1,70,000
Rent received ₹ 15,000 p.m.
The loan for the construction of this property is jointly taken and the interest charged by the bank is
₹ 25,000 out of which ₹ 21,000 have been paid. Interest on the unpaid interest is ₹ 450. To repay this
loan, Raman and his brother have taken a fresh loan and interest charged on this loan is ₹ 5,000. The
Municipal Taxes of ₹ 5,100 have been paid by the tenant. Compute the income from this property
chargeable in the hands of Mr. Raman. [Income from HP- ₹ 48,000]


Class Notes


DEEMED OWNERSHIP [SECTION 27]
The following persons, though not legal owners of a property, are deemed to be the owners for the
purposes of section 22 to 26:
(i) TRANSFER TO A SPOUSE [Section 27(i)]

In case of transfer of house property by an individual to his or her spouse otherwise than for
adequate consideration [Except in connection with an agreement to live apart], the
transferor is deemed to be the owner of the transferred property.
(ii) TRANSFER TO A MINOR CHILD

In case of transfer of house property by an Individual to his or her MINOR CHILD [Except a
transfer to Minor Married Daughter] otherwise than for adequate consideration, the transferor
would be deemed to be owner of the house property transferred.
(iii) HOLDER OF AN IMPARTIBLE ESTATE

The impartible estate is a property which is not legally divisible.
(iv) Member of a co-operative society etc.

A member of a co-operative society, company or other association of persons to whom a
building or part thereof is allotted shall be deemed to be owner of that building allotted to him
although the co-operative society/company/ association is the legal owner of that building.
(v) Person in possession of a property

A person who is allowed to take or retain the possession of any building or part thereof in part
performance of a contract of the nature referred to in section 53A of the Transfer of
Property Act shall be the deemed owner of that house property.
(vi) Person having right in a property for a period not less than 12 years:
A person [Lessee] who acquires any rights in any building or part thereof, by virtue of any
transfer by way of lease for not less than 12 years, shall be deemed to be the owner of that
building or part thereof.
Exception – In case of any rights by way of lease from month to month or for a period not
exceeding one year, Lessee shall not be treated as deemed owner.
(vii) DISPUTED OWNERSHIP:

If the title of ownership is disputed in a court of law, the income shall be taxable in the hands of
recipient.


CASES WHERE INCOME FROM HOUSE PROPERTY IS EXEMPT FROM TAX
S. No. Section Particulars

1 10(1) Income from any Farm House forming part of agricultural income.
2 10(19A) Any one palace of an ex-ruler.
3 10(20) Income from house property of a local authority.
4 10(21) Income from house property of an approved scientific research
association.
5 10(23C) Property income of universities, educational institutions, etc.
6 10(24) Property income of any registered trade union.
7 11 Property held for charitable or religious purpose.
8 13A Property income of any political party.
9 22 Property used for own business or profession
10 23(2) TWO Self-occupied property of an individual/HUF

House Property SATC 5A.1

PRACTICAL QUESTION - SET A
“Treatment of Unrealised Rent” – View 1 is adopted in all questions. Ignored Section 115BAC
1) Compute GAV of the following houses let out throughout the year (Amount in ₹)
A B C D
Municipal Value 84,000 84,000 72,000 80,000
Fair Rent 72,000 72,000 84,000 70,000
Standard Rent 60,000 1,20,000 60,000 -
Actual Rent Receivable (12 month) 1,20,000 90,000 90,000 84,000
Unrealised Rent 24,000 30,000 15,000 14,000
2) Find out the GAV in each case (amount in ₹) [Vacancy]

House – I House - II House – III
Municipal Value 30,000 26,000 35,000
Annual Rent 42,000 36,000 30,000
Fair Rent 36,000 28,000 30,000
Standard Rent 30,000 35,000 36,000
Unrealised Rent 7,000 9,000 2,500
Period vacancy 1 month 2 months 3 months
3) Mr. Aakash owns three house properties in Mumbai, the particulars of which are given below:
House I House II House III
Particulars (₹) (₹) (₹)
Municipal Valuation 2,00,000 1,50,000 1,00,000
Fair Rent 2,80,000 1,80,000 1,20,000
Standard Rent 2,40,000 2,00,000 N.A.
Actual Rent(p.m.) 22,000 17,500 10,500
Period of vacancy [Vacancy] Nil 1 month 6 month
Municipal Taxes paid 40,000 80,000 15,000
Compute income from HP in all the 3 cases.

4) Mr. Ramesh completed construction of his house property on 31st May 2021 on a leasehold land. The
house property was self – occupied during June and July 2021 and let- out thereafter for a rent of
₹ 10,000 per month. The amount paid for during the year: Municipal taxes ₹ 6,000; Repairs ₹ 12,000;
Ground rent ₹ 24,000 and insurance premium ₹ 4,000. Determine the taxable income from house
property. [Fair Rent – 70,000 p.a.]
5) Mr. X owns a building property, the income from which is chargeable under the head “Income from house
property”. He incurs, apart from making payment towards land revenue, repairs, collection charges, etc.,
stamp duty and registration charges in respect of lease deed and also salary paid to caretaker. He wants
to know whether he can claim such expenditure?
6) In the following cases State the head of income under which the receipt is to be assessed and
comment:
(i) X Ltd. lets out its property Y. Y sublets it. How is subletting receipt to be assessed in the hand of Y.
(ii) X has built a house on a leasehold land. He has let-out the property and claims income from House
property under “Other Sources” and deducted expenses on repair, security charges, insurance and
collection charges in all amounting to 40% of receipts.
7) A house property is let out for ₹ 6,000 PM including ₹ 1,000 PM as consideration for electricity facility.
Total municipal taxes of ₹ 5,000 are also paid by the tenant. Compute total income of the owner if he
has actually paid electricity bills of ₹ 15,000 during the P.Y.
8) Ramesh, a foreign national, is a resident and ordinarily resident in India during the PY 2021-22. He owns
a house in USA, which he has let out at $ 12,000 p.m. The municipal taxes paid to the Municipal
Corporation of USA is $ 8,000 during the PY 2021-22. The value of one $ in Indian rupee to be taken at
₹ 40. Compute Ramesh’s taxable income.


9) Mr. Ajay furnishes the following particulars in respect of a house property:
Municipal Valuation : ₹ 2,00,000
Fair Rent : ₹ 2,40,000
Actual Rent : ₹ 20,000 PM
Municipal Taxes paid : ₹ 10,000
The property was vacated on 1.11.2021 and thereafter the property was let out for ₹ 25,000 PM. The
assessee could not realize rent for the month of September and October 2021 due to death of the earlier
tenant. Compute the income for HP.
10) Mr. X took a loan of ₹ 6,00,000 @ 10% on 1/07/2018. The construction is actually completed on
31/05/2020. The assessee repaid loan of ₹ 2,00,000 on 30/06/2019 & ₹ 3,00,000 on 31/12/2021.
Compute deduction of Interest.
11) X takes a loan of ₹ 40,000 @ 15% per annum for construction a house on June 1, 2016. Construction of
the house is completed on January 20, 2022. Date of repayment of loan is
a. January 16, 2025, or b) June 30, 2023, or c) October 31, 2019.
Compute the interest allowable as deduction under section 24.
12) Arvind had taken a loan of ₹ 5,00,000 for construction of property on 1.10.2020. Interest was payable @
10% p.a. The construction was completed on 30.6.2021. No principal repayment has been made up to
31.3.2022. Compute the interest allowable as deduction under section 24 for the PY 2021-22.
13) Mr. Amit took a loan of ₹ 2,00,000 @ 14% for construction of house on 01/07/2018. The construction is
actually completed on 31/12/2021. Calculate deduction of Interest on loan.
14) Arvind commenced construction of a residential house intended exclusively for his residence, on
1.11.2020. he raised a loan of ₹ 5,00,000 at 16% interest for the purpose of construction on 1.11.2020.
Finding that there was an over-run in the cost of construction he raised further loan of ₹ 8,00,000 at the
same rate of interest on 1.10.2021. What is the interest allowable under section 24, assuming that
the construction was completed on 31.3.2022?
15) Compute Income from house property of Mr. X, having house property in Delhi, for PY 2021-22:
Municipal Valuation : ₹ 1,75,000 PA
Fair Rent : ₹ 2,50,000 PA
Std. Rent : ₹ 2,10,000 PA
Actual Rent : ₹ 22,500 Per Month
Municipal taxes are ₹ 40,000 PA and Repairs towards the house are ₹ 23,000. Also X has taken a loan of
₹ 8,00,000 @ 10% on 1.7.2018 for construction of house which is completed on 20.2.2021. The loan is
still not paid.
16) Mr Anil borrowed a loan of ₹ 8,00,000 on 1.7.2016 @ 12%. The construction is completed on 31.11.2018.
Compute Income if house is self occupied for PY 2021-22. Other details are as under:
Municipal Valuation ₹ 3,50,000. Fair Rent ₹ 250,000. Standard Rent ₹ 4,20,000. Municipal Taxes Paid
₹ 20,000.
17) Ms. Ramya owns a house property the construction of which was completed in November 2018. The
house is let-out for a rent of ₹ 9,000 per month. On 1 April 2016 she borrowed a loan of ₹ 3 lakhs for the
purpose of construction @ 18% interest. On 30th November, 2018, she borrowed a loan of ₹ 2 lakhs @
15% interest and utilized this amount along with interest free rental advance of ₹ 1 lakh obtained from the
tenant and repaid the original loan of ₹ 3,00,000/-. The house is insured and the premium of ₹ 2,000 is
regularly paid each year. Property taxes paid is ₹ 15,000/-. Compute the income from house property.
18) [Vacancy] Lakdawala completed construction of a residential house on 1.4.2017. Interest paid on loans
borrowed for purpose of construction during the 2 years prior to completion was ₹ 20,000. The house was
let-out on a monthly rent of ₹ 4,000. Annual Corporation Tax paid is ₹ 6,000. Interest paid during the year
is ₹ 15,000. Amount spent on repairs is ₹ 2,000. Fire Insurance Premium paid is ₹ 1,500 p.a. Property
was vacant for 3 months. Annual letting value is ₹ 30,000. Compute the income chargeable under the
head “Income from House Property”.


19) Compute Income from house property of Mr Yatin, having house property in Delhi, for P.Y. 2021-22
(Let out for 10 Months and Self occupied for 2 month):
Municipal Valuation : ₹ 3,15,000 P.A.
Fair Rent : ₹ 3,50,000 P.A.
Std. Rent : ₹ 3,20,000 P.A.
Actual Rent (Let out for 10 Month) : ₹ 25,000 P.M.
Municipal taxes are 20% of MV and half of the amount is paid. Yatin also has taken a loan of ₹ 10,00,000
@ 10% on 1.7.2016 which is fully repaid on 31.12.2019 and construction of house is completed on
20.4.2020.
20) X owns a property at Delhi (municipal value ₹ 1,64,000 p.a., fair rent: ₹ 2,16,000 p.a., standard rent:
₹ 1,80,000 p.a.). The house is let out up to January 31, 2022 (monthly rent being ₹ 14,000). From
February 1, 2022, the property is self-occupied for own residential purposes. Expenses incurred by X are:
municipal tax: ₹ 6,000 (actually paid), repairs: ₹ 2,100, insurance : ₹ 1,100, interest on capital borrowed
(dated of borrowing being June 10, 1997) for acquiring the property: ₹ 1,23,000. Assuming that the
income of x from other sources is ₹ 1,86,000, find out the net income of X. Does it make any
difference if property is let out up to January 31, 2022 @ ₹ 19,000 per month? There is no unrealized
rent.
21) X owns a residential house property in Jaipur. It has two equal residential units- Unit 1 and Unit 2.
While Unit 1 is self – occupied by X for his residential purpose, Unit 2 is let out on rent being ₹ 6,000 per
month, rent of 2 months could not be recovered). Municipal value of the property is ₹ 1,30,000 p.a.,
standard rent is ₹ 1,25,000 p.a. and fair rent is ₹ 1,40,000 p.a.. Municipal tax is imposed @ 12% which is
paid by X. Other expenses for the previous year being repairs: ₹ 250, insurance: ₹ 600, interest on capital
(borrowed during 1998) for constructing the property: ₹ 63,000. Find the income of X on the
assumption that income of X from other sources is ₹ 1,80,000.
22) [Vacancy] Mr. X is the owner of a house property. 30% portion is self occupied and remaining 70%
is let out on monthly rent of ₹ 13,500 pm. The let out portion remains vacant for 2 months and one month
rent could not be realized. The MV, FR and SR of complete house property are ₹ 2,00,000, ₹ 2,50,000 &
₹ 2,10,000. Municipal taxes @ 10% are paid by the owner of the house property. Compute total income
from house property.
23) Ajay owns a house in Jaipur. During the previous year 2021-22, 2/3rd portion of the house was self-
occupied and 1/3rd portion was let out for residential purposes at a rent of ₹ 8,000 p.m. Municipal value of
the property is ₹ 3,00,000 p.a., fair rent is ₹ 2,70,000 p.a. and standard rent is ₹ 3,30,000. He paid
municipal taxes @ 10% of municipal value during the year. A Loan of ₹ 25,00,000 was taken by him
during the year 2014 for acquiring the property. Interest on loan paid during the previous year 2021-22
was ₹ 1,20,000. Compute Ajay’s income from house property.
24) Mrs. Rohini Devi, a citizen of the U.S.A., is a resident and ordinarily resident in India during the
financial year 2021-22. She owns two house properties at Los Angeles, U.S.A. which is used as her
residence. The annual value of the house is $ 20,000 & $ 25,000 respectively. The value of one USD may
be taken as ₹ 70.
She took ownership and possession of a flat in Chennai on 1.7.2021, which is used for residence, while
she is in India. The flat was used by her for 7 months only during the year ended 31.3.2022. Whilst the
municipal valuation is ₹ 32,000 p.m., the fair rent is ₹ 4,20,000 p.a. She paid the following to Corporation
of Chennai:
Property Tax ₹ 16,200
Sewerage Tax ₹ 1,800
She had taken a loan from Standard Chartered Bank for purchasing this flat. Interest on loan was as
under:
₹
Period prior to 1.4.2021 49,200
1.4.2021 to 30.6.2021 50,800
1.7.2021 to 31.3.2022 1,31,300
She has a house property in Bangalore, which was sold in March, 2020. In respect of this house, she
received arrears of rent of ₹ 60,000 in March, 2022. This amount has not been charged to tax earlier.
Compute the income chargeable from house property of Mrs. Rohini Ravi, exercising the most
beneficial option available.


25) Mrs. Indu, a resident individual, own a house in USA. She receives rent @ $ 2,000 per month. She
paid municipal taxes of $1,500 during the financial year 2021-22. She also owns a two storied house in
Mumbai, ground floor is used for her residence and first floor is let out at a monthly rent of ₹ 10,000.
Standard rent for each floor is ₹ 11,000 per month. Fair rent for each floor is ₹ 140,000. Municipal taxes
paid for the house amounts to ₹ 7,500. Mrs. Indu had constructed the house by taking a loan from a
nationalized bank on 20.6.2014. She repaid the loan of ₹ 54,000 including interest of ₹ 24,000. The value
of one dollar is to be taken as ₹ 45. Compute total income from house property of Mrs. Indu.
26) [Vacancy] - Y owns a big house (erection completed on 31.03.2012). The house has three
independent units. Unit – I (50% of the floor area) is let out for residential purpose on monthly rent of
₹ 8,200. Unit – I remains vacant for 1 month when it is not put to any use. A sum of ₹ 700 could not be
collected from the tenant. Unit –II (25% of the floor area) is used by Y for the purpose of his profession,
while Unit – III ( the remaining 25%) is utilized for the purpose of his residence. Other particulars of the
house are as follows:
Municipal valuation: ₹ 60,000, fair rent: ₹ 70,000, standard rent under the Rent control Act: ₹ 90,000,
municipal taxes: ₹ 15,000, repairs: ₹ 4,000, interest on capital borrowed for renewal of the property:
₹ 36,000, ground rent: ₹ 6,400, annual charge created under the will by father in favour Mrs. Y: ₹ 9,000
and fire insurance premium paid: ₹ 15,000. Income of Y from profession is ₹ 7,95,000 (without debiting
house rent and other incidental expenditure including admissible depreciation on the portion of house
used for profession: ₹ 8,000). Determine the taxable income of Y.
27) Deemed Ownership: Answer the following:

a) Mr. Ram transfers a property of market value ₹ 10,00,000 to his wife only for ₹ 4,00,000. The income
from such property is ₹ 1,50,000. How will the property income be taxed?
b) Mr. Rohan gifts a property valuing ₹ 5,00,000 to his minor child being a married daughter. The annual
income from such property is ₹ 25,000. How will the property income be taxed?
c) Mr. Sohan gifts ₹ 20,00,000 to his wife and the wife purchases a house property of ₹ 20,00,000 out of
such money. Will Mr. Sohan be the deemed owner of the house property?
d) Mr. A gives his house property on lease to Mr. B for a total period of 13 years, but the lease is to be
renewed by Mr. B annually during this period. In whose hands will the property income be assessed?
e) Mr. X gives his house property on lease to Mr. Y for a period of two year. Mr. Y can get the lease
renewed for another two years on payment of a specified sum and so on for indefinite period. In
whose hands will the property income be assessed?
f) Mr. P leases his house property to Mr. Q for 8 months, which can be renewed every six months for
indefinite period. In whose hands will the property income be assessed?

House Property SATC 5B.1

SOLUTION – SET A
1. 96000, 84000, 75000 & 80,000.
2.
3. House I - GAV – Actual rent being Higher – ₹ 22,000 x 12. Income from HP – ₹ 1,56,800.
House II - GAV – Actual rent being Higher – ₹ 17,500 x 11. Income from HP – ₹ 78,750.
House III - GAV – Actual rent being lower due sec 23(1)(c)– ₹ 10500 x 6. Income from HP – ₹ 33,600.
4. Income from House Property

Particulars Amount ₹
Gross Annual Value [₹ 80,000 (10,000 x 8)] 80,000
Less: Municipal taxes 6,000
Net Annual Value 74,000
Less : Deduction u/s.24
- 30% of Net Annual Value 22,200
Income from House Property 51,800
Where the house property comes into existence only during the previous year, the annual value shall be
computed only for the period for which the house existed. In this case, therefore, the annual value is
computed only for 10 months, i.e. from June 2021 to March 2022. The same analogy would apply where the
assessee purchases or sells the house property during the year and consequently owns the house property
only for part of the year.
5. Assessee cannot claim deduction in respect of such payments as they are not specified as deduction either
u/s.23 or u/s.24.
6.
(a) Income from sub-letting is taxable under the head "Income from other sources". However, if the subletting
constitutes a business activity, the same shall be taxable under the head 'Profit and gains of business and
profession'.
(b) A person who owns the building need not necessarily be the owner of the land on which the building is
constructed. The rent is derived from the building. In the present case the rent is derived from the house
on a leasehold land. Therefore the income so received is taxable under the head 'Income from house
property' and Mr. X is entitled to statutory deduction of 30% of such rent so received under/ section 24(a).
7. HP 42000 + Other Source – Electricity Facility (3,000) = ₹ 39,000
8. For the P.Y. 2021-22, Mr. Ramesh, a foreign national, is resident and ordinarily resident in India. Therefore,
income received by him by way of rent of the house property located in USA is to be included in the total
income in India. Municipal taxes paid in USA is be to allowed as deduction from the gross annual value.
Computation of Income from house property of Mr. Ramesh

Particulars ₹
Gross Annual Value ($ 12,000 × 12 × 40) 57,60,000
Less: Municipal taxes paid ($ 8,000 × 40) 3,20,000
Less: Deduction u/s 24
(a) 30% of NAV = 30% of ₹ 60,80,000 16,32,000
9. Income from House Property – ₹ 161000.
10.


11. If date of repayment of loan is January 16, 2025 or June 30, 2023, then pre-construction period ends on
March 31, 2021 (being March 31 immediately prior to the date of completion of construction/ acquisition).
Interest on ₹ 40,000 @ 15 per cent per annum from June 1, 2016 to March 31, 2021 is ₹ 29,000. Amount of
installment deductible in first 5 years is ₹ 5,800 {i.e., ₹ 29000/5).
If date of repayment is 31st October 2019, than pre-construction period ends on same date only as no loan is
outstanding thereafter. Month – 41 month. Total Int. - 20500
Year Ending
on March
31, 2022
₹
If date of repayment of loan is January 16, 2025:
Current year's interest 6,000
Pre-construction period's interest 5,800
Total deduction 11,800
If date of repayment of loan is June 30, 2023

Current year's interest 6,000*
Pre-construction period's interest 5,800
Total deduction 11,800
If date of repayment of loan is October 31, 2019:

Current year's interest Nil
Pre-construction period's interest [1/5 of 20500] 4,100
Total 4,100
12. Interest for the year (1.4.21 to 31.3.22) = 10% of ₹ 5,00,000 = ₹ 50,000
Pre-construction interest = 10% of ₹ 5,00,000 for 6 months (from 1.10.19 to 31.3.21) = ₹ 25,000
Pre-construction interest to be allowed in 5 equal annual installments of ₹ 5,000 from the year of completion
of construction i.e. in this case, PY 2021-22.
Therefore, total interest deduction under section 24 = 50,000+5,000 = ₹ 55,000.
13. Pre Construction Period : 1.7.2017 to 31.03.2020 – 33 month

Pre Construction Interest – ₹ 77,000
Interest Deductible: 200000 x 14% + 77,000 / 5.
14. Computation of Interest allowable under section 24 in the hands of Mr. Arvind.
Assumption : Construction completed on 31.3.2021.
In the present case,
Pre construction period starts from
1.11.2020 (date of commencement of construction & borrowing) and ending on
31.3.2021 (being 31st March immediately prior to year of completion which is 31.3.2022)
Loan Amount ₹ 5,00,000.
Computation of Interest for pre construction period.

₹ 5,00,000 x 16% * 5/12 = ₹ 33,333
This interest is to be allowed in five equal installments commencing from the year in which the construction is
completed i.e. interest on account of pre-construction period for assessment year 2022-23 is ₹ 33,333 * 1/5 =
₹ 6,667.
Computation of total interest for the period 1.4.2021 to 31.3.2022 ₹
Current year interest On loan of ₹ 5,00,000
₹ 5,00,000 x 16% 80,000
On further loan of ₹ 8,00,000 (for the period 1.10.21 to 31.3.22)
₹ 8,00,000 × 16 / 100 × 6 / 12 64,000
1,44,000
Interest for pre construction period 6,667
Total interest 1,50,667
15. GAV – 270,000; NAV – 230,000; Deduction u/s 24(a) - 69,000 + u/s 24(b) Interest – 28,000 (1/5 of 140,000) +
80,000 Income from House property – ₹ 53,000


16. NIL (Self Occupied) Less Interest – 96000 + 33600 [1/5 for 21 months]
17. GAV – 108000; Pre Construction – 108000/5. Income from House Property: ₹ 13,500.
18. GAV – 36,000; M. Tax – 6,000; NAV -30,000; Std Ded - @ 30% - ₹ 9,000; Interest – 15000 + 1/5 of 20000
Income from House Property – ₹ 2,000
19. GAV – 320,000. Mun tax – 31500 (Half Paid), Pre Construction Interest – 350000 [42 month]
Income from House Property – ₹ 131950.
20.
If rent is If rent is
₹ 14,000 ₹ 19,000
per month per month
₹ ₹
Municipal valuation (MV) 1,64,000 1,64,000
Fair rent (FR) 2,16,000 2,16,000
Standard rent (SR) 1,80,000 1,80,000
Annual rent 1,40,000 1,90,000
Gross annual value
Step I - Reasonable expected rent of the property [MV or FR, whichever is
higher, but subject to maximum of SR] 1,80,000 1,80,000
Step II - Rent received/receivable after deducting unrealized rent but before
adjusting loss due to vacancy 1,40,000' 1,90,000
Step III - Amount computed in Step 1 or Step II, whichever is higher 1,80,000 1,90,000
Step IV - Loss due to vacancy Nil Nil
Step V - Gross annual value is Step III minus Step IV 1,80,000 1,90,000
Less: Municipal tax 6,000 6,000
Net annual value 1,74,000 1,84,000
Less: Deduction under section 24
Standard deduction (30%) 52,200 55,200
Interest on borrowed capital 1,23,000 1,23,000
Income from property (-) 1,200 5,800
Other income 1,86,000 1,86,000
Net income 1,84,800 1,91,800
21. Unit 1 - Self-occupied ₹

Gross annual value Nil
Less: Municipal tax Nil
Net annual value Nil
Less: Interest on borrowed capital [1 /2 of ₹ 63,000 or ₹ 30,000 whichever is lower] 30,000
Income of Unit 1 (-) 30,000
Unit 2- Let out

Municipal value (50% of ₹ 1,30,000) (MV) 65,000
Fair rent (50% of ₹ 1,40,000) (FR) 70,000
Standard rent (50% of ₹ 1,25,000) (SR) 62,500
Annual rent (₹ 6,000 X 12) 72,000
Unrealised rent 12,000
Gross Annual Value

Step I - Reasonable expected rent of the property [MV or FR, whichever is higher, but subject
to maximum of SR] 62,500
Step II - Rent received/receivable after deducting unrealized rent but before adjusting loss
due to vacancy 60,000
Step III - Amount computed in Step I or Step II, whichever is higher 62,500
Step IV - Loss due to vacancy NIL
Step V - Gross annual value is Step III minus Step IV 62,500
Less: Municipal tax (50% of 12% of ₹ 1,30,000) (7,800)
Net annual value 54,700
Standard deduction (30% of ₹ 54,700) (16,410)


Interest on borrowed capital (50% of ₹ 63,000) (31,500)
Income of Unit 2 6,790
Computation of income of X ₹
Income from house property
Unit 1: ₹ (-) 30,000
Unit 2: ₹ 6,790 (-) 23,210
Other income 1,80,000
Net income 1,56,790
22. GAV – 13500 x 9 = 121500 [Loss due to Vacancy – Section 23(1)(c) - ALV is ₹ 2,10,000 x 70%]
M.Tax - 200000 x 10% x 70%
Income from House Property – ₹ 75,250 [121500 – 14000 – 30% (121500-14000)]
23. There are two units of the house. Unit I with 2/3rd area is used by Ajay for self-occupation throughout the year
and no benefit is derived from that unit, hence it will be treated as self occupied and its annual value will be
nil. Unit 2 with 1/3rd area is let-out through out the previous year and its annual value has to be determined as
per section 23(1).
Computation of Income from house property of Mr. Ajay

Particulars Amount in rupees
Unit I (2/3rd area – self-occupied)
Annual Value Nil
Less: Deduction u/s 24(b)
2/3rd of ₹ 1,20,000 80,000
Income from Unit I (self-occupied) -80,000
Unit II (1/3rd area – let out)
Computation of GAV
Step 1. – Compute ALV
ALV = Higher of MV and FR, restricted to SR. However, in this
case, SR of ₹ 1,10,000 (1/3rd of ₹ 3,30,000) is more than the
higher of MV of ₹ 1,00,000 (1/3rd of ₹ 3,00,000) and FR of
₹ 90,000 (1/3rd of ₹ 2,70,000). Hence the higher of MV and FR
is the ALV. In this case, it is the MV. 1,00,000
Step 2. – Compute actual rent received/ receivable
8,000 x 12 = ₹ 96,000 96,000
Step 3. – GAV is the higher of ALV and actual rent
received/receivable i.e. higher of ₹ 1,00,000 and ₹ 96,000 1,00,000
Gross Annual Value (GAV) 1,00,000

Less: Municipal taxes paid by the owner during the previous year relating to let-out portion
1/3rd of (10% of ₹ 3,00,000) = ₹ 30,000/3 = 10,000 10,000
Net Annual Value (NAV) = (1,00,000-10,000) 90,000

Less: Deductions under section 24
(a) 30% of NAV = 30% of ₹ 90,000 27,000
(b) Interest paid on borrowed capital (relating to let out portion)
1/3 rd of ₹ 1,20,000 40,000 67,000
Income from Unit II (let-out) 23,000
Loss under the head “Income from house property” = - 80,000 + 23,000 - 57,000


24. Since the assessee is a resident and ordinarily resident in India, her global income would form part of her total
income i.e., income earned in India as well as outside India will form part of her total income.
She possesses 3 self-occupied house at Los Angeles as well as at Chennai. At her option, two house shall be
treated as self-occupied, whose annual value will be nil. The other self-occupied house property will be
treated as "deemed let out property".
The annual value of the Los Angeles houses are higher as compare to Chennai flat. Since the annual value of
Los Angeles house is obviously more, it will be beneficial for her to opt for choosing the same as self-
occupied. The Chennai house will, therefore, be treated as "deemed let out property"
As regards the Bangalore house; arrears of rent will be chargeable to tax as income from house property in
the year of receipt under section 25A. It is not essential that the assessee should continue to be the owner.
30% of the arrears of rent shall be allowed as deduction.
Accordingly, the income from house property of Mrs. Rohini Ravi will be calculated under:
Particulars ₹ ₹
(a) Self-occupied house at Los Angeles (two houses)
Annual value Nil
Less: Deductions under section 24 Nil
Chargeable income from this house property Nil
(b) Deemed let out house property at Chennai

Gross Annual Value
(Higher of municipal value and fair rent) 3,15,000
[₹ 35,000 x 9]
Less: Municipal Taxes (Property tax + Sewerage tax) 18,000
Statutory deduction u/s 24(a) @ 30% of NAV 89,100
Interest on borrowed capital (See Note below) 1,91,940
2,81,040
15,960
(c) Arrears in respect of Bangalore property
Arrears of rent received 60,000
Less: Statutory deduction u/s 24(a) @ 30% 18,000
42,000
Income chargeable under the head "Income from house property 57,960
Note: Interest on borrowed capital ₹

Interest for the current year (₹ 50,800 + ₹ 1,31,300) 1,82,100
Add: 1/5th of pre-construction interest (₹ 49,200 × 1/5) 9,840
Interest deduction allowable under section 24 1,91,940
25. Computation of taxable Income from House Property
House No. 1 House No. 2

at USA at Mumbai
(First Floor)
(Let out) (Let out)
₹ ₹
Gross annual value [2000 x 12 x 45] 10,80,000 1,32,000
Less : Municipal tax paid by the owner [1500x 45] 67,500 3,750
10,12,500 1,28,250
(a) Statutory deduction @30% 3,03,750 38,475
(b) Interest on borrowed capital Nil 3,03,750 12,000 50,475
Income from house property 7,08,750 77,775
House No. 2 – Ground Floor (Self occupied)

Annual value Nil
Less : Interest on loan for current year 12,000
(-)12,000


In Nutshell
Incomes taxable under the head Income from House Property
House No. 1 (USA) 7,08,750
House No. 2 (First Floor) 77,775
7,86,525
House No. 2 (Ground Floor) (-) 12,000
7,74,525
Working Note:
Annual value of property at Mumbai
1. Annual value of the property
Notional rent or expected rent - it is the higher of MV or FR but it cannot exceed SR
Municipal Value: Not given
Fair Rental Value: 140,000
Standard Rent: ₹ 11,000 × 12 = ₹ 1,32,000
Notional rent or expected rent ₹ 1,32,000
Actual rent received: ₹ 10,000 × 12 = ₹ 1,20,000 ₹ 1,20,000
Annual value is the higher of notional rent or actual rent
26. Unit 1 (let out)

Municipal valuation (50% of ₹ 60,000) (MV) 30,000
Fair rent (50% of ₹ 70,000) (FR) 35,000
Standard rent (50% of ₹ 90,000) (SR) 45,000
Annual rent (₹ 8,200 x 12) 98,400
Unrealized rent 700
Loss of rent because of vacancy 8,200
Gross Annual Value

Step I - ALV of the property [MV or FR, whichever is higher, but subject to maximum of SR] 35,000
Step II - Rent received / receivable after deducting unrealized rent and loss due to vacancy 89,500
Step III - Gross annual value = Amount computed in Step I or Step II, whichever is higher 89,500
Less: Municipal tax (50% of ₹ 15,000) 7,500
Net annual value 82,000
Standard deduction (30% of ₹ 82,000) 24,600
Interest (50% of ₹ 36,000) 18,000
House Property Income of Unit 1 39,400
Unit 3 (self-occupied)
Net annual value Nil
Less: Interest (25% of ₹ 36,000) 9,000
House Property Income of Unit 3 (-) 9,000
COMPUTATION OF PROFESSIONAL INCOME ₹ ₹

[Unit II – Used for Profession]
Income 7,95,000
Less: Municipal taxes (1/4 of ₹ 15,000) 3,750
Repairs (1/4 of ₹ 4,000) 1,000
Interest (1/4 of ₹ 36,000) 9,000
Ground rent (1/4 of ₹ 6,400) 1,600
Annual charge (*personal expenditure not deductible) *Nil
Insurance premium (1/4 of ₹ 15,000) 3,750
Depreciation 8,000 27,100
7, 67,900
COMPUTATION OF TOTAL INCOME
Income from house property:
Unit 1 39,400
Unit 3 (-) 9,000 30,400
Income from profession 7,67,900
Gross total income 7,98,300
Less: Deduction under section 80C Nil
Net income 7,98,300
Note - Ground rent, annual charge and fire insurance premium are not deductible while calculating
property income.


27. The above issues can be answered as follows -
(a) Here Mr. Ram has transferred his house property to his spouse otherwise than for adequate
consideration. Therefore, he will be deemed to be owner of the property to the extent of such
inadequacy of consideration i.e. 60% of the house and the part of house representing the consideration
i.e. 40% of the house shall be assessed in the hands of the spouse.
In other words, the property income shall be assessed as follows -
In the hands of Mr. Ram: ₹ 1,50,000 × 6,00,000 ÷10,00,000 = ₹ 90,000
In the hands of Mrs. Ram: ₹ 1,50,000 × 4,00,000 ÷ 10,00,000 = ₹ 60,000
(b) In case of property transferred by way of gift to minor child being a married daughter, the transferor
shall not be deemed to the owner of the property because section 27 specifically excludes married
daughter from this purview.
(c) Section 27(i) speaks of transfer of house property and not the transfer of any other asset. In this case, Mr.
Sohan doesn't transfer house property but what is transferred is money. It is immaterial that out of such
money the Mrs. Sohan purchases a house property. The owner of the house property will be Mrs. Sohan.
Mr. Sohan cannot be deemed to be the owner of such house property.
(d) In this case the lease is for a period exceeding 12 years, but the same is to be renewed annually i.e. for a
period not exceeding one year. Hence, the same doesn't fall u/s 27 and therefore, Mr. B is not the
deemed owner of the property u/s 27. The property income will be assessed in the hands of Mr. A.
(e) The lease is to be renewed after every two years but the lessee i.e. Mr. Y has a right to get it renewed
after every two years for indefinite period. Hence, the total period of lease can be more than 12 years and
therefore, Mr. Y will be deemed to be the owner of the house property and property income will be
assessed in his hands.
(f) Since the lease is to be renewed every six months i.e. for a period not exceeding one year, therefore,
lease doesn't fall under section 27 and Mr. Q cannot be deemed to be the owner of the house property.
Thus, the property income will be assessed in the hands of Mr. P.


Class Notes

House Property SATC 5C.1

PRACTICAL QUESTION - SET B
1. Rajesh, a British national, is a resident and ordinarily resident in India during the P.Y. 2021-
22. He owns a house in London, which he has let out at £ 10,000 p.m. The municipal taxes
paid to the Municipal Corporation of London is £ 8,000 during the P.Y. 2021-22. The value of
one £ in Indian rupee to be taken at ₹ 92.50. Compute Rajesh’s Net Annual Value of the
property for the A.Y. 2022-23.
Solution:
For the P.Y. 2021-22, Mr. Rajesh, a British national, is resident and ordinarily resident in India.
Therefore, income received by him by way of rent of the house property located in London is to be
included in the total income in India. Municipal taxes paid in London is be to allowed as deduction
from the gross annual value.
Computation of Net Annual Value of the property of Mr. Rajesh for A.Y. 2022-23
Particulars ₹
Gross Annual Value (£10,000 x 12 x 92.50) 1,11,00,000
Less: Municipal taxes paid (£8,000 x 92.50) 7,40,000
Net Annual Value (NAV) 1,03,60,000
2. Mr. Manas owns two house properties one at Bombay, wherein his family resides and the
other at Delhi, which is unoccupied. He lives in Chandigarh for his employment purposes in
a rented house. For acquisition of house property at Bombay, he has taken a loan of ₹ 30
lakh@10% p.a. on 1.4.2020. He has not repaid any amount so far. In respect of house
property at Delhi, he has taken a loan of ₹ 5 lakh@11% p.a. on 1.10.2020 towards repairs.
Compute the deduction which would be available to him under section 24(b) for A.Y. 2022-23
in respect of interest payable on such loan.
Solution:
Mr. Manas can claim benefit of Nil Annual Value in respect of his house property at Bombay and
Delhi, since no benefit is derived by him from such properties, and he cannot occupy such
properties due to reason of his employment at Chandigarh, where he lives in a rented house.
Computation of deduction u/s 24(b) for A.Y. 2022-23

Particulars ₹
(I) Interest on loan taken for acquisition of residential house property at Bombay
30,00,000 x 10% = ₹ 3,00,000
Restricted to ₹ 2,00,000
2,00,000
(II) Interest on loan taken for repair of residential house property at Delhi
₹ 5,00,000 x 11% = ₹ 55,000
Restricted to ₹ 30,000
30,000
Deduction under section 24(b) in respect of (I) and (II) above to be restricted to 2,00,000
3. Anirudh has a property whose municipal valuation is ₹ 1,30,000 p.a. The fair rent is ₹
1,10,000 p.a. and the standard rent fixed by the Rent Control Act is ₹ 1,20,000 p.a. The
property was let out for a rent of ₹ 11,000 p.m. throughout the previous year. Unrealised rent
was ₹ 11,000 and all conditions prescribed by Rule 4 are satisfied. He paid municipal taxes
@10% of municipal valuation. Interest on borrowed capital was ₹ 40,000 for the year.
Compute the income from house property of Anirudh for A.Y. 2022-23.


Solution:
Computation of Income from house property of Mr. Anirudh for A.Y. 2022-23
Particulars Amount in ₹
Computation of GAV
Step 1 Compute ER 1,20,000

ER = Higher of MV of ₹ 1,30,000 p.a. and FR of
₹ 1,10,000p.a., but restricted to SR of ₹ 1,20,000 p.a.
Step 2 Compute actual rent received/receivable 1,21,000
Actual rent received/ receivable less unrealized rent as per
Rule 4 = ₹ 1,32,000 - ₹ 11,000
Step 3 Compare ER of ₹ 1,20,000 and Actual rent
received/receivable of ₹ 1,21,000
Step 4 GAV is the higher of ER and Actual rent received/receivable 1,21,000
Less: Municipal taxes (paid by the owner during the previous
year) = 10% of ₹ 1,30,000 13,000
(a) 30% of NAV 32,400
(b) Interest on borrowed capital (actual without any ceiling limit) 40,000
72,400
Note – Alternatively, if as per income-tax returns, unrealized rent is deducted from GAV, then
GAV would be ₹ 1,32,000, being higher of expected rent of ₹ 1,20,000 and actual rent of ₹
1,32,000. Thereafter, unrealized rent of ₹ 11,000 and municipal taxes of ₹ 13,000 would be
deducted from GAV of ₹ 1,32,000 to arrive at the NAV of ₹ 1,08,000.
4. Ganesh has a property whose municipal valuation is ₹ 2,50,000 p.a. The fair rent is
₹ 2,00,000 p.a. and the standard rent fixed by the Rent Control Act is ₹ 2,10,000 p.a. The
property was let out for a rent of ₹ 20,000 p.m. However, the tenant vacated the property on
31.1.2022. Unrealised rent was ₹ 20,000 and all conditions prescribed by Rule 4 are
satisfied. He paid municipal taxes @8% of municipal valuation. Interest on borrowed
capital was ₹ 65,000 for the year. Compute the income from house property of Ganesh for
A.Y. 2022-23.
Solution:
Computation of income from house property of Ganesh for A.Y. 2022-23
Computation of GAV
Step 1 Compute ER
ER = Higher of MV of ₹ 2,50,000 p.a. and FR of 2,10,000
₹ 2,00,000 p.a., but restricted to SR of ₹ 2,10,000 p.a.
Step 2 Compute Actual rent received/ receivable 1,80,000
Actual rent received/ receivable for let out period less unrealized
rent as per Rule 4 = ₹ 2,00,000 – ₹ 20,000
Step 3 Compare ER and Actual rent received/ receivable
Step 4 In this case the actual rent of ₹ 1,80,000 is lower than ER of ₹

2,10,000 owing to vacancy, since, had the property not been
vacant the actual rent would have been ₹ 2,20,000 (₹ 1,80,000 1,80,000
+ ₹ 40,000, being notional rent for February and March 2022).
Therefore, actual rent is the GAV.


Less: Municipal taxes (paid by the owner during the previous year) = 8%
of ₹ 2,50,000 20,000
(a) 30% of NAV = 30% of ₹ 1,60,000 48,000
(b) Interest on borrowed capital (actual without any ceiling limit) 65,000 1,13,000
GAV would be ₹ 2,00,000, being the actual rent, since the actual rent is lower than the expected
rent of ₹ 2,10,000 owing to vacancy. Thereafter, unrealized rent of ₹ 20,000 and municipal taxes of
₹ 20,000 would be deducted from GAV of ₹ 2,00,000 to arrive at the NAV of ₹ 1,60,000.
5. Poorna has one house property at Indira Nagar in Bangalore. She stays with her family in the
house. The rent of similar property in the neighbourhood is ₹ 25,000 p.m. The municipal
valuation is ₹ 23,000 p.m. Municipal taxes paid is ₹ 8,000. The house construction began in
April 2015 with a loan of ₹ 20,00,000 taken from SBI Housing Finance Ltd. @9% p.a. on
1.4.2015. The construction was completed on 30.11.2017. The accumulated interest up to
31.3.2017 is ₹ 3,60,000. On 31.3.2022, Poorna paid ₹ 2,40,000 which included ₹ 1,80,000 as
interest. There was no principal repayment prior to this date. Compute Poorna’s income from
house property for A.Y. 2022-23.
Solution:
Computation of income from house property of Smt. Poorna for A.Y. 2022-23
Particulars Amount
Annual Value of house used for self-occupation under section 23(2) Nil
Less: Deduction under section 24 Interest on borrowed capital
Interest on loan was taken for construction of house on or after
1.4.99 and same was completed within the prescribed time -
interest paid or payable subject to a maximum of ₹ 2,00,000
(including apportioned pre- construction interest) will be allowed as
deduction.
In this case the total interest is ₹ 1,80,000 + ₹ 72,000 (Being
1/5th of ₹ 3,60,000) = ₹ 2,52,000. However, the interest
deduction is restricted to ₹ 2,00,000. 2,00,000
Loss from house property (2,00,000)
6. Smt. Rajalakshmi owns a house property in Jaipur. The municipal value of the property is ₹
5,00,000, fair rent is ₹ 4,20,000 and standard rent is ₹ 4,80,000. The property was let-out for ₹
50,000 p.m. up to December 2021. Thereafter, the tenant vacated the property and Smt.
Rajalakshmi used the house for self- occupation. Rent for the months of November and
December 2021 could not be realised in spite of the owner’s efforts. All the conditions
prescribed under Rule 4 are satisfied. She paid municipal taxes @12% during the year. She
had paid interest of ₹ 25,000 during the year for amount borrowed for repairs for the house
property. Compute her income from house property for the A.Y. 2022-23.


Solution:
Computation of income from house property of Smt. Rajalakshmi for the A.Y. 2022-23
Computation of GAV
Step 1 Compute ER for the whole year
ER = Higher of MV of ₹ 5,00,000 and FR of ₹ 4,20,000, but
restricted to SR of ₹ 4,80,000 4,80,000
Step 2 Compute Actual rent received/ receivable
Actual rent received/ receivable for the period let out less
unrealized rent as per Rule 4 = (₹ 50,000 x 9) - (₹ 50,000 x 3,50,000
2) = ₹ 4,50,000 - ₹ 1,00,000
Step 3 Compare ER for the whole year with the actual rent received/
receivable for the let out period i.e. ₹ 4,80,000 and ₹
3,50,000
Step 4 GAV is the higher of ER computed for the whole year and
Actual rent received/ receivable computed for the let-out 4,80,000
period
Less: Municipal taxes (paid by the owner during the previous year)
= 12% of ₹ 5,00,000 60,000

(a) 30% of NAV = 30% of ₹ 4,20,000 1,26,000
(b) Interest on borrowed capital 25,000 1,51,000
GAV would be ₹ 4,80,000, being higher of expected rent of ₹ 4,80,000 and actual rent of ₹
4,50,000. Thereafter, unrealized rent of ₹ 1,00,000 and municipal taxes of ₹ 60,000 would be
deducted from GAV of ₹ 4,80,000 to arrive at the NAV of ₹ 3,20,000. The deduction u/s 24(a) would
be ₹ 96,000, being 30% of ₹ 3,20,000. The income from house property would, therefore, be ₹
1,99,000.
7. Ms. Aparna co-owns a residential house property in Calcutta along with her sister Ms.
Dimple, where her sister’s family resides. Both of them have equal share in the property and
the same is used by them for self-occupation. Interest is payable in respect of loan of
₹ 50,00,000@10% taken on 1.4.2020 for acquisition of such property. In addition, Ms. Aparna
owns a flat in Pune in which she and her parents reside. She has taken a loan of
₹ 3,00,000@12% on 1.10.2020 for repairs of this flat. Compute the deduction which would be
available to Ms. Aparna and Ms. Dimple under section 24(b) for A.Y. 2022-23.
Solution:
Computation of deduction u/s 24(b) available to Ms. Aparna for A.Y. 2022-23.
Particulars ₹
(I) Interest on loan taken for acquisition of residential house property at
Calcutta ₹ 50,00,000 x 10% = ₹ 5,00,000
Ms. Aparna’s share = 50% of ₹ 5,00,000 = ₹ 2,50,000 Restricted to ₹
2,00,000 2,00,000
(II) Interest on loan taken for repair of flat at Pune ₹ 3,00,000 x 12% = ₹
36,000 Restricted to ₹ 30,000 30,000
Deduction under section 24(b) in respect of (I) and (II) above to be 2,00,000
restricted to

Computation of deduction u/s 24(b) available to Ms. Dimple for A.Y. 2022-23
Particulars ₹
Interest on loan taken for acquisition of residential house property at
Calcutta ₹ 50,00,000 x 10% = ₹ 5,00,000
Ms. Dimple’s share = 50% of ₹ 5,00,000 = ₹ 2,50,000
Deduction under section 24(b) 2,00,000
2,00,000
8. Mr. Raman is a co-owner of a house property along with his brother holding equal share in
the property.
Particulars ₹
Municipal value of the property 1,60,000
Fair rent 1,50,000
Standard rent under the Rent Control Act 1,70,000
Rent received 15,000 p.m.
The loan for the construction of this property is jointly taken and the interest charged by the
bank is ₹ 25,000, out of which ₹ 21,000 has been paid. Interest on the unpaid interest is ₹ 450.
To repay this loan, Raman and his brother have taken a fresh loan and interest charged on
this loan is ₹ 5,000.
The municipal taxes of ₹ 5,100 have been paid by the tenant.
Compute the income from this property chargeable in the hands of Mr. Raman for the A.Y.
2022-23.
Solution:
Computation of income from house property of Mr. Raman for A.Y. 2022-23
Particulars ₹ ₹
Gross Annual Value (See Note 1 below) 1,80,000
Less: Municipal taxes – paid by the tenant, hence not deductible Nil
(i) 30% of NAV 54,000
(ii) Interest on housing loan (See Note 2 below)
 Interest on loan taken from bank 25,000
 Interest on fresh loan to repay old loan for this property 5,000 84,000
50% share taxable in the hands of Mr. Raman (See Note 3 below) 48,000
Notes:
1. Computation of Gross Annual Value (GAV)
GAV is the higher of Expected rent and actual rent received. Expected rent is the higher of
municipal value and fair rent, but restricted to standard rent.

Particulars ₹ ₹ ₹ ₹
(a) Municipal value of property 1,60,000
(b) Fair rent 1,50,000
(c) Higher of (a) and (b) 1,60,000
(d) Standard rent 1,70,000
(e) Expected rent [lower of (c) and (d)] 1,60,000
(f) Actual rent [₹ 15,000 x 12] 1,80,000
(g) Gross Annual Value [higher of (e)and (f)] 1,80,000
2. Interest on housing loan is allowable as a deduction under section 24 on accrual basis.

Further, interest on fresh loan taken to repay old loan is also allowable as deduction.
However, interest on unpaid interest is not allowable as deduction under section 24.
3. Section 26 provides that where a house property is owned by two or more persons whose
shares are definite and ascertainable, the share of each such person in the income of house
property, as computed in accordance with sections 22 to 25, shall be included in his
respective total income. Therefore, 50% of the total income from the house property is
taxable in the hands of Mr. Raman since he is an equal owner of the property.
9. Mr. X owns one residential house in Surat. The house is having two identical units. First
unit of the house is self-occupied by Mr. X and another unit is rented for ₹ 8,000 p.m. The
rented unit was vacant for 2 months during the year. The particulars of the house for the
previous year 2021-22 are as under:
Standard rent ₹ 1,62,000 p.a.

Municipal valuation ₹ 1,90,000 p.a.
Fair rent ₹ 1,85,000 p. a
Municipal tax (Paid by Mr. X) 15% of municipal valuation
Light and water charges ₹ 500 p.m.
Interest on borrowed capital ₹ 1,500 p.m.
Lease money ₹ 1,200 p.a.
Insurance charges ₹ 3,000 p.a.
Repairs ₹ 12,000 p.a.
Compute income from house property of Mr. X for the A.Y. 2022-23.
Solution:
Computation of Income from house property for A.Y. 2022-23
Particulars ₹ ₹
(A) Rented unit (50% of total area – See Note below)
Step I - Computation of Expected Rent
Municipal valuation (₹ 1,90,000 x ½) 95,000
Fair rent (₹ 1,85,000 x ½) 92,500
Standard rent (₹ 1,62,000 x ½) 81,000
Expected Rent is higher of municipal valuation and fair rent, but 81,000
restricted to standard rent
Step II - Actual Rent
Rent receivable for the whole year (₹ 8,000 x 12) 96,000


Step III – Computation of Gross Annual Value
Actual rent received owing to vacancy (₹ 96,000 – 80,000
₹ 16,000) Since, owing to vacancy, the actual rent received is lower
than the Expected Rent, the actual rent received is the Gross Annual
Value
Gross Annual Value 80,000
Less: Municipal taxes (15% of ₹ 95,000) 14,250
Net Annual value 65,750
Less : Deductions under section 24 -
(i) 30% of net annual value 19,725
(ii) Interest on borrowed capital (₹ 750 x 12) 9,000 28,725
Taxable income from let out portion 37,025
(B) Self occupied unit (50% of total area – See Note below)
Annual value Nil
Less : Deduction under section 24 -
Interest on borrowed capital (₹ 750 x 12) 9,000
9,000
Loss from self-occupied portion (9,000)
Note: No deduction will be allowed separately for light and water charges, lease money paid,
insurance charges and repairs.
10. Mr. Vikas owns a house property whose Municipal Value, Fair Rent and Standard Rent are
₹ 96,000, ₹ 1,26,000 and ₹ 1,08,000 (per annum), respectively.
During the Financial Year 2021-22, one-third of the portion of the house was let out for
residential purpose at a monthly rent of ₹ 5,000. The remaining two-third portion was self-
occupied by him. Municipal tax @ 11 % of municipal value was paid during the year.
The construction of the house began in June, 2014 and was completed on 31-5-2017. Vikas
took a loan of ₹ 1,00,000 on 1-7-2014 for the construction of building.
He paid interest on loan @ 12% per annum and every month such interest was paid.
Compute income from house property of Mr. Vikas for the Assessment Year 2022-23.
Solution:
Computation of income from house property of Mr. Vikas for the A.Y. 2022-23
Particulars ₹ ₹
I. Self-occupied portion (Two third)
Nil
Net Annual value
Less: Deduction under section 24(b)
Interest on loan (See Note below)
(₹ 18,600 x 2/3) 12,400
Loss from self occupied property (12,400)
II. Let-out portion (One third)
Gross Annual Value
(a) Actual rent received (₹ 5,000 x 12) ₹ 60,000
(b) Expected rent ₹ 36,000
[higher of municipal valuation (i.e.,
₹ 96,000) and fair rent (i.e., ₹ 1,26,000)
but restricted to standard rent (i.e.,
₹ 1,08,000)] = ₹ 1,08,000 x 1/3
Higher of (a) or (b) 60,000


Less: Municipal taxes (₹ 96,000 x 11% x 1/3) 3,520
Net Annual Value 56,480
(a) 30% of NAV 16,944
(b) Interest on loan (See Note below)
(₹ 18,600 x 1/3) 6,200 33,336
Note: Interest on loan taken for construction of building
Interest for the year (1.4.2021 to 31.3.2022) = 12% of ₹ 1,00,000 = ₹ 12,000
Pre-construction period interest = 12% of ₹ 1,00,000 for 33 months (from 1.07.2014 to 31.3.2017) =
₹ 33,000
Pre-construction period interest to be allowed in 5 equal annual installments of ₹ 6,600 from the
year of completion of construction i.e. from F.Y. 2017-18 till F.Y. 2021-22.
Therefore, total interest deduction under section 24 = ₹ 12,000 + ₹ 6,600 = ₹ 18,600.
11. Mrs. Rohini Ravi, a citizen of the U.S.A., is a resident and ordinarily resident in India during
the financial year 2021-22. She owns a house property at Los Angeles, U.S.A., which is used
as her residence. The annual value of the house is $20,000. The value of one USD ($) may be
taken as ₹ 65.
She took ownership and possession of a flat in Chennai on 1.7.2021, which is used for self-
occupation, while she is in India. The flat was used by her for 7 months only during the year
ended 31.3.2022. The municipal valuation is ₹ 32,000 p.m. and the fair rent is ₹ 4,20,000 p.a.
She paid the following to Corporation of Chennai:
Property Tax ₹ 16,200

Sewerage Tax ₹ 1,800
She had taken a loan from Standard Chartered Bank in June, 2019 for purchasing this flat.
Interest on loan was as under:
₹
Period prior to 1.4.2021 49,200
1.4.2021 to 30.6.2021 50,800
1.7.2021 to 31.3.2022 1,31,300
She had a house property in Bangalore, which was sold in March, 2018. In respect of this
house, she received arrears of rent of ₹ 60,000 in March, 2022. This amount has not been
charged to tax earlier.
Compute the income chargeable from house property of Mrs. Rohini Ravi for the assessment
year 2022-23.
Solution:
Since the assessee is a resident and ordinarily resident in India, her global income would form part
of her total income i.e., income earned in India as well as outside India will form part of her total
income.
She possesses a self-occupied house at Los Angeles as well as at Chennai. She can take the
benefit of “Nil” Annual Value in respect of both the house properties.


As regards the Bangalore house, arrears of rent will be chargeable to tax as income from house
property in the year of receipt under section 25A. It is not essential that the assessee should
continue to be the owner. 30% of the arrears of rent shall be allowed as deduction.
Accordingly, the income from house property of Mrs. Rohini Ravi will be calculated as
under:
Particulars ₹ ₹
1. Self-occupied house at Los Angeles
Annual value Nil
Less: Deduction under section 24 Nil
Chargeable income from this house property
Nil
2. Self-occupied house property at Chennai
Annual value Nil
Less: Deduction under section 24 1,91,940
Interest on borrowed capital (See Note below) (1,91,940)
3. Arrears in respect of Bangalore property (Section 25A) 60,000

Arrears of rent received 18,000 42,000
Less: Deduction @ 30% u/s 25A(2)
Loss under the head "Income from house property” (1,49,940)
Note: Interest on borrowed capital
Particulars ₹
Interest for the current year (₹ 50,800 + ₹ 1,31,300) 1,82,100
Add: 1/5th of pre-construction interest (₹ 49,200 x 1/5) 9,840
Interest deduction allowable under section 24 1,91,940
12. Ganesh has three houses, all of which are self-occupied. The particulars of the houses for
the P.Y. 2021-22 are as under:
Particulars House I House II House III

Municipal valuation p.a. ₹ 3,00,000 ₹ 3,60,000 ₹ 3,30,000
Fair rent p.a. ₹ 3,75,000 ₹ 2,75,000 ₹ 3,80,000
Standard rent p.a. ₹ 3,50,000 ₹ 3,70,000 ₹ 3,75,000
Date of completion/purchase 31.3.1999 31.3.2002 01.4.2015
Municipal taxes paid during the year 12% 8% 6%
Interest on money borrowed for repair of property - 55,000
during the current year
Interest for current year on money borrowed in April, 1,75,000
2015 for purchase of property
Compute Ganesh’s income from house property for AY 2022-23 and suggest which houses
should be opted by Ganesh to be assessed as self-occupied so that his tax liability is
minimum.


Solution:
Let us first calculate the income from each house property assuming that they are deemed to be let
out.
Computation of income from house property of Ganesh for the A.Y. 2022-23
House I House II House III
Gross Annual Value (GAV)
ER is the GAV of house property
ER = Higher of MV and FR, butrestricted to SR 3,50,000 3,60,000 3,75,000
Less: Municipal taxes (paid by the owner during the 36,000 28,800 19,800
previous year)
Net Annual Value (NAV) 3,14,000 3,31,200 3,55,200
(a) 30% of NAV 94,200 99,360 1,06,560
(b) Interest on borrowed capital - 55,000 1,75,000
Income from house property 2,19,800 1,76,840 73,640
Ganesh can opt to treat any two of the above house properties as self-occupied .
OPTION 1 (House I and II– self-occupied and House III – deemed to be let out)
If House I and II are opted to be self-occupied, the income from house property shallbe –
House I (Self-occupied) Nil
House II (Self-occupied) (interest deduction restricted to ₹ 30,000) (30,000)
House III (Deemed to be let-out) 73,640
OPTION 2 (House I and III – self-occupied and House II – deemed to be let out)
If House I and III are opted to be self-occupied, the income from house property shallbe –
House I (Self-occupied) Nil
House II (Deemed to be let-out) 1,76,840
House III (Self-occupied) (1,75,000)
OPTION 3 (House II and III – self-occupied and House I – deemed to be let out)
If House II and III are opted to be self-occupied, the income from house property shallbe –
House I (Deemed to be let-out) 2,19,800
House II (Self-occupied) (interest deduction restricted to ₹ 30,000) (30,000)
House III (Self-occupied) (1,75,000)
(Total interest deduction restricted to ₹ 2,00,000) (2,00,000)
Since Option 2 is most beneficial, Ganesh should opt to treat House I and III as self-occupied and
House II as deemed to be let out. His income from house property would be ₹ 1,840 for the A.Y.
2022-23.


rd
13. Prem owns a house in Surat. During the previous year 2021-22, 2/3 portion of the
house was self-occupied and 1/3rd portion was let out for residential purposes at a rent of
₹ 8,000 p.m. Municipal value of the property is ₹ 3,00,000 p.a., fair rent is ₹ 2,70,000 p.a.
and standard rent is ₹ 3,30,000 p.a. He paid municipal taxes @10% of municipal value
during the year. A loan of ₹ 25,00,000 was taken by him during the year 2017 for
acquiring the property. Interest on loan paid during the previous year 2021-22 was
₹ 1,20,000. Compute Prem’s income from house property for the A.Y. 2022-23.
Solution:
There are two units of the house. Unit I with 2/3rd area is used by Prem for self- occupation
throughout the year and no other benefit is derived from that unit, hence it will be treated as
self-occupied and its annual value will be Nil. Unit 2 with 1/3rd area is let-out throughout the
previous year and its annual value has tobe determined as per section 23(1).
Computation of income from house property of Mr. Prem for A.Y. 2022-23
Unit I (2/3rd area – self-occupied)
Annual Value Nil
Less: Deduction under section 24(b)2/3rd of ₹ 1,20,000
80,000
Income from Unit I (self-occupied) (80,000)
Unit II (1/3rd area – let out)

Computation of GAV
Step I Compute ER
ER = Higher of MV and FR, restricted to SR However, in this 1,00,000
case, SR of ₹ 1,10,000 (1/3rd of ₹ 3,30,000) is more than
the higher of MV of ₹ 1,00,000 (1/3rd of ₹ 3,00,000) and
FR of ₹ 90,000 (1/3rd of ₹ 2,70,000).
Hence the higher of MV and FR is the ER. In this case, it is
the MV.
Step 2 Compute actual rent received/ receivable
₹ = ₹ 96,000 96,000
Step 3 Compare ER and Actual rent received/receivable
Step 4 GAV is the higher of ER and actual rent received/ receivable
i.e. higher of ₹ 1,00,000 and ₹ 96,000 1,00,000
Gross Annual Value(GAV) 1,00,000
Less: Municipal taxes paid by the owner during theprevious year
relating to let-out portion 1/3rd of (10% of ₹ 3,00,000) =
₹ 30,000/3 = ₹10,000 10,000
Net Annual Value(NAV) 90,000
(a) 30% of NAV = 30% of ₹ 90,000 27,000
(b) Interest paid on borrowed capital (relatingto let out portion)
1/3rd of ₹ 1,20,000 40,000 67,000
Income from Unit II (let-out) 23,000
Loss under the head “Income from house property”
= (₹ 80,000) + ₹ 23,000 = (₹ 57,000)


Class Notes

SALARY SATC 6.1
INCOME UNDER THE HEAD OF SALARIES

[Chapter IV-A & Sections 15 – 17]
Income from Salary XXX
Add: Income by way of Allowances XXX
Add: Taxable Value of Perquisites XXX
Gross Salary XXX
(ia) Statutory Deduction 50,000
(ii) Entertainment Allowances XXX
(iii) Professional Tax XXX XXX
INCOME UNDER THE HEAD “SALARIES” XXX
NOTE: Deduction under Section 16 (all 3) would not be available in case of an employee, being
an assessee, who opts for the provisions of section 115BAC.
CONDITION FOR CHARGING INCOME UNDER THE HEAD OF “SALARIES”
Income is taxable under the head ‘salaries’ only if there exists employer-employee relationship between
the payer and the payee.
IMPORTANT FEATURES OF EMPLOYER-EMPLOYEE RELATIONSHIP:
1. Contract of Services (Salary) Vs Contract for services (PGBP)
2. Master-Servant Relationship.
3. Direct supervision and control of the employer.
4. It is distinct from principle-agent relationship.
INSTANCES WHERE EMPLOYER-EMPLOYEE RELATIONSHIP EXISTS/DOES NOT EXIST
1) Director of a company: In the case of a Director of a company, employer – employee relationship

cannot be presumed but should be ascertained based on the service agreement, if any, executed or
the Articles of Association of the company.
2) MPs/MLAs: The CBDT has issued instructions that salaries of MPs and MLAs [Member of
legislative assemblies] is not chargeable under the head 'salaries' but it is chargeable under the
head 'income from other sources' since there is no employer – employee relationship between them
and the Government.
3) Paper-setters/Examiners: Where a teacher of college receives remuneration for setting question

paper for examination or works as an invigilator in University then the remuneration received by
him will be taxable under the head ‘income from other sources’.
4) Judges: It was held that what the Judges receive is salary since there is employment as created by
the constitution of India.

SALARY SATC 6.2

Class Notes

SALARY SATC 6.3

SECTION 17(1) - ‘SALARY’ includes:
a) Wages,
b) any Annuity or Pension,
c) any Gratuity,
d) any Fees, Commission, Perquisite or Profits in lieu of or in addition to any Salary or Wages,
e) any Advance of salary,
f) any payment received in respect of any period of leave not availed by him i.e. Leave Salary or
leave encashment,
g) the portion of the annual accretion in any previous year to the balance at the credit of an
employee participating in a recognised provident fund to the extent it is taxable,
h) the aggregate of all sums that are comprised in the transferred balance of an employee
participating in a recognized provident fund to the extent it is taxable,
i) the contribution made by the Central Government or any other employer in the previous year
to the account of an employee under a pension scheme referred to in section 80CCD.
SECTION 15 - BASIS OF CHARGE
The following Income shall be chargeable to income tax under the head “Salaries”
 Salary Due: Any Salary due from an employer or a former employer to an assessee in the
previous year, whether paid or not.
 Advance Salary: Any salary paid or allowed to the assessee in the previous year by or on behalf
of an employer or a former employer though not due or before it became due to him
 Arrears of Salary: Any arrears of salary paid or allowed to assessee in the previous year by or on
behalf of an employer or a former employer, if not charged to income-tax for any earlier previous
year.
Note:
1. Salary chargeable to tax either on ‘due’ basis or on ‘receipt’ basis whichever is earlier.
2. Accounting method of the employee is not relevant
1.2
SALARY IN THE GRADE SYSTEM:
Refer Class Notes

SALARY SATC 6.4

Class Notes

SALARY SATC 6.5

TAX TREATMENT OF DIFFERENT FORM OF ‘SALARY’
Advance Salary:
Salary can’t be taxed twice i.e. where any salary paid in advance is taxed on receipt basis (in
the yr. of receipt) it can’t be taxed again on the due basis (in the yr. in which it becomes due).
Arrear of Salary:
Arrear of Salary received by an assessee is charged to tax on receipt basis (if it was not taxed
earlier on due basis).
Salary to Partners {Explanation 2 to Section 15}:
Any salary, bonus, commission or remuneration received by a partner from his firm is taxed as
business income and not as salary income.
Fees & Commission:
Fees & Commission paid to an employee are taxed as salary income.
Overtime Payment:
Overtime payment is a taxable salary income.
Annuity {Section 17(1) (ii)}:
Annuity received from present employer will be taxed as salary.
Bonus:
Bonus is taxed in the year of receipt, it is not taxed on due basis.
Salary from UNO {Sec. 2 of UN (Privileges & Immunities Act, 1947)}:
Salaries, emoluments & pension paid by UNO to its officials are exempt from tax.
Full-time or part-time employment:
It does not matter whether the employee is a fulltime employee or a part-time one. Once the
relationship of employer and employee exists, the income is to be charged under the head
“salaries”.
Foregoing of Salary:
Once salary accrues, the subsequent waiver by the employee does not absolve him from liability
to income-tax. Such waiver is only an application and hence, chargeable to tax.
Surrender of Salary:
If an employee [Govt/PSU/Pvt] surrenders his salary to the Central Government under Section
2 of the Voluntary Surrender of Salaries (Exemption from Taxation) Act, 1961, the salary
so surrendered would be exempt while computing his taxable income.

SALARY SATC 6.6

Class Notes

SALARY SATC 6.7

TDS on Salary:
As Per Section 192, every employer has to deduct Tax on the Taxable salary of his employee if
such salary is more than the basic exemption limit and handover the net salary which is after TDS,
to the employee. While calculating taxable Income of employee ‘Salary before TDS’ has to be
taken and not the net salary after TDS.
Salary Paid Tax-Free:
In this arrangement, the employer bears the burden of the tax on the salary of the employee. In
such a case, the income from salaries in the hands of the employee will consist of his salary
income and also the tax on this salary paid and bears by the employer.
Loan or Advance Against Salary:
Loan is different from salary. When an employee takes a loan from his employer, which is
repayable in certain specified installments, the loan amount cannot be brought to tax as salary of
the employee.
Similarly, advance against salary is different from advance salary. It is an advance taken by the
employee from his employer. This advance is generally adjusted with his salary over a specified
time period. It cannot be taxed as salary.
PLACE OF ACCRUAL OF SALARY (ALSO REFER RESIDENTIAL STATUS CHAPTER)
 Section 9(1)(ii) provides that salary earned in India is deemed to accrue or arise in India even if it
is paid outside India or it is paid or payable after the contract of employment in India comes to an
end.
[Pension paid abroad in respect of services rendered in India & leave salary paid abroad in
respect of leave earned in India is deemed to accrue or arise in India]
 Section 9(1)(iii) provides that salaries payable by the Government to a citizen of India for
services outside India shall be deemed to accrue or arise in India.
Foreign Allowances by the Govt. Employer - Section 10(7) –Exempted
Any allowance or perquisite paid or allowed outside India, by the Indian Govt. to a citizen of India,
for rendering service outside India is fully exempt.
Example: If an employee gets pension paid abroad in respect of services rendered in India, the same
will be deemed to accrue in India. Similarly, leave salary paid abroad in respect of leave earned in
India is deemed to accrue or arise in India.
Example: A, a citizen of India is posted in the United States as our Ambassador. Obviously, he
renders his services outside India. He also receives his salary outside India. He is also a non-resident.
The same will be deemed to accrue or arise in India.

SALARY SATC 6.8

Class Notes

SALARY SATC 6.9

SECTION 17(3) – “PROFITS IN LIEU OF SALARY” INCLUDES
(a) TERMINAL COMPENSATION:

The amount of any compensation due to or received by employee from his employer or former
employer in connection with the termination of his employment or the modification of the terms
and conditions relating thereto.
[Usually, such compensation is treated as a capital receipt. However, by virtue of this provision,
the same is treated as a revenue receipt and is chargeable as salary.]
(b) PAYMENT FROM AN UNRECOGNIZED PROVIDENT FUND:

Any payment due / received by an assessee from unrecognized Provident Fund or other
Fund to the extent to which it does not consist of employee’s contributions or interest on such
contributions.
(c) PAYMENT UNDER KEYMAN INSURANCE POLICY:

Any payment due to or received by an assessee under a Keyman Insurance policy including
the sum allocated by way of bonus on such policy.
(d) ANY AMOUNT, WHETHER IN LUMPSUM OR OTHERWISE, DUE TO THE ASSESSEE OR

RECEIVED BY HIM, FROM ANY PERSON
i. before joining employment with that person, or
ii. after cessation of his employment with that person.
(e) ANY OTHER PAYMENT due to or received by an assessee from an employer or a former
employer or any fund [Other than the payments exempt under section 10]

SALARY SATC 6.10

Class Notes

SALARY SATC 6.11

DEDUCTIONS FROM SALARY
The income chargeable under the head ‘salaries’ is computed after making the following deductions:
ENTERTAINMENT ALLOWANCE [SEC. 16(ii)]

 First the entire entertainment allowance received by an employee is added to the gross salary.
 Then deduction u/s 16(ii) shall be allowed as under.
Government (CG/SG) employees Non-Government employees
Least of the following is deductible- (No deduction)
a. Amount actual received

b. ₹ 5,000
c. 20% of salary
(Salary=Basic Salary)
Note – Actual expenditure towards entertainment is not deductible. It is irrelevant.
PROFESSIONAL TAX [SEC. 16(iii)]
Professional tax or taxes on employment levied by a State is allowed as deduction only when it is
actually paid by the employee during the previous year (deduction on paid basis).
If professional tax is reimbursed or directly paid by the employer on behalf of the employee, the amount
so paid is first included as salary income and then allowed as a deduction under section 16.
Question 1:
X is employed by A Ltd. (basic salary being ₹ 38,750 per month). Besides, he gets ₹ 3,000 per
month as entertainment allowance. He pays professional tax of ₹ 1,000. Find out the salary
chargeable to tax. Does it make any difference if the professional tax is paid by A Ltd.
Answer:
If
professional If professional
tax is paid tax is paid by
by X the employer
A Ltd.
₹ ₹
Basic Salary (₹ 38,750 x 12) 4,65,000 4,65,000
Entertainment allowance 36,000 36,000
Professional tax paid by the employer — 1,000
Gross Salary 5,01,000 5,02,000
Less : Deduction under section 16
Standard deduction 50,000 50,000
Entertainment allowance [not allowed] — —
Professional tax 1,000 1,000
Income under the head "Salaries" 4,50,000 4,51,000

SALARY SATC 6.12

Question 2
A furnishes the following particular for his remuneration from Delta Pvt. Ltd.
Basic salary ₹ 9,300 p.m.
Dearness Allowance (forming part of salary for retirement benefits) ₹ 4,500 p.m.
Entertainment Allowance ₹ 2,250 p.m.
He had paid ₹ 3,500 towards professional tax to State Government. Compute his income from
salary.
Question 3:
Mr. Goyal receives the following emoluments (Gross) during the previous year ending 31.03.
Basic pay ₹ 40,000
Dearness Allowance ₹ 15,000
Commission ₹ 10,000
Entertainment allowance ₹ 4,000
Professional tax paid ₹ 3,000 (₹ 2,000 was paid by his
employer)
He has no other income. Determine the income from salary, if Mr. Goyal is a State Government
employee.

SALARY SATC 6.13

CLASS NOTES

SALARY SATC 6.14

CLASS NOTES

SALARY SATC 6.15

GRATUITY [SECTION 10(10)]
Any gratuity received by an Individual on his death or retirement is eligible for exemption u/s 10(10)
as under –
 IN CASE OF GOVT. EMPLOYEES (CG/SG), EMPLOYEE OF LOCAL AUTHORITY (BUT NOT

STATUTORY CORPORATION)
Gratuity received is FULLY EXEMPT
 IN CASE OF OTHER EMPLOYEES
(a) If covered under Payment of Gratuity Act, 1972, then least of the following is
exempt:-
(i) Actual Amount received

(ii) ₹ 20,00,000
15
(iii) days * last drawn salary for each completed year of service or part thereof
26
in excess of 6 months
Note:
1. Salary means Basic Salary and Dearness Allowance (Whether or not forming
part of retirement benefit) on DUE BASIS
2. In case of SEASONAL ESTABLISHMENT – “15 days” will be replaced with “7

days”.
(b) If not covered under Payment of Gratuity Act, 1972, then least of the following is
exempt:-
(i) Actual amount received

(ii) ₹ 20,00,000
(iii) Half month’s salary (based on last 10 months’ average salary immediately
preceding the month of retirement or death) for each completed year of
service (fraction to be ignored)
Note:
1. Salary means Basic Salary and Dearness Allowance, if provided in the terms of
employment for retirement benefits, forming part of salary and commission which
is expressed as a fixed percentage of turnover achieved by the employee.
[Basic Salary + DA (R) + Commission (Sales)] - [Gestetner Duplicators Pvt.
Ltd (SC)]
2. It should be on DUE BASIS.
3. Half Month Salary should be read as 15/30.

SALARY SATC 6.16

Notes on Gratuity:
1. Gratuity received during the period of service is always taxable for all employees.
2. If Employee receives gratuity from two or more employers, then aggregate amount of gratuity
exempt from tax cannot exceed ₹ 20,00,000.
3. Where the employee has received gratuity in any earlier year & also receives gratuity from another
employer in a later year, the limit of ₹ 20,00,000 will be reduced by the amount of gratuity exempt
from tax in any earlier year.
4. Exemption under this provision will be available only in case where employer employee relationship
exists.
Question 4:
Mr. Ravi retired on 15.6.2021 after completion of 26 years 8 months of service and received
gratuity of ₹ 12,00,000. At the time of retirement his salary was:
Basic Salary : ₹ 6,000 p.m.

Dearness Allowance : ₹ 4,000 p.m. (60% of which is for retirement benefits)
Commission : 1% of turnover (turnover in the last 12 months was ₹12,00,000)
Bonus : ₹ 20,000 p.a.
Compute his taxable gratuity assuming:

(a) He is non-government employee and covered by the Payment of Gratuity Act 1972.
(b) He is non-government employee and not covered by Payment of Gratuity Act 1972.
(c) He is a Government employee.
Question 5:
Question 5:
Mr. Hari retires on 15th October 2021, after serving 30 years and 7 months. He gets ₹ 3,80,000 as
gratuity. His salary details are given below:
FY 2021-22 Salary ₹ 16,000 pm D.A. 50% of salary. 40% forms part of retirement
benefits.
FY 2020-21 Salary ₹ 15,000 pm D.A. 50% of salary. 40% forms part of retirement
benefits
Determine his taxable gratuity in the following cases:

(i) He retires from government service
(ii) He retires from seasonal factory in a private sector, covered under Payment of Gratuity
Act, 1972.
(iii) He retires from non-seasonal factory, covered by Payment of Gratuity Act, 1972
(iv) He retires from private sector, not covered by payment of Gratuity Act

SALARY SATC 6.17

PENSION [SEC 10(10A)]
“Pension” may be defined as a periodic payment made especially by Government or a company or
other employers to the employee in consideration of past service payable after his retirement.
Pension is of two types: Commuted and Uncommuted
Uncommuted Pension:
Uncommuted pension refers to pension received periodically. It is fully taxable in the hands of
both government and non-government employees.
Commuted Pension:
Commuted pension means lump sum amount taken by commuting the whole or part of the
pension.
Taxability:
EMPLOYEES OF THE CENTRAL/STATE GOVERNMENT/LOCAL AUTHORITIES/STATUTORY

CORPORATION
Any commuted pension received is fully exempt from tax.
IN CASE OF OTHER EMPLOYEES:
Case I: If the Employee receives the Gratuity also:
Then Exemption = 1/3 * Full Commutable value of

Pension.
Case II: If the Employee DOES NOT receive any Gratuity:
Then Exemption = 1/2 * Full Commutable value of Pension.
Here, Full Commutable value of Pension = Commuted Amount

% of Commutation
Question 6:
Mr. Sagar retired on 1.10.2021 receiving ₹ 5,000 p.m. as pension. On 1.2.2022, he commuted 60%
of his pension and received ₹ 3,00,000 as commuted pension. You are required to compute his
taxable pension assuming:
a) He is a government employee.
b) He is a non-government employee, receiving gratuity of ₹ 5,00,000 at the time of retirement.
c) He is a non-government employee and is in receipt of no gratuity at the time of retirement.

SALARY SATC 6.18

CLASS NOTES

SALARY SATC 6.19

LEAVE SALARY [SECTION 10(10AA)]
It provides exemption in respect of amount received by way of encashment of unutilised earned leave
by an employee at the time of his retirement whether on superannuation or otherwise.
In case of Central or State Government Employees [Employee of Local Authority/Statutory

Corporation excluded]:
- Fully Exempt
In case of other Employees:
- Leave salary received at the time of retirement is exempt from tax to the extent of least of
the following:
i) ₹ 3,00,000
ii) Leave salary actually received
iii) 10 months X Average Salary
iv) Earned leave to the credit of employee x Average Salary
Where:
(1) ‘Average salary’ will be determined on the basis of the salary drawn during the period
of ten months immediately preceding the date of his retirement whether on
superannuation or otherwise.
(2) Salary means Basis Salary + DA (R) + Commission (Sales).
(3) Earned leave to the credit of the employee =
{Annual Leave Entitlement (Not exceeding 30 days) X Completed years of actual

service rendered (Fractions will be ignored)} – Leave availed during the
service
Note:
(1) Leave salary received during the period of service (i.e. during continuity of employment) is
fully taxable.
(2) Leave encashment on retirement by way of resignation will also be eligible for exemption.
(3) Where leave salary is received from two or more employers in the same year, then the aggregate
amount of leave salary exempt from tax cannot exceed ₹ 3,00,000.
(4) Where leave salary is received in any earlier year from a former employer and again received from
another employer in a later year, the limit of ₹ 3,00,000 will be reduced by the amount of leave
salary exempt earlier.

SALARY SATC 6.20

Question 7
Mr. G retired on 1.12.2021 after 20 years 10 months of service, receiving leave salary of
₹ 5,00,000. Other details of his salary income are:
Basic Salary: ₹ 5,000 p.m. (₹ 1,000 was increased w.e.f. 1.4.21)

Dearness Allowance: ₹ 3,000 p.m. (60% of which is for retirement benefits)
Commission: ₹ 500 p.m.
Bonus: ₹ 1,000 p.m.
Leave availed during service: 480 days
He was entitled to 30 days leave every year. You are required to compute his taxable leave salary
assuming:
(a) He is a government employee.
(b) He is a non government employee.
RETRENCHMENT COMPENSATION [SECTION 10(10B)]
Any compensation received by a workman at the time of his retrenchment, under the Industrial Disputes
Act, 1947, shall be exempt to the extent of least of the following:
(i) Actual amount received;

(ii) An amount calculated in accordance with Section 25F(b) of the Industrial Disputes Act, 1947 i.e.
15 / 26 day’s average pay [3 months basis] for every completed year of service or part
thereof in excess of 6 months;
(iii) ₹ 5,00,000.
[In case where the retrenchment scheme is approved by the Central government, the entire
amount is exempt.]
Note: Pay will include Basic Salary + D.A (Whether or not forming part of retirement benefit) +
………………………..etc.
Question 8:
Mr. Agrawal received retrenchment compensation of ₹ 10,00,000 after 30 years 4 months of service. At
the time of retrenchment, he was drawing basic salary ₹ 20,000 p.m.; Dearness allowance ₹ 5,000 p.m.
Compute his taxable retrenchment compensation.

SALARY SATC 6.21

Class Notes

SALARY SATC 6.22

Class Notes

SALARY SATC 6.23

COMPENSATION RECEIVED at the time VRS / VSS under Golden
Handshake Scheme – [SECTION 10(10C)]
(A) Compensation received is exempt from tax if the following conditions are satisfied:
1) Compensation is received at the time of Voluntarily Retirement Scheme or Voluntarily

Separation Scheme.
2) Compensation is received by the employees of -
a. Central & State Govt.
b. Local Authority
c. Statutory Corporation
d. Co – Operative Society
e. Public Sector Company; or any other Company
f. Approved University
g. I.I.T.
h. Notified Institution
i. Some Notified institute of management (i.e. IIM and IIFT)
3) Compensation is received in accordance with VRS / VSS framed in accordance with guidelines.
4) Exemption u/s. 10(10C) shall be once for any assessment year [Means “in life”].
5) No Exemption if relief availed u/s 89:
Where any relief has been allowed to an assessee under section 89 for any AY in respect of any
amount received or receivable on his voluntary retirement or termination of service or voluntary
separation, no exemption under this section shall be allowed to him in relation to such, or
any other, AY.
Further, once relief is claimed u/s 89, the right to claim exemption in respect of VRS
compensation is lost forever.
(B) Quantum of Exemption: Least of the following is exempt: Least of the

following is exempt:
1) Actual Compensation Received
2) Statutory Limit: ₹ 5,00,000
3) 3 months’ salary for each completed year of service
4) Salary at the time of retirement x balance months of service left
[Salary = Last drawn Basic Pay + DA (R) + Comm. (Sales)]
(C) Following guidelines should be noted for the purpose of claiming exemption [Rule 2BA]:
a) The employee must have completed 10 year of service or attained 40 years of age except
in the case of an employee of a PSU;
b) The employee must not be a director in a company or co-operative society;
c) The scheme results in overall reduction in the existing strength of the employees;
d) The vacancy caused on such VRS / VSS shall not be filled up.
e) The retiring employee shall not be employed in another company or concern belonging to
the same management group; and

SALARY SATC 6.24

Question 9:
Mr. A received voluntary retirement compensation of ₹ 8,00,000 after 30 years 4 months of service. He
still has 6 year of service left. At the time of voluntary retirement, he was drawing basic salary ₹ 20,000
p.m.; DA (which forms part of pay) ₹ 5,000 p.m.; compute his taxable VRS.
VALUATION OF LEAVE TRAVEL CONCESSION

[Section 10(5) read with Rule 2B]
[Exemption u/s 10(5) would not be available in case of an employee, being an assessee, who
opts for the provisions of section 115BAC]
1. An employee is entitled to exemption under section 10(5) in respect of value of travel concession or
assistance due to or received by him from his employer or former employer for himself and his
family , in connection with his proceedings-
a. on leave to any place IN INDIA, or

b. to any place in India after retirement from service or after the termination of his service.
FAMILY MEANS: (Spouse + Children) & (Dependent Parents / Brothers / Sisters of the
individual)
2. Availability of Exemptions:
a. Exemption is available in respect of 2 journeys performed in a block of 4 calendar years.

The current block is 2018-2021 (9th) & 2022-2025 (10th).
b. However, if individual does not avail such LTC during any such block then he can claim the
exemption of one journey in the calendar year immediately succeeding the end of the said
block.
c. Exemption shall not be available to more then 2 surviving children of an individual after
1.10.1998. However, this restriction does not apply in respect of children born before
1.10.1998 & also in respect of multiple births after one child.
3. Amount of exemption CANNOT EXCEED the amount of expenditure actually incurred for the
purposes of such travel. It is allowable only in respect of FARE.

SALARY SATC 6.25

4. VALUE OF TRAVEL CONCESSION: Exemption u/s. 10(5) is subject to the following
conditions:
Different situations Amount of Exemption
Where journey is performed by AIR  Amount of ECONOMY CLASS AIRFARE

OF NATIONAL CARRIER by the shortest
route OR the amount spent, whichever is
less
Where journey is performed by RAIL  Amount of AC FIRST CLASS RAIL FARE

by the shortest route OR amount spent,
whichever is less.
Where the places of origin of journey &  Amount of AC FIRST CLASS RAIL FARE
destination are connected by Rail and by the shortest route OR amount spent,
journey is performed by any other Mode of whichever is less.
Transport
Where the places of origin of journey and destination or part thereof are not connected by
RAIL:
 Where a Recognised Public Transport  FIRST CLASS OR DELUXE CLASS FARE

System exists by the shortest route OR the amount spent,
whichever is less.
 Where a Recognised Public Transport
System does not exists  AC FIRST CLASS RAIL FARE by the
shortest route (as if the journey had been
performed by rail) OR the amount actually
spent, whichever is less.
Question 10:
Mr. D went on a holiday on 25.12.2021 to Delhi with his wife and three children (one son – age 5 years;
twin daughters – age 2 years). They went by flight (economy class) and the total cost of tickets
reimbursed by his employer was ₹ 60,000 (₹ 45,000 for adults and ₹ 15,000 for the three minor
children).
Compute the amount of LTC exempt.
Question 11:
In the above question, will be there be any difference if among his three children the twins were 5 years
old and the son 3 years old? Discuss.
Question 12:
Mr. J is working with ABC Ltd. getting the basic salary of ₹ 20,000 pm and DA of ₹ 5,000 pm. He is
given bonus of ₹ 5000 in the August 2022 which was due in March 2022. He has availed the benefit of
LTC during the current year and goes to Goa with his family. He takes along with him his wife, one
financially independent son, one married daughter, his dependent mother, his financially
independent father, his financially independent sister and dependent father in law. The employer
has spent ₹ 15,000 per head on tickets in Jet Airways’ Airlines where as the fare of Indian Airlines is ₹
11,000 per head. Calculate his taxable Salary.

SALARY SATC 6.26

CLASS NOTES

SALARY SATC 6.27

Class Notes

SALARY SATC 6.28

Class Notes

SALARY SATC 6.29

HOUSE RENT ALLOWANCE [Section 10(13A) read with Rule 2A]
[Exemption u/s 10(13A) would not be available in case of an employee, being an assessee, who
opts for the provisions of section 115BAC]
If HRA is received by the assessee and he incurs the expenditure of rent on residential
accommodation, then an exemption of least of the following amount is allowed:
(1) Actual Amount received [HRA]
(2) Rent Paid Less 10% of Salary
(3) 50% of Salary (in Metro cities) OR 40% of Salary (in other cities)
Here, Salary = Basic Pay + DA (forming part) + Commission (based on % of Sales Turnover)
Notes:
(a) If the employee receives HRA but does not incur any expenditure of Rent on residential
accommodation, then HRA received is fully taxable.
(b) Exemption is not available to an assessee who lives in his own house.
(c) The exemption shall be calculated on the basis of where the accommodation is situated.
(d) If Place of employment, Rent, HRA, Salary etc is the same for the whole year, then exemption shall
be calculated for the whole year.
(e) If there is a change in place, change in rent paid, Change in HRA or change in Basic Salary
structure during the previous year, then it shall be calculated on monthly/periodic basis.
(f) Exemption should be calculated in respect of the period during which rental accommodation is
occupied by the Employee during the previous year.
(g) Salary means Salary on Due Basis.
Question 13:
Mr. A working in Delhi, receives the following amounts:
(a) Basic salary ₹ 6,000 PM
(b) DA Rs. 2,000 pm (50% is forming part of salary)
(c) Commission based on production ₹ 30,000 annually
(d) Commission based on Sales @ 2% on sales of ₹ 6,00,000 achieved by A
(e) HRA ₹ 5,000 pm (Rent of ₹ 4,500 p.m. paid in Delhi).
Compute Total Income.
Question 14:
Mr. Raj Kumar has the following receipts from his employer:
(1) Basic pay ₹ 3,000 p.m.
(2) Dearness allowance (D.A.) ₹ 600 p.m.
(3) Commission ₹ 6,000 p.a.
(4) Motor car for personal use (expenditure met by the employer) ₹ 500 p.m
(5) House rent allowance ₹ 900 p.m.
Find out the amount of HRA eligible for exemption to Mr. Raj Kumar assuming that he paid a
rent of ₹ 1,000 p.m. for his accommodation at Kanpur. DA forms part of salary for retirement
benefits.

SALARY SATC 6.30

CLASS NOTES

SALARY SATC 6.31

ALLOWANCES U/S 10(14)
Different types of allowances are given to employees by their employers. Generally allowances are
given to employees to meet some particular requirements like house rent, expenses on uniform,
conveyance etc. Under the Income-tax Act, allowance is taxable on due or receipt basis,
whichever is earlier.
ALLOWANCES EXEMPT TO THE EXTENT ACTUALLY EXPENDED FOR THE OFFICIAL

PURPOSES [SECTION 10(14)(i)]
These allowances are given for official purposes and lower of the below two is the Exempted amount:
I. Amount of Allowance Actually Received from the Employer; OR

II. Amount Spent for official purpose.
S.No. Nature Particulars
(a) Traveling Allowance To meet the cost of travel on tour or on transfers

(including any sum paid in connection with transfer,
packing and transportation of personal effects on such
transfer.
(b) Daily Allowance For ordinary daily charges on account of absence from
his normal place of duty on tour or journey in
connection with transfer
(c) Conveyance Allowance To meet the expenditure on local conveyance in

performance of official duties if free conveyance is not
provided by the employer
(d) Helper Allowance Granted to meet the expenditure incurred on a helper

(Servant Allowance is different) engaged for the duties.
(e) Academic / Research allowance Granted for encouraging academic research & other
professional pursuits.
(f) Uniform Allowance Granted to meet the expenditure incurred on the

purchase or maintenance of uniform for wears during
the performance of the duties.
Note: An employee, being an assessee, who opts for the provisions of section 115BAC would be
entitled for exemption only in respect of travelling allowance, daily allowance and conveyance
allowance mentioned in (a) to (c) above.

SALARY SATC 6.32

Class Notes

SALARY SATC 6.33

ALLOWANCES MEANT FOR PERSONAL EXPENSES EXEMPT TO THE EXTENT NOTIFIED BY
RULES [SECTION 10(14)(ii)]
In these allowances, the actual amount spend by the assessee is not relevant. Lower of the below
two amount is Exempted amount:
I. Amount of Allowance Actually Received from the Employer OR

II. Limit specified in the Act
S. Allowances Extent of Exemption

No.
1 Children Education Allowance ₹ 100 p.m. per child upto a max. of two
children
2 Hostel Expenditure Allowance: ₹ 300 p.m. per child upto a max. of two
children.
3 Tribal or Scheduled Area Allowance ₹ 200 P.M.
4 Transport Allowance ₹ 3,200 PM in case of Blind/Handicapped

Employee
5 Underground Allowance (In coal ₹ 800 P.M.

Mines)
6 Allowances granted to employees of Lower of below two is exempt:

transport system to meet personal
expenditure during his duty, provided - 70% of allowance received from the
he is not in receipt of daily allowances Employer; OR
- ₹ 10,000 P.M.
7 Hill Compensatory Allowances ₹ 300 p.m.
Note:
An employee, being an assessee, who opts for the provisions of section 115BAC would be
entitled for exemption only in respect of transport allowance granted to an employee who is
blind or deaf and dumb or orthopedically handicapped with disability of the lower extremities of
the body to the extent of ₹ 3,200 p.m.

SALARY SATC 6.34

ALLOWANCES WHICH ARE FULLY TAXABLE
1) City Compensatory Allowance:
City Compensatory Allowance is normally intended to compensate the employees for the higher
cost of living in cities. It is taxable irrespective of the fact whether it is given as compensation for
performing his duties in a particular place or under special circumstances.
2) Entertainment Allowance:
This allowance is given to employees to meet the expenses towards hospitality in receiving
customers etc. The Act gives a deduction towards entertainment allowance only to a Government
employee. The details of deduction permissible are discussed later on in this Unit.
3) Dearness Allowance:
It is fully taxable allowance. It is of following 2 types:
 DA which is forming part of salary for computation of retiremental benefits as per the terms of
employment.
 DA which is NOT forming part of salary for computation of retiremental benefits as per the
terms of employment.
Note: If the Question is silent, it is to be assumed that DA is not forming part of salary.
4) Medical Allowance: It is a fully taxable allowance.
5) Lunch Allowances / Tiffin Allowances / Cash Allowance / Deputation Allowance
6) Overtime Allowances / Servant Allowances / Warden Allowance / Family Allowance etc.

SALARY SATC 6.35

ALLOWANCES WHICH ARE EXEMPT IN CASE OF CERTAIN PERSONS
1) Allowances to a citizen of India, who is a Government employee, rendering services outside
India. [Section 10(7)]
2) Travelling Allowances to High Court judges
3) Sumptuary allowance to HC/SC judges.
4) Allowance received by an employee of UNO from his employer.
Question 15:
Mr. Srikant has two sons. He is in receipt of children education allowance of ₹ 150 p.m. for his elder
son and ₹ 70 p.m. for his younger son. Both his sons are going to school. He also receives the
following allowances:
Transport allowance: ₹ 1,000 p.m. (amount spent ₹ 600 p.m.)
Tribal area allowance: ₹ 500 p.m. Compute his taxable allowances.
Question 16:
Mr. X receives Basic salary of ₹ 10,000 PM and DA of ₹ 4,000 PM. He retires on Oct 31st of the PY
and pension is fixed at ₹ 3,000 PM. He receives the following amounts as well:
(a) HRA ₹ 4,000 PM (he lives in his own house)
(b) Medical allowance ₹ 600 PM (Actual expenditure on medical treatment is more than ₹ 600 PM)
(c) Children Education allowance ₹ 250 PM per child for 3 children.
(d) Children hostel allowance ₹ 250 PM for 1 child.
(e) Travelling allowance ₹ 1,000 PM (60% spent on official duties)
(f) Transport allowance ₹ 900 PM (Actual expenditure ₹ 850 PM)
(g) Uniform allowance ₹ 1,000 PM

SALARY SATC 6.36

Class Notes

SALARY SATC 6.37

SECTION 7 – INCOME DEEMED TO BE RECEIVED
The following incomes shall be deemed to be received in India in the previous year:
I. Employer’s contribution to RPF in excess of 12% of the salary of the employee.
II. Interest credited to RPF balance in excess of 9.5% p.a.
III. The taxable transfer balance from URPF to RPF.
IV. Contribution made, by the any employer, to the account of an employee under a pension scheme
referred to in Sec. 80CCD.
SECTION 10(11) AND (12) – PAYMENT FROM PROVIDENT FUNDS

Provident fund scheme is a scheme intended to give substantial benefits to an employee at the time of
his retirement. Under this scheme, a specified sum is deducted from the salary of the employee as his
contribution towards the fund. The employer also generally contributes the same amount out of his
pocket, to the fund. The contribution of the employer and the employee are invested in approved
securities. Interest earned thereon is also credited to the account of the employee. Thus, the credit
balance in a provident fund account of an employee consists of the following:
a) Employee’s Contribution
b) Interest on Employee’s Contribution
c) Employer’s Contribution
d) Interest on Employer’s Contribution.
The accumulated balance is paid to the employee at the time of his retirement or resignation. In the
case of death of the employee, the same is paid to his legal heirs. The provident fund represents an
important source of small savings available to the Government. Hence, the Income-tax Act gives certain
deductions on savings in a provident fund account.
THERE ARE FOUR TYPES OF PROVIDENT FUNDS:
(i) STATUTORY PROVIDENT FUND [SPF]

The SPF is governed by Provident Funds Act, 1925. It applies to employees of government,
railways, semi-government institutions, local bodies, universities and all recognised educational
institutions.
(ii) PUBLIC PROVIDENT FUND [PPF]

Public provident fund is operated under the Public Provident Fund Act, 1968. A membership of
the fund is open to every individual though it is ideally suited to self-employed people. A salaried
employee may also contribute to PPF in addition to the fund operated by his employer. An
individual may contribute to the fund on his own behalf as also on behalf of a minor of whom he is
the guardian.
(iii) RECOGNISED PROVIDENT FUND [RPF]

Recognised provident fund means a provident fund recognised by the Commissioner of Income-
tax for the purposes of income-tax. It is governed by Part A of Schedule IV to the Income-tax
Act, 1961. This schedule contains various rules regarding the following:
a. Recognition of the fund
b. Employee’s and employer’s contribution to the fund
c. Treatment of accumulated balance etc.
A fund constituted under the Employees’s Provident Fund and Miscellaneous Provisions Act,
1952 will also be a Recognised Provident Fund.
(iv) UNRECOGNISED PROVIDENT FUND [UPF]

A fund not recognised by the Commissioner of Income-tax is Unrecognised Provident Fund.

SALARY SATC 6.38

Class Notes

SALARY SATC 6.39

THE TAX TREATMENT IS GIVEN BELOW:
Particulars SPF PPF RPF URPF

Employer’s Fully Exempt N.A. in excess of 12% of Not taxable at the
Contribution salary* is taxable time of contribution
Ded. u/s 80C Available Available Available Not Available
(Employee’s [500 – 150,000]
Cont)
Interest Exempt upto Fully Exempt in excess of 9.5% p.a.
credited certain limit of (IOS Head) is taxable under Salary ----
contribution head.
[See Note [See Note below]
below]
Amount Fully Exempt Fully Exempt Fully Exempt sub. to  Intt. on

received on u/s. 10(11) u/s. 10(11) condition u/s. 10(12) Employee’s
retirement, Contribution is
death etc. taxable u/h.
“IOS”
 Employer’s
Contribution and
intt. on such
Contribution is
fully taxable as
salary u/s. 17(3)
* Salary = Basic Pay + DA (if forming part of Ret. Benefits) + Comm. (if based on % of Sales T/O)
NOTE:
As per section 10(11), any payment from a Provident Fund (PF) to which Provident Fund Act, 1925 (i.e.
SPF), applies or from Public Provident Fund would be exempt.
Accumulated balance due and becoming payable to an employee participating in a Recognized

Provident Fund (RPF) would be exempt under section 10(12).
However, the exemption under section 10(11) or 10(12) would not be available in respect of income by
way of interest accrued during the previous year to the extent it relates to the amount or the
aggregate of amounts of contribution made by that person/employee exceeding ` 2,50,000 in any
previous year in that fund, on or after 1st April, 2021.
If the contribution by such person/employee is in a fund in which there is no employer’s contribution,

then, a higher limit of ` 5,00,000 would be applicable for such contribution, and interest accrued in any
previous year in that fund, on or after 1st April, 2021 would be exempt upto that limit.
It may be noted that interest accrued on contribution to such funds upto 31st March, 2021 would be
exempt without any limit, even if the accrual of income is after that date.
NOTE: Above Monetary Limit is not applicable on interest accrued on Employer’s contribution.

SALARY SATC 6.40

The payment from R.P.F. balance is fully exempt from tax in following
cases:
Accumulated balance in RPF payable to an employee (subject to certain following conditions).
Condition 1– Employee has rendered continuous service for a period of atleast 5 years; or
Condition 2– Where employee could not complete 5 years of service by reason of
- ill-health; or
- discontinuance of the employer’s business or
- other cause beyond the control of the employee.
In any other case, the payment from RPF is fully taxable in the manner given below:
(i) Interest on Employee’s contribution is fully taxable u/h Other Sources.
(ii) Employer’s contribution and Interest thereon is taxable as salary u/s 17(3).
Note:
1. If employee gets transfer of balance of RPF with another employer who also maintains RPF, then,
the period of service under former employer shall also be included in calculating the period of
continuous service.
2. Any payment from fund by way of transfer to the account of the employee under a pension scheme
(New Pension Scheme u/s 80CCD) shall be EXEMPT.
Question 17:
Mr. A, working in ABC Pvt. Ltd., receiving Basic Salary of ₹ 9,000 P.M. retires from service on 31st dec
of the P.Y. He contributes 15% of salary to his URPF balance to which an equal amount is contributed
by the employer. On retirement he receives ₹ 1,00,000 from his URPF which consists of ₹ 60,000 as
total of Employee and Employer’s contribution and ₹ 40,000 as total interest. Compute TI if monthly
pension is fixed at ₹ 4,000 P.M.

SALARY SATC 6.41

CONVERSION OF URPF INTO RPF
When a URPF gets converted into RPF, then, the income that would have been taxed had the fund
been recognised from the date of its institution would be taxed as the income of the employee during
the P.Y. in which the funds gets such recognition. The amount not transferred to RPF & paid out of
URPF will be taxable in the same manner as the lumpsum payment from URPF is taxed.
[REFER CLASS EXAMPLE]
APPROVED SUPERANNUATION FUND
1. It means a superannuation fund which has been and continues to be approved by the
Commissioner in accordance with the rules framed in this regard.
2. The tax treatment of contribution and exemption of payment from tax are as follows:
a) Employer’s contribution – refer Page 6.45
b) Employee’s contribution qualifies for deduction under section 80C;
c) Interest on accumulated balance – refer Page 6.45
3. Section 10(13) grants exemption in respect of payment from the fund—

a) Paid to legal heirs on death of the employee, or
b) Paid to employee on his retirement or
c) Paid to employee on his becoming incapacitated prior to such retirement.
4. Any payment from fund by way of transfer to the account of the employee under a pension scheme
(New Pension Scheme u/s 80CCD) shall be EXEMPT.

SALARY SATC 6.42

Class Notes

SALARY SATC 6.43

Class Notes

SALARY SATC 6.44

PERQUISITES
1) The term ‘perquisite’ indicates some extra benefit in addition to the amount that may be legally
due by way of contract for services rendered.
2) Perquisite may be provided in cash or in kind.
3) Perquisite may arise in the course of employment or in the course of profession. If it arises from a
relationship of employer-employee, then the value of the perquisite is taxable as salary. However,
if it arises during the course of profession, the value of such perquisite is chargeable as profits
and gains of business or profession.
4) Perquisite will become taxable only if it has a legal origin.
5) Reimbursement of expenses incurred in the official discharge of duties is not a perquisite.
Types of perquisites: Perquisites may be divided into three broad categories:

 Perquisites taxable in the case of all employees
 Perquisites exempt from tax in the case of all employees
 Perquisites taxable only in the hands of specified employees.
TAXABILITY OF PERQUISITE
Section 17(2) of the Income Tax Act gives an inclusive definition of perquisite. Perquisite includes:
i) VALUE OF RENT-FREE ACCOMMODATION [RFA] PROVIDED to the assessee by his

employer [Section 17(2)(i)].
ii) Value of CONCESSION IN RENT IN RESPECT OF ACCOMMODATION PROVIDED to the

assessee by his employer [Section 17(2)(ii)].
iii) The value of any benefit or amenity GRANTED OR PROVIDED free of cost or at
concessional rate to SPECIFIED EMPLOYEES i.e.
a. by a company to an employee in which he is a director;
b. by a company to an employee being a person who has substantial interest in the company
(i.e. 20% or more of the voting rights of the company);
c. by any employer (including a company) to an employee to whom the provisions of (a) & (b) do
not apply and whose income under the head ‘salaries’ (whether due from, or paid or allowed
by, one or more employers) exclusive of the value of all benefits or amenities not
provided for by way of monetary benefits exceeds ₹ 50,000 - Section 17(2)(iii);
[i.e. Salary for this purpose = Basic Salary + D.A. + Commission, whether payable
monthly or turnover based + Bonus + Fees + Advance Salary + Arrear Salary + Any
other taxable payment + Any taxable allowances + Any other monetary benefits –
Deductions under section 16 (ia) / (ii) / (iii)]
Such benefits are:
1. Motor Car
2. Sweeper, Gardener, Watchman etc.
3. Gas, Electricity & Water
4. Free Education Facility
5. Free / Concessional Fare

SALARY SATC 6.45

iv) AMOUNT PAID by an employer in respect of any obligation which otherwise would have
been payable by the employee [Section 17(2)(iv)].
v) AMOUNT PAYABLE by an employer directly or indirectly to effect an assurance on the life of the
assessee or to effect a contract for an annuity, other than payment made to RPF or approved
superannuation fund - Section 17(2)(v).
a. However, there are schemes like group annuity scheme, employees state insurance
scheme and fidelity insurance scheme, under which insurance premium is paid by
employer on behalf of the employees. Such payments are not regarded as perquisite in view
of the fact that the employees have only an expectancy of the benefit in such schemes.
b. In Case employer has paid life insurance premium on behalf of the employee then it will be
taxable for the employee and further employee can claim deduction under section 80C from
GTI
vi) The Value Of Any Specified Security Or Sweat Equity Shares ALLOTTED OR
TRANSFERRED, directly or indirectly, by the employer or former employer, free of cost or at
concessional rate to the assessee – Section 17(2)(vi).
vii) The amount or aggregate of amounts of any contribution made

- in a recognised provident fund
- in NPS referred to in section 80CCD(1)
- in an approved superannuation fund
by the employer to the account of the assessee, to the extent it exceeds ₹ 7,50,000.
[Section 17(2)(vii)]
(viia) Any annual accretion by way of interest, dividend or any other amount of similar nature
during the previous year to the balance at the credit of the recognized provident fund or
NPS or approved superannuation fund to the extent it relates to the employer’s
contribution which is included in total income in any previous year under section 17(2)(vii)
computed in prescribed manner [Section 17(2)(viia)].
Note: Section 17(2)(vii) & Section 17(2)(viia) are not applicable in case of a Statutory
Provident Fund.
viii) The value of any other fringe benefit or amenity as may be prescribed by the CBDT – Section
17(2)(viii). They are
a) Concessional or Interest Free Loan

b) Travelling, touring & accommodation other than LTC
c) Free Food & Beverage to employees during office hours
d) Gift to the employees
e) Credit Card expenses
f) Club Expenses
g) Use of Movable assets by the employees
h) Transfer of any Movable Assets to the employees
i) Value of any other benefit or amenity, service, right / privilege

SALARY SATC 6.46

Annual accretion to the balance at the credit of the recognised provident
fund/NPS/approved superannuation fund which relates to the employer’s contribution
and included in total income (on account of the same having exceeded ` 7,50,000)
EFFECTIVE FROM AY 2021-22
Any annual accretion by way of interest, dividend or any other amount of similar nature during the
previous year to the balance at the credit of the recognized provident fund or NPS or approved
superannuation fund to the extent it relates to the employer’s contribution which is included in total
income in any previous year under section 17(2)(vii) computed in prescribed manner.
[Section 17(2)(viia)]
In other words, interest, dividend or any other amount of similar nature on the amount which is
included in total income under section 17(2)(vii) would also be treated as a perquisite.
The CBDT has, vide Rule 3B, notified the following manner to compute the annual accretion by way
of interest, dividend or any other amount of similar nature during the previous year-
TP = (PC/2)*R + (PC1 + TP1)*R

Where,
TP Taxable perquisite under section 17(2)(viia) for the current previous year
PC Amount or aggregate of amounts of employer’s contribution in excess of ` 7.5 lakh to

recognized provident fund, national pension scheme u/s 80CCD and approved
superannuation fund during the previous year
PC1 Amount or aggregate of amounts of employer’s contribution in excess of ` 7.5 lakh to
recognized provident fund, national pension scheme u/s 80CCD and approved
superannuation fund for the previous year or years commencing on or after 1st April,
2020 other than the current previous year
TP1 Aggregate of taxable perquisite under section 17(2)(viia) for the previous year or years
commencing on or after 1st April, 2020 other than the current previous year
R I/ Favg
I Amount or aggregate of amounts of income accrued during the current previous
year in recognized provident fund, national pension scheme u/s 80CCD and approved
superannuation fund
Favg (Amount or aggregate of amounts of balance to the credit of recognized provident
fund, national pension scheme u/s 80CCD and approved superannuation fund on 1st
April, 2021 + Amount or aggregate of amounts of balance to the credit of recognized
provident fund, national pension scheme u/s 80CCD and approved superannuation
fund on 31st March, 2022) / 2

SALARY SATC 6.47

Note: Where the amount or aggregate of amounts of TP1 and PC1 exceeds the amount or aggregate of
amounts of balance to the credit of the specified fund or scheme on 1st April, 2021 (for PY 2021-22),
then, the amount in excess of the amount or aggregate of amounts of the said balance shall be ignored
for the purpose of computing the amount or aggregate of amounts of TP1 and PC1.
Example:
Mr. X is appointed as a CFO of ABC Ltd. in Mumbai from 1.5.2020. His basic salary is ₹ 5,50,000
p.m. He is paid 10% as D.A. He contributes 11% of his pay and D.A. towards his recognized provident
fund and the company contributes the same amount.
The accumulated balance in recognized provident fund as on 1.4.2021 and 31.3.2022 is ₹ 15,35,000
and ₹ 33,55,000.
Compute the perquisite value chargeablein the hands of Mr. X u/s 17(2)(vii) and 17(2)(viia) for the
P.Y. 2021-22.
Solution:
1. Perquisite value taxable u/s 17(2)(vii) = ₹ 7,98,600, being employer’s contribution to
recognized provident fund during the P.Y. 2021-22 – ₹ 7,50,000 = ₹ 48,600
2. Annual accretion on perquisite taxable u/s 17(2)(vii)

= (PC/2)*R + (PC1 +TP1)*R
= (48,600/2)*0.091 + 0
= ₹ 2,211
Working Note:
PC ABC Ltd.’s contribution in excess of ₹ 7.5 lakh to recognized provident fund
during P.Y. 2021-22 = ₹ 48,600
PC1 Nil since employer’s contribution is less than ₹ 7.5 lakh torecognized provident
fund in P.Y. 2020-21.
TP1 Nil
R I/Favg = 2,22,800/24,45,000 = 0.091
I RPF balance as on 31.3.2022 – employee’s and employer’s contribution during the
year – RPF balance as on 1.4.2021 = ₹ 2,22,800 (₹ 33,55,000 – ₹ 7,98,600 –
₹ 7,98,600 – ₹ 15,35,000)
Favg (Balance to the credit of recognized provident fund as on 1st April, 2021 + Balance
to the credit of recognized provident fund as on 31st March, 2022)/2
= (₹ 15,35,000 + ₹ 33,55,000)/2 = ₹ 24,45,000
Note – Since the employee’s contribution to RPF exceeds ₹ 2,50,000 in the P.Y. 2021-22,
interest on ₹ 5,48,600 (i.e., ₹ 7,98,600 – ₹ 2,50,000) will also be chargeable to tax.
[Amendment in Section 10(12)]

SALARY SATC 6.48

Class Notes

SALARY SATC 6.49

Exempted Perquisites
Following perquisites are exempted in hands of employee:
1. Tea or snacks: Tea, similar non-alcoholic beverages and snacks provided during working hours.
2. Food: Food provided by employer in working place upto ₹ 50 per meal. Remote area – full exempt.
(exemption would not be available in case of an employee, being an assessee, who opts for
the provisions of section 115BAC)
3. Recreational facilities: Recreational facilities extended to a group of employees.
4. Goods sold to employee at concessional rate: Goods manufactured by employer and sold by
him to his employees at concessional (not free) rates.
5. Conveyance facility: Conveyance facility provided -
• to employees for journey between office and residence and vice versa.
• to the judges of High Court and Supreme Court
6. Training. Amount spent on training of employees including boarding and lodging expenses of the
employees on such training.
7. Services rendered outside India: Any perquisite/allowances allowed outside India by the
Government to a citizen of India for rendering services outside India.
8. Contribution in some specified schemes
• Employer's contribution to staff group insurance scheme.
• Payment of annual premium by employer on personal accident policy affected by him in respect
of his employee.
9. Loans
• Loan given at nil or at concessional rate of interest by the employer provided the aggregate
amount of loan does not exceed ₹ 20,000.
• Interest free loan for medical treatment of the diseases specified in Rule 3A.
10. Medical facility
A provision of medical facility at office is exempt.
11. Periodicals and journals: Periodicals and journals required for discharge of work.
12. Telephone, mobile phones: Expenses for telephone, mobile phones actually incurred on behalf of
employee by the employer whether by way of direct payment or reimbursement.
13. Free education facility: Free education facility to the children of employee in an institution owned
or maintained by the employer provided cost of such facility does not exceed Rs.1000 per month
per child.
14. Computer or Laptop: Computer or Laptop provided whether to use at office or at home (provided
ownership is not transferred to the employee).
15. Movable assets: Sale or gift of any movable asset (covered under SLM method) to employee after
being used by the employer for 10 or more years.
16. Leave Travel Concession: Leave Travel Concession (LTC) to the extent of lowest cost incurred.
17. Rent-free accommodation
• Rent-free official residence provided to a Judge of a High Court or the Supreme Court.
• Rent-free furnished residence (including maintenance thereof) to Official of Parliament, a Union
Minister or a Leader of opposition in Parliament.
18. Accommodation: Accommodation provided -
• on transfer of an employee in a hotel for a period not exceeding 15 days in aggregate.
• in a remote area to an employee working at a mining site or an onshore exploration site or a
project execution site or a dam site or a power generation site or an offshore site.
19. Tax on non-monetary perquisite paid by employer on behalf of employee.
20. Health club. Sports club facility

SALARY SATC 6.50

Class Notes

SALARY SATC 6.51

Class Notes

SALARY SATC 6.52

Class Notes

SALARY SATC 6.53

VALUATION OF PERQUISITES
Rule 3 of the Income-tax Rules, 1962 contains the guidelines for the purpose of valuation of
perquisites:
VALUATION OF RENT FREE UNFURNISHED ACCOMMODATION

(a) IN CASE OF GOVT. EMPLOYEES [CG/SG] : As per License Fee determined by Govt.
(b) IN CASE OF NON – GOVT. EMPLOYEES:
(i) If Accommodation is not owned by Employer: Value shall be the lower of
(i) Rent paid by the Employer OR

(ii) 15% of salary
(ii) If Accommodation is owned by Employer: Value shall be
If population < 10 Lakhs : 7.5% of Salary
If 10 Lakhs < Population < 25 Lakhs : 10% of Salary
If Population > 25 Lakhs : 15% of Salary
If ACCOMODATION IS PROVIDED AT CONCESSIONAL RATE then value = Value determine as

above Less Rent actually paid by employee.
RENT FREE FURNISHED ACCOMMODATION
Value of unfurnished accommodation shall be calculated as above and shall be increased by value of
furnished accommodation, which is:
10% p.a. of the original COST OF FURNITURE if owned by employer
and/or
The actual hire charges paid/payable, if hired from a third party
Note: The valuation shall be reduced by any amount recovered from the employee.
SALARY FOR THE PURPOSE OF VALUATION OF ACCOMMODATION
Basic Salary + DA (Forming Part of Salary) + Bonus + Fees + Commission + All other Taxable
Allowance + Any monetary payment by employer to employee, by whatever name called
[Above does not include Perquisites (Monetary or Non-Monetary) and Employer’s contribution
to PF + Arrear Salary + Advance Salary]
Note:
1. Salary are to be considered on due basis for the relevant period for which accommodation is
provided.
2. If the employee receives salary from more than one employer, the aggregate of the salary
received from both the employers has to be taken into account for valuation of rent free
accommodation.

SALARY SATC 6.54

VALUATION OF ACCOMMODATION PROVIDED IN A HOTEL:
Where the accommodation is provided by the employer (Government or other employer) in a hotel, the
value of the perquisite will be lower of:
a. 24% OF SALARY paid or payable for the previous year OR
b. the actual charges paid or payable to such hotel for the period during which such
accommodation is provided.
The above value is reduced by the rent, if any, actually paid or payable by the employee.
Note:
The value of this perquisite will not be calculated if the employee is provided such
accommodation for a period not exceeding in aggregate 15 days on the transfer from one
place to another.
ACCOMMODATION PROVIDED AT THE TIME OF TRANSFER:
FOR FIRST 90 DAYS - ANY ONE
Where on account of his transfer from one place to another, the employee is provided with
accommodation at the new place of posting while retaining the accommodation at the other place, the
value of perquisite shall be determined with reference to ONLY ONE SUCH ACCOMMODATION which
has the lower value (as determined according to the above provisions) for a period not exceeding 90
days and thereafter the value of perquisite shall be charged for both such accommodations in
accordance with the valuation rules.
EXCEPTIONS:
However, none of the above valuation rules would be applicable to any accommodation provided to an
employee working at a mining site/onshore oil exploration site/project execution site/dam
site/power generation site/offshore site which:
a. being of a temporary nature and is located at least 8 kms away from the local limits of any
municipality or cantonment board; or
b. is located in a remote area.
[Remote area means an area that is located at least 40 kms away from a town having a population not
exceeding 20,000 based on latest published all India census].

SALARY SATC 6.55

Question 18:
Ramnath is employed with Mega Limited and is paid Basic Salary ₹ 15,000/ – p.m.; – ₹ 2,000/ – p.m.
as Commission; D.A not forming part of retirement benefits ₹ 1,250/ – p.m. and travel allowances of
₹ 1,000/ – p.m. Bonus paid during the year is ₹ 12,000/ – 60% of the travel allowance is not spent and
the balance is spent for office purpose.
Compute the taxable salary by also taking into account the fact that he is provided rent free furnished
accommodation where population is 15 lakhs. Original cost of furniture provided in the house ₹ 30,000/
– (W.D.V. ₹ 6,000). Hire charges ₹ 450 pm for hired furniture provided.
[Answer: Taxable Salary – 2,18,920]
Question 19:
Mr. Ritesh is provided with an accommodation in Kolkata since April 2021. Salary ₹ 40,000 p.m.
Cost of furniture provided ₹ 80,000. On 1st October, 2021, following a promotion with a increase
in Salary by ₹ 15,000, he was transferred to Nagpur (population less than 25 lakhs but more than
10 lakhs), and was also provided an accommodation there. Mr. Ritesh was allowed to retain the
Kolkata accommodation till March, 2022. Compute taxability.
Solution: Phase 1: Value of Furnished Accommodation (Kolkata) (April to September 2021)

Particulars ₹
Value of unfurnished accommodation (15% of 40,000 × 6 months) 36,000
Add: Value of Furniture provided:
• 10%p.a. of original cost of such furniture
(10% of ₹ 80,000 x 6 / 12 months) 4,000
Value of Furnished Accommodation 40,000
Phase 2: Valuation of accommodation (October 2021 to December 2021)
(a) For the first 90 days of transfer: Where accommodation is provided both at existing place of
work and in new place, the accommodation, which has lower value, shall be taxable.
(b) After 90 days: Both accommodations shall be taxable.
Computation for the first 90 days of transfer: (October 2021 to December 2021) Lower of:
(i) Value of accommodation at existing place of work
(ii) Value of accommodation at new place
Value of accommodation at existing place of work (Kolkata)

15% of salary for 3 months (i.e. 90 days) = 15% of ₹ 55,000 x 3 months =24,750
Add: Cost of furniture provided: 10% of ₹ 80,000 x 3 months / 12 = 2,000
Total Value of Perquisite 26,750
Value of accommodation at new work place (Nagpur)
10% of salary for 3 months (i.e. 90 days) = 10% of ₹ 55,000 x 3 months = ₹ 16,500
Therefore, the assessee shall be assessed to tax on ₹ 16,500 (being the lower)
Phase 3: Valuation of accommodation (after 90 days) (January 2022 to March 2022)
For Kolkata accommodation: 15% of ₹ 55,000 x 3 months = ₹ 24,750
Add: Cost of furniture provided: 10% x ₹ 80,000 x 3 months / 12 = ₹ 2,000
Total value of perquisite ₹ 26,750
For Nagpur accommodation: 10% of ₹ 55,000 x 3 months = ₹ 16,500

Total value of perquisite:
Particulars Taxable value of
perquisite
Phase 1: Accommodation in Kolkata 40,000
Phase 2: Accommodation in Nagpur (being the lower during 90 days) 16,500
Phase 3: Accommodation in Kolkata 26,750
Phase 4: Accommodation in Nagpur 16,500
Total Value of Taxable Perquisite 99,750

SALARY SATC 6.56

Class Notes

SALARY SATC 6.57

MOTOR CAR [RULE 3(2)] – SPECIFIED EMPLOYEE
Owner of Car Expenses Purpose Taxable Value of Perquisite
met by
1(a) Employer Employer Fully Official use Not a Perquisite, provided the documents
specified in Rule 3(2)(B) are maintained. [See
Note 2 below]
1(b) Employer Employer Fully Personal use Aggregate of

(a) Actual expenditure on Car
(b) Remuneration to Chauffeur
(c) 10% p.a. of the Cost of Car (normal wear &
tear)
Less: Amount charged from Employee
1(c)(i) Employer Employer Partly for Official Cubic Capacity of Car Engine
and
partly for Personal upto 1.6 Litres: ₹ 1,800 p.m. + ₹ 900 p.m. for
use Chauffeur
above 1.6 Litres: ₹ 2,400 p.m. + ₹ 900 p.m. for

Chauffeur
1(c)(ii) Employer Employee Partly for Official Cubic Capacity of Car Engine
and
partly for Personal upto 1.6 Litres ₹ 600 p.m. + ₹ 900 p.m. for
use Chauffeur
above 1.6 Litres ₹ 900 p.m. + ₹ 900 p.m. for

Chauffeur
2(i) Employee Employer Fully Official use Not a Perquisite, provided the documents
specified in Rule 3(2)(B) are maintained. [See
Note 2 below]
2(ii) Employee Employer Partly for Official Subject to Rule 3(2)(B)

and
partly for Personal Actual Expenditure incurred Less
use
upto 1.6 Litres: ₹ 1,800 p.m. + ₹ 900 p.m. for
Chauffeur
above 1.6 Litres: ₹ 2,400 p.m. + ₹ 900 p.m. for

Chauffeur
3(i) Employee Employer Fully Official use Not a Perquisite, provided the documents
owns other specified in Rule 3(2)(B) are maintained.
automotive but [See Note 2 below]
not Car
3(ii) Employee Employer Partly for Official Subject to Rule 3(2)(B)

owns other and
automotive but partly for Personal Actual expenditure incurred by Employer
not Car use Less: ₹ 900 p.m.

SALARY SATC 6.58

CLASS NOTES

SALARY SATC 6.59

Notes:
1. Pool of Cars owned or hired by Employer: If the Employee is permitted to use any or all Cars for
both official and personal use, the treatment will be as under
For one Car Valued as per 1(c)(i)

For more than one Valued as per 1(b), as if fully used for personal purpose
Car
2. Documents required for claiming 'Not Taxable Perquisite' or higher deduction wherever
applicable. [Rule 3(2)(B)]:
(a) Employee should maintain complete details of journey undertaken for official purpose, which
includes date of journey, destination, mileage and amount of expenditure incurred thereon.
(b) Certificate of supervising authority of the Employee, wherever applicable, to the effect that the
exp. was incurred for wholly and exclusively for performance of official duties, should be
provided.
PROVISION OF DOMESTIC SERVANTS [Rule – 3(3)]

(Sweeper, Gardener, watchman or a personal attendant)
Servant Servant’s Value of perquisite Taxable in the hands of

appointed by salary paid by
Employee Employee Nil Not applicable
Employee Employer Actual cost incurred by the All employees

Employer on the servant
Employer Employer Actual cost incurred by the Specified employee

Employer on the servant
Employer Employee Nil Not applicable
Note:
1. Where the employee is paying any amount in respect of such servant facility, the amount so paid
shall be deducted from the value of perquisite determined above.
2. Domestic Servant Allowance given to an employee is always chargeable to tax.
QUESTION 20:
Mr. E is employed with N Ltd. he also gets the services of sweeper and watchman. E has
paid employment tax of ₹ 800. Determine his gross salary in the following cases:
1) His salary is ₹ 8,400 pm. Employer provides the services of sweeper and watchman. N Ltd.
pays them ₹ 600 pm and ₹ 500 pm;
2) His salary is ₹ 8,400 pm. Sweeper and watchman are engaged by Mr. E at the rates given in
clause(1) above but their wages are reimbursed by the employer;
3) His salary is ₹ 9,000 pm. Employer provides the services of sweeper and watchman at the
above rates but he recovers from Mr. E ₹ 200 pm and ₹ 300 pm respectively.

SALARY SATC 6.60

Class Notes

SALARY SATC 6.61

SUPPLY OF GAS, ELECTRICITY OR WATER FACILITY [Rule – 3(4)]
Facility in the VALUE OF PERQUISITE Taxable in the hands
name of of
Provided from own Provided from
source outside
Employer Mfg. cost to the employer Amount paid to the Specified employees
supplier
Employee Mfg. cost to the employer Amount paid to the All employees
supplier
Note:
1. Where the employee is paying any amount in respect of such above facility, the amount so paid
shall be deducted from the value of perquisite determined above.
2. Gas/Electricity/Water Allowance given to an employee is always fully chargeable to tax.
QUESTION 21:
G Ltd. provides electricity to its employee, P. Annual consumption as per meter reading
comes to 2,250 units. Determine the value of the perquisite in the following cases:
1) Electricity meter is in the name of P and the rate of electricity is ₹ 3 per unit
2) Electricity meter is in the name of G Ltd. the rate of electricity is ₹ 3 per unit.
3) G Ltd. is a power-generating company. Manufacturing cost is 90 paise per unit but supplied to
public @ ₹ 2 per unit. However, it charges 30 paise per unit from employees.
FREE OR CONCESSIONAL EDUCATION FACILITY [Rule – 3(5)]
The value of perquisite is determined as under:
Facility provided Value of perquisite Taxable in

to the
Provided in a school Provided in any other hands of
owned by the employer school
[Case 1] [Case 2]
Children Cost of such education in Cost of such education Specified
[Any No.] similar school* employee
(There would be no
perquisite if the cost of
education does not exceed
₹ 1,000 p.m. per child)
OTHER Cost of such education in Cost of such education Specified

HOUSEHOLD similar school incurred employee
MEMBER
Note:
1) If the employee incurs the expenditure of school fees and the same is reimbursed by the
employer, then the entire amount of reimbursement so made, shall be fully taxable in the hands of
all employees.
2) Child includes step child as well as the adopted child of the employee.
* If cost of education exceeds ₹ 1,000 p.m. then full amount is taxable. An alternate view
possible is that only the sum in excess of ₹ 1,000 per month is taxable.

SALARY SATC 6.62

Class Notes

SALARY SATC 6.63

VALUATION IN RESPECT OF FREE TRANSPORT [Rule – 3(6)]
In case of employees of Taxable value
Railways / Airlines Nil
Any other transport Value at which such benefit is offered by the xxx
undertaking employer to the public
Less: Recovery from the employee xxx
END OF SECTION 17(2)(iii) – Perquisites for Specified Employee only

SALARY SATC 6.64

VALUATION IN RESPECT OF SHARES & SECURITIES ISSUED
UNDER ESOP [SECTION 17(2)(vi)]
 The value of any specified security or sweat equity shares allotted or transferred, directly or
indirectly, by the employer or former employer, free of cost or at concessional rate to the
assessee shall be taxable as perquisite.
 The value shall be the FMV of such security or shares on the date on which the option is
exercised by the assessee, as reduced by any amount actually paid by, or recovered from,
the assessee.
 FMV FOR LISTED SHARES:

Perquisite Value of listed sweat equity shares allotted or transferred free of cost or at
concessional rate shall be average of opening and closing price of shares listed on
stock exchange on date of exercise of option less any amount recovered from the
employee
If shares are listed on more than one recognized stock exchange - However, where,
on the date of exercising of the option, the share is listed on more than one recognized
stock exchanges, the fair market value shall be the average of opening price and closing
price of the share on the recognised stock exchange which records the highest volume of
trading in the share.
Deferment of perquisite tax on ESOPs – Amended by Finance Act 2020

Section 156 of the IT Act, as amended, provides for deferment of perquisite tax liability
Where the income of the assessee of any assessment year, beginning on or after the 1st day of
April, 2021,
 includes income of the nature specified in clause (vi) of sub-section (2) of section 17 and
 such specified security or sweat equity shares referred to in the said clause are allotted or
transferred directly or indirectly by the current employer, being an eligible start-up referred to
in section 80-IAC,
the tax or interest on such income included in the notice of demand referred to in sub-
section (1) shall be payable by the assessee within 14 days-
i. after the expiry of forty-eight months from the end of the relevant assessment year; or
ii. from the date of the sale of such specified security or sweat equity share by the assessee; or
iii. from the date of the assessee ceasing to be the employee of the employer who allotted or
transferred him such specified security or sweat equity share,
whichever is the earliest.
Question 22:
IT Limited, under its Employment Stock Option Plan, allotted 500 equity shares to its finance
manager, Pooja on 15th May, 2021, when she exercised her option. The option was granted on
15th January, 2020 and the shares vested with her on 15th January, 2021. The company's shares
are quoted in Bombay Stock Exchange, where the opening price and closing price on the date
of exercise of option were ₹ 250 and ₹ 256, respectively. The company recovered ₹ 50 per share
from Pooja. Compute the value of perquisite for the previous year 2021-22.

SALARY SATC 6.65

SECTION 17(2)(viii) - VALUATION OF OTHER FRINGE BENEFITS AND
AMENITIES [Sub-rule (7) of Rule 3]
INTEREST FREE OR CONCESSIONAL LOAN [Rule 3(7)(i)]
1. Value of perquisite =
Interest computed as per SBI rates [as on 01.04.2021] on Maximum Outstanding Monthly
Balance xxx
Less: Interest recovered by the employer from the employee xxx
2. “Maximum outstanding monthly balance” means the aggregate outstanding balance for each
loan as on the last day of each month.
3. Nothing is taxable if-
- Amount of Such Loans are not exceeding in the aggregate ₹ 20,000
- Such loans are given for medical treatment in respect of diseases specified in rule 3A.
- Where loans are made available for medical treatment, referred to above, the exemption
shall not apply to so much of the loan as has been reimbursed to the employee
under any medical insurance scheme.
Question 23:
Determine the taxable value of the perquisite in the following cases:
1. Z Ltd. gives an interest-free housing loan ₹ 10,00,000 to its employee on 1 October 2021. Loan is
repayable within 5 years. SBI lending rate, as on 1.4.2021 is 10% p.a.
2. A, an employee, takes a personal loan of ₹ 1,25,000 from Alfa Ltd. @ 6% p.a. on April 1, 2021,
[SBI lending rate may be assumed, as on 1.4.2021 is 14% p.a.]
3. A purchased a Car on March 1, 2021 from a loan of ₹ 9,00,000 taken at concessional rate of 7%
p.a. from his employer. It is repayable in monthly installments of ₹ 25,000 starting from January 1,
2022. Compute the taxable value of perquisite in respect of concessional loan for the previous year
2021-22. SBI lending rate may be assumed, as on 1.4.2021 is 12.25% p.a.

SALARY SATC 6.66

Class Notes

SALARY SATC 6.67

Travelling, Touring & Accommodation [Rule 3(7)(ii)]
Valuation of perquisite in respect of traveling, touring, accommodation and any other expenses paid /
reimbursed by employer for any holiday availed by EMPLOYEE (OR ANY MEMBER OF
HOUSEHOLD) other than LTC (section 10(5) read with Rule 2B):
(a) Where such facility is maintained by the employer and available uniformly to all employees,
then value shall be:-
Expenditure incurred by the employer LESS Amount recovered from the employee.
(b) Where such facility is maintained by employer and not available uniformly to all employees,
then value shall be:-
Value at which such facilities are offered by other agencies to the public LESS Amount
recovered from the employee.
Notes:
(1) Where the employee is on official tour & the expenses are incurred in respect of any member of his
household accompanying him, the amount of expenditure so incurred in respect of such member
only shall be liable to be tax as perquisite.
(2) Where any official tour is extended as vacation, then expenses incurred in relation to such extended
period of stay or vacation, shall be treated as perquisite.
Free LUNCH/refreshment/ Beverages etc [Rule 3(7)(iii)]
THE TAXABLE VALUE OF THIS PERQUISITE SHALL BE:
Cost incurred by the employer LESS Amount recovered from the employee
However, facility in the following cases is exempt from Tax:
 FREE FOOD AND NON-ALCOHOLIC BEVERAGES UPTO RS. 50 PER MEAL provided by
employer,
 during working hours at office or business premises; or
 through paid voucher which are not transferable and usable only at eating joints;
[This exemption would not be available in case of an employee, being an assessee,
who opts for the provisions of section 115BAC]
 Tea or snacks provided during working hours; or
 Free food and non-alcoholic beverages during working hours provided in a remote area or an off-
shore installation.
Note:- Working hours includes extended office hours (like working on holiday, over-time etc).

SALARY SATC 6.68

GIFT, VOUCHER OR TOKEN [Rule 3(7)(iv)]
 The Value of any gift, or any voucher/ token made by employer to THE EMPLOYEE OR HIS
HOUSEHOLD MEMBER, in excess of ₹ 5,000, is fully taxable.
 If the value of such gift, voucher or token is below ₹ 5,000 in the aggregate during the previous
year, the value of perquisite shall be taken as NIL.
 The aforesaid exemption of ₹ 5,000 shall be denied in case of cash gift.
Note:
An alternate view possible is that only the sum in excess of ₹ 5,000 is taxable in view of the language of
Circular No. 15/2001 that such gifts upto ₹ 5,000 in the aggregate per annum would be exempt, beyond
which it would be taxed as perquisite. As per this view, the value of perquisite would be difference
between Gift Value & ₹ 5,000.

SALARY SATC 6.69

CREDIT CARD [Rule 3(7)(v)]
 The amount of expenses including membership fees and annual fees incurred by THE
EMPLOYEE OR ANY MEMBER OF HIS HOUSEHOLD which is charged to a credit card (including
add on card) provided by the employer or otherwise, paid for or reimbursed by the employer shall
be taken to be the value of perquisite chargeable to tax.
 Amount recovered from such employee will be reduced from the value determined.
 However, such expenses incurred wholly and exclusively for official purposes would not be
treated as a perquisite if it is supported by necessary documents.
CLUB EXPENDITURE [Rule 3(7)(vi)]

 If employer reimburses or makes payment of any expenditure incurred in a club including the
amount of annual or periodical fee for the EMPLOYEE OR ANY MEMBER OF HOUSEHOLD,
the actual amount of such expenditure shall be the value of perquisite.
 Amount recovered from such employee will be reduced from the value determined.
 Initial fee paid for acquiring corporate membership is not a taxable perquisite
 No taxable perquisites in case health club, sports club and similar facilities provided uniformly
to all employees
 No taxable perquisite if the club expenditure is incurred wholly and exclusively for business
purposes.
USE of Employer’s MOVABLE ASSETS [Rule – 3(7)(vii)]
If the facility of usage of any movable asset (Except LAPTOP & Computers) is provided by employer to
EMPLOYEE OR ANY MEMBER OF HIS HOUSEHOLD, the taxable value shall be:
- 10% P.A. OF THE ACTUAL COST of asset (if owned by the employer) or
- Actual amount of hire charges (if taken on hire by the employer)
Note:
1. Where the employee is paying any amount in respect of such asset, the amount so paid shall be
deducted from the value of perquisite determined above.
2. Member of household shall include- (a) Spouse; (b) Children and their spouses; (c) parents;
and (d) Servants and dependents.
TRANSFER of any Movable Asset [Rule – 3(7)(viii)]
If any movable asset is transferred by the employer to employee, then, taxable value of this perquisite
shall be:
Actual cost of the asset to the employer

Less: Dep. for every completed year of usage by employer
Less: The amount charged from the employee.
The following will be the rate and method of depreciation:
S.N. Asset Rate Method
1. Computer & electronic items 50% W.D.V.

[Not covering Household appliances]
2. Motor Car 20% W.D.V.
3. Any other asset 10% Straight Line

SALARY SATC 6.70

Other Benefit or Amenity [Rule – 3(7)(ix)]
2)
Residual Head- The value of any other benefit or amenity, service, right or privilege provided by the
employer shall be determined on the basis of cost to the employer under an arms' length transaction as
reduced by the employee's contribution, if any.
However, there will be no taxable perquisite in respect of expenses on telephones including

mobile phone actually incurred on behalf of the employee by the employer i.e., if an employer pays or
reimburses telephone bills or mobile phone charges of employee, there will be no taxable perquisite.
SECTION 10(10CC) – INCOME IN THE NATURE OF PERQUISITE –Exempted
As per section 10(10CC), tax paid by employer on non-monetary perquisite income of employee shall
be exempt in the hands of employee.
TAX IMPLICATION IN HANDS OF EMPLOYER: Section 40(a)(v) disallows such expenditure in the
hands of the employer. Therefore, the tax so paid by the employer will not be deductible expenditure in
his hands.

SALARY SATC 6.71

Class Notes

SALARY SATC 6.72

Class Notes

SALARY SATC 6.73

Medical Facilities Provided by Employer [Proviso to Section 17(2)]
MEDICAL TREATMENT IN INDIA:

In the following cases, medical facilities/ reimbursement incurred for employee/his family member are
treated as tax FREE perquisites:-
I. Expenditure incurred in a HOSPITAL MAINTAINED BY THE EMPLOYER.

II. Sum paid by the employer for any expenditure for medical treatment:
 in any hospital maintained by
o the Govt. or local authority or
o an approved hospital under CGHS or
 of prescribed diseases/ ailment in a hospital approved by CCIT. [Certificate is required]
III. Group Medical Insurance paid u/s 36(1)(ib).
IV. Medical Insurance paid u/s 80D.
V. Premium of Accidental Insurance Policy.
VI. Any other medical expenditure reimbursed to the extent of ₹ 15,000 in the Previous Year. This
exemption is not available from AY 19-20.
MEDICAL TREATMENT OUTSIDE INDIA:
The following expenditure incurred by employer on treatment of the employee/his family members,
outside India is also a tax-free perquisite:
1. EXPENSES ON MEDICAL TREATMENT OF THE EMPLOYEE OR ANY FAMILY MEMBER:
Exempt to the extent permitted by RBI.
2. EXPENSES ON STAY ABROAD OF THE PATIENT AND ONE ATTENDANT:
Exempt to the extent permitted by RBI
3. TRAVEL EXPENSES FOR ABROAD OF THE PATIENT AND ONE ATTENDANT:
Travel expenses shall be wholly exempt if the employee’s GTI before including therein, the said
travel expenditure ≤ ₹ 2,00,000.
Notes
 Family = Spouse + Children + Dependent [Parents + Brothers + Sister]
 Hospital includes a dispensary or a clinic or a nursing home.
 Fixed medical allowance – always taxable.

SALARY SATC 6.74

Class Notes

SALARY SATC 6.75

RELIEF UNDER SECTION 89
Where by reason of any portion of an assessee’s salary being paid in arrears or in advance or by
reason of his having received in any one financial year, salary for more than twelve months or a
payment of profit in lieu of salary under section 17(3), his income is assessed at a rate higher than that
at which it would otherwise have been assessed, the AO shall, on an application made to him in this
behalf, grant such relief as prescribed.
Similar tax relief is extended to assessees who receive arrears of family pension as defined in the
Explanation to clause (iia) of section 57.
[No relief shall be granted in respect of any amount received or receivable by an assessee on his
voluntary retirement or termination of his service, in accordance with any scheme or schemes of
voluntary retirement or a scheme of voluntary separation (in the case of a public sector company), if
exemption under section 10(10C) in respect of such compensation received on voluntary retirement or
termination of his service or voluntary separation has been claimed by the assessee in respect of the
same assessment year or any other assessment year.]
COMPUTATION OF RELIEF IF SALARY RECEIVED IN ARREARS OR IN ADVANCE
Steps Procedure
1 Compute the tax payable (after HEC) on the total income, including the additional salary,
of the relevant previous year in which the same is received.
2 Compute the tax payable (after HEC) on the total income, excluding the additional
salary, of the relevant previous year in which the same is received.
3 Find out the difference between the tax at (1) and (2).
4 Compute the tax (after HEC) on the total income after including the additional salary in
the previous year to which such salary relates.
5 Compute the tax (after HEC) on the total income after excluding the additional salary in
the previous year to which such salary relates.
6 Find out the difference between tax at (4) and (5).
7  If tax computed in step (3) > tax computed in step (6) then the excess amount
is admissible as relief u/s 89.
 If tax computed in step (3) ≤ tax computed in step (6) then NO RELIEF is
admissible u/s 89. In such a case, the assessee employee need not apply for relief.

SALARY SATC 6.76

MEANING OF GOVERNMENT EMPLOYEES FOR DIFFERENT PURPOSE
S. No. Purpose Government employees

1. GRATUITY [SECTION 10(10)] CG/SG/LA
2. PENSION [SECTION 10(10A)] CG/SG/LA/SC
3. LEAVE SALARY [SEC 10(10AA)] CG/SG
RENT FREE ACCOMODATION

4. CG/SG
[SECTION 17(2)(i) & 17(2)(ii)]
ENTERTAINMENT ALLOWANCE
5. CG/SG
[SECTION 16(ii)]
MEANING OF SALARY FOR COMPUTATION
SECTION Purpose of computation Salary includes

16(ii) Entertainment allowance Basic salary
10(10) Gratuity [if gratuity Act, 1972 is Basic salary + DA
applicable]
10(10) Gratuity [it Act not applicable] Basic salary + DA (R) + % Commission on Sales.
10(10AA) Leave Salary DO
10(10B) Retrenchment Compensation Basic salary + DA
10(13A) HRA Basic salary + DA (R) + % Commission on Sales.
10(10C) VRS DO
10(12) RPF DO
17(2)(i) & RENT FREE ACC [RFA] OR Basic + Allowance +Bonus + Commission + DA(R) + Any
17(2)(ii) ACCOMMODATION AT money payment ( which in chargeable to tax)
CONFESSIONAL RATE But does not include –
1. Employer’s contribution to RPF
2. Value of perquisite specified in Sec 17(2)
[from one or more employer]
17(2)(iii) SPECIFIED EMPLOYEE Basic Salary + D.A. + Commission, whether payable

monthly or turnover based + Bonus + Fees + Advance
Salary + Arrear Salary + Any other taxable payment + Any
taxable allowances + Any other monetary benefits –
Deductions under section 16
[from one or more employer]
DEARNESS ALLOWANCE (DA)

If in question DA is given, then it will not be treated as forming part of salary unless question specifically
says that –
 If forming part of retirement benefit

 Under the terms of employment
 Consider for retirement benefit
DEARNESS PAYS (DP)
It means it is forming part of retirement benefit unless question says otherwise.
MEMBERS OF HOUSEHOLD
= Spouse, Children, Spouse of children, Parents, Servants & all other Dependents.
FAMILY = Spouse + Children + Dependent [Parents + Brothers + Sisters]


SALARY SATC 6.77

SALARY FROM UNITED NATIONS ORGANISATION
Section 2 of the United Nations (Privileges and Immunities), Act 1947 grants exemption from income-
tax to salaries and emoluments paid by the United Nations to its officials. Besides salary, any pension
covered under the United Nations (Privileges and Immunities) Act and received from UNO is also
exempt from tax.

SALARY SATC 6.78

Class Notes

SALARY SATC 6A.1

PRACTICAL QUESTIONS – SET A
ASSUMPTION FOR ALL QUESTIONS – Assessee has not opted for Section 115BAC
1) Mr. X has joined ABC Ltd. on 01.10.2008 in the pay scale of 10,000 – 900 – 16,300 – 1,100 –
25,100 – 1,500 – 32,600. The employer has allowed him dearness allowance @4.35% of basic pay
up to 30.09.2020, @7.5% up to 31.12.2021. Thereafter, it was allowed @10.5% of the basic pay.
Compute employee’s gross salary.
2) Raghav furnished the following particulars and requests you to compute his taxable income
for the previous year ending 31.3.2022:
a) Joined service on 1.10.2021, on a consolidated salary of ₹ 25,000 per month.
b) He was paid ₹ 1,30,000 in September, 2021, so that he should not join elsewhere.
c) He contributed towards:
i) Life Insurance Premium ₹ 20,000
ii) National Saving Certificates ₹ 10,000
3) Up till June 30, 2021, X is in the employment of A Ltd. on the fixed salary of ₹ 25,000 per month
which becomes "due" on the first day of the next month. On July 1, 2021, X joins B Ltd. (salary
being ₹ 30,000 per month which becomes "due" on the last day of each month). Salary is actually
paid on the seventh day of the next month in both cases. Find out the amount of salary
chargeable to tax.
4) Mr. Sunil is working as an employee in ABC Ltd. He received the following amounts during
the previous year 2021-22. Compute the gross salary:
(a) He received ₹ 1,85,000 as salary after deducting ₹ 15,000 as income tax and ₹ 12,000 as
contribution towards provident fund.
(b) He received ₹ 4,000 as guarantee commission.
(c) He was also acting MP and received ₹ 1,25,000 as salary from the consolidated fund of
India.
(d) He took 1 month's salary as loan for his daughter's marriage.
5) Rajesh Kumar, an Indian citizen, is posted in the Indian High Commission at London during the PY
2021-22. His emoluments consist of basic pay of ₹ 1,00,000 per month and overseas allowance of
₹ 2,000 per month. Besides, he is entitled to airfare for going from and coming to India and also to
free use of Government's car at London. He has no taxable income except salary income stated
above. His employer did not deduct tax at source.
Rajesh Kumar argues that

i) he is not liable to pay tax on salary earned and received outside India since he is a non –
resident during the PY 2021-22 and
ii) even if any tax is due, it is the duty of his employer to deduct tax at source and as such he
has no responsibility to pay the tax.
Discuss whether his contention is correct. Will it make any difference if Rajesh Kumar is
foreign citizen? Give reasons.

SALARY SATC 6A.2

6) Mr. Shyam, an employee of AB Ltd. receives ₹ 90,000 as gratuity under the Payment of Gratuity
Act, 1972. He retires on August 15, 2021 after rendering service for 32 years and 4 months. The
last drawn salary was ₹ 3,250 p.m. Calculate the amount of gratuity chargeable to tax.
7) Ms. Uma, not being covered by the Payment of Gratuity Act, 1972 retires during 2021-22 from SR
Private Ltd, and receives ₹ 45,000 as gratuity after a service of 40 years 11 months. Her average
monthly salary during the last 10 months of service was ₹ 2,200. Determine the taxable gratuity
in her case. What would be your answer if she retired after serving for another 2 months?
8) X, who is not covered by the Payment of Gratuity Act, 1972, retires on November 20, 2021 from
ABC Ltd. and receives ₹ 1,86,000 as gratuity after service of 38 years and 10 months. His salary is
₹ 8,000 per month up to July 31, 2021 and ₹ 9,000 per month from August 1, 2021. Besides, he
gets ₹ 500 per month as dearness allowance (69 per cent of which is part of salary for computing
retirement benefits). What amount of gratuity will be exempt from tax?
9) X, a marketing specialist of Bombay, is working with two companies, viz., A Co. and B Co. He
retires from A Co. on November 30, 1993 (salary at the time of retirement: ₹ 2,600) and receives
₹ 22,000 as gratuity out of which ₹ 20,000 is exempt under section 10(10). He also retires from B
Co. on December 10, 2021 after 38 years and 8 months of service and receives ₹ 3,90,000 as
death – cum – retirement gratuity. His average basic salary drawn from B Co. for the preceding 10
months ending on November 30, 2021 is ₹ 18,200 per month. Besides, he has received ₹ 1,000 per
month as dearness allowance, 80 per cent of which forms part of salary for the purpose of
computation of retirement benefits and 6 per cent commission on turnover achieved by him. Total
turnover achieved by him during 10 months ending on November 30, 2021 is ₹ 2,00,000.
Determine the amount of gratuity exempt under section 10(10).
10) Determine the amount of pension taxable for the previous year in the following cases on the
assumption that it becomes due on the last day of each month:
a) X receives ₹ 18,250 per month as pension from the Central Government during the previous
year 2021-22.
b) X receives ₹ 21,000 per month as pension from the Government of Punjab during the previous
year 2021-22.
c) X receives ₹ 20,000 per month as pension from ABC Ltd., a public limited company in the
private sector, during the previous year 2021-2022.
d) X retires from the Central Government service on May 31, 2021. He gets pension of ₹ 15,000
per month up to November 30, 2021 [i.e., ₹ 15,000 x 6]. With effect from December 1, 2021, he
gets one – third of his pension commuted for ₹ 7,18,000.
e) X retires from ABC Co. on June 30, 2021. He gets pension of ₹ 20,000 per month up to January
31, 2022. With effect from February 1, 2022, he gets 60 per cent of pension commuted for
₹ 10,71,000. Does it make any difference if he also gets gratuity of ₹ 40,000 at the time of
retirement?
11)
a) Mr. Kumar retires from Government service on 1-1-2022. He was drawing a salary of ₹ 6,000
p.m. He was drawing dearness allowance of ₹ 1,200 p.m. On retirement, he receives a gratuity
of ₹ 1,20,000. He is paid monthly pension of ₹ 4,200. Compute the Gross salary in his case.
b) Mr. Dalai retires from an employment covered by Payment of Gratuity Act on 30.11.2021 and he
is paid gratuity of ₹ 55,000. While the last drawn salary is ₹ 1,950, the average of last 10
months salary is ₹ 1,800. He served for 36 years and 4 months before retirement. Compute the
taxable gratuity in his case.

SALARY SATC 6A.3

c) Mr. Rohit not covered by Payment of Gratuity Act, retires on 28th Feb 2022 after serving the
employer company for a period of 18 years and 10 months. He was drawing a salary of ₹ 5,000
up to Sep 2021 and thereafter ₹ 6,000/ – per month. On retirement he is not in receipt of
pension but gratuity of ₹ 60,000 is paid. Compute Gross salary.
12) Determine the gross amount of taxable pension includible in salary income for the AY 2022-
23 in the following cases:
a) On 30th June 2021, Mr. Santhosh retires from Central Government service and gets pension of
₹ 3,000 p.m. up to 31-1-2022. With effect from 1-2-2022 he gets 1/3 of his pension commuted
for ₹ 1,20,000.
b) Mr. Kamath retires from X Ltd., on 31.10.2020. He gets pension of ₹ 2,000 p.m. up to 31-10-
2021. With effect from Nov 1, 2021 he gets 60% of pension commuted for ₹ 30,000. He is not in
receipt of gratuity.
13) Mr. Daniel resigned from his employment and is paid leave salary of ₹ 92,400. He completed 32
years of service and he was drawing a salary of ₹ 4,200 p.m throughout the period of 10 months
before retirement. During service he availed 10 months leave. Calculate the leave salary taxable
in his case. [Company Policy – 1 Month]
14) Mr. Arif retired from service after serving for 12 years and encashed leave of 15 months to his credit
at ₹ 60,000. As per the rules of employment he was eligible for 2 months leave per year of
completed service and he was drawing ₹ 4,000 p.m. as salary throughout the period of 10 months
before retirement. Determine taxable amount of leave salary.
15) Shri A.K. Gupta was employed in a factory in Faridabad. He retired on 1.1.2022 after completing a
service of 26 years and 5 months. He had been getting a salary of ₹ 23,000 per month and a
dearness allowance of ₹ 2,000 per month (forming part of retirement benefits) for the last four
years. His pension was determined @ ₹ 9,000 p.m. and 3/4 portion of it was commuted for
₹ 2,70,000. In addition to this he received a gratuity of ₹ 4,00,000 and as per entitlement of 30 days
earned leave for each year of service, he also received ₹ 3,00,000 for encashment of earned leave
of 12 months during the previous year. Compute gross salary of Shri Gupta, assuming he is not
covered under Payment of Gratuity Act.
16) X was employed with ABC Ltd. He retired w.e.f. 1.2.2022 after completing a service of 24
years and 4 months. He submits the following information :
Basic Salary ₹ 5,000 per month (at the time of retirement)
Dearness Allowance 100% of Basic Salary (40% of which forms part of salary for
retirement benefits).
Last increment ₹ 500 w.e.f. 1.7.2021
His pension – was determined at ₹ 3,000 per month. He got 50% of the pension commuted w.e.f.
1.3.2022 and received a sum of ₹ 1,00,000 as commuted pension. In addition to this, he received a
gratuity of ₹ 1,20,000 and leave encashment amounting to ₹ 56,000 on account of accumulated
leave of 240 days. He was entitled to 40 days leave for every year of service.
Compute his Gross Salary assuming that he is not covered under Payment of Gratuity Act.

SALARY SATC 6A.4

17) Mr. Narendra, who retired from the services of Hotel Samode Ltd., on 31.1.2022 after putting
on service for 5 years, received the following amounts from the employer for the year ending
on 31.3.2022:
Salary @ ₹ 16,000 p.m. comprising of basic salary of ₹ 10,000, Dearness allowance of ₹ 3,000,
City compensatory allowance of ₹ 2,000 and Night duty allowance of ₹ 1,000. Pension @ 30% of
basic salary from 1.2.2022. Leave salary of ₹ 75,000 for 225 days of leave accumulated during 5
years @ 45 days leave in each year. Gratuity of ₹ 50,000.
Compute Gross Salary of Mr Narendra.
18) Mr. Zakaria, staying at Chennai, receives ₹ 12,500 monthly as basic salary; ₹ 1,500 as D.A.PM.
provided in terms of employment and 4% as commission on turnover achieved by him. He is paid
an house rent allowance of ₹1,800 p.m. The turnover achieved by him for the year is ₹15 lakhs.
House rent paid by him is ₹ 2,500 p.m. He received advance salary of ₹ 50,000/ – in March 2022
relating to the period April to July 2022. Determine the taxable quantum of HRA.
19) Mr. Kapil is in receipt of the following allowances and seeks your advice about the taxable
quantum of these allowances for FY 2021-22:
i) Helper allowance ₹ 300 p.m. Mr. Kapil had appointed a helper for 9 months during the year
to whom he paid ₹ 200 p.m.
ii) Conveyance allowance of ₹ 750 p.m. Mr. Kapil owner car which is used both for personal
purposes and official purposes. Total monthly expenses Amounts to ₹ 1,200 of which 40% is
attributable to office use.
iii) During the year Mr. Kapil received education allowance for his 3 children a sum of ₹ 250 per
month each towards education and hostel expenditure. All the children are staying in hostel.
iv) During the year for six months Mr. Kapil was posted at Khandala, a hilly area loc; at a height
of 1,200 mts. above sea level. Hill compensatory allowance of ₹ 2,400 has been received by
him at ₹ 400/ – per month.
20) Compute the gross salary of Mr. Kamlesh on the basis of the following information:
a) Basic pay ₹ 8,000 per month
b) Dearness allowance - 40% of basic pay
c) City compensatory allowance -10% of basic pay.
d) Medical allowance- ₹ 800 per month
e) Children education allowance - ₹ 80 per month per child for 3 children
f) Hostel expenditure allowance - ₹ 400 per child per month for 2 children.
g) Tribal area allowance- ₹ 500 per month
h) Travelling allowance - ₹ 12,000 (However actual expenditure was only ₹ 8000 for official
duties)
i) Conveyance allowance - ₹ 500 per month. (The whole amount was spent for official duties)
j) Transport Allowance - ₹ 28,200
k) Overtime allowance - ₹ 4,000

SALARY SATC 6A.5

21) Mr. Khanna, an employee of lOL, New Delhi, a Private Sector Company, received the
following for the FY 2021-22: ₹
1. Basic pay . 1,20,000
2. House rent allowance 90,000
3. Special allowance 30,000
X was residing at New Delhi and was paying a rent of ₹ 10,000 a month.
Compute eligible exemption under section 10(13A) of Income – tax, Act 1961, in respect of
HRA received.
22) Mr. M is an area manager of M/s N. Steels Co. – Ltd. During the financial year 2021-22, he
gets following emoluments from his employer:
Basic Salary
– Up to 31.08.2021 ₹ 20,000 p.m.
– From 01.09.2021 ₹ 25,000 p.m.
Transport allowance ₹ 1,200 p.m.
Contribution to recognized provident fund 15% of basic salary and D.A.
Children education allowance ₹ 500 p.m. for two children
City compensatory allowance ₹ 300 p.m.
Hostel expenses allowance ₹ 380 p. m. for two children
Tiffin allowance ₹ 5,000 p.a.
(actual expenses ₹ 3700)
Tax paid on employment ₹ 2,500
Compute taxable salary of Mr. M.
23) Mr. D is employed in Nainital Transport Corporation as a conductor with basic pay ₹ 4,000 p.m.
upto 30.09.2021 and ₹ 4,500 p.m. with effect from 01.10.2021. Dearness allowance is allowed @
12% of the basic pay and 10% of it is taken into consideration as per terms of employment. The
employer has paid him outstation allowance of ₹ 1,200 p.m., transport allowance of ₹ 300 p.m.
(savings ₹ 100 p.m.), conveyance allowance for personal purpose ₹ 100 p.m.
He has resigned from Nainital Transport Corporation with effect from 01.03.2022 and has joined
Haryana Transport Corporation at a consolidated pay of ₹ 8,500 p.m.
Compute his income under the head salary.

SALARY SATC 6A.6

24) Mr A, a civil engineer was in Government service till 30.06.2021. He joined as an adviser (part
time) from 1st October, 2021 in a organisation on an honorarium of ₹ 32,000 per month. He owns a
house properly which is self occupied. From the following further information, furnished for the
year ending 31st March, 2022, you are requested to
(a) compute his income under the head salary
₹
(a) Salary from Government service 30,000
(b) Leave at credit (encashment) 50,000
(c) Provident fund 78,000
(d) Commuted pension 35,000
(e) Uncommuted Pension 20,000
(f) House rent allowance 5,000
(g) Gratuity Received 1,20,000
(h) Repayment to Housing Development Finance Corporation Ltd. 24,000
(Paid in July 2022-Principal ₹ 10,000+Interest ₹ 14,000 on loan taken for construction of house)
(i) Deposit in public provident fund account 32,000
25) Mr. X, a resident individual is retired from A Co. Ltd. w.e.f. 1st February, 2022, after 20 years and 9
months of service. He joined B Co. Ltd. on the same day, i.e. 1st February, 2022 and remained in
service till 31st March, 2022.
He furnished the following information:

Salary and allowances from 01.04.2021 to 31.01.2022 from A Co. Ltd. ₹
Basic salary 10,000 p.m.
Dearness allowance 1,500 p.m.
Commission calculated @ 4% on turnover achieved by Mr. X 4,000
Gratuity received 1,25,000
(not covered by the Payment of Gratuity Act, 1972)
Salary and allowance from B Co. Ltd.

Basic Salary 7,000 p.m.
Entertainment allowance 1,000 p.m.
Fixed medical allowance 500 p.m.
House rent allowance 600 p.m.
Leave salary received (During the service) 5,000
Other information:
Mr. X resides in his own house throughout the year.
Mr. X paid a premium of ₹ 12,000 on the policy of ₹ 150,000 on life of his minor child.
Contribution to an approved superannuation fund and the Jeevan Dhara Scheme of the LIC
covered under section 80C amounted to ₹ 8,000 and ₹ 5,000 respectively.
Compute Mr. X's total income.

SALARY SATC 6A.7

26) From the following particulars furnished by Mr. X for the year ended 31.03.2022. Compute
his total income.
a. Mr. X retired on 31.12.2021 at the age of 59, after putting in 25 years and 11 months of
service, for a private company at Delhi.
b. He was paid a salary of ₹ 30,000 p.m. and house rent allowance of ₹ 7,000 p.m. He paid rent
of ₹ 6,500 p.m. during his tenure of service.
c. On retirement, he was paid a gratuity of ₹ 3,75,000. He was not covered by the payment of
Gratuity Act. His average salary in this regard may be taken as ₹ 26,500. Mr. X has not
received any other gratuity at any point of time earlier, other than this gratuity.
d. He had accumulated leave of 15 days per annum during the period of his service; this was
encashed by Mr. X at the time of his retirement. A sum of ₹ 3,20,000 was received by him in
this regard. His average salary may be taken as ₹ 26,500.
e. Mr. X has invested ₹ 20,500 in recognised provident fund, ₹ 45,000 in public provident fund
and ₹ 29,500 in National Savings Certificates.
27) Mr. A retires from service on December 31, 2021, after 25 years of service. Following are the
particulars of his income/investments for the previous year 2021-22:
Particulars ₹
Basic pay @ ₹ 16,000 per month for 9 months 1,44,000
Dearness pay (50% forms part of the retirement benefits) ₹ 8,000 per month
for 9 months 72,000
Lumpsum payment received from the Unrecognised Provident Fund 6,00,000
Deposits in the PPF account 40,000
Out of the amount received from the provident fund, the employer’s share was ₹ 2,20,000 and the
interest thereon ₹ 50,000. The employee’s share was ₹ 2,70,000 and the interest thereon ₹ 60,000.
What is the taxable portion of the amount received from the unrecognized provident and in
the hands of Mr. A? Will your answer be any different if the fund mentioned above was a
recognised provident fund?
28) Mr. B is working in XYZ Ltd. and has given the details of his income for the P.Y. 2021-22. You
are required to compute his gross salary from the details given below:
Basic Salary ₹ 10,000 p.m.
D.A. (50% is for retirement benefits) ₹ 8,000 p.m.
Commission as a percentage of turnover 1%
Turnover during the year ₹ 5,00,000
Bonus ₹ 40,000
Gratuity ₹ 25,000
His own contribution in the RPF ₹ 20,000
Employer’s contribution to RPF 20% of his basic salary
Interest accrued in the RPF @ 13% p.a. ₹ 13,000

SALARY SATC 6A.8

29) X retires on June 30, 2020 He submits the following information —
Basic salary (since January 2020); ₹ 20,000 per month, dearness allowance : ₹ 6,000 per month
(1/3 of which is part of salary for retirement benefits), employer's contribution towards provident
fund : ₹ 3,000 per month (X makes a matching contribution); interest credited at the rate of 15 per
cent on April 30, 2021 : ₹ 7,500; pension after retirement : ₹ 10,000 per month; and payment of
provident fund at the time of retirement: ₹ 7,60,000 (out of which employer's contribution:
₹ 3,30,000, interest thereon ₹ 44,000, X's contributions : ₹ 3,40,000, interest thereon : ₹ 46,000).
Salary and pension become due on the last day of each month. X has deposited the entire
provident fund payment with a company (rate of interest: 9 per cent per annum).
Find out the income of X on the assumption that the provident fund is (a) statutory provident
fund, (b) recognised provident fund, or (c) unrecognised provident fund.
30) Mr. R is employed with a transport firm. He is a member of an unrecognized provident fund. He
has been drawing salary @ ₹ 10,000 p.m. since 01.01.2021. Dearness allowance, forming part of
pay for superannuation benefits, is paid @ 10% of his salary. He gets house rent allowance @
₹ 1,300 per month. He pays rent of ₹ 2,100 p.m. He contributes @ 10% of his salary to the
unrecognized provident fund and the employer contributes @ 15%. The employer also paid his
club bills amounting to ₹ 8,000. Besides, he is paid ₹ 1,800 p.m. as outstation allowance.
He retires on 31st December 2021 after 20 years and 10 months of service. He gets ₹ 1,56,000
accumulated balance from the fund. It consists of ₹ 30,000 as his contribution and ₹ 22,000
interest thereon. The employer's contribution is ₹ 66,000 and interest thereon is ₹ 38,000. He also
gets gratuity of ₹ 90,000.
After retirement, he gets pension @ ₹ 4,000 p.m. On 1st March, 2022 he surrenders one-half
pension for a consolidated amount of ₹ 1,20,000.
He has made the following payment/investments during the previous year 2021-22:
(i) Purchases of National Savings Certificates, VIII issue, amounting to ₹ 4,000.
(ii) Contribution of ₹ 10,000 under the Jeevan Dhara Scheme of Life Insurance Corporation of
India eligible for deduction under section 80C.
(iii) Life insurance premium amounting ₹ 4,000 on the policy taken on the life of his married son.
(Sum assured ₹ 80,000)
(iv) Public provident fund deposit ₹ 12,000
(v) Repayment of ₹ 25,000 to the Life Insurance Corporation of India on account of loan taken for
the purchase of a flat, allotted in March, 2020.
(vi) Tuition fees of his son studying in college ₹ 1,100 per month.
From the above information you are required to compute his income under the head salary.
31) Mr. X is employed in A Ltd. getting basic pay ₹ 20,000 p.m., dearness allowance ₹ 7,000 p.m.
The employer has contributed ₹ 3,500 to the unrecognised provident fund and the employee has
also contributed equal amount. The employee was retired on 31.10.2021 after serving the
employer for 20 years and 6 months and employer has credited interest ₹ 21,000 to the provident
fund account on 31.10.2021 and interest rate is 12% p.a.
The employer has paid provident fund balance ₹ 10,00,000 to the employee on 01.11.2021 out of
which employee's contribution is ₹ 4,00,000 and employer's contribution is also ₹ 4,00,000 and
balance is interest. Employer has paid gratuity ₹ 2,60,000 and allowed him pension ₹ 5,000 p.m.
The employee was allowed commutation of pension on 01.01.2022 for 40% of the pension and has
paid ₹ 2,40,000. Compute employee's total income for the assessment year 2022-23.

SALARY SATC 6A.9

32) Mr. C is a Finance Manager in ABC Ltd. The company has provided him with rent-free
unfurnished accommodation in Mumbai. He gives you the following particulars:
Basic salary ₹ 6,000 p.m.

Advance salary for April 2022 received in March 2022 ₹ 5,000
Dearness Allowance ₹ 2,000 p.m. (30% is for retirement
benefits)
Bonus ₹ 1,500 p.m.
The company allotted the house to him on 1.11.21. Calculate the taxable value of the perquisite.
33) Using the data given in the previous question No. 35, compute the value of the perquisite if Mr.
C is required to pay a rent of ₹ 1,000 p.m. to the company, for the use of this accommodation.
34) Using the data given in above question No. 35, compute the value of the perquisite if ABC Ltd.
has taken this accommodation on a lease rent of ₹ 1,200 p.m. and Mr. C is required to pay a rent of
₹ 1,000 p.m. to the company, for the use of this accommodation.
35) Using the data given in question No. 35, compute the value of the perquisite if ABC Ltd. has
provided a television (WDV ₹ 10,000; Cost ₹ 25,000) and two air conditioners. The rent paid by the
company for the air conditioners is ₹ 400 p.m. each. The television was provided on 1.1.22.
However, Mr. C is required to pay a rent of ₹ 1,000 p.m. to the company, for the use of this
furnished accommodation.
36) Using the data given in question No. 38 above, compute the value of the perquisite if Mr. C is
a government employee. The licence fee determined by the Government for this
accommodation was ₹ 700 p.m.
37) Mr. Prabhu, a private sector employee gets ₹ 60,000 as basic pay, ₹ 6,000 as commission, ₹ 4,000
as bonus, ₹ 6,000 as Uniform allowance (60% spent for uniform); ₹ 12,000 as conveyance
allowance (75% utilised for official purposes); and entertainment allowance ₹ 5,000. His employer
has paid income – tax of ₹ 3,000 and profession tax of ₹ 1,000 on his behalf. A rent free
unfurnished accommodation is provided in a place where population is
a) more than 25 lakhs, b) less than 10 lakhs,
c) between 10 lakhs and 25 lakhs. Determine the value of rent free accommodation.
38) X received during the previous year ending March 31, 2022, emoluments consisting of basic pay:
₹ 1,62,000; special allowance : ₹ 17,000 and reimbursement of medical expenditure : ₹ 3,800. His
employer has also provided a rent – free furnished flat in Bombay. Lease rent of the unfurnished flat
is ₹ 50,000. Some of the household appliances provided to X (with effect from June 1, 2021) are
owned by the employer (cost price of which is ₹ 36,000, date of purchase is April 1, 1960 and
written down value, as on April 1, 2021 is ₹ 620). Employer pays ₹ 10,000 annually as hire charges
for three air – conditioners installed throughout the previous year in rent – free flat.
Compute the value of the perquisite if:

a. X is a Secretary in the Ministry of Law and ₹ 4,000 is the licence fee of unfurnished flat as per
the Central Government rules;
b. X is the Managing Director of ABC (P.) Ltd. Does it make any difference if, X has been provided
a hotel accommodation throughout the year (tariff being ₹ 1,20,000 per annum) ?

SALARY SATC 6A.10

39) X, a regular employee of A Ltd., gets the following emoluments during the PY 2021-22:
Basic salary : ₹ 6,000 per month (which has been increased to ₹ 7,000 per month from January 1,
2022); dearness allowance ₹ 4,000 per month (72 per cent of which is part of salary for computing
retirement benefits); education allowance : ₹ 550 per month per child for 4 children; medical
allowance : ₹ 400 per month; transport allowance : ₹ 350 per month (out of which ₹ 100 per month
is used for covering the journey between office and residence and ₹ 250 per month is used for other
purposes). Besides, he gets ₹ 4,500 per month as house rent allowance upto November 30, 2021
(rent paid at Ghaziabad : ₹ 5,500 per month). With effect from December 1, 2021, he has been
provided a furnished flat by the employer at Delhi (rent paid by employer: ₹ 7,500 per month; rent of
furniture provided : ₹ 500; rent recovered from X : ₹ 900 per month). Find out the Gross salary
chargeable to tax on the assumption that with effect from January 1, 2022, he joins a part –
time employment with B Ltd. (salary ₹ 2,000 per month) with the permission of A Ltd (without
leaving the job of A Ltd.)
40) Mr. X is employed in ABC Ltd. getting basic pay ₹ 11,000 p.m., dearness allowance ₹ 5,000
p.m. and 30% of it forms part of salary.
The employee is also getting dearness pay ₹ 1,000 p.m. and 10% of it forms part of salary. He is
getting bonus ₹ 1,200 p.m. The employer has provided him one accommodation in Delhi for which
rent paid by the employer is ₹ 1,200 p.m.
The employee was transferred to Bombay with effect from 01.01.2022 and the employer has
provided him rent free accommodation at Bombay also which is owned by the employer himself.
The employee has received arrears of salary ₹ 32,000 and advance salary of ₹ 11,000.
Compute employee's total income.
41) Mrs. Padma (age : 25 years) is offered an employment by Pritam Ltd. at a basic salary of ₹ 24,000
per month; other allowances according to rules of the company are - Dearness allowance : 18% of
basic pay (not forming part of salary for calculating retirement benefits); Bonus : 1 month basic pay;
and Project allowance : 6% of basic pay.
The company gives Mrs. Padma an option either to take a rent-free unfurnished accommodation at
Mumbai for which the company would directly bear the rent of ₹ 15,000 per month or to accept a
house rent allowance of ₹ 15,000 per month and find out her own accommodation. If Mrs. Padma
opts for house rent allowance, she will have to pay ₹ 15,000 per month for an unfurnished house.
Which one of the two options should be opted by Mrs. Padma in order to minimize her tax
liability?
42) Determine the value of perquisite in the following cases with brief reasons for your answer:
Motorcar (cubic capacity of engine below 1.60 Hz) owned by employer and provided to employee
since 1.04.2016. It is partly used for official and personal purposes by the employee. Expenditure
fully met by the employer ₹ 25,600. (Car is self – driven by the employee)

SALARY SATC 6A.11

43) Mr. A is provided with two cars, to be used for official and personal work, by his employer
ABC Ltd. The following information is available from the company records:
Car 1 Car 2
₹ ₹
Cost of the Car 6,00,000 4,00,000
Running and maintenance
(Borne by the company) 40,800 28,000
Salary of driver (Borne by the company) 24,000 24,000
The taxable monetary emoluments of Mr. A are ₹ 90,000. Compute the taxable Perk in respect of
Cars, on the assumption car 2, is exclusively used by A.
44) Mr. Guru receives ₹ 15,000 p.m. as basic salary and ₹ 1,500 p.m. as D.A. not forming part of
retirement benefit. He has been provided with the following perquisites:
a) Unfurnished accommodation at Bangalore. Rent paid by Mr. Guru towards this accommodation
is ₹ 1,000/ – p.m.
b) He has provided with the services of cook and watchman. Company pays a salary of ₹ 1,000
p.m. each to cook and watchman.
Compute the Gross salary. [Ans: ₹ 2,37,000]
45) Please determine the taxable value of the perquisite in the following cases :
i) X is employed by A Ltd. On June 1, 2021, the company gives an interest – free housing loan of
₹ 14,00,000. Loan is repayable within 5 years. [Assumed SBI rate is 8%]
ii) Y is employed by B Ltd. On April 1, 2021, he takes a personal loan of ₹ 25,000 from B Ltd. B
Ltd. recovers interest @ 7 per cent per annum from Y. [Assumed SBI rate is 16%]
iii) C Ltd. gives the following interest – free loan to Z, an employee of the company - ₹ 15,000 for
child's education and ₹ 5,000 for purchasing a refrigerator. No other loan is given by C Ltd.
iv) A purchases a Honda City 1.6 Lxi on March 1, 2021 from a loan of ₹ 8,00,000 taken at
concessional rate of 7 per cent per annum from his employer XYZ Ltd. As per the agreed terms
of repayment, A is supposed to repay in monthly installments of ₹ 25,000 starting from January
1, 2022. [Assumed SBI rate is 8%]
Compute the taxable value of perquisite in respect of concessional loan.
46) Find out the taxable value of the perquisite in the following cases–
(1) X is given a laptop by the employer – company for using it for office and private purpose
(ownership is not transferred). Cost of the laptop to the employer is ₹ 96,000.
(2) On October 15, 2021, the company gives its music system to Y for domestic use. Ownership is
not transferred. Cost of music system (in 2000) to the employer is ₹ 15,000.
(3) The employer company sells the following assets to the employees on January 1, 2022 —
Name of employee Z A B
Asset sold Car Computer Fridge
Cost of the asset to employer ₹ 6,96,000 ₹ 1,17,000 ₹ 40,000
Date of purchase (put to use - same day) May 15, 2019 May 15, 2019 May 2019
Sale price ₹ 2,10,000 ₹ 24,270 ₹ 1,000
Before sale on January 1, 2022, these assets were used for business purpose by the employer.

SALARY SATC 6A.12

47) Find out the perquisite value in the following cases:
Assets Furniture Air- Video Motor car Computer
conditioner camera
Original cost 2,00,000 75,000 60,000 5,40,000 1,20,000
Date of purchase by 07.03.2018 01.07.2020 10.07.2019 01.10.2017 01.01.2019
the Employer
Date of putting to 31.03.2018 01.07.2020 11.07.2019 01.10.2017 10.01.2019
use by employer
Date of sale of asset 01.09.2021 01.08.2021 01.08.2021 01.01.2022 09.01.2022
to the employee
Payment made by the 40,000 15,000 20,000 1,50,000 25,000
employee
48) Following benefits have been granted by Ved Software Ltd. to one of its employees Mr.
Badri:
a) Housing loan @ 6% per annum. Amount outstanding on 1.4.2021 is ₹ 6,00,000. Mr. Badri pays
₹ 12,000 per month on 5th of each month.
b) Air – conditioners purchased 4 years back for ₹ 2,00,000 have been given to Mr. Badri for
₹ 90,000.
Compute the chargeable perquisite in the hands of Mr. Badri.
The lending rate of State Bank of India as on 1.4.2021 for housing loan may be taken as 10%.
49) Mr. Raghu Raj is employed with Bhoruka Power Corporation Ltd., as General Manager,
Finance, on a monthly salary of ₹ 26,000. He has been provided with the following
perquisites:
Rent free accommodation is provided in Bangalore. The company has given him housing loan of
₹ 4 lakhs repayable in 8 years during the previous year @ 3% per annum [SBI Rate – 10.5%]. The
company had purchased a car on 01.05.2019 for ₹ 2,50,000/ –. This car is sold to Mr. Raghu Raj on
1-7-2021 for ₹ 1,20,000/ –. He made Diwali purchases for office gifts amounting to ₹ 19,000/ – on
his corporate credit card. This amount along with the annual fee of ₹ 1,500/ – was paid by the
company. He was allowed to use the video camera and laptop belonging to the company. The
company had purchased these assets for ₹ 40,000/ – and ₹ 2 lakhs respectively. Compute taxable
salary of Mr. Raghu Raj.
50) Mr. Syed Zaki receives ₹ 10,000 p.m. as basic salary and ₹ 1,000 p.m. as D.A. forming part of
retirement benefit. He has been provided with the following perquisites:
Unfurnished accommodation at Chennai. Rent paid by Mr. Zaki towards this accommodation is
₹ 750/ – p.m. He has been provided with the services of watchman and sweeper. Company pays a
salary is ₹ 1,000 p.m. each to watchman and sweeper. He has been offered 1000 shares of the
employer company at ₹ 120 per share under "Employee Stock Purchase Scheme". Public offer is
₹ 140 per share. The said scheme is approved by SEBI. Compute the taxable salary.

SALARY SATC 6A.13

51) A Ltd. has offered you a job in Delhi at a basic salary of ₹ 11,500 per month and an option to
choose any one of the following two packages :
Package I
(1) HRA ₹ 4,500 p.m. (Rent to be paid ₹ 4,500 p.m)
(2) Education allowance ₹ 300 p.m. (for one child)
(3) Telephone allowance ₹ 1,000 p.m.
(4) Medical Allowance ₹ 1,500 p.m.
(5) Conveyance allowance ₹ 1,500 p.m. (for private user)
(6) Lunch allowance – ₹ 1500 p.m.
Package II
(i) Company owned unfurnished accommodation FRV ₹ 54,000 p a.
(ii) Education facility for one child valued at ₹ 300 p.m.(Not owned by employer)
(iii) Free telephone facility at residence upto ₹ 1,000 p.m.
(iv) Medical reimbursement upto ₹ 18,000 p.a.
(v) Motor Car facility for private use with expenditure valued at ₹ 18,000 (including normal
wear & tear).
(vi) Free Lunch (₹ 60 x 300 days)
The company also offers you the services of watchman, sweeper and gardener in both the above
packages. The salary of each employee is ₹ 500 p.m.
Which package will you choose so that your tax liability is minimum?
52) Mr. Albert is employed with Sonata Software Ltd., as Vice – President, Marketing, on a
monthly salary of ₹ 30,000. He has been provided with the following perquisites:
 Rent free accommodation is provided in Hyderabad
 During the previous year, the company has given him interest free housing loan of ₹ 6 lakhs
repayable within 12 years. (SBI rate of interest – 10%)
 The company had purchased a car on 1-4-2020 for ₹ 3,50,000/ – . This car is sold to him on
1-5-2021 for ₹ 1,00,000/–
 He was allowed to use the Air conditioner and Invertor belonging to the company. The
company had purchased these assets for ₹ 50,000/– and ₹ 75,000/– respectively.
Compute Gross salary of Mr. Albert.

SALARY SATC 6A.14

53) Mr. A, finance manager of Jet Ltd. Mumbai, furnishes the following particulars for the
financial year 2021-22:
i. Salary ₹ 46,000 per month
ii. Value of medical facility in a hospital maintained by the company ₹ 17,000
iii. Housing loan of ₹ 6,00,000 at the interest rate of 5% p.a. (No repayment made during the year,
but the loan is repayable in tenth year) [SBI Rate – 10.5%]
iv. Gifts (in kind) made by the company on the occasion of wedding anniversary of Mr. A ₹ 3,750
v. Rent free accommodation owned by the company
vi. A wooden table and 4 chairs were provided to Mr. A at his residence. These were purchased
on 01.04.2018 for ₹ 60,000 and put to use on 01.04.2018 and sold to Mr. A on 01.08.2021 for
₹ 30,000
vii. Personal purchases through credit card provided by the company amounting to ₹ 30,000 was
paid by the company. No part of the amount was recovered from Mr. A.
viii. An ambassador car which was purchased by the company on 16.07.2018 for ₹ 2,50,000 and
put to use on the same date. It was sold to the assessee on 14.07.2021 for ₹ 100,000.
Compute Gross Salary of Mr. A.
54) Mr. G is the General Manager of Software Ltd, which is covered under recognised provident
fund scheme. He voluntarily retired on 31.12.2021 after 20 years of service. He submits the
following particulars of his salary income and approved savings during the previous years
on 2021-22:
(i) Salary @ ₹ 15,000 per month from 01.02.2021.

(ii) Dearness allowance ₹ 1,500 per month from 01.02.2021, 50% of the dearness allowance
is part of superannuation benefits,
(iii) Pension @ ₹ 4,000 per month.
(iv) House rent allowance @ ₹ 3,000 p.m. from 01.02.2021 rent paid by him is ₹ 4,000 p.m.
(v) He received ₹ 5,30,000 as gratuity,
(vi) He received ₹ 1,57,500 for encashment of 10 month unutilised earned leave. As per rules
of the company, he was entitled to one month leave for every year of service. During his
service, he has availed 10 months earned leave,
(vii) An ambassador car (with engine capacity 1.6 litres is provided by the company for official
& personal use. Expenses of its running and maintenance : and salary of the driver are
borne by the company,
(viii) He contributes 20% of his salary to the fund which includes 12% voluntary contribution &
8% compulsory contribution. The company's contribution is 12% of the salary to the fund,
(ix) The company paid ₹ 8,000 to quick gas service for the use of cooking gas by him.
However, it was usual practice of the company to hold its business dinners at his house,
(x) He has invested ₹ 13,000 in National Saving Certificates VIII issue. He deposited
₹ 14,000 in public provident fund. He paid ₹ 16,000 towards Life Insurance Premium on
the policy taken on the life of his married son (sum assured ₹ 120,000).
(xi) The company deducted ₹ 500 as tax at source.

SALARY SATC 6A.15

55) Mr. X employed in ABC Ltd, submits the following particulars of His income for the previous
year 2021-22.
₹
Salary after deduction of income tax at source and own
contribution to the Recognised Provident fund 2,25,000
— Income tax deducted at source 25,400
— Own contribution to the recognised provident fund 40,000
Employer's contribution to recognised provident fund 35,000
Interest credited to the provident fund calculated at the rate of 9.5% per 7,000
annum
Mr. X is given free use of 1.8 litres engine capacity car by his employer for personal and official
purposes with effect from 13.12.2021, all the expenses including salary of driver being met by
the latter (employer). A sum of ₹ 1,500 is, however, recovered from Mr. X.
Mr. X is also provided free service of a watchman with effect from 05.04.2022 and a sweeper
with effect from 07.12.2021. Salary ₹ 600 per month per person is paid by employer. Income of
Mr. X from other sources is ₹ 1,25,000 which includes income tax refund of ₹ 10,000 and ₹ 800,
being interest thereon.
Compute Mr. X's total income.
56) Babu joined a Company on 1.6.2021 and was paid the following emoluments and allowed
perquisites as under:
Emoluments: Basic Pay ₹ 25,000 per month; DA ₹ 10,000 per month; Bonus ₹ 50,000 per month.
Perquisites:
a) Furnished accommodation owned by the employer and provided free of cost. Value of furniture
therein ₹ 3,00,000.
b) Motorcar owned by the Company (with engine cubic capacity less than 1.6 litres) along with
chauffeur for official and personal use.
c) Sweeper salary paid by Company ₹ 1,500 per month.
d) Watchman salary paid by Company ₹ 1,500 per month.
e) Educational facility for 2 children provided free of cost. School is owned and maintained by
company.
f) Interest free loan of ₹ 5,00,000 given on 1.10.2021 for purchase of a house. No repayment was
made during the year. (SBI Rate 12.25%)
g) Interest free loan for purchase of computer ₹ 50,000 given on 1.1.2022. No repayment was
made during the year. (SBI Rate 15.25%)
h) Corporate membership of a club. The initial fee of ₹ 1,00,000 was paid by the Company. Babu
paid the bills for his use of club facilities.
You are required to compute Gross Salary. Suitable assumptions may be made, wherever
necessary.

SALARY SATC 6A.16

57) Naresh, who is neither a director nor he has substantial interest in any company, is offered
an employment by Freewheel Ltd., Mumbai with following alternatives :
Alternative I Alternative II
(₹) (₹)
Basic pay 92,000 92,000
Bonus 9,000 9,000
Education allowance for 2 children/ Education facility for 2 30,200 30,200
children in a school maintained by employer
Sweeper allowance/ Sweeper facility 10,000 10,000
Entertainment Allowance/Club facility 6,000 6,000
Transport allowance/Free car (1200 cc) facility for personal use (car 21,600 21,600
owned by the employer)
Medical allowance/ Medical facility for Naresh and his family 18,000 18,000
members in a hospital maintained by employer
Allowance for gas, electricity and water supply/ Free gas, electricity 4,500 4,500
and water supply (bills will be in the name of the employer)
Holiday home allowance/Holiday home facility 8,000 8,000
Lunch allowance/ Free lunch (₹ 70 × 200 days + ₹ 80 × 50 days) 18,000 18,000
Diwali gift allowance/ Gift on Diwali 7,500 7,500
A rent-free unfurnished home — lease rent 14,000 14,000
Which of the two alternatives Naresh should opt for on the assumption that both employer
and employee will contribute 10% of salary towards unrecognised provident fund? Interest-
free loan of ₹ 20,000 will be given to him for purchasing household items.
58) Mr. X is employed in ABC Ltd. getting basic pay of ₹ 9,000 p.m. Employer has provided him
treatment outside India and has incurred a sum of ₹ 3,60,000 but Reserve Bank of India has
permitted ₹ 3,50,000. Employer incurred ₹ 1,50,000 on stay but Reserve Bank of India has
permitted ₹ 1,05,000; employer has incurred ₹ 97,000 on travelling and Reserve Bank of India has
permitted ₹ 60,000.
Employer has paid medical allowance of ₹ 10,000 during the year and has incurred ₹ 7,000 on the
treatment of father in law of Mr. X in India. The treatment was provided in a Government hospital
and father in law of Mr. X is dependent on him.
The employee has been provided with a motor car of 1.8 litre engine capacity for official as well as
personal use and all expenses are met by the employee himself but driver has been provided by
the employer. Compute his total income.

SALARY SATC 6A.17

59) Satish is a State Government employee and the salary and other emoluments received by
him during the previous year 2021-22 are as under: (all amount in ₹)
- Basic salary : per month. 10000
- Dearness allowance : 40% of basic salary.
- Entertainment allowance 8000
- Medical expenses reimbursed 25000
- Professional tax paid : ₹ 5,000 of which ₹ 4,000 paid by employer.
- Free car facility for official & personal use provided by the employer for which 42000
expenditure incurred by employer is
- Contribution to provident fund 12000
He has no other income. Compute the taxable income of Satish.
60) Mrs. Z is employed with ABC Ltd. on a monthly salary of ₹ 15,000. She has been provided
with the following perquisite:
a) Rent free accommodation at Delhi with rent paid by the company ₹ 60,000.
b) A mobile phone and a fixed line telephone at her residence. The bills reimbursed by the
company during the previous year amounted to ₹ 12,000.
c) On the eve of Silver Jubilee Celebrations of the company she got a gift worth ₹ 12,000
from the company.
d) She was allowed to use the Video Camera and Laptop belonging to the company. The
company has purchased these assets for ₹ 75,000 and ₹ 2,50,000 respectively on 01.04.2021
and the employee has used it throughout the year.
e) She was given a chauffeur driven car (1.6 litres) for private and official use. All expenses of
running and maintenance including driver's salary were paid by the company.
She also drew the following allowances:
₹
(i) Dearness allowance (50% forms the part of basic pay) 5,600 p.m.
(ii) Education allowance for 2 children 300 p.m. per child
(iii) Transport allowance 1,800 p.m.
During the year she got reimbursement from the company ₹ 20,000 spent on the medical treatment
of her husband at a private nursing home.
She made the following payments and contributions:

i. Life insurance premium paid ₹ 6,000 each against a policy taken on the life of her husband
and her married daughter, (sum assured ₹ 60,000 each)
ii. Contributed ₹ 2,500 p.m. to Recognised provident fund, employer contributing an equal
sum.
You are required to compute her Total Income.

SALARY SATC 6A.18

61) Mr. Y.R. Meena, an Indian citizen, was working with UNO till 31st July 2021 and was residing
at USA. On 1st August, he joined Indian-Government service and was deputed to Karachi in
Pakistan.
On 1st December he left the Indian Government service and joined a private company and
started working at its Sri Lanka branch. On 1st March, he has been shifted to the head office
in India. He was provided rent-free accommodation during whole of the year.
His salary structure in various assignments is as under: (in ₹)
Particulars UNO Government Private Ltd.

service Co.
Basic 10000 p.m. 5000 p.m. 4000 p.m.
Dearness Allowance (forms part of salary 3000 p.m. 5000 p.m. 2500 p.m.
for calculation of retirement benefits)
Project Allowance 1500 p.m. 2500 p.m. 1000 p.m.
Entertainment Allowance 1800 p.m. 1000 p.m. 2000 p.m.
Servant and sweeper facility 4000 p.m. 2000 p.m. 1200 p.m.
Education to two children in employer's 2000 p.m. 2500 p.m. 3000 p.m.
school. Cost per child -
Find Gross salary for the previous year 2021-22.

SALARY SATC 6B.1

SOLUTIONs – SET A
Solution 1:
Basic Salary – 21800 x 6 + 22900 x 3 + 22900 x 3
DA – 7.5% upto Dec i.e. for 9 months & 10.5% for balance 3 months
Gross Salary: ₹ 290,376.
Answer 2: Computation of salary income of Raghav for the previous year:

On the assumption that
salary becomes due on
the last day of each
month
₹
Basic salary 1,50,000
Lump-sum payment 1,30,000
Gross Salary 2,80,000
Less: Deduction u/s 16(ia) 50,000
Salary Income 230,000
Any other Income Nil
Less: Deduction u/s 80C 30,000
Net Income 2,00,000
Answer 3:
Computation of gross salary for the previous year:
"Due" date or "receipt" date, Amount
Difference months
whichever is earlier ₹
1. March 2021 April 1, 2021 25,000
2. April 2021 May 1, 2021 25,000
3. May 2021 June 1, 2021 25,000
4. June 2021 July 1, 2021 25,000
5. July 2021 July 31, 2021 30,000
6. August 2021 August 31, 2021 30,000
7. September 2021 September 30, 2021 30,000
8. October 2021 October 31, 2021 30,000
9. November 2021 November 30, 2021 30,000
10. December 2021 December 31, 2021 30,000
11. January 2022 January 31, 2022 30,000
12. February 2022 February 28, 2022 30,000
13. March 2022 March 31, 2022 30,000
Total 3,70,000
Solution 4: Computation of Gross Salary of Mr. Sunil (amounts in ₹)
Salary received 1,85,000

Add: Income tax deducted at source 15,000
Contribution to Provident Fund 12,000 2,12,000
Guarantee commission 4,000
Gross salary 2,16,000
Note:
(1) Salary received as MP is taxable under Income from other sources.
(2) Loan taken against salary cannot be regarded as 'advance' of salary. Hence, the same is not taxable.

SALARY SATC 6B.2

Answer 5:
As per section 9(1)(iii), Income deemed to accrue or arise in India includes, income chargeable under the
head 'Salaries' payable by the Government of India to a citizen of India for services rendered outside India.
As per section 10(7), any allowance or perquisites paid or allowed as such outside India by the Government
to a citizen of India for rendering service outside India shall be exempt.
In view of the above, the computation of taxable income of Mr. Rajesh is as follows.
₹ ₹
Basic Pay 100,000 x 12 12,00,000
Overseas allowance 2,000 x 12 24,000
Less: Exempt under section 10(7) 24,000 Nil
12,00,000
Deduction under section 16 50,000
Income under the head Salaries 11,50,000
Contentions of Mr. Rajesh Kumar

(i) The salary shall be deemed to accrue or arise in India and therefore, this contention of Mr. Rajesh Kumar
is not valid.
(ii) As per section 192, the employer is liable to deduct the tax at source from taxable salary. However, if the
employer does not deduct tax, the employee is not granted exemption from tax liability.
If Mr. Rajesh Kumar is a foreign citizen, The above provisions of Sec. 9(1)(iii), shall not apply. Therefore,
there will be no tax liability on Mr. Rajesh Kumar
Answer 6: Computation of taxable gratuity of Mr. Shyam

Particulars ₹
Actual gratuity 90,000
Less: Exempt u/s 10(10) to the extent of least of the following
1. ₹ 20,00,000
2. 15/26 × ₹ 3,250 × 32 = ₹ 60,000
3. Actual Gratuity received – ₹ 90,000 60,000
Taxable Gratuity ₹ 30,000
Answer 7:
Computation of taxable gratuity of Ms. Uma
Case 1: 40 years and 11 months service ₹
Actual Gratuity 45,000
Less : Exempt u/s. 10(10) to the extent of least of the following:
1. ₹ 20,00,000 (not covered)
2. ₹ 2,200 x ½ x 40 = ₹ 44,000.
3.Actual Gratuity received ₹ 45,000 44,000
Taxable gratuity 1,000
On service of another 2 months - NIL
Answer 8: Computation of average monthly salary

₹
Basic salary from January 1, 2021 to October 31, 2021 (i.e., ₹ 8,000 × 7 ÷ ₹ 9,000 x 3) 83,000
69% of dearness allowance [i.e., 69% of ₹ 500 × 10)*] 3,450
Total 86,450
Average monthly salary 8,645
Amount of exempt gratuity is the least of the following:

(a) ₹ 20,00,000 (not covered)
(b) ₹ 1,64,255 [being half month's salary for each completed year of service (₹ 8,645 x ½ x 38)]; and
(c) ₹ 1,86,000
₹ 1,64,255, being the least, it exempt from tax.

SALARY SATC 6B.3
Answer 9:
Salary for the purpose of computation of exempt gratuity:
₹
Basic salary of 10 months (₹ 18,200 x 10) 1,82,000
Dearness allowance of 10 months (80% of ₹ 1,000 x 10) 8,000
Commission @ 6% of turnover of preceding 10 months [6% of ₹ 2,00,000] 12,000
Total 2,02,000
Average monthly salary (₹ 2,02,000 / 10) 20,200
Amount of exempt gratuity is the least of the following (not covered)

(a) ₹ 19,80,000 [₹ 20,00,000 - ₹ 20,000, being amount of exempt gratuity received from A Co.);
(b) ₹ 3,83,800 [being half month's salary for each completed year of service (₹ 20,200 x ½ x 38)]; and
(c) ₹ 3,90,000 (being amount of gratuity received from B Co.).
₹ 3,83,800, being the least, it exempt from tax.
Notes :-
(1) Dearness allowance is included in salary for the purpose of computation of exempt gratuity, if it forms part
of salary for the purpose of retirement benefits. In this case, 80% of the dearness allowance forms part of
salary for computation of retirement benefits. Therefore, 80% of the dearness allowance is included in
average monthly salary. (It may be noted that the entire dearness allowance is chargeable to tax).
Commission is included in salary for the purpose of calculating exempt gratuity if it is based on a fixed
percentage of turnover achieved by the employee.
(2) If an employee, who has received gratuity in earlier year from his former employer, receives gratuity from
another employer in the same year or a later year, the limit of ₹ 20,00,000 is reduced by the amount of
gratuity exempt from tax under section 10(10)(iii) in earlier year. Therefore, ₹ 20,000, being the amount of
exempt gratuity from A Co., is deducted from ₹ 20,00,000.
Answer 10:
1. Uncommuted pension of ₹ 2,19,000 (i.e., ₹ 18,250 x 12) is chargeable to tax as salary
2. Uncommuted pension of ₹ 2,52,000 (i.e., ₹ 21,000 x 12) is chargeable to tax as salary
3. Uncommuted pension of ₹ 2,40,000 (i.e., ₹ 20,000 × 12) is chargeable to tax
4. While uncommuted pension is chargeable to tax, commuted pension is exempt from tax in the case of
Government employees. Therefore, commuted pension of ₹ 7,18,000 is exempt from tax. The amount of
uncommuted pension will be calculated as under :
₹
Uncommuted pension up to November 30, 2021 (i.e., ₹ 15,000 × 6) 90,000
Uncommuted pension from December 1, 2021 to March 31, 2022 (i.e., 2/3 x ₹ 15,000 x 4) 40,000
Total uncommuted pension 1,30,000
5. In the case of non-Government employee while uncommuted pension is fully chargeable to tax,
commuted pension is partly chargeable to tax and partly exempt from tax. Amount of taxable pension will
be commuted as under
UNCOMMUTED PENSION
Uncommuted pension from July 1, 2021 to January 31, 2022 (i.e., ₹ 20,000 x 7} 140,000
Uncommuted pension from Feb 1, 2022 to March 31, 2022 (i.e., 40% of ₹ 20,000 x 2) 16,000
Total uncommuted pension chargeable to tax as salary 1,56,000
COMMUTED PENSION
Commuted value of 60% of usual pension 10,71,000
Commuted value of full pension (i.e., ₹ 10,71,000 x 100/60) 17,85,000
If X does not receive gratuity

Amount exempt (1/2 of commuted value of full pension (i.e., 1/2 x ₹ 17,85,000)] 8,92,500
Commuted pension chargeable to tax as salary (i.e., ₹ 10,71,000 - ₹ 8,92,500) 1,78,500
if X receives gratuity
Amount exempt [1/3 of commuted value of full pension (i.e., 1/3 × ₹ 17,85,000)] 5,95,000
Commuted pension chargeable to tax as salary (i.e., ₹ 10,71,000 – ₹ 5,95,000) 4,76,000
Note : X can claim relief under section 89 in respect of commuted pension chargeable to tax.

SALARY SATC 6B.4

Answer 11: (a) 6000 x 9 + 1200 x9 + NIL + 4200 x 3 = 77400.
(b) Taxable Gratuity = ₹ 55,000 – ₹ 40,500 = ₹ 14,500 [15/26 x 36 x 1950]
(c) 5000 x6 + 6,000 x 5 + (60,000 – 48,600) = ₹ 71,400.
Answer 12:
(a) Taxable pension of Mr. Santhosh
Particulars ₹ ₹
(1) Uncommuted pension before the date of commutation 21,000
(₹ 3,000 x 7)
(2) Uncommuted pension after the date of commutation 4,000
(₹ 3,000 x 2 x 2/3)
(3) Commuted pension 1,20,000
Less : exempt u/s 10 (10A) 1,20,000 Nil
Taxable pension includible in salary 25,000
(b) Taxable pension of Mr. Kamath

Particulars ₹ ₹
(1) Uncommuted pension before the date of commutation (₹ 2,000 x7) 14,000
(2) Uncommuted pension after the date of commutation (₹ 2,000 x 40% x 5) 4,000
(3) Commuted pension 30,000
Half of the full value of commuted pension is exempt u/s.10(10A) as he is not in receipt
of gratuity (₹ 30,000 x 100 ÷ 60 x ½) 25,000 5,000
Taxable pension includible in salary 23,000
Answer 13: Leave enactment is exempt to the extent of least of the following:
Particulars Amount
(₹)
(i) Statutory limit 3,00,000
(ii) ₹ 4200 x 22 92,400
(iii) 10 months average salary (10 x ₹ 4,200) 42,000
(iv) Actual amount received 92,400
Therefore, ₹ 42,000 is exempt under section 10(10AA)
Taxable Leave = ₹ 92400 - ₹ 42000.
Answer 14:
Leave enactment is exempt to the extent of least of the following:
Particulars Amount
(₹)
(ii) ₹ 4000 x 3 12,000
(iii) 10 months average salary (10 x ₹ 4,000) 40,000
Taxable Leave = 60000 - 12000.
Answer 15:
Computation of Gross Salary of Mr. A.K. Gupta
₹
(1) Salary ₹ 23,000 x 9 2,07,000
(2) DA (2,000 x 9) 18,000
(3) Uncommuted Pension ₹ 9,000 x 25% x 3 6,750
(4) Commuted Pension Received 2,70,000
Less: Exempt [₹ 2,70,000 x 4/3 x 1/3] 1,20,000 1,50,000
(5) Gratuity Received 4,00,000

Less: Exempt
(i) ₹ 4,00,000
(ii) [25,000 / 2 x 26] = ₹ 3,25,000
(iii) ₹ 20,00,000 (not covered) 3,25,000 75,000

SALARY SATC 6B.5

(6) Leave Encashment Received 3,00,000
Less: Exempt – least of the following
(i) Actual 3,00,000
(ii) 12 months x AMS
12 x 25,000 = 3,00,000
(iii) 10 months x AMS = 2,50,000
(iv) Stat. Limit: 3,00,000 2,50,000 50,000
Answer 16:
Computation of Gross Salary
₹ ₹
Basic Salary (4,500 x 3 + 5,000 x 7) 48,500
Dearness Allowance (100%) 48,500
Uncommuted Pension (3,000 x 1 + 1,500 x 1) 4,500
Commuted Pension 1,00,000
Less : Exempt [(1,00,000/ 50%) × 1/3] 66,667 33,333
Gratuity :
Amount received 1,20,000
Less : Exempt (Note No. 1) 81,480 38,520
Leave Encashment
Amount received 56,000
Less : Exempt (Note No. 2) Nil 56,000
Answer 17:
Computation of Total Income of Mr. Narendra
Particulars Amount Amount
(₹) (₹)
Income from Salaries
Gross salary received during 1/4/21 to 31/1/22 @
₹ 16,000 p.m. (₹ 16,000 x 10) 1,60,000
Pension for 2 months @ 30% of the basic salary of ₹ 10,000 p.m. 6,000
Leave Salary 75,000
Less: Exempt under section 10(10AA) (Note 1) 50,000 25,000
Gratuity 50,000
Less: Exempt under section 10(10) (Note 2) 25,000 25,000
Notes:
1. Leave enactment is exempt to the extent of least of the following:
Particulars Amount
(₹)
(ii) Cash equivalent of leave for 30 days (30/45 x ₹ 75,000) 50,000
(iii) 10 months average salary (10 x ₹ 10,000) 1,00,000
2. Gratuity is exempt to the extent of least of the following:
Particulars Amount
(ii) Half month's salary for 5 years of service (5 × ₹ 5,000) 25,000
(iii) Actual gratuity received 50,000
Therefore, ₹ 25,000 is exempt under section 10(10). It is assumed that the employee is not covered
under the Payment of Gratuity Act, 1972.

SALARY SATC 6B.6

Answer 18:
Computation of taxable house rent allowance - Mr Zakaria
Particulars ₹ ₹
Actual House Rent allowance 21,600
Less: Exempt U/S. 10(13A) to the extent of least of the following:
1. Excess of rent paid over 10% of the salary (30,000 – 22,800) 7,200
2. 50% of salary 1,14,000
3. Actual HRA received 21,600 7,200
Taxable HRA 14,400
Working Note ₹
Basic Salary 12,500 x 12 1,50,000
Dearness Allowance 1,500 x 12 18,000
Commission @ 4% on 15,00,000 60,000
Salary for this purpose 2,28,000
Note: Though advance Salary is taxable in A.Y. 2022-23 on receipt basis, it should not be considered in
computing Salary for the purpose of calculating exemption u/s. 10(13A).
Answer 19:
Computation of taxable quantum of various allowances of Mr. Kapil
Particulars ₹ ₹
Helper allowance received 3,600
Less: Exempt (Actually spent - 9 x 200) 1,800 1,800
Conveyance allowance received 9,000
Less: Exempt (Actually spent]
₹ 1,200 x 40% x 12 5,760 3,240
Education & hostel expenditure allowance 250 x 3 x 12 9,000
Less: Education & hostel expenses ₹ 250 x 2 x 12 6,000 3,000
Hill compensatory allowance 2,400
Less: Exempt ₹ 300 p.m x 6 months 1,800 600
Taxable amount of allowances 8,640
Solution 20: Computation of Gross salary of Mr. Kamlesh (amounts in ₹)

Basic salary (₹ 8,000 × 12) 96000
Dearness allowance (40% of basic pay) 38400
City compensatory allowance (10% of basic pay) 9600
Medical allowance (800 x 12) 9600
Children education allowance [2,880 - (80 × 2 × 12)] 960
Hostel expenditure allowance (9,600 - 7,200) 2400
Tribal area allowance (6,000 - 2,400) 3600
Travelling allowance (12,000 - 8,000) 4000
Conveyance allowance Exempt
Transport allowance 28200
Overtime allowance 4000
Gross salary 196760
Answer 21:
Where HRA is
Received
₹
HRA received 90,000
Less: Exemption from HRA u/s 10(13A)
(1) Actual amount received 90,000
(2) Rent paid - 10% of salary (1,20,000-12,000) 1,08,000
(3) 50% of salary 60,000
Least of the above three 60,000 30,000

SALARY SATC 6B.7

Answer 22:
Basic Salary
Upto 31.8.21 (20,000 x 5) 1,00,000
from 1.9.21 (25,000 x 7) 1,75,000 2,75,000
Transport allowance 14,400
City Compensatory Allowance (W.N - 2) 3,600
Contribution to PPF (in excess of 12% of salary) (W.N - 3) 8,250
Children education allowance (W.N - 4) 3,600
Hostel Expense Allowance (W.N - 5) NIL
Tiffin Allowance (W.N. 6) 5,000
Tax paid by employer on employment 2,500
Less: Deduction u/s 16(ia) & (iii) (52,500)
Income from Salary 2,59,850
Working notes:
(1) Transport Allowance is now fully taxable
(2) City Compensatory Allowance is fully taxable
(3) Contribution to recognized PPF is taxable in excess of 12% of salary.
Taxable contribution = Actual - 12% of salary
= (15% x 2,75,000) - (12% x 2,75,000)
= ₹ 41,250 - ₹ 33,000 = ₹ 8,250
(4) Children Education Allowance is exempt upto ₹ 100 per month per child. (₹ 500 for 2 Child)
Taxable Allowance = (500 - 100 x 2) x 12 = 3,600
(5) Hostel expense allowance is exempt upto ₹ 300 per month per child
Taxable Allowance = (380 - 300 x 2) therefore NIL
(6) Tiffin Allowance is fully taxable
(7) Tax on employment is paid by Mr. M's employer. Hence it is taxable in his hand i.e. Mr. X.
Answer 23:
Computation of income under the head Salary ₹
Nainital Transport Corporation
Basic Pay [(4,000 x 6) + (4,500 x 5)] 46,500
Dearness Allowance (12% of basic pay) 5,580
Outstation Allowance (W. Note1) 3,960
Transport Allowance 3,300
Conveyance Allowance (100 x 11) 1,100
Haryana Transport Corporation
Basic Pay 8,500
Gross Salary 68,940
Income under the head Salary 18,940
Gross Total Income 18,940
Less: Deduction u/s 80C to 80U Nil
Total Income (rounded off u/s 288A) 18,940
Working Note:
1. Outstation allowances
Least of the following is exempt:
1. 70% of 13,200 = ₹ 9,240
2. ₹ 10,000 x 11 = ₹ 1,10,000
Received = ₹ 13,200
Exempt = ₹ 9,240
Taxable = ₹ 3,960

SALARY SATC 6B.8

Answer 24:
Computation of income under the head salary ₹ ₹
Salary 30,000
House Rent Allowance (As he owns the house where he resides, this is taxable) 5,000
Gratuity (Exempt u/s 10(10)- Government Employee) Nil
Leave encashment at the time of retirement (Exempt u/s 10(10AA)- Government Employee) Nil
Provident Fund (Exempt u/s 10(11)) Nil
Commuted Pension (Exempt u/s 10(10A)) Nil
Pension from Government 20,000
Honorarium from charitable dispensary (Assuming he is in part time employment) (32,000×6) 1,92,000
Less: HP Loss (Interest – self occupied) 14,000
Less: Dedication u/s 80C
Public Provident Fund Contribution 32,000
Repayment of loan taken from HDFC
(As loan is paid after 31.03.2022, it is not qualified
for deduction u/s 80C for the previous year 2021-22) Nil 32,000
Answer 25:
Computation of Income of X, an individual Salary From ABC Co. Ltd. ₹ ₹
Basic Salary (10,000 x 10) 1,00,000.00
Dearness Allowance (1,500 x 10) 15,000.00
Commission 4,000.00
Gratuity (W Note 1) 21,000.00
Salary From B Co. Ltd.
Basic Salary (7,000 x 2) 14,000.00
Entertainment Allowance (1,000 x 2) 2,000.00
Medical Allowance (500 x 2) 1,000.00
House Rent Allowance (600 x 2) 1,200.00
(Exemption is not available at X resides in his own house)
Leave Salary 5,000.00
Gross Salary 1,63,200.00
Less: Deduction u/s 16(ia) 50,000.00
Income under the head Salary 1,13,200.00
Gross Total Income 1,13,200.00
Less: Deduction u/s 80C
Insurance premium on life of minor child 12,000
Approved Superannuation Fund 8,000
Jeevan Dhara Scheme 5,000 25,000.00
Total Income 88,200.00
Working Note:
1. Gratuity
1. ₹ 1,25,000
2. ₹ 20,00,000 (not covered)
3. 1/2 x 10,400 x 20 = ₹ 1,04,000
Received = ₹ 1,25,000
Exempt =₹ 1,04,000
Taxable = ₹ 21,000
Answer 26: ₹ ₹
Basic Pay (30,000 x 9) 2,70,000.00
House Rent Allowance (Sec 10(13A) Rule 2A) (W Note 1) 31,500.00
Gratuity {Sec 10(10)} (W Note 2) 43,750.00
Leave Salary {Sec 10(10AA)} (W Note 3) 55,000.00

SALARY SATC 6B.9

Recognized Provident Fund 20,500
Public Provident Fund 45,000
National Saving Certificates 29,500 95,000.00
Total Income 2,55,250.00
Working Note:
1. HRA
Least of the following is exempt: 2. Gratuity – least of the following exempt
1. ₹ 63,000 1. ₹ 3,75,000
2. ₹ 58,500 - ₹ 27,000 = ₹ 31,500 2. ₹ 20,00,000 (not covered)
3. 50% of retirement benefit salary = ₹ 1,35,000 3. 1/2 x 26,500 x 25 = ₹ 3,31,250
(Retirement benefit salary = ₹ 2,70,000) Received = ₹ 3,75,000
Received = ₹ 63,000 Exempt = ₹ 3,31,250
Exempt = ₹ 31,500 Taxable = ₹ 43,750
Taxable = ₹ 31,500
3. Leave Salary – Lease of the following exempt
1. ₹ 3,20,000
2. ₹ 3,00,000
3. 26,500 x 10 = ₹ 2,65,000
4. 26,500 x 25 * 15/30 = 3,31,250
Received = ₹ 3,20,000
Exempt =₹ 2,65,000
Taxable = ₹ 55,000
Solution 27:
Taxable portion of the amount received from the URPF in the hands of Mr. A is computed hereunder:
Amount taxable under the head “Salaries”:
Employer’s share in the payment received from the URPF ₹ 2,20,000
Interest on the employer’s share ₹ 50,000
Total ₹ 2,70,000
Amount taxable under the head “Income from Other Sources”:
Interest on the employee’s share ₹ 60,000
Total amount taxable from the amount received from the fund ₹ 3,30,000
Note: Since the employee is not eligible for deduction under section 80C for contribution to URPF at the time
of such contribution, the employee’s share received from the URPF is not taxable at the time of withdrawal as
this amount has already been taxed as his salary income.
In case fund is Recognised PF

Since the fund is a recognized one, and the maturity is taking place after a service of 25 years, the entire
amount received on the maturity of the RPF will be fully exempt from tax.
Solution 28: Computation of Gross Salary of Mr. B

Particulars ₹ ₹
Basic Salary [₹10,000 × 12] 1,20,000
Dearness Allowance [₹ 8,000 × 12] 96,000
Commission on turnover [1% × ₹ 5,00,000] 5,000
Bonus 40,000
Gratuity [Note 1] 25,000
Employee’s contribution to RPF [Note 2] -
Employers contribution to RPF [20% of ₹ 1,20,000] 24,000
Less : Exempt [Note 3] 20,760 3,240
Interest accrued in the RPF @ 13% p.a. 13,000
Less : Exempt @ 9.5% p.a. 9,500 3,500 .
Note 1 : Gratuity received during service is fully taxable.
Note 2 : Employee’s contribution to RPF is not taxable. It is eligible for deduction under section 80C.
Note 3 : Employers contribution in the RPF is exempt up to 12% of the salary. i.e. 12% of [B.S + D.A. for
retirement benefits + Commission based on turnover]
= 12% of [₹ 1,20,000 + (50% × Rs. 96,000) + ₹ 5,000]
= 12% of ₹ 1,73,000 = ₹ 20,760

SALARY SATC 6B.10

Answer 29: Statutory Recognised Unrecognised
provident provident provident
fund fund fund
₹ ₹ ₹
Basic Salary (20,000 x 3) 60,000 60,000 60,000
Dearness allowance (6,000 x 3) 18,000 18,000 18,000
PF by employer [3,000 x 3 - 12% of
(Rs. 60,000 + 1/3 of 18,000)] — 1,080
Interest credited in PF account in excess of 9.5%
[7,500 x 5.5./15] — 2,750
Pension (10,000 x 9) 90,000 90,000 90,000
Payment for provident fund account
Employer's contribution — — 3,30,000
Interest thereon — — 44,000
Gross Salary 1,68,000 1,71,830 5,42,000
Less : Standard deduction 50,000 50,000 50,000
Income from salary 1,18,000 1,21,830 4,92,000
- Interest on X's contribution to provident fund — — 46,000
- Interest on company deposits (i.e., 9% per annum
on 7,60,000 from July 1, 2021 to March 31, 2022) 51,300 51,300 51,300
Gross total income 1,69,300 1,73,130 5,89,300
Less : Deduction under section 80C 9,000 9,000 Nil
Net Income 1,60,300 1,64,130 5,89,300
Notes :-
1. X can claim deduction under section 80C in respect of his contribution towards statutory / recognised
provident fund.
2. In the case of recognised provident fund, it is assumed that X has retired after rendering service of 5 years.
Answer 30:
₹ ₹
Computation of income under the head Salary
Basic Pay (10,000 x 9) 90,000.00
Dearness Allowance (10% of 90,000) 9,000.00
House Rent Allowance {Sec 10(13A), Rule 2A} (W. Note 1) 2,700.00
Payment of Club Bills {(Sec 17(2)(viii) Rule 3(7)(vi)} 8,000.00
Outstation Allowance {Sec 10(14), Rule 2BB} (W. Note 2) 4,860.00
Employer's Contribution to unrecognized provident fund 66,000.00
Interest on Employer's Contribution to unrecognized provident fund 38,000.00
Gratuity {Sec 10(10)} (W. Note 3) Nil
Uncommuted Pension {Sec 17(l)(ii)} (W. Note 4) 10,000.00
Commuted Pension {Sec 10(10A)} (W. Note 5) 40,000.00
Income under the head Other Sources 22,000.00
Interest on own Contribution to unrecognised provident fund
Less: Deduction u/s 80C 68,200.00
National Saving Certificate 4,000
Contribution in Jeevan Dhara Scheme 10,000
Life insurance premium 4,000
Public provident fund 12,000
Repayment of housing loan 25,000
Tuition fees 13,200

SALARY SATC 6B.11

1. HRA
1. ₹ 11,700
2. ₹ 18,900 - ₹ 9,900 = ₹ 9,000
3. 40% of retirement benefit salary = ₹ 39,600
{Since place of posting is not given, so it is presumed to be non-metro}
{Retirement benefit salary = ₹ 90,000 + 9,000 = ₹ 99,000}
Received = ₹ 11,700 Exempt =₹ 9,000 Taxable = ₹ 2,700
2. Outstation allowance 3. Gratuity (not covered)
Least of the following is exempt: Least of the following is exempt:
1. 70% of ₹ 16,200 = ₹ 11,340 1. ₹ 90,000
2. ₹ 90,000 [9 x ₹ 10,000 p.m.] 2. ₹ 20,00,000
Received = ₹ 16,200 3. ½ x 20 x (10,000 + 1,000) - ₹ 1,10,000
Exempt =₹ 11,340 Received = ₹ 90,000
Taxable - ₹ 4,860 Exempt = ₹ 90,000
Taxable = Nil
4. Uncommuted pension
For January and February = ₹ 4,000 × 2 = 8,000
For March = ½ × 4,000 = 2,000
Total = 10,000
5. Commuted pension
Received = 1,20,000
Exempt= 1/3 of Total Pension
= 1/3 of 2,40,000= 80,000
Taxable = 40,000
Answer 31:
Basic Pay (20,000 x 7) 1,40,000
Dearness Allowance (7,000 x 7) 49,000
Refund of employer's contribution in unrecognised provident fund 4,00,000
Refund of Interest on employer's contribution in unrecognised provident fund 1,00,000
Gratuity {Sec 10(10A)} (W Note 1) 60,000
Uncommitted Pension (W Note 2) 19,000
Commuted Pension {Sec 10(10A)} (W Note 3) 40,000
Income under the head Salary 7,58,000
Income under the head Other Sources 1,00,000
(Interest on employee's contribution)
Less: Deduction u/s 80C to 80U Nil
Working Note:
1. Gratuity (not covered)
1. ₹ 2,60,000
2. ₹ 20,00,000
3. ½ x 20,000 x 20 = ₹ 2,00,000
Received = ₹ 2,60,000
Exempt = ₹ 2,00,000
Taxable - ₹ 60,000
2. Uncommuted Pension ₹
For November to December
5,000 x 2 = 10,000'
For January to March
5.000 x 60% x 3 = 9,000
Total = ₹ 10,000 + ₹ 9,000 = 19,000

SALARY SATC 6B.12

3. Commuted Pension ₹
Received = 2,40,000
Exempt = ₹ 2,40,000 / 40% x 100% x 1/3 = 2,00,000
Taxable 40,000
Solution 32: Value of the rent free unfurnished accommodation

= 15% of salary for the relevant period
= 15% of [(₹ 6000 × 5) + (₹ 2,000 × 30% × 5) + (₹ 1,500 × 5)] [See Note below]
= 15% of ₹ 40,500
= ₹ 6,075.
Note: Since, Mr. C occupies the house only from 1.11.2021, we have to include the salary due to him only in
respect of months during which he has occupied the accommodation. Hence salary for 5 months (i.e. from
1.11.2021 to 31.03.2022) will be considered. Advance salary for April 2022 drawn during this year is not to be
considered because it falls in respect of a period beyond the relevant previous year.
Solution 33:
Value of the rent free unfurnished accommodation [15% of salary] = ₹ 6,075
Less : Rent paid by the employee (₹ 1,000 × 5) = ₹ 5,000
Perquisite value of unfurnished accommodation given at concessional rent = ₹ 1,075
Solution 34:
Value of the rent free unfurnished accommodation [Note1] = ₹ 6,000
Less: Rent paid by the employee (₹ 1,000 × 5) = ₹ 5,000
Value of unfurnished accommodation given at concessional rent = ₹ 1,000
Note 1 : Value of the rent free unfurnished accommodation is lower of

(i) Lease rent paid by the company for relevant period = ₹ 1,200 × 5 = ₹ 6,000
(ii) 15% of salary for the relevant period (computed earlier) = ₹ 6,075
Solution 35:
Value of the rent free unfurnished accommodation (computed earlier) =₹ 6,075
Add: Value of furniture provided by the employer [Note 1] =₹ 4,625
Value of rent free furnished accommodation =₹ 10,700
Less: Rent paid by the employee (₹ 1,000 × 5) =₹ 5,000
Value of furnished accommodation given at concessional rent =₹ 5,700
Note 1: Value of the furniture provided

= (₹ 400 p.m. × 2 × 5 months) + (₹ 25,000 × 10% p.a. for 3 months)
= ₹ 4,000 + Rs. 625 = ₹ 4,625
Solution 36:
Value of the rent free unfurnished accommodation (₹700 × 5) =₹ 3,500
Add: Value of furniture provided by the employer (computed earlier) =₹ 4,625
Value of rent free furnished accommodation =₹ 8,125
Less: Rent paid by the employee (₹1,000 × 5) =₹ 5,000
Perquisite value of furnished accommodation given at concessional rent =₹ 3,125
Answer 37:
Determination of value of rent free accommodation
Salary for this purpose: ₹
Basic pay 60,000
Commission 6,000
Bonus 4,000
Uniform allowance (40% of 6,000) 2,400
Conveyance allowance (25% of 12,000) 3,000
Entertainment allowance 5,000
Total ₹ 80,400
(a) where the population is more than 25 lakhs.
Value of rent free accommodation = 15% of salary
= 15% of ₹ 80,400 = ₹ 12,060
(b) where the population is less than 10 lakhs.
Value of rent free accommodation = 7.5% of salary
= 7.5% of ₹ 80,400 = ₹ 6,030

SALARY SATC 6B.13

(c) where the population is between 10 lakhs and 25 lakhs.
Value of rent free accommodation = 10% of salary
= 10% of ₹ 80,400 = ₹ 8,040
Note: Income-tax and Profession-tax are the obligation cast on the employee. In case the same was paid by
the employer they are taxable as perquisite u/s. 17(2)(iv).
Answer 38: Valuation of unfurnished flat:

(1) If X is a Secretary to the Central Government ₹ 4,000 is the taxable value of the unfurnished flat.
(2) If X is the Managing Director of ABC (P.) Ltd. - Salary for the purpose of calculating taxable value of the
perquisite works out to be ₹ 1,79,000 (₹ 1,62,000 + ₹ 17,000). As lease rent of unfurnished flat (₹ 50,000)
exceeds 15% of salary, ₹ 26,850 (being 15% of salary) is taxable value of the perquisite.
Valuation of furniture ₹
10% per annum of cost of furniture [₹ 36,000 x 10/100 x 10/12] 3,000
Add : Rent of air-conditioners 10,000
Valuation of furniture 13,000
Valuation of furnished flat :

Valuation of
Unfurnished flat Furniture Furnished flat
If X is a Secretary to the Central Government 4,000 13,000 17,000
If X is a Managing Director of ABC (P.) Ltd. 26,850 13,000 39,850
Valuation of hotel accommodation - ₹ 42,960 (being 24% of salary or ₹ 1,20,000, whichever is lower) is
chargeable to tax whether X is a Government employee or non-Government employee.
Answer 39:
₹ ₹
Basic salary (6,000 x 9 + 7,000 x 3) 75,000
Dearness allowance (4,000 x 12) 48,000
Education allowance (550 x 4 x 12) 26,400
Less : Exemption (100 x 2 x 12) 2,400 24,000
Medical allowance (400 x 12) 4,800
Transport allowance (350 x 12) 4,200
House rent allowance (4,500 x 8) 36,000

Less : Exempt [see note 1]] 28,416 7,584
Furnished house [see note 2 5,228
Salary from B Ltd. (2,000 x 3) 6,000
Notes :-
(1) House rent allowance exempt from tax - Salary for this purpose is ₹ 8,880 per month (basic salary :
₹ 6,000 per month + dearness allowance : 72% of ₹ 4,000 per month). The amount of exemption is —
a) ₹ 3,552 per month (being 40% of ₹ 8,880);
b) ₹ 4,500 per month (being house rent allowance); or
c) ₹ 4,612 per month (being excess of rent paid over 10% salary, ₹ 5,500 - ₹ 888), whichever is lower.
Hence, the amount exempt from tax is ₹ 3,552 per month from April 1, 2021 to November 30, 2021 -
₹ 28,416) i.e. for 8 months
(2) Valuation of the perquisite in respect of furnished flat - X has been provided a furnished flat at Delhi
with effect from December 1, 2021. Salary, for this purpose, from December 1, 2021 to March 31, 2022
is as follows -
₹
Basic Salary (6,000 x 1+ 7,000 x 3) 27,000
Dearness allowance (72% of 4,000 x 4) 11,520
Education allowance [(550 x 4 - 100 x 2) x 4] 8,000
Medical allowance (400 x 4) 1,600
Transport allowance [350 x 4] 1,400
House rent allowance (not received during December 1, 2021 to March 31, 2022) —
Salary from B Ltd. (2,000 x 3) 6,000
Total salary 55,520

SALARY SATC 6B.14

Lease rent of 4 months (7,500 x 4) : ₹ 30,000. The perquisite shall be valued as follows -
Value of unfurnished flat (15% of 55,520 or 30,000, whichever is lower) 8,328
Add : Rent of furniture 500
Value of rent-free furnished flat 8,828
Less : Rent paid by X (900 x 4) 3,600
Value of the perquisite 5,228
(3) Transport allowance is now fully taxable.
Answer 40:
Computation of Gross Salary ₹
Basic Pay (11,000 x 12) 1,32,000.00
Dearness Allowance (5,000 x 12) 60,000.00
Dearness Pay (1,000 x 12) 12,000.00
Bonus (1,200 x 12) 14,400.00
Rent Free Accommodation {Sec 17(2)(i), Rule 3(1)} (W. Note1) 14,400.00
Arrears of Salary {Sec 15} 32,000.00
Advance of Salary {Sec 15} 11,000.00
Working Note:
1. Rent Free Accommodation
From April To December
15% of Rent free accommodation Salary or rent paid whichever is less
Rent free accommodation Salary
= Basic Pay + Dearness Allowance + Dearness Pay + Bonus
= 99,000 + 13,500 + 900+ 10,800 = ₹ 1,24,200
15% of rent free accommodation Salary = ₹ 18,630
Rent Paid = ₹ 1,200 x 9 = ₹ 10,800
(A) Perquisite value of unfurnished house = ₹ 10,800
From January to March

Rent free accommodation Salary of Delhi
= 33,000 + 4,500 + 300 + 3,600 = ₹ 41,400
15% of Rent free accommodation Salary = ₹ 6,210
Rent paid = ₹ 3,600
Perquisite value of Rent free accommodation of Delhi = ₹ 3,600
Rent free accommodation of Bombay

Rent free accommodation Salary
= 33,000 + 4,500 + 300 + 3,600 = ₹ 41,400
15% of Rent free accommodation Salary = ₹ 6,210
Perquisite value of rent free accommodation of Bombay = ₹ 6,210
(B) Perquisite value of unfurnished house {least is in Delhi} = ₹ 3,600 [90 days – only one accommodation
is taxable]
Total Amount = A + B = ₹ 10,800 + 3,600 = ₹ 14,400
Solution 41: Computation of Gross Salary of Mrs. Padma
Receipt of HRA Rent-free accommodation

Basic Salary (24,000 × 12) 288000 288000
Dearness Allowance (18% of basic salary) 51840 51840
Bonus (1 month basic pay) 24000 24000
Project Allowances (6% of basic salary) 17280 17280
House Rent Allowance (1,80,000 – 1,44,000) 36000
(See note 1)
Rent Free Accommodation (See note 2) 49392
Gross Salary 417120 430512
Hence, Mrs. Padma should opt for HRA so as to minimize her tax liability.

SALARY SATC 6B.15

Note:
(1) Amount of HRA exempt from tax shall be the least of the following - (all amount in ₹)
(a) Actual amount received 180000
(b) Rent paid less 10% of salary i.e. 1,80,000 - 28,800 151200
(c) 50% of salary 144000
(2) Value of rent free accommodation shall be least of the following - (Amount in ₹)
(a) Actual rent paid or payable or 180000
(b) 15% of salary i.e. 15% of (2,88,000 + 24,000 + 17,280) 49392
Answer 42:
The perquisite value of the motor car partly used for official and partly for private purpose shall be computed
at the rate of ₹ 1,800 p.m. In the present case the actual expenditure incurred by the employer has no
relevance. Therefore, the perquisite value shall be ₹ 1,800 x 12 = ₹ 21,600.
Answer 43:
Car1 [(1,800 + 900) x 12] 32,400
Car2 [ (40,000 + 28,000 + 24,000)] 92,000
Total 1,24,400
Note : It is assumed that CC rating of the cars does not exceed 1600CC & chauffeur has been
provided.
Answer 44: 180000 + 18000 + 15000 + 24000 = 2,37,000.
Answer 45:
For the assessment year 2022-23, the taxable value of the perquisite will be as under
1. The lending rate of SBI on April 1, 2021 for similar loan is 8% per annum. ₹ 93,333 (being interest @ 8%
on ₹ 14,00,000 from June 1, 2021 to March 31, 2022) is taxable in the hands of X.
2. The SBI lending rate for a similar loan is 16%. Rs. 2,250 [being interest @ 9% (i.e., 16% - 7%) on is
25,000 for one year] is taxable in the hands of Y.
3. Nothing is taxable in the hands of Z as the amount of loan does not exceed ₹ 20,000.
4. The lending rate of SBI for a for a similar loan is 8%. Maximum monthly outstanding amount for the
various months in the previous year 2021-22 is as follows:
Maximum monthly outstanding Interest

Month amount on last day of the month
₹ ₹
April 30, 2021 8,00,000 666.67 (i.e., Rs. 8,00,000 x 1% x 1/12)
May 31,2020 8,00,000 666.67
June 30, 2021 8,00,000 666.67
July 31,2021 8,00,000 666.67
August 31, 2021 8,00,000 666.67
September 30, 2021 8,00,000 666.67
October 31 2021 8,00,000 666.67
November 30, 2021 8,00,000 666.67
December 31,2021 8,00,000 666.67
January 31, 2022 7,75,000 645.83 (i.e. ₹ 7,75,000 x 1% x 1/12)
February 28, 2022 7,50,000 625 (i.e., ₹ 7,50,000 x 1% x 1/12)
March 31, 2022 7,25,000 604.16 (i.e. ₹ 7,25,000 x 1% x 1/12)
Total 7,875
Taxable value of concessional loan is ₹ 7,875 for the previous year 2021-22.

SALARY SATC 6B.16

Answer 46:
1. X s provided use of laptop by the employer. The perquisite is not chargeable to tax.
2. Y is provided a music system by the employer. The taxable value of the perquisite is determined @ 100
per annum of cost. Accordingly ₹ 690 (being ₹ 15,000 × 10/100 × 168 days ÷ 365 days) is chargeable to
tax.
3. The taxable value of the perquisite in the hands of Z, A and B shall be determined as follows -
Car Computer Fridge
₹ ₹ ₹
Cost of the asset on May 15, 2019 6,96,000 1,17,000 40,000
Less : Normal wear and tear for the first year ending May 14, 2020 (20% of 1,39,200 58,500 4,000
Rs. 6,96,000, 50% of ₹ 1,17,000, 10% of ₹ 40,000)
Balance on May 15, 2020 5,56,800 58,500 36,000
Less : Normal wear and tear for the second year ending May 14, 2021 (20% 1,11,360 29,250 4,000
of ₹ 5,56,800, 50% of ₹ 58,500, 10% of ₹ 40,000) Balance on May 16, 2021
4,45,440 29,250 32,000
Less : Sale consideration 2,10,000 24,270 1,000
Taxable Value of the perquisite 2,35,440 4,980 31,000
Note: In the case of car and computer/electronic items, normal wear and tear is calculated @ 20% and 50%
per annum respectively on the basis of written down value. In the case of any other asset, normal wear and is
calculated at the rate of 10% per annum of cost of the asset to the employer. Normal wear and tear tax part of
the year is not taken into consideration.
Answer 47: ₹
Computation of perquisite value of Furniture
Cost of the furniture 2,00,000
Less: Depreciation on straight line method @ 10% from 31.03.2018 to 30.03.2019 20,000
Written down value 1,40,000
Less: Amount paid by the assessee 40,000
Perquisite value of Furniture 1,00,000
Computation of perquisite value Air-conditioner

Cost of the Air-conditioner 75,000
Written down value 67,500
Perquisite value of Air-conditioner 52,500
Computation of perquisite value Video Camera

Cost of the Video Camera 60,000
Perquisite value of Video Camera 28,000
Computation of perquisite value Motor car

Cost of the motor 5,40,000
Less: Depreciation on reducing balance method @ 20% from 01.10.2017 to 30.09.2018 1,08,000
Less: Depreciation on reducing balance method @ 20% from 01.10.2018 to 30.09.2019 86,400
Less: Depreciation on reducing balance method @ 20% from 01.10.2020 to 30.09.2021 55296
Less: Amount paid by the assessee 1,50,000
Perquisite value of motor car 71,184

SALARY SATC 6B.17

Computation of perquisite value Computer
Cost of the Computer 1,20,000
Perquisite value of computer Nil
Answer 48:
Chargeable perquisite in the hands of Mr. Badri for Assessment Year 2022-23
Housing Loan @ 6% p.a. is taken
SBI home loan @ 10% p.a.
Difference rate 4% p.a.
(i) Housing Loans
Month Maximum outstanding Balance Interest
30 April 2021 5,88,000 1960 (5,88,000 x 4% x 1/12)
31 May 2021 5,76,000 1920 (5,76,000 x 4% x 1/12)
30 June 2021 5,64,000 1880 (5,64,000 x 4% x 1/12)
31 July 2021 5,52,000 1840 (5,52,000 x 4% x 1/12)
31 August 2021 5,40,000 1800 (5,40,000 x 4% x 1/12)
30 September 2021 5,28,000 1760 (5,28,000 x 4% x 1/12)
31 October 2021 5,16,000 1720 (5,16,000 x 4% x 1/12)
30 November 2021 5,04,000 1680 (5,04,000 x 4% x 1/12)
31 December 2021 4,92,000 1640 (4,92,000 x 4% x 1/12)
31 Jan 2022 4,80,000 1600 (4,80,000 x 4% x 1/12)
28 February 2022 4,68,000 1560 (4,68,000 x 4% x 1/12)
31 March 2022 4,56,000 1520 (4,56,000 x 4% x 1/12)
Total interest as a perquisite 20880
Taxable value of concessional loan is ₹ 20,880 for the PY 2021-22.
(ii) Air Conditioner
Cost of air conditioners 2,00,000
Less: Depreciation for 4 yrs. @ 10% p.a. 80,000
1,20,000
Less: Amount charged from Badri 90,000
Value of perquisite 30,000
Chargeable perquisite in the hands of Mr. Badri for the Assessment Year 2022-23 ₹
Housing loan 20,880
Air conditioner 30,000
Total 50,880
Answer 49
Computation of taxable salary of Mr. Raghu Raj
Particulars ₹
Salary (26,000 x 12) 3,12,000
Perquisite value in respect of accommodation (3,12,000 x 15%) 46,800
Value of housing loan - 4,00,000 x 7.5% (i.e. 10.5% - 3%) 30,000
Perquisite in respect of sale of car (1,60,000 - 1,20,000) 40,000
Credit card expenses reimbursed (Not a perquisite) Nil
Perquisite value of Video camera (40,000 x 10%) 4,000
Perquisite value of laptop Nil
Taxable Salary 3,82,800

SALARY SATC 6B.18

Answer 50: Computation of taxable salary of Mr. Syed Zaki
Particulars ₹
Basic salary (10,000 x 12) 1,20,000
D.A. (1,000 x 12) 12,000
Perquisite value of concession in the matter of rent (15% of 1,32,000 – 750 x 12) 10,800
Perquisite value in respect of services of watchman and sweeper (1,000 x 2 x 12) 24,000
Shares offered under approved scheme (1,000 shares X ₹ 20 each) 20,000
Taxable salary 1,36,800
Answer 51:
Option I Option II
₹ ₹
Salary 1,38,000 1,38,000
Rent Free Accommodation __ 20,700
HRA (₹ 54,000 - 40,200) 13,800 —
Education facilities — 3,600
Education allowance (₹ 3,600 - 1,200) 2,400 —
Telephone facility — —
Telephone Allowance 12,000 —
Medical Allowance / Reimbursement 18,000 18,000
Motor Car facility — 18,000
Conveyance Allowance 18,000 —
Lunch Allowance 18,000 —
Free Lunch (Free Lunch exempt upto ₹ 50 per male)
then taxable amount = (60 - 50) x 300 days 3000
Sweeper's Salary 6,000 6,000
Gardner's Salary 6,000 6,000
Watchman's Salary 6,000 6,000
2,38,200 2,19,300
Less : Deduction under section 16 50,000 50,000
Net Salary 1,88,200 1,69,300
Working Notes :-
(1) RFA
15% of salary 20,700
(2) HRA
(i) Actual Received ₹ 54,000
(ii) (50% of 1,38,000) 69,000
(iii) 54,000 - 13,800 40,200
Option - Package II should be opted.
Answer 52: 360000 + 54000 + 60000 + 180000 (20% WDV) + 5000 + 7500 = ₹ 6,66,500
Answer 53: ₹
Computation of Gross Salary of Mr. Anil
Salary (46,000 x 12) 5,52,000.00
Medical Facility {Proviso Sec 17(2)} Nil
{In the hospital maintained by the company is exempt}
Perquisite of interest on loan {Sec 17(2)(viii) Rule 3(7)(i)} (W. Note 1) 33,000.00
Gift given on the occasion of wedding anniversary Nil
Rent Free Accommodation {Sec 17(2)(i) Rule 3(1)} (W. Note 2) 84,800.00
Sale of Table and Chairs {Sec 17(2)(viii) Rule 3(7)(viii)} (W. Note 3) 12,000.00
Credit Card Facility 30,000.00
Sale of Ambassador Car {Sec 17(2)(viii) Rule 3(7)(viii)} (W. Note 4) 60,000.00

SALARY SATC 6B.19

Working Note: ₹
1. Perquisite on sale of table and chairs
Cost 60,000
Less: Dep. on straight line method @ 10% for 3 years 18,000
Perquisite value of Table and chairs 12,000
2. Rent Free Accommodation
15% of rent free accommodation salary
Rent Free Accommodation salary = ₹ 5,52,000
Value of unfurnished house 82,800
Add: 10% of cost of furniture (60,000 x 10% x 4/12) 2,000
Perquisite value of furnished house 84,800
3. Perquisite of interest on loan – SBI Rate is taken as 10.5%
10.5% is taxable which is to be reduced by actual rate of interest charged i.e.
[l0.5%-5% = 5.5%] (6,00,000 x 5.5%) - ₹ 33.000
4. Perquisite value of car
Original cost of Car 2,50,000
Less: Dep. from 16.07.2018 to 15.07.2019 50,000
Less: Dep. from 16.07.2019 to 15.07.2020 40,000
Less: amount received from the assessee 1,00,000
Perquisite value of Ambassador car 60,000
Answer 54:
Computation of income under the head Salary ₹ ₹
From 01.04.2021 to 31.12.2021
Basic Pay (15,000 x 9) 1,35,000
Dearness Allowance (1,500 x 9) 13,500
Pension {17(i)(ii)} (4,000 x 3) 12,000
House Rent Allowance {Sec 10(13A), Rule 2A}(W. Note1) 5,175
Gratuity {Sec 10(10))} (W. Note2) 3,72,500
Leave Salary {Sec 10(10AA)} (W. Note3) _ Nil
Car Facility {Sec 17(2)(iii) Rule 3(2)}(2,700 x 9) 24,300
Employer's contribution to recognised provident fund Nil
Gas Facility {Sec. 17(2)(iii), Rule 3(4)} 8,000
Less: Deduction u/s 16(ia) - 50,000
National Saving Certificate 13,000
Public Provident Fund 14,000
Insurance premium on the life of married son 12,000
Own contribution in recognised provident fund 28,350 67,350
Total Income (Rounded off 288A) 4,53,130
Working Note:
1. HRA
1. ₹ 27,000
2. ₹ 36,000 - ₹ 14,175 = ₹ 21,825
3. 40% of retirement benefit salary = ₹ 56,700 {Since place of posting is not given}
{Retirement benefit salary = 1.35,000 + 6,750 = ₹ 1,41,750} Received = ₹ 27.000
Exempt = ₹ 21,825
Taxable = ₹ 5,175
2. Gratuity (not covered)
1. ₹ 5,30,000
2. ₹ 20,00,000
3. ½ x 20 x 15,750 = ₹ 1,57,500
Received = ₹ 5,30,000
Exempt = ₹ 1,57,500
Taxable = ₹ 3,72,500

SALARY SATC 6B.20

3. Leave salary
1. ₹ 1,57,500
2. ₹ 3,00,000
3. 10 x 15,750 x 10/ 10 = ₹ 1,57,500
4. 15,750 x 10 = ₹ 1,57,500
Received = ₹ 1,57,500
Exempt = ₹ 1,57,500
Taxable = Nil
Answer 55: ₹
Basic Salary 2,90,400
Employer’s contribution to recognized provident fund in excess of 12% of salary 152
Motor Car {Sec 17(2)(iii) Rule 3(2)} { (2,400+900)×3} 9,900
Sweeper [(600×3)+(600×25/31)] 2,284
Income under the head Other Source (1,25,000-10,000) 1,15,000
Less: Deduction u/s 80C 40,000
{Employee’s contribution to recognized provident fund}
Or, 3,27,740
Note:
1. Watchmen has been provided from the next year, hence not taxable.
2. Actual expenditure shall be taken in case of sweeper.
3. Income tax refund or any other refund is not considered to be income. Hence ₹ 10,000 included in the
income has been deducted (₹1,25,000 - ₹10,000= ₹1,15,000)
4. Any interest received is always income.
Working Note:
Basic Salary
Salary 2,25,000
Add: Income Tax 25,400
Own contribution to recognized provident fund 40,000
Basic Salary 2,90,400
Solution 56: Computation of Gross Salary (amounts in ₹)

Basic Salary (25,000 × 10 months) 250000
Dearness allowance (10,000 × 10 months) (assumed that it does not forms part of salary for 100000
retirement benefits as question is silent)
Bonus (50,000 × 10 months) 500000
Value of Accommodation (assumed that place of accommodation has population exceeding 25
lakhs) [DA will not be considered] 137500
[15% of (basic salary + Bonus) + 10% of cost of furniture of ₹ 3 lakhs × 10 months ÷ 12]
Sweeper Salary paid by employer (₹ 1,500 × 10 months) 15000
Watchman Salary paid by employer (₹ 1,500 × 10 months) 15000
Car facility (partly for personal and partly for official use, assuming that the maintenance and 27000
running expenses are met by the owner-company] [(1,800 + 900) × 10]
Club facility (Initial fee for corporate membership is exempt. Further, since no further expenses NIL
have been incurred by the employer, no taxability arises.]
Education facility to children (assuming the cost of education per child does not exceed ₹ NIL
1,000 p.m.)
Interest free housing Loan (₹ 5,00,000 × 13.25% × 6/12) 30625
Interest free Computer Loan (₹ 50,000 × 15.25% p.a. × 3/12 months) 1906
Gross Salary 1077031

SALARY SATC 6B.21

Solution 57: Computation of Gross Salary of Naresh under two Alternatives (amounts in ₹)
Alt. I Alt. II
Basic pay 92000 92000
Bonus 9000 9000
Education allowance for 2 children [30200 - 100 x 12 x 2]/ Education facility for 2 27800 30200
children, fully taxable as the value exceeds ₹ 1,000 p.m. per child
Sweeper allowance/Sweeper facility 10000 10000
Entertainment Allowance/Club facility 6000 6000
Transport allowance (now fully taxable) / Free car (1200 cc) facility for 21600 21600
personal use
(assumed that ₹ 21600 includes all expenses incurred including normal wear &
tear)
Medical allowance/ Medical facility for Naresh and his family members in a 18000 Exempt
hospital maintained by employer
Allowance for gas, electricity and water supply/ Free gas, electricity and water 4500 4500
supply (bills will be in the name of the employer)
Holiday home allowance/Holiday home facility 8000 8000
Lunch allowance/ Free lunch [free lunch exempt upto Rs. 50 per meal, hence, 18000 5500
taxable amount = (₹80 - ₹50) × 50 days + (₹70 - ₹50) x 200 days]
Diwali gift allowance/ Gift on Diwali (Gift Taxable if exceeds ₹5,000) 7500 7500
Rent-free unfurnished home (See Note) 14000 14000
Gross Salary 236400 208300
Hence, Naresh should opt for Alternative II, as taxable income is less in that case.
Note: Value of rent free house shall be lower of the following - Alt. I Alt II
(a) 15% of Monetary Salary (15% of ₹2,22,400 and 15% of ₹101,000) 33360 15150
(b) Lease rent paid 14000 14000
Answer 58:
Basic Pay (9,000 x 12) 108,000.00
Medical Facilities {Proviso to Sec 17(2)}(W Note 1) 62,000.00
Medical Allowance 10,000.00
Motor Car {Sec 17(2) (iii), Rule 3(2)} (W Note 1) 21,600.00
Note: Since Gross total income before taking into consideration travelling expenses is not exceeding ₹ 2
lakhs. Hence travelling is exempt.
Working Note: ₹
1. Medical Facilities
Expenses on treatment = 3,60,000
Exempt = Permitted by RBI = 3,50,000
(A)Taxable = 10,000
Expenses on Stay = 1,50,000
Exempt = Permitted by RBI = 1,05,000
(B)Taxable = 45,000
Treatment of father in law = 7,000
Total = 10,000 + 45,000 +7,000 = 62,000
2. Motor Car
Since basic pay is ₹ 106,000 so monetary income is more than ₹ 50,000 hence, he is a specified employee
(1,800 x 12 – 50,000)

SALARY SATC 6B.22

Solution 59: Computation of taxable income of Mr. Satish
Salary (10,000 × 12) 12,0,000

Dearness Allowance (40% of 1,20,000) 48,000
Entertainment Allowance 8,000
Reimbursement of Medical Expenses (fully taxable now) 25,000
Professional Tax paid by employer 4,000
Free Car facility (3,300 x 12) (See Note 2) 39,600
Less : Deductions u/s 16 –
(ia) Statutory Deduction 50,000
(ii) Entertainment allowance (see note 1) 5,000
(iii) Professional Tax Income from salary/Gross Total Income 5,000
1,84,600
Less : Deduction u/s 80C - Contribution to PF 12,000
Notes:
1) Entertainment allowance will be deductible to the extent of least of the following -
(i) Actual amount 8,000
(ii) Fixed amount 5,000
(iii) 20% of basic salary 24,000
2) In absence of details as to cubic capacity of car, it is assumed that it exceeds 1.6 litres and chauffeur has
also been provided. Since only one car has been provided, the same will be treated as partly for business
use and party for personal use of the employee. Hence, amount taxable will be 2,400 + 900 = ₹ 3,300
p.m.
3) Professional tax paid by employee as well as employer is allowed as deduction. Though the amount of
tax cannot exceed ₹ 2,500 p.a., but since the question gives the amount of ₹ 5,000 as tax paid,
therefore, the whole of the amount of will be deducted assuming that the same relates to more than one
year.
Answer 60:
Basic Salary (15,000 x 12) 1,80,000.00
Dearness Allowance (5,600 × 12) 67,200.00
Education Allowance (W Note 1) 4,800.00
Transport Allowance 21,600.00
Rent free Accommodation (W Note 3) 36,000.00
Mobile phone and fixed line telephone Nil
Gift 12,000.00
Use of video Camera 7,500.00
Motor Car (1,800 + 900 x 12) 32,400.00
Reimbursement of medical treatment 20,000.00
Employer's contribution in recognised provident fund in excess of 12% of Salary 4,368.00
(30,000 - 25,632)
Life insurance premium 12,000
Contribution in recognised provident fund 30,000 42,000.00
Total Income (rounded off u/s 288A} 2,93,870.00
Working Note:
1. Education Allowances ₹
Received = 300 x 2 x 12 = 7,200
Exempt = 100 x 2 x 12 = 2,400
Taxable 4,800

SALARY SATC 6B.23

2. Rent Free Accommodation ₹
15% of rent free accommodation salary or rent paid whichever is less
Rent free accommodation salary
= Basic Salary + Dearness Allowance (R) + Education Allowance + Transport Allowance
= 1,80,000 + 33,600 + 4,800 + 21,600 = 2,40,000
15% of rent free accommodation Salary 36,000
Rent paid 60,000
Perquisite value of rent free accommodation 36,000
Solution 61: Computation of Gross salary of Mr. Y.R. Meena

UNO April- Govt. Service Pvt. Ltd. Co. (Note 4)
July Aug-Nov Sri lanka India office
branch
(Note 2) (Note 3) Dec-Feb March

Basic Salary — 20,000 — 4,000
Dearness Allowance — — — 2,500
Project Allowance - — — — 1,000
Entertainment Allowance — — — 2,000
Servant & Sweeper facility (Note 5) — — — —
Education facility (Note 5) — — — —
Rent-free accommodation (Note 6) — — — 1,425
Gross Salary NIL 20,000 NIL 10,925
Notes:
1) Mr. Meena was in India for the month of March i.e. for 31 days only during the previous year. Hence, he is
non-resident in India.
2) Since, Mr. Meena is non-resident in India and services for which salary is received from UNO were not
rendered in India, therefore, the salary from UNO cannot be taxed in India. Further, even if salaries were
income accrued/arisen or received in India, then also it would not be liable to be taxed in India, as it is
exempt from tax.
3) Salary received by a citizen of India from Government of India for services rendered outside India is
deemed to accrue or arise in India under section 9(1)(iii). So, it is taxable in India. However, allowances
and perquisites are exempt under section 10(7).
4) Salaries received from Pvt. Ltd. co. for services rendered outside India is not taxable in India. However,
services rendered in the month of March in India is taxable in India.
5) Servant and sweeper facility and education facility is taxable only in case of specified employees. Since
Mr. Meena is not a specified employee, they will not be taxable in his case.
6) The perquisite in respect of rent-free accommodation has been valued as follows -

15% of Salary = 15% of (4,000 + 2,500 + 1,000 + 2,000) = ₹ 1,425. (It has been assumed that population
of the place where he was posted in India, exceeds 25 lacs).

SALARY SATC 6B.24

Class Notes

SALARY SATC 6C.1

PRACTICAL QUESTIONS – SET B
1. Examples: Sujatha, an actress, is employed in Chopra Films, where she is paid a monthly remuneration
of ₹ 2 lakh. She acts in various films produced by various producers. The remuneration for acting in such
films is directly paid to Chopra Films by the different producers.
In this case, ₹ 2 lakh will constitute salary in the hands of Sujatha, since the relationship of employer and
employee exists between Chopra Films and Sujatha.
In the above example, if Sujatha acts in various films and gets fees from different producers, the same
income will be chargeable as income from profession since the relationship of employer and employee
does not exist between Sujatha and the film producers.
2. Examples: Commission received by a Director from a company is salary if the Director is an employee
of the company. If, however, the Director is not an employee of the company, the said commission cannot
be charged as salary but has to be charged either as income from business or as income from other
sources depending upon the facts.
3. Examples: Salary paid to a partner by a firm is nothing but an appropriation of profits. Any salary, bonus,
commission or remuneration by whatever name called due to or received by partner of a firm shall not be
regarded as salary. The same is to be charged as income from profits and gains of business or
profession. This is primarily because the relationship between the firm and its partners is not that
of an employer and employee.
4. Examples: Mr. A, an employee instructs his employer that he is not interested in receiving the salary for
April 2021 and the same might be donated to a charitable institution.
In this case, Mr. A cannot claim that he cannot be charged in respect of the salary for April 2021. It is only
due to his instruction that the donation was made to a charitable institution by his employer. It is only an
application of income.
Hence, the salary for the month of April 2021 will be taxable in the hands of Mr. A. He is, however, entitled
to claim a deduction under section 80G for the amount donated to the institution.
5. Examples: Mr. A, a citizen of India, is posted in the United States as our Ambassador. Obviously, he
renders his services outside India. He also receives his salary outside India. He is also a non-resident.
The question, therefore, arises whether he can claim exemption in respect of his salary paid by the
Government of India to him outside India.
Section 9(1)(iii) provides that salaries payable by the Government to a citizen of India for services outside
India shall be deemed to accrue or arise in India. However, by virtue of section 10(7), any allowance or
perquisites paid or allowed outside India by the Government to a citizen of India for rendering services
outside India will be fully exempt.
6. Examples: If ‘A’ draws his salary in advance for the month of April 2022 in the month of March 2022 itself,
the same becomes chargeable on receipt basis and is to be assessed as income of the P.Y. 2021-22 i.e.,
A.Y. 2022-23. However, the salary for the A.Y. 2023-24 will not include that of April 2022.
If the salary due for March 2022 is received by ‘A’ later in the month of April 2022, it is still
chargeable as income of the P.Y. 2021-22 i.e., A.Y. 2022-23 on due basis. Obviously, salary for the
A.Y.2023-24 will not include that of March 2022.
7. Examples: If the Pay Commission is appointed by the Central Government and it recommends revision of
salaries of employees, the arrears received in that connection will be charged on receipt basis. Here also,
relief under section 89 is available.

SALARY SATC 6C.2

8. Mr. X and Mr. Y are working for M/s. Gama Ltd. As per salary fixation norms, the following
perquisites were offered:
(i) For Mr. X, who engaged a domestic servant for ₹ 500 per month, his employer reimbursed the
entire salary paid to the domestic servant i.e. ₹ 500 per month.
(ii) For Mr. Y, he was provided with a domestic servant @ ₹ 500 per month as part of remuneration
package.
You are required to comment on the taxability of the above in the hands of Mr. X and Mr. Y, who
are not specified employees.
Solution:
In the case of Mr. X, it becomes an obligation which the employee would have discharged even if the
employer did not reimburse the same. Hence, the perquisite will be covered under section 17(2)(iv) and
will be taxable in the hands of Mr. X. This is taxable in the case of all employees.
In the case of Mr. Y, it cannot be considered as an obligation which the employee would meet. The
employee might choose not to have a domestic servant. This is taxable only in the case of specified
employees covered by section 17(2)(iii). Hence, there is no perquisite element in the hands of Mr. Y.
9. Mr. X retired from the services of M/s Y Ltd. on 31.01.2022, after completing service of 30 years
and one month. He had joined the company on 1.1.1992 at the age of 30 years and received the
following on his retirement:
(i) Gratuity ₹ 6,00,000. He was covered under the Payment of Gratuity Act, 1972.
(ii) Leave encashment of ₹ 3,30,000 for 330 days leave balance in his account. He was credited 30
days leave for each completed year of service.
(iii) As per the scheme of the company, he was offered a car which was purchased on 30.01.2019
by the company for ₹ 5,00,000. Company has recovered ₹ 2,00,000 from him for the car.
Company depreciates the vehicles at the rate of 15% on Straight Line Method.
(iv) An amount of ₹ 3,00,000 as commutation of pension for 2/3 of his pension commutation.
(v) Company presented him a gift voucher worth ₹ 6,000 on his retirement.
(vi) His colleagues also gifted him a Television (LCD) worth ₹ 50,000 from their own contribution.
Following are the other particulars:

(i) He has drawn a basic salary of ₹ 20,000 and 50% dearness allowance per month for the period
from 01.04.2021 to 31.01.2022.
(ii) Received pension of ₹ 5,000 per month for the period 01.02.2022 to 31.03.2022 after
commutation of pension.
Compute his gross total income from the above for Assessment Year 2022-23.
Solution:
Computation of Gross Total Income of Mr. X for A.Y. 2022-23
Particulars ₹
Basic Salary = ₹ 20,000 x 10 2,00,000
Dearness Allowance = 50% of basic salary 1,00,000
Gift Voucher (See Note - 1) 6,000
Transfer of car (See Note - 2) 56,000
Gratuity (See Note - 3) 80,769
Leave encashment (See Note - 4) 1,30,000
Uncommuted pension (₹ 5000 x 2) 10,000
Commuted pension (See Note - 5) 1,50,000
Less: Standard deduction u/s 16(ia) 50,000
Taxable Salary /Gross Total Income 6,82,769

SALARY SATC 6C.3

Notes:
(1) As per Rule 3(7)(iv), the value of any gift or voucher or token in lieu of gift received by the employee
or by member of his household not exceeding ₹ 5,000 in aggregate during the previous year is
exempt. In this case, the amount was received on his retirement and the sum exceeds the limit of
₹ 5,000.
Therefore, the entire amount of ₹ 6,000 is liable to tax as perquisite.
Note – An alternate view possible is that only the sum in excess of ₹ 5,000 is taxable. In such a
case, the value of perquisite would be ₹ 1,000 and gross taxable income would be ₹ 6,77,769.
(2) Perquisite value of transfer of car: As per Rule 3(7)(viii), the value of benefit to the employee,
arising from the transfer of an asset, being a motor car, by the employer is the actual cost of the motor
car to the employer as reduced by 20% of WDV of such motor car for each completed year during
which such motor car was put to use by the employer. Therefore, the value of perquisite on transfer of
motor car, in this case, would be:
Particulars ₹
Purchase price (30.1.2018) 5,00,000
Less: Depreciation @ 20% 1,00,000
WDV on 29.1.2019 4,00,000
Less: Depreciation @ 20% 80,000
WDV on 29.1.2020 3,20,000
Less: Depreciation @ 20% 64,000
WDV on 29.1.2021 2,56,000
Less: Amount recovered 2,00,000
Value of perquisite 56,000
The rate of 15% as well as the straight line method adopted by the company for depreciation of
vehicle is not relevant for calculation of perquisite value of car in the hands of Mr. X.
(3) Taxable gratuity
Particulars ₹
Gratuity received 6,00,000
Less : Exempt under section 10(10) - Least of the following:
(i) Notified limit = ₹ 20,00,000
(ii) Actual gratuity = ₹ 6,00,000
(iii) 15/26 x last drawn salary x no. of completed years of services or
part in excess of 6 months
(15/26 x ₹ 30,000 x 30) =₹ 5,19,231 5,19,231
Taxable Gratuity 80,769
Note: As per the Payment of Gratuity Act, 1972, D.A. is included in the meaning of salary. Since in
this case, Mr. X is covered under payment of Payment of Gratuity Act, 1972, D.A. has to be included
within the meaning of salary for computation of exemption under section 10(10).
(4) Taxable leave encashment
Particulars ₹
Leave Salary received 3,30,000
Less : Exempt under section 10(10AA) - Least of the following:
(i) Notified limit ₹ 3,00,000
(ii) Actual leave salary ₹ 3,30,000
(iii) 10 months x ₹ 20,000 ₹ 2,00,000
(iv) Cash equivalent of leave to his credit ₹ 2,20,000
(330/30 X 20,000) 2,00,000
Taxable Leave encashment 1,30,000

SALARY SATC 6C.4

Note – It has been assumed that dearness allowance does not form part of salary for retirement
benefits.
In case it is assumed that dearness allowance forms part of pay for retirement benefits,
then, the third limit for exemption under section 10(10AA) in respect of leave encashment would
be ₹ 3,00,000 (i.e. 10 x ₹ 30,000) and the fourth limit ₹ 3,30,000, in which case, the taxable leave
encashment would be ₹ 30,000 (₹ 3,30,000 - ₹ 3,00,000). In such a case, the gross total income
would be ₹ 5,82,769.
(5) Commuted Pension

Since Mr. X is a non-government employee in receipt of gratuity, exemption under section 10(10A)
would be available to the extent of 1/3rd of the amount of the pension which he would have received
had he commuted the whole of the pension.
Particulars ₹
Amount received 3,00,000
Exemption under section 10(10A) = 1/3 (3,00,000 x 3/2) 1,50,000
Taxable amount 1,50,000
(6) The taxability provisions under section 56(2)(x) are not attracted in respect of television received from
colleagues, since television is not included in the definition of property therein.
10. Shri Bala employed in ABC Co. Ltd. as Finance Manager gives you the list of perquisites provided
by the company to him for the entire financial year 2021-22:
(i) Domestic servant was provided at the residence of Bala. Salary of domestic servant is ₹ 1,500
per month. The servant was engaged by him and the salary is reimbursed by the company
(employer).
In case the company has employed the domestic servant, what is the value of perquisite?
(ii) Free education was provided to his two children Arthy and Ashok in a school maintained and
owned by the company. The cost of such education for Arthy is computed at ₹ 900 per month
and for Ashok at ₹ 1,200 per month. No amount was recovered by the company for such
education facility from Bala.
(iii) The employer has provided movable assets such as television, refrigerator and air-conditioner
at the residence of Bala. The actual cost of such assets provided to the employee is ₹ 1,10,000.
(iv) A gift voucher worth ₹ 10,000 was given on the occasion of his marriage anniversary. It is
given by the company to all employees above certain grade.
(v) Telephone provided at the residence of Shri Bala and the bill aggregating to ₹ 25,000 paid by
the employer.
(vi) Housing loan @ 6% per annum. Amount outstanding on 1.4.2021 is ₹ 6,00,000. Shri Bala pays
₹ 12,000 per month towards principal, on 5th of each month.
Compute the chargeable perquisite in the hands of Mr. Bala for the A.Y. 2022-23.
The lending rate of State Bank of India as on 1.4.2021 for housing loan may be taken as 10%.
Solution:
Taxability of perquisites provided by ABC Co. Ltd. to Shri Bala
(i) Domestic servant was employed by the employee and the salary of such domestic servant was paid/
reimbursed by the employer. It is taxable as perquisite for all categories of employees.
Taxable perquisite value = ₹ 1,500 × 12 = ₹ 18,000.
If the company had employed the domestic servant and the facility of such servant is given to the
employee, then the perquisite is taxable only in the case of specified employees. The value of the
taxable perquisite in such a case also would be ₹ 18,000.

SALARY SATC 6C.5

(ii) Where the educational institution is owned by the employer, the value of perquisite in respect of free
education facility shall be determined with reference to the reasonable cost of such education in a
similar institution in or near the locality. However, there would be no perquisite if the cost of such
education per child does not exceed ₹ 1,000 per month.
Therefore, there would be no perquisite in respect of cost of free education provided to his child Arthy,
since the cost does not exceed ₹ 1,000 per month.
However, the cost of free education provided to his child Ashok would be taxable, since the cost
exceeds ₹ 1,000 per month. The taxable perquisite value would be ₹ 14,400 (₹ 1,200 × 12).
Note – An alternate view possible is that only the sum in excess of ₹ 1,000 per month is
taxable. In such a case, the value of perquisite would be ₹ 2,400.
(iii) Where the employer has provided movable assets to the employee or any member of his household,
10% per annum of the actual cost of such asset owned or the amount of hire charges incurred by the
employer shall be the value of perquisite. However, this will not apply to laptops and computers. In
this case, the movable assets are television, refrigerator and air conditioner and actual cost of such
assets is ₹ 1,10,000.
The perquisite value would be 10% of the actual cost i.e., ₹ 11,000, being 10% of ₹ 1,10,000.
(iv) The value of any gift or voucher or token in lieu of gift received by the employee or by member of his
household not exceeding ₹ 5,000 in aggregate during the previous year is exempt. In this case, the
amount was received on the occasion of marriage anniversary and the sum exceeds the limit of
₹ 5,000.
Therefore, the entire amount of ₹ 10,000 is liable to tax as perquisite.
Note- An alternate view possible is that only the sum in excess of ₹ 5,000 is taxable. In such a
case, the value of perquisite would be ₹ 5,000
(v) Telephone provided at the residence of the employee and payment of bill by the employer is a tax
free perquisite.
(vi) The value of the benefit to the assessee resulting from the provision of interest-free or concessional
loan made available to the employee or any member of his household during the relevant previous
year by the employer or any person on his behalf shall be determined as the sum equal to the interest
computed at the rate charged per annum by the State Bank of India (SBI) as on the 1st day of the
relevant previous year in respect of loans for the same purpose advanced by it. This rate should be
applied on the maximum outstanding monthly balance and the resulting amount should be reduced by
the interest, if any, actually paid by him.
“Maximum outstanding monthly balance” means the aggregate outstanding balance for loan as on the
last day of each month.
The perquisite value for computation is 10% - 6% = 4%
Month Maximum outstanding balance as Perquisite value at 4% for

on last date of month (₹) the month (₹)
April, 2021 5,88,000 1,960
May, 2021 5,76,000 1,920
June, 2021 5,64,000 1,880
July, 2021 5,52,000 1,840
August, 2021 5,40,000 1,800
September, 2021 5,28,000 1,760
October, 2021 5,16,000 1,720
November, 2021 5,04,000 1,680

SALARY SATC 6C.6

December, 2021 4,92,000 1,640
January, 2022 4,80,000 1,600
February, 2022 4,68,000 1,560
March, 2022 4,56,000 1,520
Total value of this perquisite 20,880
Total value of taxable perquisite

= ₹ 74,280 [i.e. ₹ 18,000 + ₹ 14,400 + ₹ 11,000 + ₹ 10,000 + ₹ 20,880].
Note - In case the alternate views are taken for items (ii) & (iv), the total value of taxable perquisite
would be ₹ 57,280 [i.e., ₹ 18,000 +₹ 2,400 + ₹ 11,000 +₹ 5,000 +₹ 20,880].
11. AB Co. Ltd. allotted 1000 sweat equity shares to Sri Chand in June 2021. The shares were allotted
at ₹ 200 per share as against the fair market value of ₹ 300 per share on the date of exercise of
option by the allottee viz. Sri Chand. The fair market value was computed in accordance with the
method prescribed under the Act.
(i) What is the perquisite value of sweat equity shares allotted to Sri Chand?
(ii) In the case of subsequent sale of those shares by Sri Chand, what would be the cost of
acquisition of those sweat equity shares?
Solution:
(i) As per section 17(2)(vi), the value of sweat equity shares chargeable to tax as perquisite shall be the
fair market value of such shares on the date on which the option is exercised by the assessee as
reduced by the amount actually paid by, or recovered from, the assessee in respect of such shares.
Particulars ₹
Fair market value of 1000 sweat equity shares @ ₹ 300 each 3,00,000
Less: Amount recovered from Sri Chand 1000 shares @ ₹ 200 each 2,00,000
Value of perquisite of sweat equity shares allotted to Sri Chand 1,00,000
(ii) As per section 49(2AA), where capital gain arises from transfer of sweat equity shares, the cost of
acquisition of such shares shall be the fair market value which has been taken into account for
perquisite valuation under section 17(2)(vi).
Therefore, in case of subsequent sale of sweat equity shares by Sri Chand, the cost of acquisition
would be ₹ 3,00,000.
12. X Ltd. provided the following perquisites to its employee Mr. Y for the P.Y. 2021-22.
(1) Accommodation taken on lease by X Ltd. for ₹ 15,000 p.m. ₹ 5,000 p.m. is recovered from the
salary of Mr. Y.
(2) Furniture, for which the hire charges paid by X Ltd. is ₹ 3,000 p.m. No amount is recovered
from the employee in respect of the same.
(3) A Car of 1,200 cc which is owned by X Ltd. and given to Mr. Y to be used both for official and
personal purposes. All running and maintenance expenses are fully met by the employer. He is
also provided with a chauffeur.
(4) A gift voucher of ₹ 10,000 on his birthday.
Compute the value of perquisites chargeable to tax for the A.Y. 2022-23, assuming his salary for
perquisite valuation to be ₹ 10 lakh.

SALARY SATC 6C.7

Solution:
Computation of the value of perquisites chargeable to tax in the hands of Mr. Y for the A.Y. 2022-
23
(1) Value of concessional accommodation
Actual amount of lease rental paid by X Ltd. 1,80,000
15% of salary i.e., 15% of ₹ 10,00,000 1,50,000
Lower of the above 1,50,000
Less: Rent paid by Mr. Y (₹ 5,000 × 12) 60,000
90,000
Add: Hire charges paid by X Ltd. for furniture provided for 36,000 1,26,000
the use of Mr. Y (₹ 3,000 × 12)
(2) Perquisite value of Santro car owned by X Ltd. and 32,400

provided to Mr. Y for his personal and official use
[(₹ 1,800 + ₹ 900) × 12]
(3) Value of gift voucher 10,000

Value of perquisites chargeable to tax 1,68,400
13. Mr. Goyal receives the following emoluments during the previous year ending 31.03.2022.
Basic pay ₹ 40,000
Dearness Allowance ₹ 15,000
Commission ₹ 10,000
Entertainment allowance ₹ 4,000
Medical expenses reimbursed ₹ 25,000
Professional tax paid ₹ 2,000 (₹ 1,000 was paid by his employer)
Mr. Goyal contributes ₹ 5,000 towards recognized provident fund. He has no other income.
Determine the income from salary for A.Y. 2022-23, if Mr. Goyal is a State Government employee.
Solution:
Computation of salary of Mr. Goyal for the A.Y. 2022-23
Particulars ₹ ₹
Basic Salary 40,000
Dearness Allowance 15,000
Commission 10,000
Entertainment Allowance received 4,000
Employee’s contribution to RPF [Note] -
Medical expenses reimbursed 25,000
Professional tax paid by the employer 1,000
Gross Salary 95,000
under section 16(ia) - Standard deduction of up-to ₹ 50,000 50,000
under section 16(ii) - Entertainment allowance being lower of :
(a) Allowance received 4,000
(b) One fifth of basic salary [1/5 × ₹ 40,000] 8,000
(c) Statutory amount 5,000 4,000
under section 16(iii) - Professional tax paid 2,000
Income from Salary 39,000

SALARY SATC 6C.8

14. In the case of Mr. Hari, who turned 68 years on 28.3.2022, you are informed that the salary
(computed) for the previous year 2021-22 is ₹ 10,20,000 and arrears of salary received is
₹ 3,45,000. Further, you are given the following details relating to the earlier years to which the
arrears of salary received is attributable to:
Previous year Taxable Salary (₹) Arrears now received (₹)

2011 – 2012 7,10,000 1,03,000
2012 – 2013 8,25,000 1,17,000
2013 – 2014 9,50,000 1,25,000
Compute the relief available under section 89 and the tax payable for the A.Y. 2022-23. Ignore
Section 115BAC.
Note: Rates of Taxes:
Assessment Slab rates of income-tax

Year For resident individuals of the age For other resident individuals
of 60 years or more at any time
during the previous year
Slabs Rate Slabs Rate
Upto ₹ 2,40,000 Nil Upto ₹ 1,60,000 Nil
₹ 2,40,001 - ₹ 5,00,000 10% ₹ 1,60,001 - ₹ 5,00,000 10%
2012–13
₹ 5,00,001 - ₹ 8,00,000 20% ₹ 5,00,001 - ₹ 8,00,000 20%
Above ₹ 8,00,000 30% Above ₹ 8,00,000 30%
Upto ₹ 2,50,000 Nil Upto ₹ 1,80,000 Nil
₹ 2,50,001 - ₹ 5,00,000 10% ₹ 1,80,001 - ₹ 5,00,000 10%
2013–14
₹ 5,00,001 - ₹ 8,00,000 20% ₹ 5,00,001 - ₹ 8,00,000 20%
Above ₹ 8,00,000 30% Above ₹ 8,00,000 30%
Upto ₹ 2,50,000 Nil Up-to ₹ 2,00,000 Nil
₹ 2,50,001 - ₹ 5,00,000 10% ₹ 2,00,001 - ₹ 5,00,000 10%
2014–15
₹ 5,00,001-₹ 10,00,000 20% ₹ 5,00,001 - ₹ 10,00,000 20%
Above ₹ 10,00,000 30% Above ₹ 10,00,000 30%
Note – Education cess@2% and secondary and higher education cess@1% was attracted on the
income-tax for all above preceding years.
Solution:
Computation of tax payable by Mr. Hari for the A.Y. 2022-23
Particulars Incl. arrears of Excl. arrears of

salary salary
₹ ₹
Current year salary (computed) 10,20,000 10,20,000
Add: Arrears of salary 3,45,000 -
Taxable Salary 13,65,000 10,20,000
Income-tax thereon 2,19,500 1,16,000
Add : Health and education cess @4% 8,780 4,640
Total payable 2,28,280 1,20,640

SALARY SATC 6C.9

Computation of tax payable on arrears of salary if charged to tax in the respective AYs
A.Y. 2012-13 A.Y. 2013-14 A.Y. 2014-15
Excl.
Particulars Incl. Excl. Incl. Incl. arrears Excl.
arrears
arrears (₹) arrears (₹) arrears (₹) (₹) arrears (₹)
(₹)
Taxable salary 7,10,000 7,10,000 8,25,000 8,25,000 9,50,000 9,50,000
Add: Arrears of 1,03,000 - 1,17,000 - 1,25,000 -
salary
Taxable salary 8,13,000 7,10,000 9,42,000 8,25,000 10,75,000 9,50,000
Tax on the above 97,900 76,000 1,34,600 99,500 1,47,500 1,15,000
Add: Cess@3% 2,937 2,280 4,038 2,985 4,425 3,450
Tax payable 1,00,837 78,280 1,38,638 1,02,485 1,51,925 1,18,450
Computation of relief under section 89

Particulars ₹ ₹
I Tax payable in A.Y. 2022-23 on arrears:
Tax on income including arrears 2,28,280
Less : Tax on income excluding arrears 1,20,640 1,07,640
ii Tax payable in respective years on arrears :

Tax on income including arrears 3,91,400
(₹ 1,00,837 + ₹ 1,38,638 + ₹ 1,51,925)
Less: Tax on income excluding arrears

(₹ 78,280 + ₹ 1,02,485 + ₹ 1,18,450) 2,99,215 92,185
Relief under section 89 - difference between tax on arrears in A.Y

2022-23 and tax on arrears in the respective years 15,455
Tax payable for A.Y. 2022-23 after relief under section 89:
Particulars ₹
Income-tax payable on total income including arrears of salary 2,28,280
Less : Relief under section 89 as computed above 15,455
Tax payable after claiming relief 2,12,825
15. Mr. Mohit is employed with XY Ltd. on a basic salary of ₹ 10,000 p.m. He is also entitled to
dearness allowance @100% of basic salary, 50% of which is included in salary as per terms of
employment. The company gives him house rent allowance of ₹ 6,000 p.m. which was increased to
₹ 7,000 p.m. with effect from 01.01.2022. He also got an increment of ₹ 1,000 p.m. in his basic
salary with effect from 01.02.2022. Rent paid by him during the previous year 2021-22 is as under:
April and May, 2021 - Nil, as he stayed with his parents

June to October, 2021 - ₹ 6,000 p.m. for an accommodation in Ghaziabad
November, 2021 to March, 2022 - ₹ 8,000 p.m. for an accommodation in Delhi
Compute his gross salary for assessment year 2022-23 assuming he has not opted for the
provisions of section 115BAC.
Solution:
Computation of gross salary of Mr. Mohit for A.Y. 2022-23
Particulars ₹
Basic salary [(₹ 10,000 × 10) + (₹ 11,000 × 2)] 1,22,000
Dearness Allowance (100% of basic salary) 1,22,000
House Rent Allowance (See Note below) 21,300

SALARY SATC 6C.10

Note: Computation of Taxable House Rent Allowance (HRA)
Particulars April-May June-Oct Nov-Dec Jan Feb-Mar

(₹)
(₹) (₹) (₹) (₹)
Basic salary per month 10,000 10,000 10,000 10,000 11,000
Dearness allowance 5,000 5,000 5,000 5,000 5,500
(included in salary as per terms of
employment) (50% of basic salary)
Salary per month for the purpose 15,000 15,000 15,000 15,000 16,500
of computation of house rent
allowance Relevant period (in
months)
2 5 2 1 2
Salary for the relevant period 30,000 75,000 30,000 15,000 33,000
(Salary per month × relevant
period)
Rent paid for the relevant period Nil 30,000 16,000 8,000 16,000
(₹ 6,000×5) (₹ 8,000×2) (₹ 8,000×1) (₹ 8,000×2)
House rent allowance (HRA) 12,000 30,000 12,000 7,000 14,000

received during the relevant period (₹ 6,000×2) (₹ 6,000×5) (₹ 6,000×2) (₹ 7,000×1) (₹ 7,000×2)
(A) Least of the following is
exempt [u/s 10(13A)] N.A.
- 30,000 7,000 14,000
1. Actual HRA received - 22,500 12,000 6,500 12,700
2. Rent paid (–)10% of salary - 30,000 13,000 7,500 16,500
3. 40% of salary (40% × 15,000 (50% × (50% ×
(Residence at Ghaziabad – ₹ 75,000) (50% × ₹ 15,000) ₹ 33,000)
June to Oct, 2020) 50% of ₹ 30,000)
salary (Residence at Delhi–
Nov, 20 - March, 21)
Exempt HRA (B) Nil 22,500 12,000 6,500 12,700

Taxable HRA [Actual HRA (–)
Exempt HRA] (A-B) 12,000 7,500 Nil 500 1,300
Taxable HRA (total) = ₹ 12,000 + ₹ 7,500 + ₹ 500 + ₹ 1,300 = ₹ 21,300
16. Ms. Rakhi is an employee in a private company. She receives the following medical benefits from
the company during the previous year 2021-22:
Particulars ₹
1 Reimbursement of following medical expenses incurred by Ms. Rakhi
(A) On treatment of her self employed daughter in a private clinic 4,000
(B) On treatment of herself by family doctor 8,000
(C) On treatment of her mother-in-law dependent on her, in a nursing home 5,000
2 Payment of premium on Mediclaim Policy taken on her health 7,500

3 Medical Allowance 2,000 p.m.
4 Medical expenses reimbursed on her son's treatment in a government hospital 5,000
5 Expenses incurred by company on the treatment of her minor son abroad 1,05,000
6 Expenses in relation to foreign travel and stay of Rakhi and her son abroad for 1,20,000
medical treatment (Limit prescribed by RBI for this is ₹ 2,00,000)
Examine the taxability of the above benefits and allowances in the hands of Rakhi.

SALARY SATC 6C.11

Solution:
Tax treatment of medical benefits, allowances and mediclaim premium in the hands of Ms. Rakhi
for A.Y. 2022-23.
Particulars
1. Reimbursement of medical expenses incurred by Ms. Rakhi
(A) The amount of ₹ 4,000 reimbursed by her employer for treatment of her self-employed
daughter in a private clinic is taxable perquisite.
(B) The amount of ₹ 8,000 reimbursed by the employer for treatment of Ms. Rakhi by family
doctor is taxable perquisite.
(C) The amount of ₹ 5,000 reimbursed by her employer for treatment of her dependant mother-
in-law in a nursing home is taxable perquisite.
The aggregate sum of ₹ 17,000, specified in (A), (B) and (C) above, reimbursed by the
employer is taxable perquisite
2. Medical insurance premium of ₹ 7,500 paid by the employer for insuring health of Ms. Rakhi is
an exempt perquisite as per clause (iii) of the first proviso to section 17(2).
3. Medical allowance of ₹ 2,000 per month i.e., ₹ 24,000 p.a. is a fully taxable allowance.
4. As per clause (ii)(a) of the first proviso to section 17(2), reimbursement of medical expenses of
₹ 5,000 on her son’s treatment in a hospital maintained by the Government is an exempt
perquisite.
5. As per clause (vi) of the first proviso to section 17(2), the following expenditure incurred by
& the employer would be excluded from perquisite subject to certain conditions –
(i) Expenditure on medical treatment of the employee, or any member of the family of such
6. employee, outside India [₹ 1,05,000, in this case];
(ii) Expenditure on travel and stay abroad of the employee or any member of the family of such
employee for medical treatment and one attendant who accompanies the patient in
connection with such treatment [₹ 1,20,000, in this case].
The conditions subject to which the above expenditure would be exempt are as follows –
(a) The expenditure on medical treatment and stay abroad would be excluded from perquisite to
the extent permitted by Reserve Bank of India;
(b) The expenditure on travel would be excluded from perquisite only in the case of an employee
whose gross total income, as computed before including the said expenditure, does not exceed
₹ 2 lakh.
Since the expenditure on medical treatment and stay abroad does not exceed the limit permitted
by RBI, they would be fully exempt.
However, the foreign travel expenditure of Ms. Rakhi and her minor son borne by the
employer would be excluded from perquisite only if the gross total income of Ms. Rakhi, as
computed before including the said expenditure, does not exceed ₹ 2 lakh.
17. Mr. X is employed with AB Ltd. on a monthly salary of ₹ 25,000 per month and an entertainment
allowance and commission of ₹ 1,000 p.m. each. The company provides him with the following
benefits:
1. A company owned accommodation is provided to him in Delhi. Furniture costing ₹ 2,40,000
was provided on 1.8.2021.
2. A personal loan of ₹ 5,00,000 on 1.7.2021 on which it charges interest @ 6.75% p.a. The entire
loan is still outstanding. (Assume SBI rate of interest on 1.4.2021 was 12.75% p.a.)
3. His son is allowed to use a motor cycle belonging to the company. The company had
purchased this motor cycle for ₹ 60,000 on 1.5.2018. The motor cycle was finally sold to him on
1.8.2021 for ₹ 30,000.
4. Professional tax paid by Mr. X is ₹ 2,000.
Compute the income from salary of Mr. X for the A.Y. 2022-23.

SALARY SATC 6C.12

Solution:
Computation of Income from Salary of Mr. X for the A.Y. 2022-23
Particulars ₹ ₹
Basic salary [₹ 25,000 × 12] 3,00,000
Commission [₹ 1,000 × 12] 12,000
Entertainment allowance [₹ 1,000 × 12] 12,000
Rent free accommodation [Note 1] 48,600
Add : Value of furniture [₹ 2,40,000 × 10% p.a. for 8 months] 16,000 64,600
Interest on personal loan [Note 2] 22,500
Use of motor cycle [₹ 60,000 × 10% p.a. for 4 months] 2,000
Transfer of motor cycle [Note 3] 12,000
Less : Deduction under section 16
Under section 16(ia) – Standard deduction 50,000
Under section 16(iii) - Professional tax paid 2,000 52,000
Note 1: Value of rent free unfurnished accommodation

= 15% of salary for the relevant period
= 15% of (₹ 3,00,000 + ₹ 12,000 + ₹ 12,000) = ₹ 48,600
Note 2: Value of perquisite for interest on personal loan

= [₹ 5,00,000 × (12.75% - 6.75%) for 9 months] = ₹ 22,500
Note 3: Depreciated value of the motor cycle

= Original cost – Depreciation @ 10% p.a. for 3 completed years.
= ₹ 60,000 – (₹ 60,000 × 10% p.a. × 3 years) = ₹ 42,000.
Perquisite = ₹ 42,000 – ₹ 30,000 = ₹ 12,000.
18. Mr. Balaji, employed as Production Manager in Beta Ltd., furnishes you the following information
for the year ended 31.03.2022:
(i) Basic salary upto 31.10.2021 ₹ 50,000 p.m.
Basic salary from 01.11.2021 ₹ 60,000 p.m.
Note: Salary is due and paid on the last day of every month.
(iii) Dearness allowance @ 40% of basic salary.

(iv) Bonus equal to one month salary. Paid in October 2021 on basic salary plus dearness
allowance applicable for that month.
(v) Contribution of employer to recognized provident fund account of the employee@16% of basic
salary.
(vi) Professional tax paid ₹ 2,500 of which ₹ 2,000 was paid by the employer.
(vii) Facility of laptop and computer was provided to Balaji for both official and personal use. Cost
of laptop ₹ 45,000 and computer ₹ 35,000 were acquired by the company on 01.12.2021.
(viii) Motor car owned by the employer (cubic capacity of engine exceeds 1.60 litres) provided to the
employee from 01.11.2021 meant for both official and personal use. Repair and running
expenses of ₹ 45,000 from 01.11.2021 to 31.03.2022, were fully met by the employer. The motor
car was self-driven by the employee.
(ix) Leave travel concession given to employee, his wife and three children (one daughter aged 7
and twin sons aged 3). Cost of air tickets (economy class) reimbursed by the employer
₹ 30,000 for adults and ₹ 45,000 for three children. Balaji is eligible for availing exemption this
year to the extent it is permissible in law.
Compute the salary income chargeable to tax in the hands of Mr. Balaji for the assessment year
2022-23 assuming he has not opted for the provisions of section 115BAC.

SALARY SATC 6C.13

Solution:
Computation of Taxable Salary of Mr. Balaji for A.Y. 2022-23
Particulars ₹
Basic salary [(₹ 50,000 × 7) + (₹ 60,000 × 5)] 6,50,000
Dearness Allowance (40% of basic salary) 2,60,000
Bonus (₹ 50,000 + 40% of ₹ 50,000) (See Note 1) 70,000
Employers contribution to recognised provident fund in excess of 12% of salary = 26,000
4% of ₹ 6,50,000 (See Note 2)
Professional tax paid by employer 2,000
Perquisite of Motor Car (₹ 2,400 for 5 months) (See Note 4) 12,000
Standard deduction u/s 16(ia) ₹ 50,000
Professional tax u/s 16(iii) (See Note 6) ₹ 2,500 52,500
Taxable Salary 9,67,500
Notes:
1. Since bonus was paid in the month of October, the basic salary of ₹ 50,000 for the month of October
is considered for its calculation.
2. It is assumed that dearness allowance does not form part of salary for computing retirement
benefits.
3. As per Rule 3(7)(vii), facility of use of laptop and computer is an exempt perquisite, whether used for
official or personal purpose or both.
4. As per the provisions of Rule 3(2), in case a motor car (engine cubic capacity exceeding 1.60 liters)
owned by the employer is provided to the employee without chauffeur for personal as well as office
use, the value of perquisite shall be ₹ 2,400 per month. The car was provided to the employee from
01.11.2021, therefore the perquisite value has been calculated for 5 months.
5. Mr. Balaji can avail exemption under section 10(5) on the entire amount of ₹ 75,000 reimbursed by
the employer towards Leave Travel Concession since the same was availed for himself, his wife and
three children and the journey was undertaken by economy class airfare. The restriction imposed for
two children is not applicable in case of multiple births which take place after the first child.
It is assumed that the Leave Travel Concession was availed for journey within India.
6. As per section 17(2)(iv), a “perquisite” includes any sum paid by the employer in respect of any
obligation which, but for such payment, would have been payable by the assessee. Therefore,
professional tax of ₹ 2,000 paid by the employer is taxable as a perquisite in the hands of Mr. Balaji.
As per section 16(iii), a deduction from the salary is provided on account of tax on employment i.e.
professional tax paid during the year.
Therefore, in the present case, the professional tax paid by the employer on behalf of the employee
₹ 2,000 is first included in the salary and deduction of the entire professional tax of ₹ 2,500 is
provided from salary.
19. From the following details, find out the salary chargeable to tax for the A.Y. 2022-23 assuming he
has not opted for the provisions of section 115BAC--
Mr. X is a regular employee of Rama & Co., in Gurgaon. He was appointed on 1.1.2021 in the scale
of ₹ 20,000 - ₹ 1,000 - ₹ 30,000. He is paid 10% D.A. & Bonus equivalent to one month pay based on
salary of March every year. He contributes 15% of his pay and D.A. towards his recognized
provident fund and the company contributes the same amount.
He is provided free housing facility which has been taken on rent by the company at ₹ 10,000 per
month. He is also provided with following facilities:
(i) Facility of laptop costing ₹ 50,000.
(ii) Company reimbursed the medical treatment bill of his brother of ₹ 25,000, who is dependent
on him.
(iii) The monthly salary of ₹ 1,000 of a house keeper is reimbursed by the company.
(iv) A gift voucher of ₹ 10,000 on the occasion of his marriage anniversary.

SALARY SATC 6C.14

(v) Conveyance allowance of ₹ 1,000 per month is given by the company towards actual
reimbursement.
(vi) He is provided personal accident policy for which premium of ₹ 5,000 is paid by the company.
(vii)He is getting telephone allowance @₹ 500 per month.
Solution:
Computation of taxable salary of Mr. X for A.Y. 2022-23
Particulars ₹
Basic pay [(₹ 20,000×9) + (₹ 21,000×3)] = ₹ 1,80,000 + ₹ 63,000 2,43,000
Dearness allowance [10% of basic pay] 24,300
Bonus 21,000
Employer’s contribution to Recognized Provident Fund in excess of 12% (15%- 8,019
12% =3% of ₹ 2,67,300) [See Note 1 below]
Taxable allowances
Telephone allowance 6,000
Taxable perquisites
Rent-free accommodation [See Note 1 & 2 below] 44,145
Medical reimbursement 25,000
Reimbursement of salary of housekeeper 12,000
Gift voucher [See Note 5 below] 10,000
Less: Deduction under section 16(ia) – Standard deduction 50,000
Salary income chargeable to tax 3,43,464
Notes:
1. It has been assumed that dearness allowance forms part of salary for retirement benefits and
accordingly, the perquisite value of rent-free accommodation and employer’s contribution to
recognized provident fund have been worked out.
2. Where the accommodation is taken on lease or rent by the employer, the value of rent-free
accommodation provided to employee would be actual amount of lease rental paid or payable by the
employer or 15% of salary, whichever is lower.
For the purposes of valuation of rent free house, salary includes:

(i) Basic salary i.e., ₹ 2,43,000
(ii) Dearness allowance (assuming that it is included for calculating retirement benefits) i.e. ₹ 24,300
(iii) Bonus i.e., ₹ 21,000
(iv) Telephone allowance i.e., ₹ 6,000
Therefore, salary works out to ₹ 2,43,000 + ₹ 24,300 + ₹ 21,000 + ₹ 6,000 = ₹ 2,94,300.

15% of salary = ₹ 2,94,300 × 15/100 = ₹ 44,145
Value of rent-free house = Lower of rent paid by the employer (i.e. ₹ 1,20,000) or 15% of salary (i.e.,
₹ 44,145).
Therefore, the perquisite value is ₹ 44,145.
3. Facility of use of laptop is not a taxable perquisite.

4. Conveyance allowance is exempt since it is based on actual reimbursement for official purposes.
5. The value of any gift or voucher or token in lieu of gift received by the employee or by member of his
household below ₹ 5,000 in aggregate during the previous year is exempt. In this case, the gift
voucher was received on the occasion of marriage anniversary and the sum exceeds the limit of
₹ 5,000. Therefore, the entire amount of ₹ 10,000 is liable to tax as perquisite.
Note - An alternate view possible is that only the sum in excess of ₹ 5,000 is taxable. In such a
case, the value of perquisite would be ₹ 5,000.
6. Premium of ₹ 5,000 paid by the company for personal accident policy is not liable to tax.

SALARY SATC 6C.15

Class Notes

SALARY SATC 6C.16

Class Notes

IOS SATC 7.1

INCOME FROM OTHER SOURCES
[Section 56 to 59]
Any income includible in the total income of an assessee, which cannot be included under any of the
first four heads of income, is chargeable under the head ‘IOS’.
Following conditions must be satisfied before an income can be taxed under the head “Other
Sources”:
a) There must be an income
b) Such income must not be exempted income
c) Such income must not be income falling under first four heads.
IOS Income may include: (list is not exhaustive)
a) Casual Income
b) Family Pension
c) Gift
d) Dividend Income
e) Premium amount (shares issued on premium)
f) Income from undisclosed sources
g) Income from Sub-Letting of a House Property
h) Director’s Sitting Fee
i) Remuneration received by MP/MLA
j) Interest on bank deposit / deposits with companies or on loan
k) Examiner-ship fee from non-employer
l) Rent from a vacant piece of plot of land
m) Agricultural Income from land situated outside India
n) Interest on Income Tax Refunds
o) Sum received from Keyman Insurance Policy
p) Compensation in connection with termination/modification of employment (if not taxable under
the head “Salaries”)
q) Advance money forfeited in the course of negotiation for transfer of a capital asset.
The following income is chargeable under the head “Income from other sources” only if such
income is not chargeable under the head “Profits and gains of business or profession”:
a) Income from letting out of plant, machinery or furniture.

b) Where letting out of buildings is inseparable from the letting out of plant, machinery or furniture,
the income from such letting.
c) Interest on Securities.
d) Any sum received by an employer-assessee from his employees as contributions to any
provident fund, superannuation fund or any other fund for the welfare of the employees.

IOS SATC 7.2

CASUAL INCOME
1) Casual income includes income in the nature of winning from lotteries, crossword puzzles,
horse races (including camel race), card games and other games of any sort, gambling, betting
etc.
2) Such winnings are chargeable to tax as per section 115BB. Section 115BB provides that above
casual income would be taxed at a flat rate of 30% [plus surcharge, if applicable, plus H&EC].
3) No expenditure or allowance can be allowed from such income.

4) Loss under other head or under the head of IOS is not allowed to be set off with casual income.
5) No Deduction under Chapter VI-A [Section 80C to 80U]
6) Adjustment of unexhausted basic exemption limit is also not permitted against such income.
7) Grossing up where earning given after TDS:
Income by way of winnings from lotteries / crossword puzzles / card game or other game of any
short exceeding ₹ 10,000/- and from Horse Races [Not a camel Races] exceeding ₹ 10,000 is
subject to TDS u/s 194B or 194BB. [TDS Rate is 30%]
Thus, it is included in total income of the assessee after being grossed up as follows:
Gross Winnings= [Net winnings × 100 / (100 - Rate of TDS)]
Notes:
a) Income derived from owning & maintaining racehorses is not a casual income and normal
slab rate will be applicable on such income.
b) Income of jockey: Income of jockey from such profession is not treated as winning from horse
races.
c) Winning from a motor car rally: Winning from a motor car rally is a return for skill and effort
and cannot be treated as casual income but taxable as normal income
SUM RECEIVED UNDER A KEYMAN INSURANCE POLICY
Any sum received under a Keyman insurance policy (including any bonus) is chargeable under the
head “IOS” if such income is not chargeable under the head “PGBP” or under the head “Salaries” i.e. if
such sum is received by any person [Family Members] other than the employer who took the policy
(PGBP Income) and the employee in whose name the policy was taken (Salary Income).
Note:
(i) If it is received by Employer: PGBP
(ii) If it is received by Employee: Salary
[Sum received under a Keyman insurance policy is not exempt under section 10(10D)]

IOS SATC 7.3

INTEREST ON COMPENSATION OR ENHANCED COMPENSATION
As per section 145(1), income chargeable under the head “Profits and gains of business or profession”
or “Income from other sources”, shall be computed in accordance with either cash or mercantile
system of accounting regularly employed by the assessee.
Section 145B(1) provides that notwithstanding anything contained in section 145(1), the interest
received by an assessee on compensation or on enhanced compensation shall be deemed to be his
income for the year in which it is received, irrespective of the method of accounting followed by
the assessee.
Section 56(2)(viii) provides that income by way of interest received on compensation or on enhanced
compensation referred to in section 145B(1) shall be assessed as “Income from other sources” in
the year in which it is received.
Interest received on compensation/enhanced compensation deemed to be income in the year

of receipt and taxable under the head “Income from Other Sources”.
Note: A fixed deduction of 50% of interest received will be allowed under section 57 irrespective
of actual expenses.
Advance forfeited due to failure of negotiations for transfer of a capital asset to be

taxable as “Income from other sources” [Section 56(2)(ix)]
(For Detailed Discussion – Refer Capital Gain chapter)
1. Prior to A.Y. 2015-16, any advance retained or received in respect of a negotiation for transfer
which failed to materialise is reduced from the cost of acquisition of the asset or the written down
value or the fair market value of the asset, at the time of its transfer to compute the capital gains
arising therefrom as per section 51. In case the asset transferred is a long-term capital asset,
indexation benefit would be on the cost so reduced.
2. With effect from A.Y. 2015-16, section 56(2)(ix) provides for the taxability of any sum of money,
received as an advance or otherwise in the course of negotiations for transfer of a capital asset.
Such sum shall be chargeable to income-tax under the head ‘Income from other sources’, if
such sum is forfeited and the negotiations do not result in transfer of such capital asset.
3. In order to avoid double taxation of the advance received and retained, section 51 was
amended to provide that where any sum of money received as an advance or otherwise in the
course of negotiations for transfer of a capital asset, has been included in the total income of the
assessee for any previous year, in accordance with section 56(2)(ix), such amount shall not be
deducted from the cost for which the asset was acquired or the written down value or the fair market
value, as the case may be, in computing the cost of acquisition.
4. It may be noted that advance received and forfeited upto 31.3.2014 has to be reduced from cost of
acquisition while computing capital gains, since such advance would not have been subject to tax
under section 56(2)(ix). Only the advance received and forfeited on or after 1.4.2014 would be
subject to tax under section 56(2)(ix). Hence, such advance would not be reduced from the
cost of acquisition for computing capital gains.
Compensation or any other payment received in connection with termination of his

employment [Section 56(2)(xi)]
Any compensation or any other payment, due to or received by any person, by whatever name
called, in connection with the termination of his employment or the modification of the terms and
conditions relating thereto shall be chargeable to tax under this head.

IOS SATC 7.4

Taxability of Family Pension
1) Family pension means pension received by the family members of the deceased employee. It is
chargeable to tax under the head ‘Income from Other Sources’.
2) Deduction u/s 57: Least of the following is allowed as a deduction:
(a) 1/3rd of such income

(b) Statutory Limit: ₹ 15,000
Note: This Deduction would not be available in case of an employee, being an assessee,
who opts for the provisions of section 115BAC.
3) Exemptions:
(a) any income by way of—

i. pension received by an individual who has been in the service of the Central Government
or State Government and has been awarded "Param Vir Chakra" or "Maha Vir Chakra" or
"Vir Chakra" or such other gallantry award as the Central Government may, by notification in
the Official Gazette, specify in this behalf;
ii. family pension received by any member of the family of an individual referred to in sub-
clause (i).
is exempt in full [Section 10(18].
(b) Family pension received by the widow or children or nominated heirs, as the case may be, of
a member of the armed forces (including para-military forces) of the Union, where the
death of such member has occurred in the course of operational duties, in such circumstances
and subject to such conditions, as may be prescribed; is exempt in full [Section 10(19)].
Lump sum payment made gratuitously or by way of compensation or otherwise to widow / legal heirs of an
employee, who dies while in service, will not be taxable under the Act. [CBDT Circular]
Ex-gratia payment received, by a person or his legal heir, from the Central / State Govt. / Local Authority /
Public Sector Undertaking, consequent upon injury to the person / death of a family member, while on duty,
will not be taxable under the Act. [CBDT Circular]
Taxability of Allowances to MLA/MP

A member of the Parliament or the State legislature is not treated as employee of the Government.
Payment received by them shall be taxable under the head “Income from other sources”.
However, Daily Allowances & Constituency Allowances to MLA & MP are exempt from tax u/s
10(17).
Note: This exemption would not be available in case of an Individual, being an assessee, who
opts for the provisions of section 115BAC.
METHOD OF ACCOUNTING [SECTION 145]

Income chargeable under the head “Income from other sources” has to be computed in accordance
with the cash or mercantile system of accounting regularly employed by the assessee.

IOS SATC 7.5

TAXABILITY OF INTEREST ON SECURITIES
Interest on securities may be taxed on Receipt basis or on Due basis, depending on the system of
accounting adopted by the assessee. If no system of accounting is followed, it will be taxable on
‘DUE’ basis.
LIABILITY FOR TAX: The person who owns the security on the due date of payment of interest is
liable for the entire interest even if he is not the owner for the entire period to which the interest
relates.
INTEREST AFTER TDS: If interest is received after TDS, then such amount is required to be grossed
up to include in the total income. The interest is grossed up as follows:-
Gross Interest = [Net Interest × 100 / (100 – Rate of TDS)]
Note:
1. Rate of TDS (under Section 193) is 10%.
2. In case of Govt. Securities – Rate of TDS is NIL (refer TDS chapter also – Section 193)
a. No TDS upto ₹ 10,000 in case of interest from investment in 7.75 % GOI Saving (taxable
bonds) 2018
b. No TDS upto ₹ 10,000 in case of interest from investment in 8% Taxable Saving Bonds
2003
3. No TDS is deductible if debentures is issued by a widely held company if interest is paid
/payable to a Resident Individual/HUF by an account payee cheque & the aggregate amount of
such interest during the FY does not exceeds ₹ 5,000.

IOS SATC 7.6

Section 10(15) – Interest on Securities (Exempted income)
1. Interest, premium on redemption or other payment on notified securities, bonds or certificates

Interest from Post Office Saving Bank Accounts is exempt to the extent of ₹ 3,500 in case of
an Individual Account and ₹ 7,000 in the case of Joint Account.
2. Interest in the hands of an individual and Hindu undivided family from Specified Relief Bonds
3. Interest payable by public sector companies on certain specified bonds and debentures
subject to the conditions which the Central Government may specify by notification, including the
condition that the holder of such bonds or debentures registers his name and holding with that
company;
Accordingly, the Central Government has specified tax free bonds issued by India Infrastructure
Company Ltd. and tax free, secured, redeemable, non-convertible Bonds of the Indian Railway
Finance Corporation Ltd. (IRFCL), National Highways Authority of India (NHAI), Rural Electrification
Corporation Ltd. (RECL), Housing and Urban Development Corporation Ltd. (HUDCL), Power
Finance Corporation (PFC),Jawaharlal Nehru Port Trust, Dredging Corporation of India Limited,
Ennore Port Limited and The Indian Renewable Energy Development Agency Limited, the interest
from which would be exempt under this section.
4. Interest on securities held by the Welfare Commissioner, Bhopal Gas Victims OR deposits for the
benefit of the victims of the Bhopal gas leak disaster.
5. Interest on Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit
certificates issued under the Gold Monetisation Scheme, 2015
6. Interest on specified bonds issued by a local authority or by a State Pooled Finance Entity.
“State Pooled Finance Entity” means such entity which is set up in accordance with the guidelines
for the Pooled Finance Development Scheme notified by the Central Government in the Ministry
of Urban Development.
Accordingly, the Central Government has specified the “Tax-free Pooled Finance Development
Bonds” under Pooled Finance Development Fund Scheme of Government of India, interest
from which would be exempt under section 10(15).

IOS SATC 7.7

Interest from non-SLR Securities of Banks: Whether chargeable under the head “Profits and
gains of business or profession” or “Income from other sources”? [Circular No. 18, dated
2.11.2015]
Section 56(1)(id) provides that income by way of interest on securities shall be chargeable to income-
tax under the head "Income from Other Sources", if the income is not chargeable to income-tax
under the head "Profits and Gains of Business and Profession".
The CBDT clarified that the investments made by a banking concern are part of the business of
banking. Therefore, the income arising from such investments is attributable to the business of
banking falling under the head "Profits and Gains of Business and Profession".
Interest income taxable under the head “Other Sources”:

1. Interest from Tax Saving Bonds
 Investment in Notified Tax saving bonds is eligible for Deduction under Section 80C
2. Interest from Monthly Income Scheme of Post office

3. Interest from NSC
 Investment in NSC is eligible for deduction under Section 80C
 Accrued Interest from NSC is also eligible for deduction under Section 80C
4. Interest from Bank FD
 Investment in 5 Years notified FD is eligible for deduction under Section 80C
 Interest income is eligible for deduction under section 80TTB
5. Interest from Saving Bank Interest (any Bank)
 Such interest income is eligible for Deduction under Section 80TTA/80TTB
Section 10(4) – Interest Income from Non Resident External Account

In the case of an individual, any income by way of interest on moneys standing to his credit in a Non-
Resident (External) Account in any bank in India in accordance with the Foreign Exchange
Management Act, 1999, is exempt.
Provided such individual is a person resident outside India as per FEMA Act or is a person who has
been permitted by the Reserve Bank of India to maintain the aforesaid Account
Section 10(11) – Interest from PPF

Any payment (including interest income) from a Public Provident Fund is exempt. [Amount deposited in
PPF will qualify for deduction u/s 80C]
Section 10(11A) – Interest from SSA

Any payment including interest Income from account opened as per Sukanya Samriddhi Account Rules
2014 is exempt from tax. [Amount deposited in SSA will qualify for deduction u/s 80C]

IOS SATC 7.8

BOND WASHING TRANSACTIONS [Section 94]
A bond-washing transaction is a transaction where securities are sold some time before the due date
of interest and reacquired after the due date is over. This practice is adopted by persons in the higher
income group to avoid tax by transferring the securities to their relatives/friends in the lower income
group just before the due date of payment of interest.
In such a case, interest would be taxable in the hands of the transferee, who is the legal owner of
securities. In order to discourage such practice, section 94(1) provides that where the owner of a
security transfers the security just before the due date of interest and buys back the same immediately
after the due date and interest is received by the transferee, such interest income will be deemed
to be the income of the transferor and would be taxable in his hands.
NOTE: CONCEPT OF DIVIDEND STRIPPING & BONUS STRIPPING ARE COVERED IN CAPITAL
GAIN CHAPTER.

IOS SATC 7.9

DEDUCTIONS ALLOWABLE [SECTION 57]
The income chargeable under the head “Income from other sources” shall be computed after
making the following deductions:
(i) In the case of dividend income or income in respect of units of a mutual fund (as specified
in Section 10(23D)] or income in respect of units of a specified company (as defined in
Section 10(35):
Only Interest expenditure to earn such income is allowed as deduction subject to a

maximum of 20% of such income included in the total income, without deduction under
this section.
(ii) In the case of interest on securities:

Any reasonable sum paid by way of commission or remuneration to a banker or any other person
for the purpose of realising such interest on behalf of the assessee.
(iii) Income consists of recovery from employees as contribution to any provident fund etc. in
terms of section 2(24)(x):
A deduction will be allowed in accordance with the provisions of section 36(1)(va) i.e., to the
extent the contribution is remitted before the due date under the respective Acts.
(iv) Where the income to be charged under this head is from letting on hire of machinery, plant
and furniture, with or without building:
The following items of deductions are allowable in the computation of such income:
a) the amount paid on account of any current repairs to the machinery, plant, furniture or
building.
b) the amount of any premium paid in respect of insurance against risk of damage or
destruction of the machinery or plant, furniture or building.
c) the normal depreciation allowance in respect of the machinery, plant or furniture, due
thereon.
(v) In the case of income in the nature of family pension:

A deduction of a sum equal to 33-1/3 per cent of such income or ₹ 15,000, whichever is less,
is allowable.
For the purposes of this deduction, “family pension” means a regular monthly amount
payable by the employer to a person belonging to the family of an employee in the event of
his death.
(vi) Any other expenditure not being in the nature of capital expenditure laid out or expended
wholly and exclusively for the purpose of making or earning such income.
(vii) In case of income by way of interest on compensation/ enhanced compensation received

chargeable to tax under section 56(2)(viii):
Deduction of 50% of such income. No deduction would be allowable under any other clause
of section 57 in respect of such income.

IOS SATC 7.10

DEDUCTIONS NOT ALLOWABLE [SECTION 58]
Following expenditures shall not be deducted from any income under this head:
S. No. Deduction not allowable
1 Any personal expense of the assessee
2 Any interest chargeable to tax under the Act which is payable outside India on which
tax has not been paid or deducted at source.
3 Any payment chargeable to tax under the head “Salaries”, if it is payable outside India
unless tax has been paid thereon or deducted at source.
4 30% of expenditure in respect of sum which is payable to a resident on which tax is

deductible at source, if such tax has not been deducted OR after deduction has
not been paid on or before the due date of return specified in section 139(1)
[Similar to Section 40(a)(ia) - PGBP]
5 Any expenditure in respect of which a payment is made to a related person, to the

extent the same is considered excessive or unreasonable by the Assessing Officer,
having regard to the FMV. [Similar to Section 40A(2) - PGBP]
6 Any expenditure in respect of which a payment or aggregate payments exceeding

₹ 10,000 is made to a person in a day otherwise than by account payee cheque or draft
or ECS through bank account or through such other prescribed electronic mode
such as credit card, debit card, net banking, IMPS, UPI, RTGS, NEFT, and BHIM
Aadhar Pay. [Similar to Section 40A(3) - PGBP]
7 Any expenditure or allowance in connection with income by way of earnings from

lotteries, cross word puzzles, races including horse races, card games and other
games of any sort or from gambling or betting of any form or nature.
Above provision shall not apply in computing the income of an assessee, being the
owner of horses maintained by him for running in horse races, from the activity of
owning and maintaining such horses.
In respect of the activity of owning and maintaining race horses, expenses incurred
shall be allowed even in the absence of any stake money earned. Such loss shall be
allowed to be carried forward in accordance with the provisions of section 74A
[Refer set-off of loss chapter for Section 74A].
DEEMED INCOME CHARGEABLE TO TAX [SECTION 59]

The provisions of section 41(1) [Refer PGBP Chapter] are made applicable, so far as may be, to the
computation of income under this head, as they apply in computing the income of an assessee
under the head "Profits and gains of business or profession"
Accordingly, where –
a) An allowance or deduction has been allowed for any year in respect of loss, expenditure or
trading liability incurred by the assessee; and
b) Subsequently, any amount is obtained, as revocation of such loss, expenditure or remission of
liability, whether in cash or in any other manner, during any previous year,
- then such amount received or amount remitted shall be charged to tax.
Note: Above provision holds good even in case of succession or inheritance.

IOS SATC 7.11

TAXABILITY OF GIFTS
Section 56(2)(vii) - Taxability from 01.10.2009 to 31.03.2017: - INDIVIDUAL/HUF

Section 56(2)(x) - Taxability from 01.04.2017: - ANY PERSON
Gift of any sum of money or property or transfer of property for inadequate consideration on or
after 1st April, 2017 to be subject to tax in the hands of Any Person as IOS subject to the following:
Nature of asset Particulars Taxable value
Money Without consideration The whole of aggregate amount if the same
exceeds ₹ 50,000.
Movable property Without consideration The aggregate Fair Market Value (FMV) of the
property, if it exceeds ₹ 50,000.
Movable property Inadequate consideration The difference between the aggregate FMV
and the consideration, if such difference
exceeds ₹ 50,000.
Immovable property Without consideration The Stamp Duty Value [SDV] of the property,
if it exceeds ₹ 50,000.
[Each Property Separately]
Immovable property Inadequate consideration The difference between the SDV and the
consideration, if such difference exceeds
(amended by FA 20)
higher of the following amount:
a) ₹ 50,000 or
b) 10% of the consideration
[Each Property Separately]
Further, the difference between SDV & actual purchase consideration shall be taxable under
section 56(2)(x) only if SDV exceeds 120% of the purchase consideration, if the following
conditions are satisfied, namely:-
i. the transfer of such residential unit takes place during the period beginning from the
12th day of November, 2020 and ending on the 30th day of June, 2021;
ii. such transfer is by way of first time allotment of the residential unit to any person; and
iii. the consideration paid as a result of such transfer by the purchaser does not exceed ` 2
crore
"Residential unit" means an independent housing unit with separate facilities for living,
cooking and sanitary requirement, distinctly separated from other residential units within the
building, which is directly accessible from an outer door or through an interior door in a
shared hallway and not by walking through the living space of another household.
[Amended by Finance Act 2021, effective from AY 2021-22]

IOS SATC 7.12

Note:
1) Gift provisions will not be applicable if property is received as stock in trade, consumable
stores and raw materials.
2) Sum of money may includes not only cash but also cheque, drafts, fixed deposits receipts or a
NSC (alternate view possible) since it represents a sum of money though not in cash.
3) For this purpose, “property” means the capital Asset of the assessee namely immovable
property being land or building or both, shares and securities, jewellery, archaeological collections,
drawings, paintings, sculptures or any work of art or bullion.
4) Stamp Duty Value means the value adopted by any authority for the purpose of payment of stamp
duty in respect of an immovable property.
5) If the Stamp Duty Value of immovable property is disputed by the assessee, the AO may refer
the valuation of such property to a Valuation Officer. In such a case, the provisions of section
50C shall, as far as may be, apply for determining the value of such property. – CG Class
6) When date of agreement and date of registration are not same - Where the date of an
agreement fixing the value of consideration for the transfer of the asset and the date of registration
of the transfer of the asset are not same, the stamp duty value may be taken as on the date of the
agreement for transfer and not as on the date of registration for such transfer. However, this
exception shall apply only in those cases where amount of consideration (or a part thereof) for the
transfer has been paid by way of an account payee cheque or an account payee draft or by
use of electronic clearing system through a bank account or through such other electronic
modes as may be prescribed on or before the date of the agreement.
The prescribed electronic modes notified are credit card, debit card, net banking, IMPS
(Immediate payment Service), UPI (Unified Payment Interface), RTGS (Real Time Gross
Settlement), NEFT (National Electronic Funds Transfer), and BHIM (Bharat Interface for
Money) Aadhar Pay as other electronic modes of payment.

IOS SATC 7.13

Exceptions: However, any gift received from following ways would be outside the ambit of
Section 56(2)(x):
(1) from any relative; or

(2) on the occasion of the marriage of the individual; or
(3) under a will or by way of inheritance; or
(4) in contemplation of death of the payer or donor, as the case may be; or
(5) from any local authority; or
(6) from any fund or foundation or university or other educational institution or hospital or other
medical institution or any trust or institution referred to in section 10(23C); or
(7) by any fund or trust or institution or university or other educational institution or hospital or
other medical institution referred to in section 10(23C)(iv)/(v)/(vi)/(via);
(8) from or by any trust or institution registered under section 12AA or Section 12AB
[Charitable or Religious Trust]
(9) from an Individual by a Trust created or established solely for the benefit of relative of the
Individual.
(10) From HUF on Total/Partial Partition of HUF to members
(11) Asset received by Amalgamated Indian company from Amalgamating company
(12) From Holding Company to 100% Subsidiary Company or vice versa where transferee is an
Indian Company.
(13) Asset received by Indian Resulting Company from Demerged company in a demerger
(14) Any shares received by shareholders under Amalgamation/Demerger which is not regarded
as Transfer u/s 47.
(15) from such class of persons and subject to such conditions, as may be prescribed.
 For the purpose of this clause, the expression “RELATIVE” means

In Case of Individual:
(i) spouse of the individual,
(ii) brother or sister of the individual,
(iii) brother or sister of the spouse of the individual,
(iv) brother or sister of either of the parents of the individual,
(v) any lineal ascendant or descendant of the individual,
(vi) any lineal ascendant or descendant of the spouse of the individual, and
(vii) spouse of a person referred to in items (ii) to (vi) mentioned above.
In Case of HUF: Any Member
Clubbing Provisions: As per Section 64(2), if a member of the HUF converts his separate
property into the property belonging to the family otherwise than for adequate consideration, the
income derived from the converted property shall be deemed to arise to the individual and
not the family.
[Rule 11U, Rule 11UA, Rule 11UAA, Rule 11UAB & 11UAC is not in CA-Intermediate Syllabus]

IOS SATC 7.14

Class Notes

IOS SATC 7.15

Class Notes

IOS SATC 7.16

TAXABILITY OF DIVIDEND INCOME
Basis of charge of dividend

Any income by way of dividends received from a company, whether domestic or foreign, is taxable in
the hands of shareholder at normal rates of tax.
Important Points
1) Dividend received from a Foreign Company is taxable in hands of shareholder at the normal tax
rates subject to Section 115BBD.
2) Dividends from cooperative society are Taxable in the hands of members.
TAXATION OF CERTAIN FOREIGN DIVIDEND @ 15% [Section 115BBD]
1. Section 115BBD provides that where Total Income of an Indian Company includes any dividend
income received from a foreign specified company, then such dividends shall be taxable at the
rate of 15% (plus applicable surcharge and cess) on the gross amount of dividends.
2. No expenditure in respect of such dividends shall be allowable under the Act.
3. Specified Foreign Company means a foreign company in which the Indian Company holds 26%
or more in nominal value of the equity share capital of the company.
SECTION 194 [TDS on Dividend payable to Resident Shareholders]
1. Applicability of TDS under section 194

The principal officer of a domestic company is required to deduct tax on dividend distributed or paid
by it to its resident shareholders.
2. Rate of TDS
The rate of deduction of tax in respect of such dividend is 10%.
3. Time of tax deduction at source

The deduction of tax has to be made before making any payment by any mode in respect of any
dividend or before making any distribution or payment to a resident shareholder of any amount
deemed as dividend under section 2(22)(a)/ (b)/(c)/(d)/(e).
4. Non-applicability of TDS under section194

i. No tax is to deducted in case of a shareholder, being an individual, where -
a. the dividend is paid by any mode other than cash; and
b. the amount of such dividend or aggregate of dividend distributed or paid or likely to be
distributed or paid during the financial year by the company to such shareholder does not
exceed ₹ 5,000.
ii. The TDS provisions will not apply to such dividend credited or paid to LIC, GIC, subsidiaries
of GIC or any other insurer provided the shares are owned by them, or they have full beneficial
interest in such shares

IOS SATC 7.17

iii. Dividend income credited or paid to a "Business Trust" by a Special Purpose Vehicle (an
Indian company in which Business Trust holds controlling interest);
iv. Dividend income credited or paid to any other person as may be notified by the Central
Government in the Official Gazette in this behalf.
Inserted by the Finance Act 2021, effective from 01.04.2020
SECTION 194K [TDS on Income in respect of Units]
Applicability and rate of tax

Section 194K provides for deduction of tax at source @10% by any person responsible for paying to a
resident any income in respect of –
a. units of a Mutual fund
b. units from Administrator of the specified undertaking (units of UTI)
c. units from the specified company
Time of deduction
The deduction is to be made at the time of credit of such sum to the account of the payee or at the time
of payment by any mode, whichever is earlier.
Non-applicability of section 194K
No tax is required to be deducted if -

a. the amount of such income or the aggregate of the amounts of such income credited or paid
or likely to be credited or paid during a financial year does not exceed ₹ 5,000; or
b. the income is of the nature of capital gains.

IOS SATC 7.18

DEEMED DIVIDEND [Section 2(22)]
a) Distribution of accumulated profits, entailing the release of company’s assets -

Any distribution of accumulated profits, whether capitalised or not, by a company to its shareholders
is dividend if it entails the release of all or any part of its assets.
For example, if accumulated profits are distributed in cash, it is dividend in the hands of the share-
holders.
Where accumulated profits are distributed in kind, for example by delivery of shares etc. entailing
the release of company’s assets, the market value of such shares on the date of such distribution
is deemed as dividend in the hands of the shareholder.
b) Distribution of debentures, deposit certificates to shareholders and bonus shares to

preference shareholders –
Any distribution of debentures / debenture-stock / deposit certificates etc. by a company to its
shareholders
OR
Any distribution of shares by way of bonus by a company to its preference shareholders shall be
deemed to be the dividend to the extent the company possesses accumulated profits whether
capitalized or not.
Note:
(i) For the purpose of CG, the COA of above debenture in the hands of the shareholders shall be
taken to be NIL
(ii) Bonus shares given to equity shareholders are not treated as dividend.
c) Distribution on Liquidation:
Any distribution made by a company to the shareholders (equity only) on its liquidation shall be
deemed to be the dividend to the extent of accumulated profits of the company standing
immediately before its liquidation whether capitalized or not.
d) Distribution on Reduction of Capital :

Any Distribution by company to its shareholders (equity only) on reduction of its capital shall be
deemed to be the dividend to the extent to which company possesses accumulated profits whether
capitalized or not. Sec. 2(22)(d)
Example: A Ltd. Has issued bonus shares to its equity shareholders. Subsequently company has
reduced its share capital and refunded the amount so reduced to the shareholders. The amount so
received by the shareholders to the extent of accumulated profit (whether capitalized or not) will be
considered as dividend.
e) Advance or loan by a Closely Held Company to its Shareholder [Sec. 2(22)(e)] – 5 Marks
Any payment, by a closely held company, of any sum by way of loan or advance:
 to a shareholder, being the beneficial owner of shares holding not less than 10% of voting
power, OR
 to any concern, in which such a shareholder is a member/partner and in which he has a
substantial interest, OR
 to any persons on behalf of or for the individual benefit of such a shareholder,
shall be deemed to be the dividend to the extent to which the company possesses accumulated
profits.

IOS SATC 7.19

Notes
1) Following conditions must be satisfied on the date on which loan/advance is given to the
shareholder/concern/any other person by a closely held company in order to attract section
2(22)(e):
(a) Beneficial owner of shares (b) Holding 10% or more voting power (c) Member/ Partner in
concern
2) Where loan is given and accumulated profits exceeds the loan, then the entire loan will be deemed
as dividend. No consideration is to be given to the proportionate share of the assessee in the
accumulated profits.
3) If any such loan was given to more than such shareholders, accumulated profits shall be reduced
by the amount of the loan given to the earlier shareholders.
4) Dividend shall not include any advance or loan made to a shareholder or a concern by a
company in the ordinary course of its business where the money lending is substantial part of the
business of the company.
5) Buy Back of Own Shares: Any payment made by a company on purchase of its own shares from
a shareholder is not a deemed dividend.
6) Any distribution of shares on demerger by the resulting companies to the shareholders of the
demerged company (whether or not there is a reduction of capital in the demerged company), is
not a deemed dividend.
Clarification regarding trade advance not to be treated as deemed dividend under section
2(22)(e) [Circular No. 19/2017, dated 12.06.2017]
Section 2(22)(e) provides that "dividend" includes any payment by a company in which public are not
substantially interested, of any sum by way of advance or loan to a shareholder who is the beneficial
owner of shares holding not less than 10% of the voting power, or to any concern in which such
shareholder is a member or a partner and in which he has a substantial interest or any payment by any
such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which
the company in either case possesses accumulated profits.
The CBDT observed that some Courts in the recent past have held that trade advances in the nature of
commercial transactions would not fall within the ambit of the provisions of section 2(22)(e) and such
views have attained finality.
In view of the above, the CBDT has, vide this circular, clarified that it is a settled position that trade
advances, which are in the nature of commercial transactions, would not fall within the ambit of the
word 'advance' in section 2(22)(e) and therefore, the same would not to be treated as deemed
dividend.

IOS SATC 7.20

Share premium in excess of the FMV to be treated as income [Section 56(2)(viib)]
1. Section 56(2)(viib) provides that where a company, not being a company in which the public
are substantially interested (i.e. Closely held Company), receives any consideration from issue
of shares in excess of the face value of such shares from any person being a resident, then
consideration as exceeds from FMV of the shares shall be chargeable to income tax under the
head “IOS”
2. However, the above provision shall not apply where the consideration is received F
a) by a Venture Capital Undertaking from a Venture Capital Company or a Venture Capital I
Fund or a specified fund, or N
b) by a company from a class or classes of persons as may be notified by the Central A
Government in this behalf. L
3. Fair market value of the shares shall be the higher of, the value as may be –
a) determined in accordance with the prescribed method; or
b) substantiated by the company to the satisfaction of the Assessing Officer, based on the
value of its assets on the date of issue of shares.
For the purpose of computation of FMV, the value of assets would include the value of
intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises
or any other business or commercial rights of similar nature.

IOS SATC 7.21

Class Notes

IOS SATC 7.22

Class Notes

IOS SATC 7.23

PREVIOUS YEAR FOR UNDISCLOSED SOURCES OF INCOME
Unexplained Cash Credits [Sec. 68]

 The sum is found credited in the books of assessee.
 He offers no explanation about its nature and source OR the explanation offered is not satisfactory
in the opinion of AO
 The amount so credited is treated as the income of the Previous Year in which the same is
found credited.
Note:
Section 68 further provides that the nature and source of any sum credited, as share application
money, share capital, share premium etc., in the books of a closely held company shall be treated
as explained only if the source of funds is also explained by the assessee company in the hands
of the resident shareholder (other than SEBI regulated entity) and such explanation in the
opinion of the AO is found to be satisfactory.
Unexplained Investment [Sec. 69]

 The assessee made investments which are not recorded in the books of accounts
 He offers no explanation about its nature and source OR the explanation offered is not satisfactory
in the opinion of AO
 The value of investment so made is treated as the income of the Previous Year in which the
investment is made.
Unexplained Money etc. [Sec. 69A]

 In search, the assessee was found to be owner of any money, bullion or jewellery or other valuable
article etc,
 Such money, bullion etc are not recorded in the books of accounts of the assessee
 He offers no explanation about its nature and source of acquisition or the explanation offered is not
satisfactory.
 The value of such items shall be treated as the income of that previous year in which it is
found .
Investment not fully disclosed [Sec. 69B]

 The assessee made investments or found to be owner of bullion, jewellery or other valuable article,
but has not fully recorded in his books of accounts.
 He offers no explanation about such excess amount or the explanation offered is not satisfactory.
 The excess value of the investment made shall be treated as the income of the Previous Year in
which the investment is made.
Unexplained Expenditure [Sec. 69C]

 The assessee has incurred expenditure during the financial year
 He offers no explanation about such expenditure or the explanation offered is not satisfactory.
 The amount of such expenditure shall be treated as income of the Previous Year in which it
was incurred.
Amount borrowed or repaid on Hundi other than by way of account payee cheque [Sec. 69D]
 Where any amount is borrowed on a hundi or any amount due thereon is repaid other than through
an account-payee cheque drawn on a bank,
 the amount so borrowed or repaid shall be deemed to be the income of the person borrowing or
repaying for the PY in which the amount was borrowed or repaid, as the case may be.
 However, where any amount borrowed on a hundi has been deemed to be the income of any
person, he will not be again liable to be assessed in respect of such amount on repayment of such
amount.

IOS SATC 7.24

Taxation of Cash Credit, Unexplained Money, Unexplained Investment etc. covered u/s
68, 69, 69A, 69B, 69C & 69D [Section 115BBE]
A. Section 115BBE has been inserted to tax the unexplained credits, money, investment,
expenditure, etc., which has been deemed as income under section 68, 69, 69A, 69B, 69C & 69D
Total Income of an assessee

a) includes any income referred to in Section 68, Section 69, Section 69A, Section
69B, Section 69C or Section 69D and reflected in the return of income furnished
under section 139; or
b) determined by the Assessing Officer includes any income referred to in Section

68, Section 69, Section 69A, Section 69B, Section 69C or Section 69D, if such income is
not covered under clause (a),
B. Tax Rate: 60% [plus surcharge (25%) and cess (4%) as applicable]
C. No deduction in respect of any expenditure or allowances or Set off of any loss shall be
allowed in computing above deemed income (point ‘a’ or ‘b’ above).
D. Benefit of Basic Exemption Limit is also not available while computing tax liability.

IOS SATC 7.25

Class Notes

IOS SATC 7.26

Class Notes

IOS SATC 7A.1

1. From the following particulars of Pankaj for the previous year ended 31st March 2022, Compute the
Income under the head "Income from other Sources":
₹
(i) Directors Fee from a Company 10,000
(ii) Interest on Bank Deposits 3,000
(iii) Income from undisclosed source 12,000
(iv) Winnings from Lotteries (Net) 35,000
(v) Royalty on a book written by him 9,000
(vi) Lectures in Seminars 5,000
(vii) Interest on loan given to a relative 7,000
(viii) Interest on Debentures of a Company (listed in a
Recognised Stock Exchange) Net of Taxes 6,300
(ix) Interest on Post Office Savings Bank Account 500
(x) Interest on Government Securities 2,200
(xi) Interest on Monthly Income Scheme of Post office 33,000
He paid ₹ 1,000 for typing the manuscript of book written by him.
2. Check the taxability of the following gifts received by Mrs. Rashmi during the previous year 2021-22
and compute the taxable income from gifts (under IFOS head) for AY 2022-23:
i) On the occasion of her marriage on 14.8.2021, she has received ₹ 90,000 as gift out of which
₹ 70,000 are from relatives and balance from friends.
ii) On 12.9.21, she has received gift of ₹ 18,000 from cousin of her mother.
iii) A cell phone of ₹ 21,000 is gifted by her employer on 15.8.2021.
iv) She gets a gift of ₹ 25,000 from the elder brother of her husband's grandfather on 25.10.2021.
v) She has received a gift of ₹ 2,000 from her friend on 14.4.2021.
3. A perusal of R's bank account revealed following deposits during financial year 2021-22:
Particulars Amount
(₹)
Gift from his friend on his birthday 12,000
Dividends from shares of various Indian companies (gross) 13,200
Gift from his fiancée 85,000
Gift from his mother's friend on his engagement 28,000
Gift from his sister in Netherlands 220,000
Interest on bank deposits (gross) 30,000
Compute his total income for the AY 2022-23 assuming that his income from house property
(computed) is ₹ 72,000. [Ignore TDS]
4. Mr. Ashok received a sum of ₹ 5,00,000, as gift during the FY 2021-22, the details of which are as
follows. Discuss the tax liability of the sum received.
(i) from relatives on the occasion of birthday – ₹ 1,00,000;
(ii) from an unregistered charitable institution in connection with compensation for floods – ₹ 50,000;
(iii) ₹ 1,50,000 received from friends on the occasion of birthday;
(iv) ₹ 2,00,000 received from a neighbor, who is in death bed.

IOS SATC 7A.2

5. Raman received ₹ 5 lakhs from his relatives and the parents of his wife on the occasion of their marriage on
21/09/2021. He also receives a car, some jewellery whose fair market values are ₹ 2,50,000 and ₹ 50,000
respectively and a sum of ₹ 1,50,000 from persons, other than relatives on the said occasion. His grandfather
registers in his favour, land worth ₹ 10 lakhs after a month, as his gift. Discuss the tax for AY 2022-23.
6. Mr. Ketan acquired a land at Mumbai from Mr. Agarwal for a purchase consideration of ₹ 1 Crore on
01.01.2022. The assessable value of the property for stamp duty purposes is ₹ 1.30 crore. Subsequently, in a
different transaction he was gifted with a land near Indore by his friend, the assessable value of which for
stamp duty purpose is ₹ 49,000. Advise on the taxability of these transactions.
7. Mrs. Rajni who draws a salary of ₹ 30,000 p.m. received the following gifts during the previous year:
i) Gift of ₹ 5,00,000 on 16.1.2022 from a friend,
ii) Gift of jewellery worth ₹ 4,00,000 on 17.10.2021 from her fiancée,
iii) Gift of ₹ 41,000 each received from her 4 friends on the occasion of her marriage on 21.10.2021.
iv) Gift of ₹ 1,10,000 on 22.10.2021 from her mother's sister,
v) Gift of ₹ 70,000 on 25.10.2021 from her father's brother,
vi) Gift of ₹ 40,000 from her husband's friend on 01.11.2021,
vii) Gift of ₹ 31,000 on 15.11.2021 from her mother's friend.
viii) Gift of ₹ 27,000 on 25.11.2021 from her brother's father in law.
ix) Gift of ₹ 1,21,000 from her husband's brother,
x) Gift of ₹ 23,000 from her employer.
xi) Scholarship of ₹ 2,20,000 from, a charitable institution registered u/s 12AA
xii) She has purchased an immovable property whose stamp duty value is ₹ 22,80,000 from Gita who is
not her relative for a sum of ₹ 22,60,000.
Compute her total income for the assessment year 2022-23.
8. Mr. V asks you to compute his taxable income from the following transactions which took place with
his friends during January 2022:
i) Cash gifts received during the year from Mr. X and Mr. Y: ₹ 30,000 each;
ii) Two flats gifted to him by Mr. S and Mr. T: Stamp Value ₹ 4,00,000 and ₹ 50,000 respectively;
iii) He purchased a plot of land at ₹ 6,10,000 from Mr. A, which was not registered, but the prevalent
stamp value of which was ₹ 6.6 lakh;
iv) A gold ring and a painting worth ₹ 30,000 and ₹ 35,000 respectively gifted by Mr. M and Mr. N;
v) A gold biscuit purchased by him at ₹ 10 lakh from Mr. P, when prevalent market value is ₹ 10.3 lakh
and shares and securities purchased by him at ₹ 2.5 lakh from Mr. L, when fair market value thereof
was ₹ 2.8 lakhs.
9. X receives the following gifts during the PY 2021-22:
a) On April 10, 2021, he gets a gift of ₹ 25,000 from his friend A.
b) On May 1, 2021, he gets another gift of ₹ 500 from his friend A.
c) On June 1, 2021, he gets a gift of ₹ 26,000 from C, who is cousin of his father.
d) On July 8, 2021, he gets a gift of ₹ 5,000 from D, who is elder brother of his grandfather.
e) On July 20, 2021, he gets a gift of ₹ 41,000 from his grandmother.
f) On the occasion of marriage of X, he gets ₹1,90,000 as gift on July 31, 2021 (out of which ₹ 1,00,000 is
received from different relatives of X and Mrs. X and remaining amount is received from friends of X and
Mrs. X).
g) A computer received from his employer (it was purchased for ₹ 40,000 by the employer on May 1, 2021
and given as gift on August 20, 2021).
h) On September 6, 2021, he gets ₹ 80,000 from a notified public charitable institution.
i) X receives ₹ 5,40,000 on September 30, 2021 under will of a person known to him.
j) On October 10, 2021, he gets a gift of ₹ 40,000 from his friend.
k) On December 12, 2021, he purchases a work of art for ₹ 72,000 from an exhibition in Chennai (the fair
market value of the work of art on the date of purchase is ₹ 2,00,000).
l) On March 31, 2022, he gets a birthday gift by cheque of ₹ 11,000 from his friend.
Compute the amount chargeable to tax in the hands of X under the head "Income from other
sources" for the AY 2022-23.

IOS SATC 7A.3

10. X holds the following securities on April 1, 2021:
₹ 1,48,000 10% securities of the Tamil Nadu Government and ₹ 40,000 5% non – listed debentures of
ABC Ltd. Interest in both the cases is payable on December every year. On August 1, 2021, X borrows
₹ 20,000 at 7 per cent per annum and invests it in purchasing ₹ 20,000, 7.5 per cent securities of the
Central Government [due date of interest; March 15 every year; interest due on March 15, 2022 is received
on April 2, 2022]. Interest on borrowing for the period ending March 31, 2022 is, however, paid by X on April
15, 2022. His business income is ₹ 7,86,000.
Determine the taxable income of ‘X’ for the AY 2022-23 under the following situations:
a) X maintains books of account on "mercantile" system, and
b) X maintains books of account on "cash" basis.
11. R, a resident individual, submits the following particulars of his income for the year ended 31.3.2022:
(i) Royalty from a Diamond mine ₹ 20,000.
(ii) Agricultural income in Sri Lanka ₹ 15,000.
(iii) Salary as a MP ₹ 36,000
(iv) Daily allowance as M.P. ₹ 5,000
(v) He has taken a residential house has been taken on a rent of ₹ 10,000 p.a., half of which is sublet at
₹ 1,200 p.m.
(vi) Dividend received from a cooperative society ₹ 6,000.
(vii) He has incurred the following expenses —
i) Paid collection charges ₹ 200 for collecting dividends
ii) ₹ 2000 spent for earning and collecting royalty income
Compute R's income from other sources for the assessment year 2022-23.
12. J furnishes the following particulars relating to his house properties and other incomes and
expenditure for the year 2021-22 (after HP Chapter):
A. First House: This house is taken by him on lease for 10 years which is let to a tenant, for his residence,
at a monthly rent of ₹ 2,400. He has incurred the following expenses during this year :
Lease rent ₹ 1,000 per month
Salary of Durban ₹ 200 per month
Interest on loan taken to pay for the acquisition of the lease ₹ 200 per month
B. Second House: This house was constructed by him in 1989, but was transferred to his wife in 1993 out
of love and affection. He, however, continues to stay in this house with his wife till date. He has taken a
loan for the construction of this house for which interest of ₹ 6,000 becomes due for the year, but had
not been paid by him. He has paid repair expenses of ₹ 1,000 during the year.
C. Taxable income from business for this year amounts to ₹ 64,000.
Compute gross total income of J for the AY 2022-23
13. Ms. Rupali furnishes the following details for the AY 2022-23:
Net Agricultural Income in India 4,800
Net agricultural income from land in Sri Lanka 10,000
Profit on sale of agricultural land situated in Mangalore City 25,00,000
Vacant land – ground rent received 12,000
Rent received on sub – letting house 37,500
Rent payable for house sub let 15,000
Maintenance expenses on house sublet 1,200
Directors sitting fees 3,600
Interest on Deposits with nationalized bank 1,000

IOS SATC 7A.4

Interest on Postal savings – bank account 1,200
Interest credited to PPF account 6,000
Interest accrued but not received on NSC VIII Issue 1,050
Interest received under Post Office Monthly Income Scheme 12,000
Interest on deposits with HDFC 900
Interest on securities (gross) 5,000
Dividends received from Indian Companies (gross) 12,000
Bank Charges for collection of above dividend 100
Dividend received from foreign companies 20,000
Interest paid on amount borrowed to invest in shares of foreign co. 8,600
Gift received from a Charitable Institution registered u/s 12AA 55,000
Gift from a friend in foreign currency 50,001
Gift from another friend in Indian currency 500
Winnings from Lottery (Net of Tax of ₹ 30,000) 70,000
Cost of Lottery Tickets purchased during the year 5,300
Debenture Interest on 10% debentures of ABC Ltd. of Face Value of ₹ 1,00,000 (due half yearly on 30.9 and
31.3.) but received on 15.4.2022. Compute the taxable income from other sources of Ms. Rupali, who is
following mercantile system of accounting.
14. From the following particulars, compute Gross Total Income of Radha for AY 2022-23:
(i) She is employed on a part time basis in a fashion – designing firm on a monthly salary of ₹ 15,000.
(ii) She has a house property situated in Delhi which has been let out at a rent of ₹ 3,000 p.m.
(iii) She holds the following shares and securities:
a. 1,000 Equity shares in X Ltd. of ₹ 10 each, bought @ ₹ 40 per share.
b. ₹ 20,000, 8% ICICI Bonds.
c. 1,000, 12% Preference shares of ₹ 100 each in Rosa Ltd. Dividend received on 25th March,
2022.
d. X Ltd. declared 18% equity dividend on 25th March, 2022, but the cheque was received
subsequent to 31st March, 2022. Other interest and dividends were, however, duly received.
(iv) She had set up a factory with building, plant, machinery, furniture, etc. However, she decided to give it
on hire at a composite rent of ₹ 12,000 p.m.
During the year, she spent ₹ 15,000 for repairs and ₹ 5,000 for insurance of the factory. The depreciation
allowable is ₹ 50,000. She had borrowed ₹ 5,00,000 against mortgage of these assets and paid ₹ 60,000
interest thereon. The amount was spent for marriage of her brother.
15. Mr. ‘M’ a Government Servant, died on 11.5.2008 whilst still being in service. In terms of the rules governing
his service, his widow Mrs. M, is paid, a Family Pension of ₹ 2,950 p.m. and Dearness Allowance of 30%
thereof. For the AY 2022-23, is Mrs. M assessable on the receipt and if so, under what head of income?
Is she entitled to any relief or deduction on the above sum? Discuss.
16. Mr. B, a defence personnel, was killed in a war. His wife was paid an ex-gratia payment of ₹ 1,00,000 in
February, 2022. She also received the family pension of ₹ 7,500 per month during the year 2021-22. Advise
her on the taxability of receipts.
17. M/s. Rama InfoTech Ltd. has taken a Keyman insurance policy for a sum of ₹ 25 lakhs in the name of Mr.
Rakesh, who is heading the software division of the company. The annual premium paid by the company
towards the policy is ₹ 2 lakhs. Examine the tax consequence assuming that the maturity proceeds are
received by:
i) Mr. Rakesh;
ii) company;
iii) assigned to Mrs. Rakesh.

IOS SATC 7B.1

SOLUTION – SET A
1. Computation of income under the head 'Income from other sources'
₹ ₹
General incomes [Section 56(1)]
Directors Fee from a Company 10,000
Interest on bank Deposits 3,000
Income from undisclosed source 12,000
Royalty on a book written by him 9,000
Less: Expenses 1,000 8,000
Lectures in Seminars 5,000
Interest on loan given to a relative 7,000
Interest on Debentures of a Company (listed in a
Recognized Stock Exchange) Net of Taxes (as per W.N. 1) 7,000
Interest on Post Office Savings Bank Account 500
Less: Exempt u/s 10 500 Nil
Interest on Government Securities 2,200
Interest on Monthly Income Scheme of Post office 33,000
Specific incomes [Section 56(2)]
Winnings from Lotteries (Gross) 50,000
Income from other sources 1,37,200
Working Notes:
1. Interest on Debentures of a Company
(Listed in a Recognized Stock Exchange)
Net of Taxes ₹ 6,300
Add: TDS
₹ 6,300 x 10/(100 - 10) ₹ 700
Gross Amount ₹ 7,000
2. Computation of taxable income of Mrs. Rashmi from gifts for A.Y. 2022-23
Relationship Taxability Reason for taxability or otherwise of each gift
amount
₹
Relatives and friends Not Taxable Gifts received on the occasion of marriage are not taxable.
Cousin of Mrs. Rashmi's mother 18,000 Cousin of Mrs. Rashmi's mother is not a relative. Hence, the
gift is taxable.
Employer Nil Taxable Under the head Salary
Elder brother of husband's 25,000 Brother of husband's grandfather is not a relative. Hence, the
grandfather gift is taxable.
Friend 2,000 Gift from friend is taxable.
Aggregate value of gifts 45,000
Since the aggregate value of gifts received by Mrs. Rashmi during the previous year 2021-22 does not
exceed ₹ 50,000, the same is not chargeable to tax under section 56(2)(x) of the Income-tax Act, 1961.
3. Computation of total income of Ram Mohan (All Amount in ₹)

Gift from his friend on his birthday 12,000
Gift from his fiancée 85,000
Gift from Ms mother's friend on his engagement 28,000
Gift from his sister Not Taxable
Interest on bank deposits 30,000
Dividends from shares of various companies 13,200 168,200
Total income 240,200

IOS SATC 7B.2

4.
1. any sum of money received from relatives is fully exempt from tax and therefore, ₹ 1,00,000/- is fully
exempt.
2. exemption for any sum received from trust, institution is applicable only where such trust or institution is
covered by sections 10(23C) or 12AA. In the given case, entire sum of ₹ 50,000/- is chargeable to tax as
it is an unregistered charitable institution.
3. ₹ 1,50,000/- is chargeable to tax.
4. Any sum received in contemplation of death of the payer shall be exempt from
tax. Accordingly, ₹ 2,00,000/- shall be exempt.
5. To sum up, Mr. Ashok is chargeable to tax for a sum of ₹ 2,00,000/- under the head income from other
sources. The entire sum of ₹ 2,00,000/- is chargeable as the aggregate of the sum received during the
year exceeded ₹ 50,000/-.
5. Gifts' received on the occasion of marriage of an individual is fully exempt irrespective of whether the donors
are relatives or not. Therefore, Raman cannot be taxed in respect of the gifts received on the occasion of the
marriage. As regards land registered one month after marriage is not taxable because the gift has been
received from a relative.
6. Where an immovable property is acquired for a inadequate consideration, the same is covered in the scope of
taxability u/s 56. In the given case, difference of ₹ 30,00,000 will be taxable as a gift as it exceeds higher of
110% of the consideration or ₹ 50,000.
Whereas in the second transaction, the taxability does not arise as the assessable value of land is less than
₹ 50,000 though the land is received without Consideration.
7.
₹ ₹
Income under the head salary
Salary ₹ 30,000 x 12 3,60,000
Add : Cash gift from employer 23,000
3,83,000
Less : Standard deduction u/s 16(ia) 50,000 3,33,000
(i) Gift from a friend is taxable 5,00,000
(ii) Gift of jewellery is taxable 4,00,000
(iii) Gifts received from her 4 friends are exempt as they
have been received on the occasion of her marriage —
(iv) Gift from her mother's sister is exempt as the donor is
covered in the definition of relative —
(v) Gift from her father's brother is exempt as the donor is
covered in the definition of relative —
(vi) Gift of ₹ 40,000 from her husband's friend on 1.11.2021
is taxable. 40,000
(vii) Gift of ₹ 21,000 from her mother's friend is includible 31,000
(viii) Gift from her brother's father in law is taxable as the donor
is not covered in the definition of relative 27,000
(ix) Gift from her husband's brother is exempt as the donor
is covered in the definition of relative —
(x) Gift from her employer is taxable as income from salary —
(xi) Gift in the form of scholarship from charitable
institution registered u/s 12AA Exempt
(xii) Purchase of immovable property – Not taxable -
9,98,000

IOS SATC 7B.3

8. Mr. V has received cash and various items of property which are covered by section 56(2)(x). Hence, the
taxability of these amounts in view of said section is as follows -
Aggregate cash gifts exceeding ₹ 50,000 from Mr. X and Mr. Y (fully taxable, 30000 x 2) 60,000
Gift of Flat from Mr. B (fully taxable, as stamp value exceeds ₹ 50,000) 400,000
Gift of Flat from Mr. C (not taxable, as stamp value doesn't exceed ₹ 50,000) NIL
Plot of land acquired for inadequate consideration NIL
Aggregate value of gift of movable properties: Total value of gift of movable properties exceeds 65,000
₹ 50,000, hence, fully taxable. (30000 + 35000)
Aggregate value of inadequate consideration of movable properties: Total price paid for all 60,000
movable properties ₹ 12,50,000 (10 lakh + 2.5 lakh). Total Fair market value of such movable
properties ₹ 13,10,000 (10.3 lakh + 2.8 lakh). Since the difference between the two exceeds
₹ 50,000, hence, whole of the difference will be included in income.
Total Income 585,000
9.
Date Transaction Amount Reason
₹
April 10, 2021 Gift from A 25,000 As aggregate gift in cash or by cheque/draft during
FY 21-22 exceeds ₹ 50,000, it is chargeable to tax
May 1, 2021 Gift from A 500 As aggregate gift in cash or by cheque/draft during
FY 21-22 exceeds ₹ 50,000, it is chargeable to tax
June 1, 2021 Gift from cousin of X's father 26,000 Cousin of X's father is not a "relative" of X. As
aggregate gift in cash or by cheque/draft during FY
21-22 exceeds ₹ 50,000, it is chargeable to tax
July 18, 2021 Gift from elder brother of X's 5,000 Brother of X's grandfather is not a "relative" of X. As
grandfather aggregate gift in cash or by cheque/draft during FY
21-22 exceeds ₹ 50,000, it is chargeable to tax
July 20, 2021 Gift from grandmother Nil Gift from a "relative" is not taxable
July 31, 2021 Gift on the occasion of Nil Gift from any person on the occasion of marriage of
marriage of X the taxpayer is not taxable
August 20, 2021 Gift from employer Nil Gift from employer is taxable under the head
"Salaries"
September 6, Gift from a charitable Nil Gift from a charitable institute is not taxable
2021 institute
September 30, Gift under a will Nil Gift received by taxpayer under a will of any person
2021 is not taxable
October 10, 2021 Gift in cash - ₹ 40,000 40,000 As aggregate gift in cash or by cheque/draft during
and March 31, FY 21-22 exceeds ₹ 50,000, it is chargeable to tax.
2022
December 13, Purchase of a work of art for 1,28,000 As a work of art (fair market value: ₹ 2,00,000) is
2021 ₹ 72,000 purchased for ₹ 72,000 and the difference is more
than ₹ 50,000, it is chargeable to tax
March 31, 2022 Gift by cheque ₹ 11,000 11,000 As aggregate gift in cash or by cheque/draft during
FY 21-22 exceeds ₹ 50,000, it is chargeable to tax.
10.
In situation (a) interest on securities is taxable on "due" basis. In situation (b), however, it is taxable on
"receipt" basis, as follows:
Situation Situation
(a) (b)
₹ ₹
Securities of Tamil Nadu Government (i.e., ₹ 1,48,000 x 10/100) 14,800 14,800
Non-listed debentures of ABC Ltd. [i.e., ₹ 40,000 x 5/100) 2,000 2,000
Central Government securities (i.e., instalment of interest due on
March 15, 2022, **not taxable in situation (b) as interest is not actually received) 1,500* —**
Gross interest 18,300 16,800
Less: Interest due* on ₹ 20,000 @ 7% per annum from August 1, 2021 to
March 31, 2022, **not deductible as it is not paid in the previous year 2021-22 933* —**
Interest 17,367 16,800
Business income 7,86,000 7,86,000

IOS SATC 7B.4

Gross total income 8,03,367 8,02,800
Less : Deductions under sections 80C to 80U Nil Nil
Net income (rounded off) 8,03,370 8,02,800
11.
Income from other sources of Mr. R
1. Royalty from coal mine 20,000
Less : Collection charges 2,000 18,000
2. Agricultural Income in Sri Lanka 15,000
3. Salary as MP 36,000
4. Daily allowance 5,000
Less : Exempt 5,000 Nil
5. Dividend from a Co-operative Society 6,000
Less : Collection charge NIL 6,000
6. Income from sub-letting 14,400
Less : Rent paid (50%) . 5,000 9,400
84,400
12.
Computation of Gross Total Income of J (amounts in ₹)
Income from House Property :
Net Annual Value of Self-occupied House II Nil
Less: Interest on accrual basis 6,000 (6,000)
Profits and Gains from Business or Profession 64,000
Income from other sources :
Rent of House I (2,400 x 12) 28,800
Less : Lease rent (1,000 x 12) (12,000)
Salary of Durban (200 x 12) (2,400)
Interest on loan taken to pay for the acquisition of the lease (200 x 12) (2,400) 12,000
Notes:
1. House II: J is deemed to be the owner of Hours II, as the same had been transferred to his wife without
adequate consideration. Hence the same is taxable in his hands.
2. House I: Since House I has been taken on lease for 10 year, therefore J is not deemed to be owner of
this house. Deemed ownership arises when the lease is taken for 12 years or more. Therefore, income for
House I is other sources income.
13. Computation of income from other sources of Ms. Rupali

Particulars Refer ₹ ₹
Note
Net Agricultural Income in India 1 Nil
Net agricultural income from land in Sri Lanka 2 10,000
Profit from sale of agricultural land situated in Mangalore City 3 N.A.
Vacant land -ground rent received 4 12,000
Rent received on sub-letting house 37,500
Less: Rent payable for house sub let (15,000)
Maintenance expenses on house sublet (1,200) 21,300
Directors sitting fees 3,600
Interest on Deposits with nationalized bank 1,000
Interest on Postal savings bank account 5 Nil
Interest credited to PPF account 6 Nil
Interest accrued but not received on NSC VIII Issue 12 1,050
Interest received under Post Office Monthly Income Scheme 12,000
Interest on deposits with HDFC 900
Interest on securities (gross) 5,000
Dividends received from Indian Companies 7 12,000
Dividend received from foreign companies 8 20,000
Less: Interest paid on amount borrowed (Maximum 20%) (4,000) (16,500)
Gift received from a Charitable Institution registered under section 12AA – 9 Nil
Exempt Sec. 56(2)(x)
Gift from a friend in foreign currency 50,001

IOS SATC 7B.5

Gift in Indian currency 500 50,501
Winnings from Lottery (gross) 10 1,00,000

Debenture Interest on 10% debentures of ABC Ltd. of Face Value of 11
₹ 1 lakh. 10,000
Taxable income from other sources 2,40,851
Notes:
1. Agricultural income derived from land situated in India is exempt from income tax u/s. 10(1).
2. Agricultural income from land situated outside India is not covered by exemption u/s. 10(1) and therefore,
₹ 10,000 agricultural income from Sri Lanka is taxable.
3. Agricultural income derived in India is exempt. However, sale of agricultural land in a specified area is
covered by definition of capital asset u/s. 2(14). Therefore, such gains shall be subject to tax under the
head "Capital gains". As it is not taxable under the head "Income from other sources" it is not included in
the computation.
4. Rent received from letting out of land and sub-lease is not chargeable to tax under the head "Income from
House Property". However, it is taxable under income from other sources. Accordingly, expenses in
connection with earning this income have been claimed as deduction u/s. 57.
5. Interest on postal saving bank account is exempt u/s. 10(15)
6. Interest of ₹ 6,000 is claimed as exemption u/s 10(11).
7. Dividend from domestic companies are now subject to tax. The related interest expenditure only is
allowable as deduction u/s. 57. No Deduction for Bank charges.
8. Dividend from foreign companies is subject to tax. The related interest expenditure is allowable as
deduction u/s. 57 to the extent of 20% of such dividend income.
9. Gift received from charitable institutions/associations which are covered by exemption u/s. 10(23C) or
Sec.11, are exempt- Sec. 56(2)(x).
10. Gift received from non-relatives aggregate of which does not exceed ₹ 50,000 are not chargeable to tax.
In the given case, the amount of gift received is ₹ 50,501. Therefore, the whole of such gift is chargeable
without any exemption.
11. Any expenditure incurred in relation to lottery winnings are not allowable as deduction u/s. 58. Therefore,
₹ 5,300 is not allowable as a deduction.
12. Interest accrued and due on NSC and debentures are taxable even though assessee has not received
such interest, since she is following mercantile system of accounting.
14.
Computation of Gross Total Income of Radha (amounts in ₹)
Income from Salaries (15,000 x 12 – 50,000) 130,000
Income from House Property (Rent of 3,000 x 12 - 30% Standard deduction) 25,200
Interest on 8% ICICI Bonds (20,000 x 8%) 1,600
Dividend on 12% Preference shares of Rosa Ltd. (1,000 x 100 x 12%) 12,000
Dividend on 18% equity shares of X Ltd. (1,000 x 10 x 18%) 1,800
Composite rent of Building, Plant and Machinery etc. (12,000 x 12) 144,000
Less : Expenses on repairs and insurance of the factory (20,000)
Less: Depreciation allowable (50,000) 74,000
15. Hint: ₹ 46,020 – ₹ 15,000 = ₹ 31,020.
16. The family pension of ₹ 90,000 (₹ 7,500*12) received by the widow is exempt by virtue of section 10(19) as
the death has occurred in course of operational duties and assuming that he died in prescribed
circumstances. If he does not died in prescribed circumstances, family pension shall be chargeable to tax to
the extent of ₹ 75,000 (₹ 90,000 - ₹15,000, by virtue of section 57).
According to CBDT Circular, any lump sum ex-gratia payment by the Central or state Government or local
authority or public sector undertaking, to the widow or other legal heirs of an employee, who dies while in
active service will not be taxable as income. Hence, ₹ 1,00,000 is not taxable.

IOS SATC 7B.6

17. Section 2(24) treats the maturity proceeds of the Keyman insurance policy as income in the hands of the
recipient. Exemption provided u/s.10(10D) for life insurance policy maturity proceeds is not available to
Keyman insurance policy proceeds.
The tax consequence in all the 3 cases shall be as under:

i) If the maturity proceeds are received by Mr. Rakesh, the same will be treated as profits in lieu of salary
U/S. 17(3) and chargeable to tax under the head "Salaries".
ii) If the maturity proceeds are realized by the company it is treated as business income and chargeable to
tax u/s. 28.
It requires mention that, the company is entitled to deduction in respect of premium paid every year as
business expenditure in the respective year.
iii) If the maturity proceeds are received by Mrs. Rakesh, the same will be treated as her income and
charged to tax under the head 'Income from other sources' by virtue of Sec. 56.

IOS SATC 7C.1
PRACTICAL QUESTIONS (SET B)

1. Rahul holding 28% of equity shares in a company, took a loan of ₹ 5,00,000 from the same
company. On the date of granting the loan, the company had accumulated profit of ₹ 4,00,000. The
company is engaged in some manufacturing activity.
(i) Is the amount of loan taxable as deemed dividend, if the company is a company in which the
public are substantially interested?
(ii) What would be your answer, if the lending company is a private limited company (i.e. a
company in which the public are not substantially interested)?
Answer:
Any payment by a company, other than a company in which the public are substantially interested, of any
sum by way of advance or loan to an equity shareholder, being a person who is the beneficial owner of
shares holding not less than 10% of the voting power, is deemed as dividend under section 2(22)(e), to
the extent the company possesses accumulated profits.
(i) The provisions of section 2(22)(e), however, will not apply where the loan is given by a company in
which public are substantially interested. In such a case, the loan would not be taxable as deemed
dividend.
(ii) However, if the loan is taken from a private company (i.e. a company in which the public are not
substantially interested), which is a manufacturing company and not a company where lending of
money is a substantial part of the business of the company, then, the provisions of section 2(22)(e)
would be attracted, since Rahul holds more than 10% of the equity shares in the company.
The amount chargeable as deemed dividend cannot, however, exceed the accumulated profits held
by the company on the date of giving the loan. Therefore, the amount taxable as deemed dividend
would be limited to the accumulated profit i.e., ₹ 4,00,000 and not the amount of loan which is
₹ 5,00,000.
2. Discuss the taxability or otherwise of the following in the hands of the recipient under section
56(2)(x) the Income-tax Act, 1961 -
(i) Akhil HUF received ₹ 75,000 in cash from niece of Akhil (i.e., daughter of Akhil’s sister). Akhil
is the Karta of the HUF.
(ii) Nitisha, a member of her father’s HUF, transferred a house property to the HUF without
consideration. The stamp duty value of the house property is ₹ 9,00,000.
(iii) Mr. Akshat received 100 shares of A Ltd. from his friend as a gift on occasion of his 25 th
marriage anniversary. The fair market value on that date was ₹ 100 per share. He also received
jewellery worth ₹ 45,000 (FMV) from his nephew on the same day.
(iv) Kishan HUF gifted a car to son of Karta for achieving good marks in XII board examination.
The fair market value of the car is ₹ 5,25,000.
Answer:
(i) Taxable - 75,000
Sum of money exceeding ₹ 50,000 received without consideration from a non-relative is taxable
under section 56(2)(x). Daughter of Mr. Akhil’s sister is not a relative of Akhil HUF, since she is not a
member of Akhil HUF.
(ii) Non- taxable - Nil:

Immovable property received without consideration by a HUF from its relative is not taxable under
section 56(2)(x). Since Nitisha is a member of the HUF, she is a relative of the HUF. However,
income from such asset would be included in the hands of Nitisha under 64(2).

IOS SATC 7C.2

(iii) Taxable - 55,000
As per provisions of section 56(2)(x), in case the aggregate fair market value of property, other than
immovable property, received without consideration exceeds ₹ 50,000, the whole of the aggregate
value shall be taxable. In this case, the aggregate fair market value of shares (₹ 10,000) and jewellery
(₹ 45,000) exceeds ₹ 50,000. Hence, the entire amount of ₹ 55,000 shall be taxable.
(iv) Non- taxable - Nil

Car is not included in the definition of property for the purpose of section 56(2)(x), therefore, the same
shall not be taxable.
3. Mr. A, a dealer in shares, received the following without consideration during the P.Y. 2021-22
from his friend Mr. B, -
(1) Cash gift of ₹ 75,000 on his anniversary, 15th April, 2021.
(2) Bullion, the fair market value of which was ₹ 60,000, on his birthday, 19th June, 2021.
(3) A plot of land at Faridabad on 1st July, 2021, the stamp value of which is ₹ 5 lakh on that date.
Mr. B had purchased the land in April, 2010.
Mr. A purchased from his friend Mr. C, who is also a dealer in shares, 1000 shares of X Ltd. @
₹ 400 each on 19th June, 2021, the fair market value of which was ₹ 600 each on that date. Mr. A
sold these shares in the course of his business on 23rd June, 2021.
Further, on 1st November, 2021, Mr. A took possession of property (building) booked by him two
years back at ₹ 20 lakh. The stamp duty value of the property as on 1st November, 2021 was ₹ 32
lakh and on the date of booking was ₹ 23 lakh. He had paid ₹ 1 lakh by account payee cheque as
down payment on the date of booking.
On 1st March, 2022, he sold the plot of land at Faridabad for ₹ 7 lakh.
Compute the income of Mr. A chargeable under the head “Income from other sources” and
“Capital Gains” for A.Y. 2022-23.
Answer:
Computation of “Income from other sources” of Mr. A for the A.Y. 2022-23
SN. Particulars ₹
(1) Cash gift is taxable under section 56(2)(x), since it exceeds ₹ 50,000 75,000
(2) Since bullion is included in the definition of property, therefore, when 60,000
bullion is received without consideration, the same is taxable, since the
aggregate fair market value exceeds ₹ 50,000
(3) Stamp value of plot of land at Faridabad, received without consideration, is 5,00,000
taxable under section 56(2)(x)
(4) Difference of ₹ 2 lakh in the value of shares of X Ltd. purchased from Mr.
C, a dealer in shares, is not taxable as it represents the stock-in- trade of NIL
Mr. A. Since Mr. A is a dealer in shares and it has been mentioned that the
shares were subsequently sold in the course of his business, such shares
represent the stock-in-trade of Mr. A.
(5) Difference between the stamp duty value of ₹ 23 lakh on the date of 3,00,000
booking and the actual consideration of ₹ 20 lakh paid is taxable under
section 56(2)(x) since the difference exceeds ₹ 1,00,000 being, the higher
of ₹ 50,000 and 10% of consideration.
Income from Other Sources 9,35,000

IOS SATC 7C.3

Computation of “Capital Gains” of Mr. A for the A.Y. 2022-23
Particulars ₹
Sale Consideration 7,00,000
Less: Cost of acquisition [deemed to be the stamp value charged to tax under
section 56(2)(x) as per section 49(4)] 5,00,000
Short-term capital gains 2,00,000
Note – The resultant capital gains will be short-term capital gains since for calculating the period of
holding, the period of holding of previous owner is not to be considered.
4. Mr. Hari, a property dealer, sold a building in the course of his business to his friend Rajesh, who
is a dealer in automobile spare parts, for ₹ 90 lakh on 1.1.2022, when the stamp duty value was
₹ 150 lakh. The agreement was, however, entered into on 1.9.2021 when the stamp duty value was
₹ 140 lakh. Mr. Hari had received a down payment of ₹ 15 lakh by a crossed cheque from Rajesh
on the date of agreement. Discuss the tax implications in the hands of Hari and Rajesh, assuming
that Mr. Hari has purchased the building for ₹ 75 lakh on 12th July, 2020.
Would your answer be different if Hari was a share broker instead of a property dealer?
Answer:
Case 1: Tax implications if Mr. Hari is a property dealer
In the hands of the seller, Mr. Hari In the hands of the buyer, Mr. Rajesh
In the hands of Hari, the provisions of section Since Mr. Rajesh is a dealer in automobile spare
43CA would be attracted, since the building parts, the building purchased would be a
represents his stock-in-trade and he has capital asset in his hands. The provisions of
transferred the same for a consideration less section 56(2)(x) would be attracted in the hands
than the stamp duty value; and the stamp duty of Mr. Rajesh who has received immovable
value exceeds 110% of consideration. property, being a capital asset, for inadequate
consideration and the difference between the
Under section 43CA, the option to adopt the consideration and stamp duty value
stamp duty value on the date of agreement can exceeds ₹ 9,00,000, being the higher of
be exercised only if whole or part of the ₹ 50,000 and 10% of consideration.
consideration has been received on or before the
date of agreement by way of account payee Therefore, ₹ 60 lakh, being the difference
cheque or draft or by use of ECS through a bank between the stamp duty value of the property on
account or through credit card, debit card, net the date of registration (i.e., ₹ 150 lakh) and the
banking, IMPS (Immediate payment Service), actual consideration (i.e., ₹ 90 lakh) would be
UPI (Unified Payment Interface), RTGS (Real taxable under section 56(2)(x) in the hands of
Time Gross Settlement), NEFT (National Mr. Rajesh, since the payment on the date of
Electronic Funds Transfer), and BHIM (Bharat agreement is made by crossed cheque and
Interface for Money) Aadhar Pay on or before not account payee cheque/draft or ECS or
the date of agreement. through credit card, debit card, net banking,
IMPS (Immediate payment Service), UPI (Unified
In this case, since the down payment of ₹ 15 lakh Payment Interface), RTGS (Real Time Gross
is received on the date of agreement by crossed Settlement), NEFT (National Electronic Funds
cheque and not account payee cheque, the Transfer), and BHIM (Bharat Interface for
option cannot be exercised. Money) Aadhar Pay.
Therefore, ₹ 75 lakh, being the difference

between the stamp duty value on the date of
transfer i.e., ₹ 150 lakh, and the purchase price
i.e., ₹ 75 lakh, would be chargeable as business
income in the hands of Mr. Hari, since stamp
duty value exceeds 110% of the consideration

IOS SATC 7C.4

Case 2: Tax implications if Mr. Hari is a stock broker
In the hands of the seller, Mr. Hari In the hands of the buyer, Mr. Rajesh
In case Mr. Hari is a share broker and not a There would be no difference in the taxability
property dealer, the building would represent his in the hands of Mr. Rajesh, whether Mr. Hari is
capital asset and not stock- in-trade. a property dealer or a stock broker.
In such a case, the provisions of section 50C would Therefore, the provisions of section 56(2)(x)
be attracted in the hands of Mr. Hari, since building would be attracted in the hands of Mr. Rajesh
is transferred for a consideration less than the who has received immovable property, being a
stamp duty value; and the stamp duty value capital asset, for inadequate consideration and
exceeds 110% of consideration. the difference between the consideration and
stamp duty value exceeds ₹ 9,00,000,
Thus, ₹ 75 lakh, being the difference between the being the higher of ₹ 50,000 and 10% of
stamp duty value on the date of registration (i.e., consideration.
₹ 150 lakh) and the purchase price (i.e., ₹ 75 lakh)
would be chargeable as short-term capital gains.
Therefore, ₹ 60 lakh, being the difference
between the stamp duty value of the property
It may be noted that under section 50C, the option to on the date of registration (i.e., ₹ 150 lakh)
adopt the stamp duty value on the date of and the actual consideration (i.e., ₹ 90 lakh)
agreement can be exercised only if whole or part of would be taxable under section 56(2)(x) in the
the consideration has been received on or before hands of Mr. Rajesh.
the date of agreement by way of account payee
cheque or draft or by use of ECS through a bank
account or through credit card, debit card, net
banking, IMPS (Immediate payment Service), UPI
(Unified Payment Interface), RTGS (Real Time
Gross Settlement), NEFT (National Electronic
Funds Transfer), and BHIM (Bharat Interface for
Money) Aadhar Pay on or before the date of
agreement. In this case, since the down
payment of ₹ 15 lakhs has been received on the
date of agreement by crossed cheque and not
account payee cheque, the option cannot be
exercised.
5. Interest on enhanced compensation received by Mr. G during the previous year 2021-22 is
₹ 5,00,000. Out of this interest, ₹ 1,50,000 relates to the previous year 2018-19, ₹ 1,65,000 relates to
previous year 2019-20 and ₹ 1,85,000 relates to previous year 2020-21. Discuss the tax implication,
if any, of such interest income for A.Y. 2022-23.
Answer:
The entire interest of ₹ 5,00,000 would be taxable in the year of receipt, namely, P.Y. 2021-22
Particulars ₹
Interest on enhanced compensation taxable u/s 56(2)(viii) 5,00,000
Less: Deduction under section 57(iv) @50% 2,50,000
Interest chargeable under the head “Income from other sources” 2,50,000

IOS SATC 7C.5

6. Examine whether the following are chargeable to tax and the amount liable to tax :
(i) A sum of ₹ 1,20,000 was received as gift from non-relatives by Raj on the occasion of the
marriage of his son Pravin.
(ii) Interest on enhanced compensation of ₹ 96,000 received on 12-3-2022 for acquisition of urban
land, of which 40% relates to P.Y. 2020-21.
Answer:
S.No. Taxable Answer Amount Reason

liable to tax (₹)
/Not
Taxable
(i) Taxable 1,20,000 The exemption from applicability of section 56(2)(x) would
be available if, inter alia, gift is received from a relative or
gift is received on the occasion of marriage of the
individual himself. In this case, since gift is received by
Mr. Raj from a non- relative on the occasion of marriage of
his son, it would be taxable in his hands under section
56(2)(x).
(ii) Taxable 48,000 As per section 145B(1), interest received by the assessee
on enhanced compensation shall be deemed to be the
income of the year in which it is received, irrespective of
the method of accounting followed by the assessee.
Interest of ₹ 96,000 on enhanced compensation is

chargeable to tax in the year of receipt i.e. P.Y. 2021-22
under section 56(2)(viii) after providing deduction of 50%
under section 57(iv). Therefore, ₹ 48,000 is chargeable to
tax under the head “Income from other sources”.
7. Examine under which heads the following incomes are taxable:

(i) Rental income in case property held as stock-in-trade for 3 years
(ii) Dividend on shares in case of a dealer in shares
(iii) Salary received by a partner from his partnership firm
(iv) Rental income of machinery
(v) Winnings from lotteries by a person having the same as business activity
(vi) Salaries payable to a Member of Parliament
(vii) In case of retirement, interest on employee’s contribution if provident fund is unrecognized.
(viii) Rental income in case of a person engaged in the business of letting out of properties.
Answer:
Particulars Head of Income
(i) Rental income in case property held as stock-in Income from house property
trade for 3 years
(ii) Dividend on shares in case of a dealer in shares Income from other sources
(iii) Salary by partner from his partnership Profits and gains of business or
firm profession

IOS SATC 7C.6

(iv) Rental income of machinery (See Note below) Income from other sources/ Profits and
gains of business or profession
(v) Winnings from lotteries by a person having the same Income from other sources
as business activity
(vi) Salaries payable to a Member of Parliament Income from other sources
(vii) In case of retirement, interest on employee’s Income from other sources

contribution if provident fund is unrecognized
(viii) Rental income in case of a person engaged in the Profits and gains from business or
business of letting out of properties profession
Note - As per section 56(2)(ii), rental income of machinery would be chargeable to tax under the head
“Income from Other Sources”, if the same is not chargeable to income-tax under the head “Profits and
gains of business or profession”.
8. On 10.10.2021, Mr. Govind (a bank employee) received ₹ 5,00,000 towards interest on enhanced
compensation from State Government in respect of compulsory acquisition of his land effected
during the financial year 2015-16.
Out of this interest, ₹ 1,50,000 relates to the financial year 2016-17; ₹ 1,65,000 to the financial year
2017-18; and ₹ 1,85,000 to the financial year 2018-19. He incurred ₹ 50,000 by way of legal
expenses to receive the interest on such enhanced compensation.
How much of interest on enhanced compensation would be chargeable to tax for the assessment
year 2022-23?
Answer:
Section 145B provides that interest received by the assessee on enhanced compensation shall be
deemed to be the income of the assessee of the year in which it is received, irrespective of the method
of accounting followed by the assessee and irrespective of the financial year to which it relates.
Section 56(2)(viii) states that such income shall be taxable as ‘Income from other sources’. 50% of
such income shall be allowed as deduction by virtue of section 57(iv) and no other deduction shall be
permissible from such Income.
Therefore, legal expenses incurred to receive the interest on enhanced compensation would not
be allowed as deduction from such income.
Computation of interest on enhanced compensation taxable as “Income from other sources” for
the A.Y 2022-23:
Particulars ₹
Interest on enhanced compensation taxable under section 56(2)(viii) 5,00,000
Less: Deduction under section 57(iv) (50% x ₹ 5,00,000) 2,50,000
Taxable interest on enhanced compensation 2,50,000

IOS SATC 7C.7

9. The following details have been furnished by Mrs. Hemali pertaining to the year ended 31.3.2022:
(i) Cash gift of ₹ 51,000 received from her friend on the occasion of her “Shastiaptha Poorthi”, a
wedding function celebrated on her husband completing 60 years of age.
This was also her 25th wedding anniversary.
(ii) On the above occasion, a diamond necklace worth ₹ 2 lacs was presented by her sister living
in Dubai.
(iii) When she celebrated her daughter's wedding on 21.2.2022, her friend assigned in Mrs.
Hemali's favour, a fixed deposit held by the said friend in a scheduled bank; the value of the
fixed deposit and the accrued interest on the said date was ₹ 52,000.
Compute the income, if any, assessable as income from other sources.
Answer:
(i) Any sum of money received by an individual on the occasion of the marriage of the individual is
exempt. This provision is, however, not applicable to a cash gift received during a wedding function
celebrated on completion of 60 years of age.
The gift of ₹ 51,000 received from a non-relative is, therefore, chargeable to tax under section
56(2)(x) in the hands of Mrs. Hemali, since the same exceeds ₹ 50,000.
(ii) The provisions of section 56(2)(x) are not attracted in respect of any sum of money or property
received from a relative. Thus, the gift of diamond necklace received from her sister is not taxable
under section 56(2)(x), even though jewellery falls within the definition of “property”.
(iii) To be exempt from applicability of section 56(2)(x), the property should be received on the occasion of
the marriage of the individual, not that of the individual’s son or daughter. Therefore, this exemption
provision is not attracted in this case.
Any sum of money received without consideration by an individual is chargeable to tax under section
56(2)(x), if the aggregate value exceeds ₹ 50,000 in a year. “Sum of money” has, however, not
been defined under section 56(2)(x).
Therefore, there are two possible views in respect of the value of fixed deposit assigned in
favour of Mrs. Hemali-
(1) The first view is that fixed deposit does not fall within the meaning of “sum of money” and
therefore, the provisions of section 56(2)(x) are not attracted. It may be noted that fixed deposit
is also not included in the definition of “property”.
(2) However, another possible view is that fixed deposit assigned in favour of Mrs. Hemali falls
within the meaning of “sum of money” received.
Income assessable as “Income from other sources”

If the first view is taken, the total amount chargeable to tax as “Income from other sources” would be
₹ 51,000, being cash gift received from a friend on her Shastiaptha Poorthi.
As per the second view, the provisions of section 56(2)(x) would also be attracted in respect of the
fixed deposit assigned and the “Income from other sources” of Mrs. Hemali would be ₹ 1,03,000
(₹ 51,000 + ₹ 52,000).

IOS SATC 7C.8

10. Examine the following transactions in the context of Income-tax Act, 1961:
(i) Mr. B transferred 500 shares of R (P) Ltd. to M/s. B Co. (P) Ltd. on 10.10.2021 for ₹ 3,00,000
when the market price was ₹ 5,00,000. The indexed cost of acquisition of shares for Mr. B was
computed at ₹ 4,45,000. The transfer was not subjected to securities transaction tax.
Determine the income chargeable to tax in the hands of Mr. B and M/s. B Co. (P) Ltd. because
of the above said transaction.
(ii) Mr. Chezian is employed in a company with taxable salary income of ₹ 5,00,000. He received a
cash gift of ₹ 1,00,000 from Atma Charitable Trust (registered under section 12AA) in
December 2021 for meeting his medical expenses.
Is the cash gift so received from the trust chargeable to tax in the hands of Mr. Chezian?
Answer:
(i) Any movable property received for inadequate consideration by any person is chargeable to tax under
section 56(2)(x), if the difference between aggregate Fair Market Value of the property and
consideration exceeds ₹ 50,000.
Thus, share received by M/s B. Co. (P) Ltd. from Mr B for inadequate consideration is chargeable to
tax under section 56(2)(x) to the extent of ₹ 2,00,000.
As per section 50CA, since, the consideration is less than the fair market value of unquoted shares of
R (P) Ltd., fair market value of shares of the company would be deemed to be the full value of
consideration. It is presumed that the shares of R (P) Ltd are unquoted shares.
The full value of consideration (₹ 5,00,000) less the indexed cost of acquisition (₹ 4,55,000) would
result in a long term capital gains of ₹ 55,000 in the hands of Mr. B.
(ii) The provisions of section 56(2)(x) would not apply to any sum of money or any property received from
any trust or institution registered under section 12AA. Therefore, the cash gift of ₹ 1 lakh received
from Atma Charitable Trust, being a trust registered under section 12AA, for meeting medical
expenses would not be chargeable to tax under section 56(2)(x) in the hands of Mr. Chezian.
11. MNO (P) Ltd. is a company in which the public are not substantially interested. K is a shareholder
of the company holding 15% of the equity shares. The accumulated profits of the company as on
1.10.2021 amounted to ₹ 10,00,000. The company lent ₹ 1,00,000 to K by an account payee bank
draft on 1.10.2021. The loan was not connected with the business of the company. K repaid the
loan to the company by an account payee bank draft on 30.3.2022. Examine the effect of the
borrowal and repayment of the loan by K on the computation of his total income for the
Answer:
As per section 2(22)(e), any payment by a company, in which the public are not substantially interested,
by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares holding
not less than 10% of the voting power, shall be treated as dividend to the extent to which the company
possesses accumulated profits.
In the instant case, MNO (P) Ltd. is a company in which the public are not substantially interested. The
company has accumulated profits of ₹ 10,00,000 on 1.10.2021. The loan given by the company to K was
not in the course of its business. K holds more than 10% of the equity shares in the company. Therefore,
assuming that K has voting power equivalent to his shareholding, section 2(22)(e) comes into play.
Deemed dividend of ₹ 1,00,000 under section 2(22)(e) would be taxable in the hands of Mr. K at normal
rate of tax.
Under section 2(22)(e), the liability arises the moment the loan is borrowed by the shareholder and it is
immaterial whether the loan is repaid before the end of the accounting year or not. Therefore, the
repayment of loan by K to the company on 30.3.2022 will not affect the taxability of the sum of ₹ 1,00,000
as deemed dividend.

IOS SATC 7C.9

12. Sunder died on 31st July 2021 while being in Central Government service. In terms of rules
governing his service, his widow Mrs. Sunder is paid a family pension of ₹ 10,000 p.m. and dearness
allowance of 40% thereof. State whether the amount of family pension is assessable in her hands,
and if so, under what head of income. Can she claim any relief/deduction on such receipt?
Compute taxable income for the assessment year 2022-23 and tax thereon.
Answer:
Computation of gross total income of Mrs. Sunder for the A.Y. 2022-23
Particulars Details Amount

Family pension [(₹ 10,000 + ₹ 4,000) x 8] [From 01-08-2021 to 31-03-2022] 1,12,000
Less: deduction under Section 57: being minimum of the following:
a) 1/3rd of the pension 37,333
b) Statutory limit 15,000 15,000
Total Income 97,000
Tax on above Nil
It is assumed that other income of Mrs. Sunder is nil.
13. Examine the applicability of sec. 56(2)(viib) in the following situation:
Shares Issued by Shares Issued to Per share Remarks/Applicability

Face Fair Consideration
Value Market
Value
P (P) Ltd Mr. A 10/- 12/- 11/- Sec. 56(2)(viib) is not
applicable
Q (P) Ltd Mr. B 10/- 12/- 9/- Sec. 56(2)(viib) is not
applicable
R (P) Ltd Mr. C 10/- 5/- 10/- Sec. 56(2)(viib) is not
applicable
S (P) Ltd Mr. D 10/- 15/- 20/- ₹ 5/- per share shall be
considered as income in
hands of S (P) Ltd. u/s
56(2)(viib)
T (P) Ltd Mr. E, non-resident 10/- 16/- 25/- Sec. 56(2)(viib) is not
applicable
U (P) Ltd Mr. F, non-resident 10/- 20/- 35/- ₹ 15/- per share shall be
at the time of issue considered as income in
of shares. However, hands of U (P) Ltd. u/s
later on during the 56(2)(viib)
P.Y. he became
resident

IOS SATC 7C.10

14. Compute taxable income under the head Income from other sources of Mrs. X from the following data:
Particulars Amount
Private tuition fee received 10,000
Winning from lottery 2,000
Award from KBC (a TV show) [Gross] 3,20,000
Pension from employer of deceased husband 25,000
Interest on bank deposit 25,000
Directors fee (Gross) 5,000
Letting out of vacant land 25,000
Remuneration for checking the examination copy of employer’s school 10,000
Remuneration for checking the examination copy of College 10,000
Income tax refund 5,000
Interest on income tax refund 100
Composite rent (related expenditures are ₹ 5,000) 10,000
Rent on sub-letting of house property (rent paid to original owner ₹ 12,000) 20,000
Income tax paid 2,000
Payment made for personal expenses 18,000
Payment made to LIC as premium 2,000
Answer:
Computation of income of Mrs. X under the head Income from other source for the A.Y. 2022-23
Particulars Details Amount

Private tuition fee received 10,000
Casual income
Award from KBC (a TV show) [Gross] 3,20,000
Pension 25,000
Less: Standard deduction (Lower of the two)
a) 1/3rd of amount received (i.e. ₹ 8,333)
b) ₹ 15,000 8,333 16,667
Interest on bank deposit 25,000
Directors fee 5,000
Letting out of vacant land 25,000
Remuneration for checking the examination copy of employer school Taxable as Salary -
Remuneration for checking examination copy of College 10,000
Income tax refund Not an income -
Interest on income tax refund 100
Composite rent 10,000
Less: Expenditure 5,000 5,000
Rent on sub-letting of house property 20,000
Less: Rent paid to original owner 12,000 8,000
Income from Other Source 4,26,767
Note: Payment of income tax and personal expenses is not deductible in any case.

IOS SATC 7C.11

15. Shri Anil follows cash basis of accounting and has furnished the Receipts & Payment A/c of previous
year 2021-22 for computing his income:
Particulars Receipts Payments

Interest on listed debenture of A Ltd. 16,200
Letting of building & machinery @ ₹ 15,000 p.m. under a composite lease 1,50,000
Collection charges 1,000
Repairs 5,000
Capital repairs 16,000
Interest paid outside India without deducting tax on loan taken for 8,000
construction of building
Gift from father 6,000
Ground rent received (related to financial year 2020-21) 600
The following additional information are also provided - Allowable depreciation on Building and
Machinery - ₹ 4,000. Fire Insurance on Building and Machinery (not paid) - ₹ 1,000
Answer:
Computation of income from other sources of Anil for A.Y. 2022-23
Particulars Details Details Amount Amount
Interest on debenture of A Ltd. (gross income) ₹ 16,200 / 90% 18,000
Interest received on letting of assets 1,50,000
Less: Expenses paid
Collection charges 1,000
Repair 5,000
Capital repairs Nil
Depreciation 4,000 10,000 1,40,000
Gift from father [As received from relative] Nil
Ground rent received 600
Income from other source 1,58,600
Notes
1. Since assessee follows cash basis of accounting, hence, income shall be chargeable and expenditure shall
be allowed on cash basis.
2. Debenture income required to be grossed up.
3. Capital repairs are not allowed.
4. Interest paid outside India without deducting tax at source shall not be deductible expenditure.

IOS SATC 7C.12

16. X receives the following gifts during the PY 2021-22:
1. On the occasion of marriage of X, he gets ₹ 2,90,000 as gift on April 2, 2021 (out of which ₹ 2,00,000 is
received from friends of X and Mrs. X and remaining amount is received from close relatives of X and
Mrs. X).
2. On June 22, 2021, he gets a gift of ₹ 23,000 from C, who is cousin of his father.
3. On August 18, 2021, he gets a gift of ₹ 15,000 from D, who is elder brother of his grandfather.
4. On September 20, 2021, he gets a gift of ₹ 7,00,000 from his grandmother.
5. A computer received from his employer (it was purchased for ₹ 65,000 by the employer on May 1, 2021
and given as gift to X on October 20, 2021).
6. On November 30, 2021, X gets a gift of a plot of land from his grandfather (stamp duty value is
₹ 15,00,000.
7. On December 30, 2021, X gets by gift a commercial flat from the elder brother of his father-in-law (stamp
duty value is ₹ 25,00,000).
8. On January 6, 2022, he gets a gift of ₹ 2,00,000 (cash gift of ₹ 25,000 and gift of a work of art whose
market value is ₹ 1,75,000) from a notified public charitable institution.
9. X receives on January 11, 2022 a house property under will of a person known to him. The stamp duty
value is ₹ 15,40,000.
10. On January 20, 2022, he gets a wrist watch by gift (fair market value : ₹ 40,000) from his friend B.
11. On January 25, 2022, he purchases a work of art for ₹ 16,00,000 from an exhibition in New York (the fair
market value of the work of art on the date of purchase is ₹ 17,00,000).
12. On February 5, 2022, he gets a birthday gift of a gold chain (fair market value : ₹ 11,000) from his friend.
13. On February 10, 2022, X gets by way of gift a plot of land in Pune from a partnership firm. The partnership
firm has only two partners- father of X and Mrs. X. The stamp duty value of the plot of land is ₹ 19,00,000.
14. On February 16, 2022, X purchases 500 shares in Tata Chemicals from his friend D at ₹ 90 per share
(outside stock exchange). The lowest market quotation in the Bombay Stock Exchange and the National
Stock Exchange on the date of purchase is ₹ 300 and ₹ 310 respectively.
15. On March 1, 2022, X gets a gift of gold ring from a cousin of his mother-in-law. The fair market value is
₹ 20,000.
16. On March 20, 2022, X gets a painting by way of gift from C Ltd. Mrs. X holds 70 per cent shares in C Ltd.
The fair market value of painting is ₹ 19,000.
17. On March 25, 2022, X gets a small plot of land by way of gift from a cousin of Mrs. X (stamp duty value is
₹ 44,000).
18. On March 31, 2022, X receives a shop (situated in Jammu) by way of gift from a friend (stamp duty value
is ₹ 50,000).
Compute the amount chargeable to tax in the hands of X under the head "Income from other sources"
from the AY 2022-23.
Answer:
Cash Gift of Gift of Purchase
gift immovable movable movable
property property properly for
Inadequate
consideration
₹ ₹ ₹ ₹
1. Gift on occasion of marriage of X Nil - - -
(not taxable)
2. Cash gift from C 23,000 - - -
(C is not "relative")
3. Cash gift from D 15,000 - - -
(elder brother of grandfather is not "relative")
4. Cash gift from grandmother Nil - - -
(gift from a "relative" is not taxable)
5. Gift from employer - - - -
(it is taxable under the head Salary)

IOS SATC 7C.13

6. Gift of immovable property from grandfather Nil . -
[gift from” relative" is not taxable]
7. Gift of commercial property - 25,00,000 - -
(elder brother of 'other for is not "relative")
8. Gift from notified public charitable institute Nil - Nil -
[Not Taxable]
9. Gift under a will - Nil - -
[not taxable even if received from on-emotive]
10. Gift of a wrist watch - - - -
[wrist watch is not "property" for the
purpose of section 56(2)(x) and not taxable]
11. Purchase of a work of art for inadequate - - - 1,00,000
consideration
12. Gift of gold chain 11,000 -
13. Gift from a partnership firm - 19,00,000 - -
[partnership firm is not "relative" even if
relatives of X are partners]
14. Purchase of shares for inadequate - - - 1,05,000
consideration
[(₹ 300 - ₹ 90) x 500)]
15. Gift of gold ring - - 20,000 -
(cousin of mother-in-low is not "relative" of X)
16. Gift from a company - - 19,000 -
(company is not a "relative" even if Mrs. X is a
major shareholder)
17. Gift of plot of land - Nil - -
(not taxable as stamp duty value does not
exceed ₹ 50,000)
18. Gift of shop - Nil - -
(not taxable as stamp duty value does not
exceed ₹ 50,000)
Total 38,000 44,00,000 50,000 2,05,000
Amount taxable under section 56(2)(x) under the head "Income from other sources" will be calculated
as follows-
₹
Cash gift (not 'taxable as the aggregate amount of cash gift does not exceed ₹ 50,000) Nil
Gift of immovable properties 44,00,000
Gift of movable properties (not taxable as the aggregate amount does not exceed ₹ 50,000) Nil
Purchase of movable properties for inadequate consideration 2,05,000
Amount taxable 46,05,000

IOS SATC 7C.14

Class Notes

Capital Gain SATC 8.1
INCOME UNDER THE HEAD OF “CAPITAL GAINS”

[Sections: 45 to 55A]
SECTION 45(1) – CHARGING SECTION
Any profits or gains arising from the TRANSFER of a CAPITAL ASSET effected in the PREVIOUS YEAR shall
be chargeable to income tax under the head “Capital Gain” and shall be deemed to be the income of Previous
Year in which the transfer took place.
DEFINITION OF CAPITAL ASSET [Section 2(14)]

Capital Asset means
(a) property of any kind held by an assessee, whether or not connected with his business or profession,
(b) any securities held by a Foreign Institutional Investor (FII) which has invested in such securities as
per SEBI Regulations
(c) any Unit Linked Insurance Policy to which exemption under clause (10D) of section 10 does not apply.
[Amended by Finance Act 2021, effective from AY 2021-22]
but excludes
 any stock-in-trade (other than securities referred in (b) above), consumable stores or raw materials held
for the purpose of the business or profession of the assessee;
 PERSONAL EFFECTS, that is to say, movable property (including wearing apparel and furniture) held for
personal use by the assessee or any member of his family dependent on him,
Excluding (i.e. these are capital Assets):
a) Jewellery b) Drawings c) Sculptures
d) Archaeological Collections e) Paintings f) Any work of art
 Agricultural land situated in Rural Area
 Specified Gold Bonds, Special Bearer Bonds 1991, Gold Deposit Bonds 1999 or Deposit Certificates
issued under the Gold Monetisation Scheme 2015 notified by the CG
Definition of Rural Area:

Rural area means any area which is outside the jurisdiction of a municipality or cantonment board having a
population of 10,000 or more and also which does not fall within distance given below –
Population according to the last preceding census of which
Shortest aerial distance from the local limits of the relevant-figures have been published before the first
municipality/ cantonment board day of the previous year
2 km If the population is more than 10,000 but not more than 1 lakh
If the population is more than 1 lakh but not more than 10 lakh
6 km
8 km If the population is more than 10 lakh
For Section 50 (CG on Depreciable Assets) – Refer Depreciation Notes/Class
At CA-Intermediate level – Section 45(2A), Section 45(3), Amended Section 45(4) read with new
Section 9B, Few Clauses of Section 47, Section 47A, Few Sub-sections of Section 49, Section
54D, 54G, 54GA, 54GB have been excluded from the scope of syllabus by way of Study
Guidelines.


Examine the taxability under the head CG in following independent cases for AY 2022-23:
(a) Mr. A sells gold deposit bonds on 1-7-2021 for ₹ 11 lakh. The bonds were acquired on 1-3-2008 for
₹ 7,50,000.
(b) Mrs. B, a painter, sells the paintings made by him for ₹ 45 lakhs on 1-10-2021.
(c) Mr. X, a jewellery dealer, sells jewellery on 1-7-2021 for ₹ 15,30,000, which was acquired on 1-5-2011 for
₹ 9,35,000.
(d) Mr. Y sells his personal furniture on 1-6-2021 for ₹ 40,000, which was acquired on 1-7-2010 for ₹ 90,000.
The expenses on transfer are 2% of selling price.
(e) Mr. Z sells his personal residential house on 01-04-2022 for ₹ 12,50,000, which was acquired by him on 1-4-
2007 for ₹ 7,50,000.
Treatment of Agricultural Land

The Explanation to Section 2(1A) clarifies that Capital Gains arising from transfer of any agricultural land situated
in any non-rural area (Urban Area) will not constitute agricultural revenue within the meaning of Section 2(1A) for
the purpose of exemption under section 10(1). Hence, such gains would be liable to tax under Section 45.
DEFINITION OF TRANSFER [SECTION 2(47)]
“TRANSFER”, IN RELATION TO A CAPITAL ASSET, INCLUDES:

i) Sale, Exchange or Relinquishment of the asset or Extinguishment of any rights therein; or
ii) Reduction of Share Capital; or
iii) Compulsory Acquisition thereof under any law; or
iv) Conversion of Capital Asset into Stock In Trade [SIT] of a business; or
v) Maturity or Redemption of a Zero Coupon Bond; or
vi) Allowing of the possession of any immovable property in part performance of a contract u/s. 53A of the
Transfer of property Act; 1882 [Part-performance of the contract]; or
vii) Any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society,
company or other AOPs or by way of any agreement or any arrangement or in any other manner
whatsoever) which has the effect of transferring or enabling the enjoyment of any immovable property.
[POH will be counted from date of allotment of shares/membership and not from the date of
allotment of immovable property]
TAX POINTS:
Redemption of Preference Shares:

a) Redemption of Preference Shares by the Company is a relinquishment of ownership by the Shareholder
and the same is regarded as Transfer u/s 2(47).
b) The nature of Capital Gain on such redemption depends upon the holding period of the Shareholder.


NATURE OF CAPITAL ASSETS
 Section 2(42A) defines Short-Term Capital Asset as a capital asset held by an assessee for not more
than 36 months (Period of Holding) immediately preceding the date of its transfer.
However, in case of following financial assets the above period of 36 months is replaced by 12 months:
a) A Securities (other than Unit) listed in a recognized stock exchange in India;
b) Units of an Equity Oriented Fund;
c) Units of UTI / Zero Coupon Bond;
In case of Unlisted equity or preference shares; Land or Building or Both, period of 36 months is
replaced by 24 Months.
 Section 2(29A) defines Long Term Capital Asset as a capital asset which is not Short Term Capital Asset.
Therefore, a capital asset held by an assessee for more than 36 months (or 24 months/12 months as the
case may be) immediately preceding the date of its transfer is a long-term capital asset.
Tax Points:
a) An asset held exactly for 36/24/12 months will be a STCA.
b) For computing the period of 36/24/12 months, the date on which the asset was acquired is to be included
while the date on which the asset is transferred is to be excluded.
c) In the case of transfer of a depreciable asset (WDV Method), Capital Gain (if any) is taken as STCG,
irrespective of period of holding.
TYPE OF CAPITAL GAINS

Short-Term Capital Gains: Gain arising on transfer of STCA [Section 2(42B)]
Long-Term Capital Gains: Gain arising on transfer of LTCA [Section 2(29B)]
Cost of Acquisition:
Cost of Acquisition of assets is the value for which it was acquired by the assessee. Expenses of capital nature for
completing or acquiring the capital assets are includible in the COA. COA will include the followings:
(a) Purchase Price (b) Registration charges
(c) Brokerage/Commission paid on acquisition of assets (d) any other expenses of similar nature
Cost of Improvement:
COI is capital expenditure incurred by an assessee in making any additions/improvement to the capital assets. It
also includes any expenditure to protect or complete the title to the capital assets or to cure such title. In other
words, any expenditure incurred to increase the value of the capital asset is treated as COI.


Class notes
COST INFLATION INDEX
FY CII FY 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 2019-20 289
2009-10 148 2020-21 301
2010-11 167 2021-22 317
2011-12 184


SECTION 48 - MODE OF COMPUTATION OF CAPITAL GAINS
Computation of Short Term Capital Gains

Full value of Consideration xxxx
Less: Expenditure incurred wholly and exclusively in connection with such a xxxx
transfer [Cost of Transfer - COT]
Net Sales Consideration xxxx
Less: Cost of Acquisition (as defined in Section 49, 51 and 55) [COA] xxxx
Less: Cost of Improvement [COI] xxxx xxxx
Gross Short Term Capital Gain xxxx
Less: Exemption u/s 54B Xxxx
Taxable STCG Xxxx
Computation of Long Term Capital Gains [Indexation]

Full value of Consideration Xxxx
Less: Expenditure incurred wholly and exclusively in connection with such a Xxxx
transfer [COT]
Net Sales Consideration Xxxx
Less: Indexed Cost of Acquisition [ICOA] xxxx
Less: Indexed Cost of Improvement [ICOI] xxxx Xxxx
Gross Long Term Capital Gain Xxxx
Less: Exemption U/s 54 / 54B / 54EC /54EE / 54F etc. Xxxx
Taxable LTCG Xxxx
Note: Benefit of Indexation is available only in case of Long-Term Capital Assets.
CII for the year in which asset is transferred

ICOA means = COA × ------------------------------------------------------------------------------
CII for the P.Y. in which the asset was first held by the assessee
or
CII for the year of 2001-02, whichever is later.
However as per the view expressed by Bombay High Court in CIT v. Manjula J. Shah, in case the cost
of acquisition of the capital asset in the hands of the assessee is taken to be cost of such asset in the
hands of the previous owner, the indexation benefit would be available from the year in which the
capital asset is acquired by the previous owner.
CII for the year in which asset is transferred

ICOI means = COI × -------------------------------------------------------------------------------------
CII for the year in which the improvement to the asset took place
Cases where Benefit of Indexation is Not Available even in case of Long-Term Capital Assets:
a) Transfer of a bond or a debenture other than Capital Indexed Bonds issued by the Government OR
Sovereign Gold Bond issued by the RBI under the Sovereign Gold Bond Scheme 2015. (Index benefit is
available on transfer on sovereign gold bond)
b) Transfer of undertaking or division in a Slump Sale under Section 50B.
c) Transfer of shares/debentures of an Indian company purchased by a Non-Resident in foreign currency.
d) Transfer of Depreciation Assets (other than an asset used by a power generating unit eligible for
depreciation on SLM basis),


First Proviso to Section 48 [Capital Gain to Non Resident]
Benefit of Currency Conversion
In case of a Non-Resident, the capital gains (long term or short term) arising from the transfer of Shares or
debentures held in an Indian company (not applicable on Units) shall be computed as under:
Convert the COA, COT and sales consideration in to the same foreign currency as was initially utilized in the
purchase of such shares or debentures and then capital gains so computed (without indexation) in foreign
currency shall be converted into Indian currency (It is mandatory).
Particulars Conversion rate What computation is done

Full Value of consideration Average exchange rate as on Sale consideration in Indian
date of transfer. currency is converted into foreign
currency.
Less: Expenses incurred Average exchange rate as on Expenditure in Indian currency to be
wholly and exclusively on date of transfer. converted into foreign currency.
transfer
Less: Cost of acquisition (No Average exchange rate as on Cost of acquisition in Indian
indexation benefit is date of acquisition. currency is converted into foreign
available) currency.
Resultant Capital Gains Telegraphic transfer buying Capital gains computed in foreign
rate on date of transfer. currency are reconverted in
Indian currency.
Example:
Anthony, a non-resident Indian, acquired 1,000 shares in A Ltd. (an Indian Company) for ` 20,000 by
utilizing foreign currency ($) on 18/08/2021. On 16/09/2021, Anthony sold such shares for ` 45,000 and
utilized the proceeds in acquisition of 500 shares of B Ltd. (an Indian Company) after paying
expenditure on transfer on 13/8/2021 ` 5,000. Compute capital gain liability in the PY 2021-22.
Date $ Buying rate US $ Selling rate
18/08/2021 45 46
13/08/2021 48 50
16/09/2021 46 48
Solution:
Since the assessee is a non-resident and shares of an Indian company were acquired by utilizing foreign
currency, hence, first proviso to sec. 48 shall be applicable on above transactions.
Computation of capital gain for the A.Y. 2022-23
Particulars Working Rate applied Amount Amount
Sale consideration ` 45,000/ ` 47 Av. rate as on 16/09/2021 $957.4
Less: Expenditure on transfer ` 5,000/ ` 47 Av. rate as on 16/09/2021 $106.4
Net Sale consideration $851.0
Less: Cost of acquisition ` 20,000/ ` 45.5 Av rate as on 18/08/2021 $439.6
Less: Cost of improvement Nil $439.6
Short term Capital Gain $411.4
Short term capital gain $411.4 × ` 46 Buying rate as on ` 18,924

16/09/2021


Second Proviso to Section 48 – Index Benefit
In Computing LTCG from transfer of LTCA as per Section 48, COA & COI will be replaced by ICOA & ICOI
respectively.
Third Proviso to Section 48
Nothing contained in the first and second provisos shall apply to the capital gains arising from the transfer of a
long-term capital asset being an equity share in a company or a unit of an equity oriented fund or a unit of a
business trust referred to in Section 112A
Fourth Proviso to Section 48
Nothing contained in the second proviso shall apply to the long-term capital gain arising from the transfer
of a long-term capital asset, being a bond or debenture other than-
(a) Capital Indexed Bonds issued by the Government; or
(b) Sovereign Gold Bond issued by the Reserve Bank of India under the Sovereign Gold Bond Scheme, 2015
Fifth Proviso to Section 48

In case of Non-Resident assesee, any gains arising on account of appreciation of rupee against a foreign
currency at the time of redemption of Rupee Denominated Bond of an Indian company held by him, shall be
ignored for the purposes of computation of full value of consideration under this section.


Class notes


COA IN CASE OF FOLLOWING INTANGIBLE ASSETS [SECTION 55(2)(a)]:
a) Goodwill of a business or Profession d) Tenancy rights

b) Right to carry on any business or e) Trade mark or brand name associated with a
profession business or profession
c) Right to manufacture, produce / process f) Stage carriage permits (Route Permits)
any article or thing
g) Loom Hours
Situation Cost of Acquisition

In the case of acquisition of such asset by Purchase price
the assessee by purchase
In the case falling under sub-clauses (i) to Purchase price for such previous owner
(iv) of sub-section (1) of section 49 and
where such asset was acquired by the
previous owner (as defined in that section)
by purchase
In any other case (including self-generated NIL
assets)
However, in case of a capital asset, being goodwill of a business or profession, in respect of

which depreciation under section 32(1) has been obtained by the assessee in any previous year
(upto P.Y. 2019-20), the cost of acquisition of such goodwill (as on 1.4.2020) would be the
amount of the purchase price as reduced by the total amount of depreciation (upto P.Y. 2019-20)
obtained by the assessee under section 32(1).
[Added by Finance Act 2021, effective from AY 2021-22]


COA WHEN THE ASSET IS ACQUIRED BEFORE 01/04/2001 [SECTION 55(2)(b)]
When an asset has been acquired by the

(a) assessee or
(b) by the previous owner from whom the asset was acquired by the assessee u/s 49(1),
before 01/04/2001, the assessee has an option to take either the actual COA or FMV of the asset as on
01/04/2001 to be the COA for computation of CG. [Higher will be preferred]
However, in case of capital asset, being land or building or both, the fair market value of such asset on 1-
4-2001 shall not exceed the stamp duty value, wherever available, of such asset as on 1-4-2001.
The option is however not available in respect of the following items:

(a) Goodwill of a Business/Profession or Trade Mark/Brand name associated with a business/Profession
or Right to Manufacture, produce or process any article or thing or Right to carry on any
Business/Profession, Tenancy Rights, Stage Carriage Permits or Loom Hours (Hours granted by govt.
to weave yarn or thread) &
(b) Depreciable Assets
COST OF IMPROVEMENT [COI] - SECTION 55(1)(b)

a) Any COI incurred by the Assessee/Previous Owner is to be considered.
b) Any COI incurred before 01-04-2001 is to be completely ignored.
c) COI in respect of following assets is taken at NIL: IMPORTANT
 Goodwill of a Business (not profession);
 Right to manufacture, produce or process any article or thing;
 Right to carry on any business or profession.


SECTION 51 - ADVANCE MONEY RECEIVED & FORFEITED
Where any capital asset was, on any previous occasion, the subject matter of negotiations for its transfer and any
advance or other money received is forfeited (retained) by the Assessee, then the amount so forfeited shall be
deducted from,
 The cost for which the asset was acquired, or
 The FMV as on 1.4.2001 where FMV as on 1.4.2001 has been taken as COA, or
 The WDV in case of depreciable assets
as the case may be, in computing the COA.
NOTES:
 Amount forfeited either before or on/after 1.4.2001 is to be deducted as per section 51
 Amount forfeited on or after 01/04/2014, will not be deducted under this Section, but it will be taxable
as IOS as per New Section 56(2)(ix)
 Amount forfeited by previous owner is not to be deducted as per 51
 Travancore Rubber & tea Co. ltd (SC): if the money forfeited exceeds the cost, the cost shall be reduced to
the extent it becomes NIL, the excess shall be a Capital Receipt not taxable.
Advance forfeited due to failure of negotiations for transfer of a capital asset to be

taxable as “Income from other sources” [Section 56(2)(ix)]
(i) With effect from A.Y. 2015-16, new clause (ix) has been inserted in section 56(2) to provide for the taxability
of any sum of money, received as an advance or otherwise in the course of negotiations for transfer of a
capital asset. Such sum shall be chargeable to income-tax under the head ‘Income from other
sources’, if such sum is forfeited and the negotiations do not result in transfer of such capital asset.
(ii) Section 51 has been amended to provide that where any sum of money received as an advance or otherwise
in the course of negotiations for transfer of a capital asset, has been included in the total income of the
assessee for any previous year, in accordance with section 56(2)(ix), such amount shall not be deducted
from the cost for which the asset was acquired or the written down value or the fair market value, as the
case may be, in computing the cost of acquisition.
Question:
Mr. K purchases a house property on April 10, 1998 for ₹ 35,000. The FMV of the house property on April
1, 2001 was ₹ 70,000. SDV as on 01.04.2001 is ₹ 80,000. On August 31, 2004, Mr. K enters into an
agreement with Mr. J for sale of such property for ₹ 1,20,000 and received an amount of ₹ 10,000 as
advance. However, as Mr. J did not pay the balance amount, Mr. K forfeited the advance. In May 2007, Mr.
K constructed the first floor by incurring a cost of ₹ 50,000. Subsequently, in September 2007, Mr. K gifted
the house to his friend Mr. D. On February 10, 2022, Mr. D sold the house for ₹ 30,00,000.
You are required to compute the capital gains taxable in the hands of Mr. D for the AY 2022-23.
Question:
Mr. X purchases a house property in December 1995 for ₹ 1,25,000 and an amount of ₹ 75,000 was spent on the
improvement and repairs of the property in March 2001. The property was proposed to be sold to Mr. Z in the
month of May 2003 and an advance of ₹ 40,000 was taken from him. As the entire money was not paid in time,
Mr. X forfeited the advance and subsequently sold the property to Mr. Y in the month of October 2021 for
₹ 54,00,000. The fair value of the property on April 1, 2001 was ₹ 3,90,000. SDV as on 01.04.2001 is ₹ 4,20,000.
What is the capital gain chargeable in the hands of Mr. X for the AY 2022-23?
Section 50D – FMV as a Full Value of Consideration

Fair market value of the capital asset on the date of transfer to be taken as sale consideration, in cases where
the consideration is not determinable.


SECTION 50C – SALE CONSIDERATION IN SPECIAL CASES
Where the consideration received (as declared) for LAND OR BUILDING OR BOTH is LESS THAN the value
adopted or assessed or assessable by Stamp Valuation Authority (SVA) then, sales consideration shall be
taken to be the value so adopted or assessed or assessable by SVA.
Where the date of the agreement fixing the amount of consideration and the date of registration for the transfer of
the capital asset are not the same, the value adopted or assessed or assessable by the stamp valuation authority
on the date of agreement may be taken for the purposes of computing full value of consideration for such
transfer if amount of consideration, or a part thereof, has been received by way of an account payee cheque or
account payee bank draft or by use of electronic clearing system through a bank account or through such other
electronic modes as may be prescribed, on or before the date of the agreement for transfer.
The prescribed electronic modes notified are credit card, debit card, net banking, IMPS (Immediate
payment Service), UPI (Unified Payment Interface), RTGS (Real Time Gross Settlement), NEFT (National
Electronic Funds Transfer), and BHIM (Bharat Interface for Money) Aadhar Pay as other electronic modes
of payment.
Where the value adopted or assessed or assessable by the stamp valuation authority does not exceed
110% of the consideration received or accruing as a result of the transfer, the consideration so received
or accruing as a result of the transfer shall, for the purposes of section 48, be deemed to be the full value
of the consideration.
REFERENCE TO VALUATION OFFICER:
 Where the assessee can claim that the value adopted or assessed or assessable by stamp valuation
authority is greater than the FMV of the property as on the date of transfer;
 and value so adopted / assessed or assessable by the Stamp Valuation Authority is not disputed (i.e.
challenged) in any appeal / revision before any authority or Court.,
 then A.O. may refer the case to a Valuation Officer for valuation of the capital asset.
Different situation Consideration
Value adopted / assessed or assessable
Value adopted / assessed or assessable
> by the SVA
by the SVA
Value adopted or assessed or

Where value Value ascertained by a valuation officer
assessable by the SVA but more than
ascertained
by a valuation
< 110% of declared value
Under Section 55A
officer
Section 50C is not attracted. Therefore,
Declared value in the ROI or 110% of declared value in the ROI will be sales
< declared value consideration.


SECTION 50CA – SALE CONSIDERATION IN CASE OF TRANSFER OF UNLISTED
SHARES
Where the consideration received or accruing as a result of the transfer by an assessee of a capital
asset, being share of a company other than a quoted share, is less than the fair market value of
such share determined in such manner as may be prescribed, the value so determined shall, for the
purposes of section 48, be deemed to be the full value of consideration received or accruing as a
result of such transfer.
Explanation-
For the purposes of this section, "quoted share" means the share quoted on any recognised stock
exchange with regularity from time to time, where the quotation of such share is based on current
transaction made in the ordinary course of business.
The provisions of this section would, however, not be applicable to any consideration received
or accruing as a result of transfer by such class of persons and subject to such conditions as
may be prescribed.


EXEMPTED TRANSFER [Section 47] – SOME SPECIAL CASES
HUF - Taxability of Distribution of Capital Assets on the Total / Partial Partition of HUF
1. Distribution of Capital Asset in total or partial partition of HUF is not considered as transfer and not chargeable
to capital gain tax. [Section 47(i)]
2. Holding Period in the hands of the Transferee for the purpose of subsequent transfer [Sec 2(42A)]:
Previous owner’s holding period shall be included.
3. Cost in the hands of Transferee [Sec 49]: Cost to Previous owner
Example: Mr. X & sons, HUF, purchased a land for ₹ 40,000 in 2004-05. In 2009-10, a partition takes place
when Mr. A, a coparcener, is allotted this plot valued at ₹ 80,000. In 2012-13, he had incurred expenses of
₹ 1,85,000 towards fencing of the plot. Mr. A sells this plot of land for ₹ 15,00,000 in PY 2021-22 after
incurring expenses to the extent of ₹ 20,000. You are required to compute the capital gain for the A.Y.
2022-23.
Financial year Cost Inflation Index
2004-05 113
2009-10 148
2012-13 200
2021-22 317
Solution: Computation of taxable capital gains for the A.Y. 2022-23
Particulars ₹ ₹
Sale consideration 15,00,000
Less: Expenses incurred for transfer 20,000
Less: 14,80,000
(i) Indexed cost of acquisition (₹ 40,000 × 317/148) 85,676
(ii) Indexed cost of improvement (₹ 1,85,000 × 317/200) 2,93,225 3,78,901
Long term capital gains 11,01,099

Note - As per the view expressed by Bombay High Court in CIT v. Manjula J. Shah, in case the cost of acquisition
of the capital asset in the hands of the assessee is taken to be cost of such asset in the hands of the previous
owner, the indexation benefit would be available from the year in which the capital asset is acquired by the
previous owner. If this view is considered, the indexed cost of acquisition would have to be calculated by
considering the Cost Inflation Index of F.Y. 2004-05.
GIFT - Taxability of Transfer of Capital Assets under Gift / Will/ Irrevocable Trust
(A) Transfer of Capital Asset under Gift / Will/ Irrevocable Trust is not considered as transfer and not
chargeable to capital gain tax Under Section 47(iii) in the hands of Transferor.
a) Conditions to be fulfilled: Capital Assets other than Shares, Debentures or Warrants allotted directly
or indirectly under ESOP shall be transferred.
b) Holding Periods in hands of the Transferee in case of subsequent transfer [Sec 2(42A)]: Previous
owner’s holding period shall be included.
c) Cost in the hands of Transferee [Sec. 49]: Cost to Previous Owner.
(B) COA/POH for Transferee where GIFT is taxable u/h IOS:

COA [Section 49(4)]: However where the capital gain arises from the transfer of a property, the value
which has been subject to Income-Tax under section 56(2)(x) in the hands of recipient, the COA of such
property shall be deemed to be the value [FMV/SDV] which has been taken into account for the purpose of
the said Section 56(2)(x). [Previous owner cost has to be ignored]
POH: Further, POH in the hands of transferee will be started from the date of Gift in the hands of
transferee.


TAXABILITY OF TRANSFER BY WAY OF CONVERSION OF BONDS/DEBENTURES ETC.
OF A COMPANY INTO SHARES/DEBENTURES OF THAT COMPANY:
1. Such transfer is exempted transfer u/s 47(x).

2. COA of such shares / debenture for subsequent transfer: Cost of that part of the debenture, bond,
debenture stock or deposits certificate, which is so converted.
3. POH of such converted shares or debentures shall include the period for which the bond, debentures etc
was held by the assessee before conversion.
Example: Mr. B purchased convertible debentures for ₹ 5,00,000 during August 2008. The debentures
were converted into shares in September 2012. These shares were sold for ₹ 15,00,000 in August, 2021.
The brokerage expenses is ₹ 50,000. You are required to compute the capital gains in case of Mr. B for the
Financial Year Cost Inflation Index
2008-09 137
2012-13 200
2021-22 317
Solution:
Computation of Capital Gains of Mr. B for the A.Y. 2022-23
Particulars ₹
Less: Expenses on transfer i.e. Brokerage paid 50,000
Net consideration 14,50,000
Less: Indexed cost of acquisition (₹ 5,00,000 × 317/200) 7,92,500
Long term capital gain 6,57,500
Note: For the purpose of computing capital gains, the holding period is considered from the date of purchase
of convertible debenture.
Taxability of Transfer of artistic work etc to the Government etc [Section 47(ix)]
Any Transfer of artistic work, scientific work or art collection, book, manuscript, drawing, painting photographs
printings etc., to the Govt. or University or National Museums Or National Art Gallery or any other notified
public museum / institution is EXEMPTED TRANSFER.
ESOP: TAXABILITY OF TRANSFER OF SPECIFIED SECURITY/SWEAT SHARES

ALLOTED
A. COA: Where the capital gain arises from the transfer of specified security or sweat equity shares allotted
under ESOP Scheme as referred to section 17(2)(vi), the COST OF ACQUSITION of such SECURITY or
SHARES Shall be the FMV which has been taken into account for the purposes of section 17(2)(vi)
[Section 49(2AA)]
B. POH: From the date of allotment or transfer of such specified security or sweat equity shares.


ASCERTAINMENT OF COST IN SPECIFIED CIRCUMSTANCES
SECTION 49(1) - DEEMED COST OF ACQUISITION
Cost to previous owner deemed as cost of acquisition of asset: In the following cases, the cost of
acquisition of the asset shall be deemed to be cost for which the previous owner of the property
acquired it. To this cost, the cost of improvement to the asset incurred by the previous owner or the
assessee must be added.
Where the capital asset became the property of the assessee:
(i) on any distribution of assets on the total or partition of a HUF;
(ii) under a gift or will;
(iii)
a) by succession, inheritance or devolution;
b) on any distribution of assets on the liquidation of a company;
c) under a transfer to revocable or an irrevocable trust;
d) under any transfer of capital asset by a holding company to its wholly owned subsidiary Indian
company or by a subsidiary company to its 100% holding Indian company, referred to in
section 47(iv) and 47(v) respectively;
e) under any transfer referred to in section 47(vi) of a capital asset by amalgamating company to
the amalgamated Indian company, in a scheme of amalgamation;
f) under any transfer referred to in section 47(vib), of a capital asset by the demerged company
to the resulting Indian company, in a scheme of demerger;
(list is not exhaustive)
(iv) by conversion by an individual of his separate property into a HUF property, by the mode referred
to in section 64(2).
Accordingly, section 2(42A) provides that in all such cases, for determining the period for which the
capital asset is held by the transferee, the period of holding of the asset by the previous owner shall
also be considered.
Previous owner means the last previous owner of the capital asset, who acquired it through the mode
of acquisition other than referred above.


COA IN CASE OF FINANCIAL ASSETS
Capital asset Cost Of Acquisition POH Will Start From
Shares/securities originally purchased

from:
 Primary Market (Direct from Company)  Allotment price  Date of Allotment
 Secondary Market
 Transaction through brokers  Purchase price +  Date of Broker’s note
Brokerage
 Transaction between parties directly  Purchase price  Date of Contract of sale
Right Share / Securities

 Offer price by the Co.  Date of Allotment
Renouncement of right:
 For the person who renounces the right.  Nil  Date of offer
 For the person who purchased the right.  Offer price + Amount paid  Date of Allotment
for Renouncement
Bonus shares / Securities  Nil  Date of Allotment
Note:
The option to take FMV as on 01-04-2001 as COA is available if such assets were acquired before 01-04-
2001. [Even in case of Bonus shares]


Example:
Ms. Usha purchases 1,000 equity shares in X Ltd. at a cost of ₹ 15 per share (brokerage 1%) in January
1998. She gets 100 bonus shares in August 2000. She again gets 1100 bonus shares by virtue of her
holding on February 2005. Fair market value of the shares of X Ltd. on April 1, 2001 is ₹ 25. In January
2022, she transfers all her shares @ ₹ 150 per share (brokerage 2%). Compute the capital gains taxable in
the hands of Ms. Usha for the A.Y. 2022-23 assuming X Ltd is an unlisted company and securities
transaction tax was not applicable at the time of sale.
Cost Inflation Index for F.Y. 2001-02 : 100, F.Y. 2004-05 : 113 & F.Y. 2020-21: 317
Solution
Computation of capital gains for the A.Y. 2022-23
Particulars ₹
1000 Original shares
Sale proceeds (1000 × ₹ 150) 1,50,000
Less : Brokerage paid (2% of ₹ 1,50,000) 3,000
Net sale consideration 1,47,000
Less : Indexed cost of acquisition [₹ 25 × 1000 × 317/100] 79,250
Long term capital Gain (A) 67,750
100 Bonus shares

Sale proceeds (100 × ₹ 150) 15,000
Less : Brokerage paid (2% of ₹ 15,000) 300
Net sale consideration 14,700
Less : Indexed cost of acquisition [₹ 25 × 100 ×317/100] [See Note below] 7,925
Long term capital Gain (B) 6,775
1100 Bonus shares

Sale proceeds (1100 × ₹ 150) 1,65,000
Less: Brokerage paid (2% of ₹ 1,65,000) 3,300
Less: Cost of acquisition NIL
Long term capital gain (C) 1,61,700
Long term capital gain (A+B+C) 2,36,225
Note: Cost of acquisition of bonus shares acquired before 1.4.2001 is the FMV as on 1.4.2001 (being the
higher of the cost or the FMV as on 1.4.2001).
Example:
Mr. R holds 1000 shares in Star Minus Ltd., an unlisted company, acquired in the year 2001-02 at a cost of
₹ 25,000. He has been offered right shares by the company in the month of August, 2021 at ₹ 140 per
share, in the ratio of 2 for every 5 held. He retains 50% of the rights and renounces the balance right
shares in favour of Mr. Q for ₹ 25 per share in September 2021. All the shares are sold by Mr. R for ₹ 300
per share in January 2022 and Mr. Q sells his shares in December 2021 at ₹ 280 per share. What are the
capital gains taxable in the hands of Mr. R and Mr. Q?
2001-02 100
2020-21 317
Solution
Computation of capital gains in the hands of Mr. R for the A.Y. 2022-23
Particulars ₹
1000 Original shares
Sale proceeds (1000 × ₹ 300) 3,00,000
Less : Indexed cost of acquisition [₹ 25,000 × 317/100] 79,250
Long term capital gain (A) 2,20,750
200 Right shares

Sale proceeds (200 × ₹ 300) 60,000
Less : Cost of acquisition [₹ 140 × 200] [Note 1] 28,000
Short term capital gain (B) 32,000


Sale of Right Entitlement
Sale proceeds (200 × ₹ 25) 5,000
Less : Cost of acquisition [Note 2] NIL
Short term capital gain (C) 5,000
Capital Gains (A+B+C) 2,57,750
Note 1: Since the holding period of these shares does not exceed 2 years, they are short term capital assets
and hence cost of acquisition will not be indexed.
Note 2: The cost of the rights renounced in favour of another person for a consideration is taken to be nil. The
consideration so received is taxed as short-term capital gains in full. The period of holding is taken from the
date of the rights offer to the date of the renouncement.
Computation of capital gains in the hands of Mr. Q for the A.Y. 2022-23
Particulars ₹
200 shares :
Sale proceeds (200 × ₹ 280) 56,000
Less: Cost of acquisition [200 shares × (₹ 25 + ₹ 140)] [See Note below] 33,000
Short term capital gain 23,000
Note: The cost of the rights is the amount paid to Mr. R as well as the amount paid to the company. Since the
holding period of these shares does not exceed 2 years, they are short term capital assets.
Taxability on conversion of Inventory into Capital Aseet

Section 28(via)
The fair market value of inventory as on the date on which it is converted into, or treated as, a capital asset
determined in the prescribed manner shall be chargeable to tax as business income.
Explanation 1A to Section 43(1)

Where a capital asset referred to in clause (via) of section 28 is used for the purposes of business or profession,
the actual cost of such asset to the assessee shall be the fair market value which has been taken into account for
the purposes of the said clause.
Section 49(9)
Where the capital gain arises from the transfer of a capital asset referred to in clause (via) of section 28, the cost
of acquisition of such asset shall be deemed to be the fair market value which has been taken into account for the
purposes of the said clause.
Explanation 1 to Section 2(42A)

In the case of a capital asset referred to in clause (via) of section 28, the period shall be reckoned from the date of
its conversion or treatment.


SECTION 45 - SCOPE AND YEAR OF CHARGEABILITY OF CAPITAL GAINS
Section 45(1)
Any profits or gains arising from the TRANSFER of a CAPITAL ASSET effected in the PREVIOUS YEAR shall
be chargeable to income tax under the head “Capital Gain” and shall be deemed to be the income of Previous
Year in which the transfer took place.
 For Immovable Property: The date on which conveyance deed is executed is considered
 For Movable Property: The date of delivery is important.
SECTION 45(1A) - COMPENSATION RECIEVED FROM INSURANCE COMPANY
Where any person receives any money or other assets from an INSURER on account of damage or destruction of
any capital asset, as a result of –
1. Flood, Typhoon, Hurricane, Cyclone, Earthquake or Other convulsion of nature; or
2. Riot or Civil Disturbance; or
3. Accidental Fire or Explosion; or
4. Action by an enemy/action taken in combating an enemy (whether with/without a declaration of war)
Then, any profits or gains arising from receipt of such money or other assets shall be chargeable to income-tax
under the head “Capital gains” and shall be deemed to be the income of the such person for the previous
year in which money or other asset was received.
For the purposes of section 48, the value of any money or the FMV of other assets on the date of such receipt
shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of such
capital assets.
Capital Gains = Money received and/or FMV of assets on the date of receipt xxx
Less: [COT + COA/ICOA + COI/ICOI] xxx
Note: if compensation is received for depreciable assets, then provisions of Section 50 shall apply.


SECTION 45(1B) – Proceeds under a Unit Linked Insurance Policy
[Inserted by Finance Act 2021, effective from AY 2021-22]
Where
 any person receives at any time during any previous year any amount under a unit
linked insurance policy, including the amount allocated by way of bonus on such policy,
 to which exemption under clause (10D) of section 10 does not apply on account
of applicability of the fourth or fifth proviso, then,
 any profits or gains arising from receipt of such amount by such person shall be
chargeable to income-tax under the head "Capital gains" and
 shall be deemed to be the income of such person of the previous year in which such
amount was received and
 the income taxable shall be calculated in such manner as may be prescribed.
In other words,
Where any person receives, at any time during any previous year, any amount, under a ULIP
issued on or after 1.2.2021, to which exemption under section 10(10D) does not apply on
account of –
i. premium payable exceeding ` 2,50,000 for any of the previous years during the term of
such policy; or
ii. the aggregate amount of premium exceeding ` 2,50,000 in any of the previous years
during the term of any such ULIP(s), in a case where premium is payable by a person for
more than one ULIP issued on or after 1.2.2021,
then, any profits or gains arising from receipt of such amount by such person shall be
chargeable to income-tax under the head “Capital gains” and shall be deemed to be the
income of the such person for the previous year in which such amount was received. The
income taxable shall be calculated in such manner as may be prescribed.

SECTION 45(2) - CONVERSION OF A CAPITAL ASSET IN TO STOCK-IN-TRADE
Capital gains arising from the transfer, by way of conversion of a capital asset in to stock in trade of a
business carried on by assessee, Shall be charged to tax as his income of the Previous Year in which
such stock in trade is sold or otherwise transferred by him.
Capital gains = FMV of assets as on the Date of Conversion xxx

Less: [COT + COA/ICOA + COI/ICOI] xxx
PGBP = [Consideration Received on Sale (-) FMV of assets on the date of conversion]
Important Notes:
1. Amount recorded in the books of account of the business as the value of stock-in-trade is not relevant for
computing capital gain as well as PGBP.
2. Capital gain shall be computed as per provision applicable in the Previous Year in which Stock in Trade is
sold.
Example:
ABC Ltd., converts its capital asset acquired for an amount of ₹ 50,000 in June, 2003 into stock-in-trade in
the month of November, 2012. The fair market value of the asset on the date of conversion is ₹ 2,50,000.
The stock-in-trade was sold for an amount of ₹ 3,50,000 in the month of December 2021. What will be the
tax treatment?
2003-04 109
2012-13 200
2021-22 317
Solutions:
The capital gains on the sale of the capital asset converted to stock-in-trade is taxable in the given case. It arises
in the year of conversion (i.e. P.Y. 2012-13) but will be taxable only in the year in which the stock-in-trade is sold
(i.e. P.Y. 2021-22). Profits from business will also be taxable in the year of sale of the stock-in-trade (P.Y. 2021-
22). The long-term capital gains and business income for the A.Y. 2022-23 are calculated as under:
Particulars ₹ ₹
Profits and Gains from Business or Profession
Sale proceeds of the stock-in-trade 3,50,000
Less: Cost of the stock-in-trade (FMV on the date of conversion) 2,50,000 1,00,000
Long Term Capital Gains

Full value of the consideration (FMV on the date of the conversion) 2,50,000
Less: Indexed cost of acquisition (₹ 50,000 x 200/109) 91,743 1,58,257
Note: For the purpose of indexation, the cost inflation index of the year in which the asset is converted into stock-
in-trade should be considered.
Section 45(2A) – TRANSFER OF BENEFICIAL INTEREST IN SECURITIES
NOT IN A CA-INTERMEDIATE SYLLABUS NOW


SECTION 45(3) – INTRODUCTION OF CAPITAL ASSET AS CAPITAL CONTRIBUTION
SECTION 45(4) – Distribution of a Capital Asset by A Firm / AOPs / BOIs
Section 45(4) is substituted by Finance Act 2021, effective from AY 2021-22
NEW SECTION 9B - Income on receipt of capital asset or stock in trade by specified

person from specified entity
Inserted by Finance Act 2021, effective from AY 2021-22
Section 45(3), Amended Section 45(4) & New Section 9B are now NOT in
a CA-INTERMEDIATE SYLLABUS for May & Nov 2022 Exam


Class Notes


Class Notes


SECTION 45(5) – COMPULSORY ACQUISITION OF CAPTIAL ASSET
In case of the transfer of capital asset by way of compulsory acquisition OR the transfer is the one for which,
consideration is determined or approved by CG or RBI, then, capital gain shall be computed as under:
IN RESPECT OF ORIGINAL COMPENSATION
 Taxable in the Previous Year in which such compensation is FIRST RECEIVED by the assessee (even part
thereof).
 POH shall be taken up to the date when asset is compulsorily acquired
IN RESPECT OF ENHANCED / ADDITIONAL COMPENSATION
 Taxable in the Previous Year in which such compensations received by the assessee.
 Amount of Capital Gain shall be Compensation Received less Litigation Expenses, if any.
 Nature of capital gain shall be the same as the nature of capital gain w.r.t. the original compensation.
 The COA & COI shall be taken to be NIL.
Tax Note:
1. Where the Original / Enhanced Compensation is received subsequently to the death of assessee then it is
taxable in the hands of his legal heirs.
2. Amount of compensation received in pursuance of an interim order of the court etc shall be deemed to be
income chargeable under the head ‘Capital Gains’ in the PY in which the final order of such courts etc is
made.
3. Any interest received on delayed receipt of compensation or enhanced compensation, as the case may be,
shall be subject to tax under the head ‘Income from Other Sources’ on receipt basis.
[50% deduction is allowed u/s 57]
Question:
Mr. X, who follows the accrual system of accounting, purchased land for ₹ 25,00,000/ – in June 2013. This asset
was transferred to the Government by way of compulsory acquisition in September 2019 for an immediate
compensation of ₹ 75,00,000/ – . However, Mr. X disputed the compensation and an enhanced compensation of
₹ 20,00,000 was awarded to him by the court in November 2020. Interest accrued on this compensation as on
31st March 2021 was ₹ 4,00,000/ – . The enhanced compensation was received by him in Dec 2021 along with an
interest of ₹ 5,00,000, which has accrued till date. Discuss the year of chargeability and appropriate heads of
income under which the above transactions would be taxed.


SECTION 45(5A) – Transfer under Specified Agreement
1. Notwithstanding anything contained in Sub-section (1), where the capital gain arises to an assessee,
being an Individual or a HUF, from the transfer of a capital asset, being land or building or both, under
a specified agreement, the capital gains shall be chargeable to income-tax as income of the previous
year in which the certificate of completion for the whole or part of the project is issued by the
competent authority.
2. For the purposes of section 48, the stamp duty value, on the date of issue of the said certificate, of his
share, being land or building or both in the project, as increased by the consideration received in
cash, if any, 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 provisions of this sub-section shall not apply where the assessee transfers his share in the project
on or before the date of issue of said certificate of completion, and the capital gains shall be deemed
to be the income of the previous year in which such transfer takes place and the provisions of this Act,
other than the provisions of this sub-section, shall apply for the purpose of determination of full value
of consideration received or accruing as a result of such transfer
4. "Competent Authority" means the authority empowered to approve the building plan by or under any
law for the time being in force;
5. "Specified Agreement" means a registered agreement in which a person owning land or building or both,
agrees to allow another person to develop a real estate project on such land or building or both, in
consideration of a share, being land or building or both in such project, whether with or without
payment of part of the consideration in cash;
6. "Stamp Duty Value" means the value adopted or assessed or assessable by any authority of Government
for the purpose of payment of stamp duty in respect of an immovable property being land or building
or both
Consequential amendments due to Section 45(5A):

(A) Cost of acquisition of the share in the project [Section 49(7)]:
COA of the share in the project being land or building or both, in the hands of the Individual or HUF who
was the owner of land or building or both shall be the amount which is deemed as full value of
consideration under section 45(5A) mentioned above
(B) TDS on monetary consideration – Section 194-IC:

Notwithstanding anything contained in Section 194-IA, any person responsible for paying to a Resident
any sum by way of consideration, not being consideration in kind, under the agreement referred in
Section 45(5A), shall at the time of credit of such sum to the account of the payee or at the time of
payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier,
deduct an amount equal to 10% of such sum as income tax thereon.


Class Notes


EXEMPTION OF CAPITAL GAINS
CAPITAL GAINS ON SALE OF RESIDENTIAL HOUSE [SECTION 54]
ELIGIBLE ASSESSEE – INDIVIDUAL & HUF
CONDITIONS
 There should be a transfer of Residential House Property (buildings or lands appurtenant thereto)
 It must be a Long -Term Capital Asset
 Income from such house should be chargeable under the head “Income from house property”
 Where the amount of capital gains exceeds ₹ 2 crore
Where the amount of capital gain exceeds ₹ 2 crore, one residential house in India should be
 purchased within 1 year before or 2 years after the date of transfer (or)
 constructed within a period of 3 years after the date of transfer.
 Where the amount of capital gains does not exceed ₹ 2 crore

Where the amount of capital gains does not exceed ₹ 2 crore, the assessee i.e., individual or HUF,
may at his option,
 purchase two residential houses in India within 1 year before or 2 years after the date of
transfer (or)
 construct two residential houses in India within a period of 3 years after the date of transfer.
IMP: Where during any assessment year, the assessee has exercised the option to purchase or
construct two residential houses in India, he shall not be subsequently entitled to exercise the
option for the same or any other assessment year.
However, he can continue to claim exemption on purchase or construct of one house.
QUANTUM OF EXEMPTION – LOWER OF THE TWO
 Amount invested in Residential House or houses or Capital Gain whichever is lower.
UNUTILISED AMOUNT – CAPITAL GAIN ACCOUNT SCHEME APPLICABLE
a) The amount not utilized before the due date of filing ROI shall be deposited before the due date of filing ROI
in Capital gain Accounts Scheme.
b) The amount should be utilized within the prescribed period.
c) Amount not utilized within the prescribed period (3 years from the date of transfer of the original asset) shall
be treated as LTCG of the P/Y in which the prescribed period expiries.
POH OF NEW ASSET - 3 YEARS
3 years from the date of acquisition or construction
CONSEQUENCES OF TRANSFER OF NEW ASSET BEFORE 3 YEARS
If the new asset is transferred before 3 years from the date of its acquisition/Construction, then cost of the
asset will be reduced by capital gains exempted earlier for computing capital gains.


CAPITAL GAINS ON TRANSFER OF AGRICULTURE LAND [SECTION 54B]
ELIGIBLE ASSESSEE – INDIVIDUAL & HUF
CONDITIONS
 There should be a transfer of URBAN Agricultural Land.
 Such land must have been used for agricultural purposes either by the assessee himself or his parents
or by HUF in the 2 immediately preceding years.
 Another agricultural land (urban or rural) should be purchased within 2 years from the date of transfer.
 Cost of the new agricultural land or Capital Gain whichever is lower.
a) The amount not utilized before the due date of filing ROI shall be deposited before the due date of filing
ROI in Capital gain Accounts Scheme.
c) Amount not utilized within the prescribed period (2 years from the date of transfer of the original asset)
shall be treated as CG of the P/Y in which the prescribed period expiries.
POH of NEW ASSET - 3 YEARS
3 years from the date of acquisition.
CONSEQUENCES ON TRANSFER OF NEW AGRICULTURE LAND BEFORE 3 YEARS
 If the new agricultural land is transferred before 3 years from the date of its acquisition, then cost of the land
will be reduced by capital gains exempted earlier for computing capital gains.
 However, if the new agricultural land is a rural agricultural land, there would be no capital gains on transfer
of such land.
Example:
Mr. Z had purchased certain urban agricultural land on 26.12.2006 for ₹ 7,50,000. The land was being used for
agricultural purpose by him. This land is sold by him on 15.09.2021 for ₹ 78,50,000. He has spent ₹ 5,00,000 for
acquiring an urban agricultural land on 15.10.2021 and has deposited ₹ 3,00,000 under the capital gains account
scheme on 03.05.2022. Out of the spent amount deposited in Capital Gains Account Scheme, he withdrew
₹ 1,00,000 for purchasing agricultural land on 30.03.2023. The remaining amount could not be utilized by him for
purchase of agricultural land upto 14.09.2023. Compute the taxable capital gain for the AY 2022-23, AY 2023-24
& AY 24-25.
SEC. 10(37) – Exemption on CG from Agricultural Land

Eligible Assessee: Individual & HUF
Eligible Asset: Agricultural Land Situated in Urban Area
Conditions:
1. If such land, during the period of 2 years immediately preceding the date of transfer, was being used for
agricultural purposes by such HUF or individual or a parent of individual,
2. The transfer is by way of compulsory acquisition under any law, or a transfer the consideration for which is
determined or approved by the CG or the RBI.
3. Compensation must have been received on or after 01/04/2004.
4. Compensation as well as Enhanced Compensation both will be exempt.


CAPITAL GAINS NOT CHARGEABLE ON INVESTMENT IN CAPITAL BONDS
[Section 54EC]
ELIGIBLE ASSESSEE – ANY ASSESSEE
CONDITIONS
 There should be transfer of a LTCA being Land or building or both.

 Such asset can also be a depreciable asset held for more than 24 months as the case may be.
 The capital gains arising from such transfer should be invested in a long-term specified asset within 6
months from the date of transfer.
 LONG-TERM SPECIFIED ASSET means specified bonds, redeemable after 5 years, issued by the
 National Highways Authority of India (NHAI) or
 Rural Electrification Corporation Limited (RECL)
OR any bond redeemable 5 years which is to be notified by the CG in this behalf.
For this purpose, bond issued by
 Power Finance Corporation Limited &
 Indian Railway Finance Corporation Limited is considered as long term specified asset.
Further, there is no TDS on interest payable from these 2 bonds.
 The assessee should not transfer or convert or avail loan or advance on the security of such bonds for
a period of 5 years from the date of acquisition of such bonds.
 NOTE: In case of conversion of capital asset into stock in trade and subsequent sale of stock in trade -
period of 6 months to be reckoned from the date of sale of stock in trade for the purpose of section 54EC
exemption [CBDT Circular].
 Capital gains or amount invested in specified bonds, whichever is lower.
 Investment made during the PY in which the original assets are transferred and in the subsequent
financial year does not exceed ₹ 50,00,000.
ON VIOLATION OF CONDITIONS
In case of transfer or conversion of such bonds or availing loan or advance on security of such bonds
before the expiry of 5 years, the capital gain exempted earlier shall be taxed as Capital Gain in the
year of violation of condition.


CAPITAL GAINS NOT CHARGEABLE ON INVESTMENT IN NOTIFIED UNITS OF
SPECIFIED FUND [Section 54EE]
THIS SECTION IS NOW NOT RELEVANT FOR EXAM

1. Where the capital gain arises from the transfer of a long-term capital asset (original asset) and the assessee
has, at any time within a period of 6 months after the date of such transfer, invested the whole or any part of
capital gains in the long-term specified asset, the capital gain shall be exempt as follows:
QUANTUM OF EXEMPTION
If Cost of the long-term specified asset > Capital Gains
Entire Capital Gain is exempt.
If Cost of the long-term specified asset < Capital Gains
Capital Gain to the extent of Cost of new Asset
2. Investment made during the PY in which the original assets are transferred and in the subsequent financial
year does not exceed ₹ 50,00,000.
3. "long-term specified asset" means a unit or units, issued before the 1st day of April, 2019, of such fund as
may be notified by the Central Government in this behalf.
4. POH of NEW ASSET - 3 YEARS

5. ON VIOLATION OF CONDITIONS
In case of transfer or conversion of such notified units or availing loan or advance on security of such Units
before the expiry of 3 years, the capital gain exempted earlier shall be taxed as LTCG in the year of violation
of condition.


CAPITAL GAINS IN CASES OF INVESTMENT IN RESIDENTIAL HOUSE [SECTION 54F]
ELIGIBLE ASSESSEE – INDIVIDUAL / HUF
CONDITIONS
1. There must be transfer of a LONG-TERM CAPITAL ASSET, NOT BEING A RESIDENTIAL HOUSE
2. Transfer of plot of land is also eligible for exemption
3. The assessee should -
 Purchase a residential house within a period of 1 year before or 2 years after the date of transfer; or
 Construct a residential house within 3 years from the date of transfer.
4. Exemption under this section is available if the investment is made in One Residential House and that
too the house is situated in India.
5. The assessee should not own more than one residential house on the date of transfer.
6. The assessee should not –
 purchase any other residential house within a period of 2 year or
 construct any other residential house within a period of 3 years from the date of transfer of the original
asset.
QUANTUM OF EXEMPTION
If Cost of New Residential House = Net Sale Consideration of Original Asset,
Entire Capital Gain is exempt.
If cost of new residential house < Net sale consideration of original asset, only proportionate
capital gains is exempt i.e.
LTCG X Amount invested in RESIDENTIAL HOUSE / Net consideration
a) The amount not utilized before the due date of filing ROI shall be deposited before the due date of filing
ROI in Capital gain Accounts Scheme.
c) Amount not utilized within the prescribed period shall be treated as LTCG of the P/Y in which the prescribed
period expiries.
LTCG = Unutilized Amount x Amount of LTCG / Net Consideration
POH of NEW ASSET - 3 YEARS
CONSEQUENCES OF TRANSFER OF NEW ASSET BEFORE 3 YEARS
 Capital gain on new asset shall be taxed separately.

 LTCG exempted u/s. 54F shall be chargeable to tax as LTCG in the year of transfer.


Class Notes


Class Notes


CAPITAL GAINS ACCOUNT SCHEME (CGAS)
LEGAL HEIRS: CBDT clarifies that in the event of death of an individual before the stipulated period, the
unutilized amount is not chargeable to tax in the hands of the legal heirs of the deceased individual. Such
unutilized amount is not income but is a part of the estate devolving upon them.
Extension of time for acquiring new asset or depositing or investing amount of Capital
Gain [Section 54H]
In case of compulsory acquisition of the original asset, where the compensation is not received on the date of
transfer, the period available for acquiring a new asset or making investment in CGAS under sections 54, 54B,
54EC and 54F would be considered from the date of receipt of such compensation and not from the date of the
transfer.
Surcharge on Individual / HUF / AOP / BOI / Artificial Juridical Person
Total Income Surcharge Rate

tax under Section 111A & 112A) exceeds ₹ 50 Lakhs but not exceeding
₹ 1 crores
₹ 2 crores
Or Total Income (including dividend income & capital gains chargeable
to tax under Section 111A & 112A) exceeds ₹ 2 crores but not covered
below
(15% of income tax
₹5 crores
related to dividend
income & Income
covered u/s 111A &
112A)
tax under Section 111A & 112A) exceeds ₹ 5 crores
(15% of income tax
related to dividend
income & Income
covered u/s 111A &
112A)


TAX ON STCG ON SHARES/UNITS [SECTION 111A]
 This Section provides for a concessional rate of tax (i.e. 15%) on the STCG on transfer of
 an equity share in a company; or
 a unit of a business trust; or
 a unit of an equity oriented fund (i.e., a fund set up under a scheme of mutual fund
specified u/s 10(23D) or under a scheme of an insurance company comprising
ULIPs issued on or after 1.2.2021, to which exemption under section 10(10D) does
not apply)
where transaction is subjected to STT.
 Concessional Tax rate is also applicable in the case of STCG which arises from a transaction undertaken
in foreign currency on a recognized stock exchange located in an International Financial Services
Centre located in SEZ (evenif STT is not applicable).
 RESIDENT IND/HUF: STCG will be reduced by the unexhausted basic exemption limit.
 No Deductions under Chapter VI-A.
TAX ON LONG TERM CAPITAL GAINS OTHER THAN THOSE COVERED UNDER
SECTION 112A [SECTION 112]
 Where the Total Income of an assessee includes LTCG, tax is payable by the assessee @20% on such
LTCG.
 RESIDENT IND/HUF: LTCG will be reduced by the unexhausted basic exemption limit.
 Deductions under Chapter VI-A cannot be availed in respect of such LTCG
PROVISO TO SECTION 112:

The tax on LTCG from transfer of Listed Securities (other than Units) / Zero Coupon Bond shall be the
lower of the following:
 Tax on LTCG (computed normally with Indexation & Basic Exemption, if applicable), @20% OR
 Tax on LTCG (computed normally without indexation & without Basic Exemption), @ 10%
Section 112(1)(c) - Special Tax Rate for Long Term Capital Gain in Some Cases
Applicable on Non-resident (not being a company) or a foreign company
Conditions to be satisfied
1. Long-term capital gains shall be arise from the transfer of a capital asset, being unlisted
securities or shares of a company in which the public are not substantially interested.
2. Capital gain in respect of such asset shall be computed without giving effect to the
- First proviso to sec. 48 (computation of capital gain in foreign currency) and
- second proviso to sec. 48 (index benefit).
Special Tax Rate

Such long term capital gain shall be taxable @ 10% (+ surcharge and cess, as applicable).


EXEMPTION u/s SEC 10(38) - LTCG ON TRANSFER OF SECURITIES FULLY EXEMPT:
Conditions:
 The asset transferred is a LTCA
 Such asset is Equity Share of a company or Units of a Equity Oriented Mutual Fund or a Unit of
Business Trust
 Such transaction takes place on or after 1.10.2004
 at the time of transfer, the transaction is chargeable to STT.
 Exemption is also applicable in the case of LTCG which arises from a transaction undertaken in foreign
currency on a recognized stock exchange located in an International Financial Services Centre located
in SEZ (evenif STT is not applicable).
 Exemption u/s 10(38) may not be available if the following conditions are satisfied:
(a) Transfer of equity shares
(b) Shares were acquired on or after 01/10/2004
(c) STT was not chargeable at the time of Purchase
(d) The transaction is not covered by a negative list notified by CG (list of acquisitions)
[In other words, exemption shall be available only if Acquisition & transfer both is subjected to
STT in case equity shares are acquired on or after 01/10/2004]
Benefit of Exemption under Section 10(38) is now not available from AY 2019-20 as amended by FA 2018


Section 112A – Tax on Long Term Capital Gains in certain Cases
1. Notwithstanding anything contained in Section 112, a concessional rate of tax @10% will be
leviable on the LTCGs exceeding ` 100,000 on transfer of Long Term Capital Asset being
i. an equity share in a company; or
ii. a unit of a business trust; or
iii. a unit of an equity oriented fund (i.e., a fund set up under a scheme of mutual fund
specified u/s 10(23D) or under a scheme of an insurance company comprising ULIPs
issued on or after 1.2.2021, to which exemption under section 10(10D) does not apply)
2. Securities Transaction Tax has
a. in a case where the long-term capital asset is in the nature of an equity share in a
company, been paid on acquisition and transfer of such capital asset; or
b. in a case where the long-term capital asset is in the nature of a unit of an equity oriented
fund or a unit of a business trust, been paid on transfer of such capital asset.
3. RESIDENT IND/HUF: Such LTCG will be reduced by the unexhausted basic exemption limit.
4. Requirement of STT payment shall not apply to a transfer undertaken on a recognised stock
exchange located in any International Financial Services Centre and where the consideration
for such transfer is received or receivable in foreign currency.
5. The CG may notify the nature of acquisition where STT is not required to be paid.
6. Deductions under Chapter VI-A cannot be availed in respect of such LTCG.
7. Currency conversion as per first proviso to section 48 – Not available.
8. Indexation is not permitted to compute LTCG chargeable to tax under Section 112A.
9. Rebate under Section 87A is not available against tax computed under Section 112A.
Section 55(2)(ac) - COA

Cost of Acquisition, In relation to a long-term capital asset, being an equity share in a company or a
unit of an equity oriented fund or a unit of a business trust referred to in section 112A, acquired before
the 1st day of February, 2018 shall be higher of-
i. the cost of acquisition of such asset; and
ii. lower of –
a. the fair market value of such asset as on 31.01.2018; and
b. the full value of consideration received or accruing as a result of the transfer of the capital
asset.


Meaning of Fair Market value (IMP)
S.No. Circumstance Fair Market Value
(i) In a case where the capital asset is listed If there is trading in such asset on
on any recognized stock exchange as on such exchange on 31.01.2018
31.01.2018 The highest price of the capital asset
quoted on such exchange on the said date
If there is no trading in such asset

on such exchange on 31.01.2018
The highest price of such asset on such
exchange on a date immediately preceding
31.01.2018 when such asset was traded on
such exchange.
(ii) In a case where the capital asset is a unit The net asset value of such unit as
which is not listed on any recognized stock on the said date
exchange as on 31.01.2018
(iii) In a case where the capital asset is an An amount which bears to the cost of
equity share in a company which is acquisition the same proportion as CII for the
- not listed on a recognized stock exchange financial year 2017-18 bears to the CII for the
as on 31.01.2018 but listed on such first year in which the asset was held by the
exchange on the date of transfer assessee or on 01.04.2001, whichever is later.
- listed on a recognized stock exchange on

the date of transfer and which became the
property of the assessee in consideration
of share which is not listed on such
exchange as on 31.01.2018 by way of
transaction not regarded as transfer under
section 47


Meaning of Equity Oriented Fund for Section 111A & Section 112A
"Equity oriented fund" means a fund set up under a scheme of a mutual fund specified under Section 10(23D) or
under a scheme of an insurance company comprising ULIPs to which exemption under Section 10(10D)
does not apply and,-
i. in a case where the fund invests in the units of another fund which is traded on a recognised stock
exchange,-
A. a minimum of 90% of the total proceeds of such fund is invested in the units of such other fund; and
B. such other fund also invests a minimum of 90% of its total proceeds in the equity shares of
domestic companies listed on a recognised stock exchange; and
ii. in any other case, a minimum of 65% of the total proceeds of such fund is invested in the equity shares of
domestic companies listed on a recognised stock exchange:
NOTE:
1. The percentage of equity shareholding or unit held in respect of the fund, as the case may be, shall be
computed with reference to the annual average of the monthly averages of the opening and closing
figures.
2. In case of a scheme of an insurance company comprising unit linked insurance policies to which
exemption under clause (10D) of section 10 does not apply, the minimum requirement of 90% or
65%, as the case may be, is required to be satisfied throughout the term of such insurance policy;
TREATMENT OF SECURITIES TRANSACTION TAX

If Shares/Units are treated as Investment:
The securities transaction tax (STT) paid on sale of shares / units shall not be reduced from the sale
consideration and the STT paid on purchase of shares / units shall not be added to the COA.
If Shares/Units are treated as Stock-In-Trade:

If Shares/units are held as stock-in-trade then LTCG/STCG shall not arise. The profits/loss on sale of such
shares/units shall be assessable as business income/business loss taxable normally. In such a case the STT
paid on purchase and sale of securities shall be allowed as deduction under section 36(xv) of the Income
Tax Act while computing PGBP.


Class Notes


DIVIDEND/INTEREST STRIPPING (Dividend is now Taxable)
Section 94(7) provides that where any person buys or acquires any securities or unit within a period of 3
months prior to the record date and such person sells or transfers –
(a) such securities within a period of 3 months after such date, OR

(b) such unit within a period of 9 months after such date
and the dividend or income on such securities or unit received or receivable by such person is exempted, then,
the loss, if any, arising therefrom shall be ignored to the extent of exempted income for the purposes of computing
his income chargeable to tax.
BONUS STRIPPING – APPLICABLE ONLY ON UNITS

Sec. 94(8) provides that Where-
a) any person acquires any units (i.e., original units) within a period of 3 months prior to the record date;
b) such person is allotted additional units without any payment on the basis of holding of such units on such
date;
c) such person transfers
 all or any of the original units within a period of 9 months after such date,
 while continuing to hold all or any of the additional units,
then,
 the loss, if any, arising to him on account of such purchase and sale of all or any such units shall be
ignored for the purposes of computing his income chargeable to tax AND
 the amount of loss so ignored shall be deemed to be the cost of purchase or acquisition of such
additional units as are held by him on the date of such sale or transfer.
Question:
Reliance Mutual Fund declares 1:1 bonus units on its units on 30.5.2021. The Fund fixed the record date for
bonus entitlement to be 30.6.2021 Mr. A purchases 1,000 units of Fund on 20.6.2021 @ ₹20 per unit. A sells
1000 original units on 11.12.2021 for ₹ 9 per unit. Discuss the tax implications.


SECTION 46 - CAPITAL GAINS ON DISTRIBUTION OF ASSETS BY COMPANIES IN
LIQUIDATION
TAXABILITY IN THE HANDS OF COMPANY [EXEMPT]
1) Where the assets of a company are distributed to its shareholders on its liquidation, such distribution shall
not be regarded as a transfer by the company for the purposes of section 45 [Section 46(1)].
2) If, however, the liquidator sells the assets of the company resulting in a capital gain and
distributes the funds so collected, the company will be liable to pay tax on such gains.
TAXABILITY IN THE HANDS OF SHAREHOLDERS [CG + DIVIDEND]
1) Shareholders receive money or other assets from the company on its liquidation against its shares. They
will be chargeable to tax under the head ‘capital gains’ in respect of the MARKET VALUE of the assets
received on the date of distribution, or the moneys so received by them.
2) The portion of the distribution which is attributable to the accumulated profits of the company is to be
treated as DIVIDEND INCOME of the shareholder under section 2(22)(c) & taxable in the hands of
shareholders under the head “Income from Other sources”.
The same will be deducted from the amount received/FMV of the assets received for the purpose of
determining the consideration for computation of capital gains.
3) POH: In the case of a share held in a company in liquidation, the period subsequent to the date on
which the company goes into liquidation should be excluded while calculating CG in the hands of
shareholders.
4) Capital Gains Tax on subsequent sale of the Capital Assets by the shareholders:
As per Section 55(2)(b)(iii), if the asset other than cash acquired by the shareholder, then for the
purpose of computation of Capital Gain of transfer of such Asset, the COA shall be the market value
of the asset on the date of acquisition. POH will start from the date on which such assets are
received by the shareholder.
Note: In case where an assessee, who is a shareholder, receives assets from company under liquidation, it is
always subject matter of Tax u/s 46(2). It is irrelevant at this point of time to ascertain the nature of asset
distributed to the shareholder. Even in a case where the asset distributed is an agricultural land outside the
specified Area, which is not a capital asset, the shareholder shall be subject to tax by virtue of Section 46(2)
as distribution in Kind.
TAXABILITY ON PURCHASE OF OWN SECURITIES [SECTION 46A] – BUY BACK
1. Any consideration received by a holder of other specified securities (Other than shares) from any company
on purchase of its specified securities shall be chargeable to tax on the difference between the cost of
acquisition and the value of consideration received by the holder of securities, as the case may be, as capital
gains.
2. The computation of capital gains shall be made in accordance with the provisions of section 48. Such capital
gains shall be chargeable in the year in which such securities were purchased by the company.
3. However, in case of buyback of unlisted or listed shares by domestic companies, additional income
tax@ 20% (plus surcharge@12% and cess@4%) is leviable in the hands of the company u/s 115QA.
Consequently, the income arising to the shareholders in respect of such buyback of unlisted or listed
shares by the domestic company would be exempt under section 10(34A), where the company is liable to
pay additional income-tax on the buyback of shares.


SECTION 50B – SPECIAL PROVISIONS FOR COMPUTATION OF GAINS IN CASE OF
SLUMP SALE
SECTION 2(42C) - SLUMP SALE means the transfer of one or more undertakings, by any means,
for a lump sum consideration without values being assigned to the individual assets and
liabilities in such sales.
Here, “Transfer" shall have the meaning assigned to it in Section 2(47) [it would include sale,
exchange, relinquishment of capital asset, extinguishment of any rights therein, compulsory
acquisition under any law etc.]
However, the values can be assigned to the assets for the limited purpose of payment of stamp
duty, registration fees etc. This must clarified in the agreement of slump sale.
Charge of Capital Gains: Profit or gains arising from slump sale shall be taxable as Capital Gains in
the previous year in which slump sale is effected.
NATURE OF CAPITAL GAINS: If the capital asset, being one or more undertakings, was owned and
held by the assessee for not more than 36 months, the capital gains will be 'Short Term Capital
Gains. In any other case, it shall result into Long-Term Capital Gains.
Mode of computation of capital gains: The capital Gains shall be computed in the following
manner -
Full Value of consideration (FMV of the Capital Assets transferred) XXXX
Less: Expenses wholly and exclusively in connection with such transfer XXXX
Less: Cost of acquisition and cost of improvement being net worth of the XXXX
undertaking (no indexation benefit even in case of long-term capital
asset)
Short Term/Long Term Capital gains XXXX
Deemed cost of acquisition and cost of improvement [Section 50B(2)(i)]

The net worth of the undertaking or the division, as the case may be, shall bedeemed to be the cost
of acquisition and the cost of improvement for thepurposes of sections 48 and 49 in relation to
capital assets of such undertakingor division transferred. No indexation benefit would, however, be
available,even if the slump sale has taken place of an undertaking held for more than 36months,
resulting in a long-term capital gain.
Deemed full value of consideration [Section 50B(2)(ii)]

Fair market value of the capital assets as on the date of transfer, calculated in the prescribed
manner (as per Rule 11UAE), shall be deemed to be the full value of the consideration
received or accruing as a result of the transfer of such capital asset.


NET WORTH
For calculating the Net Worth, the Aggregate VALUE of total assets, ignoring revaluation effect,
shall be-
(a) In case of depreciable assets: the WDV of block of assets as per the Income Tax Act, 1961
(i.e. Section 43(6)]
(b) In case of capital asset, being goodwill of a business or profession, which has not been
acquired by the assessee by purchase from a previous owner [self-generated goodwill]:
NIL
(c) In case of capital Assets for which the whole of the expenditure has been allowed or is
allowable as a deduction u/s. 35AD:
NIL
(d) In the case of any other assets: The book value of such assets
Less:
Value of liability (as appearing in the books of a/c on the date of transfer of undertaking)
Report of a Chartered Accountant:

Every assessee, in the case of slump sale, shall furnish in the prescribed form a report of an accountant
as defined in the Explanation below sub-section (2) of section 288 before the specified date referred
to in section 44AB [i.e., the date one month prior to the due date for filing return of income
under section 139(1)] indicating the computation of the net worth of the undertaking or division, as the
case may be, and certifying that the net worth of the undertaking or division, as the case may be, has
been correctly arrived at in accordance with the provisions of this section.


Class Notes


Class Notes


Concept of Reverse Mortgage
Applicability:
(a) Reverse Mortgage is as scheme for the benefit of senior citizens who own a residential house
property.
(b) The Senior Citizens can mortgage their house property with a scheduled bank or housing finance
company, in return for a lump-sum amount or for a regular monthly/quarterly/annual income.
Tax implication:
1. Any transfer of a capital asset in a transaction of reverse mortgage under a scheme made and notified by
the Central Government would not amount to a transfer for the purpose of capital gains. [Section
47(xvi)]
2. Further, the amount received by the senior citizen as a loan, either in lump sum or in installments, in a
transaction of reverse mortgage would be exempt from income-tax. [Section 10(43)]
ZERO COUPON BOND [ZCB]

1. Section 2(48) - ZCB means a Bond Issued By:
i. Any Infrastructure Capital Company, or
ii. Infrastructure Capital Fund, or
iii. Infrastructure Debt Fund as notified in Section 10(47), or
iv. Public Sector Company, or
v. Scheduled Banks.
[Amended by Finance Act 2021 effective from AY 2022-23]
2. Payment only on redemption: No payment and benefit is received or receivable before maturity or
redemption.
3. The income on transfer of a ZCB (not being held as stock-in-trade) is to be treated as capital gains.
4. Section 2(47)(iva) provides that maturity or redemption of a ZCB shall be treated as a transfer for the
purposes of capital gains tax. ZCBs held for not more than 12 months would be treated as short term capital
assets.
SECTION 55A - REFERENCE TO VALUATION OFFICER

The AO may refer the valuation of a capital asset to a Valuation Officer in the following circumstances
with a view to ascertaining the FMV of the capital asset for the purposes of capital gains –
1) In a case where the value of the asset as claimed by the assessee is in accordance with the estimate
made by a registered valuer:
“if the AO is of the opinion that the value so claimed is at variance with its Fair Market Value.”
2) In other case, If the AO is of the opinion that the FMV of the asset exceeds the value of the asset as claimed
by the assessee by more than 15% of the value of asset as claimed or by more than ₹ 25,000 of the
value of the asset as claimed by the assessee.
3) Further, if the AO is of the opinion that, having regard to the nature of asset and other relevant circumstances,
it is necessary to make the reference.


AMALGAMATION – SECTION 2(1B)
Amalgamation in relation to companies, means the merger of one or more companies with another
company or the merger of two or more companies to form one company in such a manner that-
(a) All the property of the amalgamating company or companies immediately before the
amalgamation becomes the property of the amalgamated company by the virtue of
amalgamation.
(b) All the liabilities of the amalgamating company or companies immediately before the
amalgamation become the liabilities of the amalgamated company by virtue of amalgamation.
(c) Shareholders holding not less than 75% in the value of shares in amalgamating company or
companies (other than shares already held therein immediately before the amalgamation by,
or by a nominee for, the amalgamated company or its subsidiary) become shareholders of the
amalgamated company by virtue of the amalgamation,
otherwise than as a result of the acquisition of the property of one company by another company
pursuant to the purchase of such property by the other company or as a result of the distribution of
such property to the other company after the winding up of the first mentioned company.


DEMERGER [SECTION 2(19AA)] - REDRAFTED
READING PURPOSE
“Demerger” in relation to company’s means
 the transfer, pursuant to a scheme of arrangement under sections 230 to 232 of the
Companies Act, 2013 by a demerged company
 Of its one or more undertakings to any resulting company.
 and all the following conditions are fulfilled :-
(i) All the property of the undertaking, being transferred by the demerged company
immediately before the demerger, becomes the property of the resulting company by
virtue of the demerger.
(ii) All the liabilities relating to the undertaking, being transferred by the Demerged Co.,
immediately before the demerger, becomes the liabilities of the resulting company by
virtue of the demerger.
(iii) The property and the liabilities of the undertaking or undertakings being transferred by
the demerged company are transferred at the values [ignoring revaluation]
appearing in the books of account immediately before demerger.
However, this provision does not apply where, in compliance to the Indian
Accounting Standards specified in Annexure to the Companies (Indian Accounting
Standards) Rules, 2015, the resulting company records the value of the property
and the liabilities of the undertaking or undertakings at a value different from the
value appearing in the books of account of the demerged company, immediately
before the demerger.
(iv) The resulting company issues, in consideration of the demerger, its shares to the
shareholders of the demerged company on a proportionate basis.
Note - If the resulting company is a shareholder of the demerged company, it cannot
issue shares to itself. However, the resulting company has to issue shares to the other
shareholders of the demerged company.
(v) The shareholders holding not less than 75% in value of the shares in the demerged
company becomes the shareholders of resulting company or companies by virtue of
demerger.
(vi) The transfer of undertaking is on a going concern basis.
(vii) the demerger is in accordance with the conditions, if any, notified8 by the Central
Government in this behalf.
NOTES:
1. "Undertaking" shall include any part of an undertaking, or a unit or division of an undertaking

or a business activity taken as a whole, but does not include individual assets or
liabilities or any combination thereof not constituting a business activity.


2. The liabilities referred to in sub-clause (ii), shall include-
a. the liabilities which arise out of the activities or operations of the undertaking;
b. the specific loans or borrowings (including debentures) raised, incurred and utilised
solely for the activities or operations of the undertaking; and
c. in cases, other than those referred to in clause (a) or clause (b), so much of the
amounts of general or multipurpose borrowings, if any, of the demerged company as
stand in the same proportion which the value of the assets transferred in a
demerger bears to the total value of the assets of such demerged company
immediately before the demerger.
3. The splitting up or the reconstruction of any authority or a body constituted or established

under a Central, State or Provincial Act, or a local authority or a public sector company, into
separate authorities or bodies or local authorities or companies, as the case may be, shall
be deemed to be a demerger if such split up or reconstruction fulfils such conditions as
may be notified in the Official Gazette, by the Central Government.
4. The reconstruction or splitting up of a company, which ceased to be a public sector company

as a result of transfer of its shares by the Central Government, into separate
companies, shall be deemed to be a demerger, if such reconstruction or splitting up has
been made to give effect to any condition attached to the said transfer of shares and also
fulfils such other conditions as may be notified by the Central Government in the
Official Gazette.
5. Reconstruction or splitting up of a public sector company into separate companies

shall be deemed to be a demerger, if such reconstruction or splitting up has been
made to transfer any asset of the demerged company to the resulting company and
the resulting company –
a. is a public sector company on the appointed day indicated in such scheme as

may be approved by the Central Government or any other body authorized under
the Companies Act, 2013 or any other law for the time being in force governing
such public sector companies; and
b. fulfils such other conditions as may be notified by the Central Government.


Demerged Company - Demerged company means the company whose undertaking is transferred,
pursuant to a demerger, to a resulting company.
Resulting Company - Resulting company means one or more companies (including a wholly owned
subsidiary thereof) to which the undertaking of the demerged company is transferred in a demerger
and, the resulting company in consideration of such transfer of undertaking, issues shares to the
shareholders of the demerged company and includes any authority or body or local authority or
public sector company or a company established, constituted or formed as a result of
demerger.


SECTION 47 – OTHER TRANSACTIONS NOT REGARDED AS TRANSFER
Taxability of Transfer of Capital Assets under Scheme of Amalgamation of Companies
 Transfer of Capital Asset, in a scheme of amalgamation, by the Amalgamating Company to the Indian
Amalgamated Company is not considered as transfer and not chargeable to capital gain tax.
[Sec 47(vi)]
a) Condition to be fulfilled: Scheme approved by CG.
b) Holding Period in the hands of the transferee in case of subsequent transfer: Previous Owner’s
holding period shall be included.
c) Cost in the hands of Transferee [Sec 49]: Cost to the Amalgamating Company.
 Transfer of shares by Shareholder in a scheme of Amalgamation is not considered as transfer and
not chargeable to capital gain tax. [Sec 47(vii)]
a) Condition to be fulfilled:
 Asset Transferred: Shares held in Amalgamating Company.
 Consideration received: Only Shares of Amalgamated Company.
 The amalgamated company is an Indian Company
b) Holding Period in the hands of the transferee in case of subsequent transfer: Period of holding of
Amalgamating Company’s Shares shall be included.
c) Cost in the hands of Transferee [Sec 49]: Cost to original shares in Amalgamating Company.
Taxability of Transfer of Capital Assets under Scheme of Demerger of Companies
1. Transfer of capital asset, by a demerged company to the resulting company is not considered as
transfer and not chargeable to capital gain tax. [sec. 47(vib)]
a) Condition: Resulting company shall be an Indian company.
b) Holding Period in the hands of the transferee in case of subsequent transfer: Previous Owner’s
holding period shall be included.
c) Cost in the hands of transferee [Sec. 49]: Cost to the demerged company.
2. Transfer of shares, by the Resulting Company to the shareholders of the demerged company if the
transfer is made in consideration of Demerger [Sec 47(vid)]
a) Holding Period in the hands of the transferee for subsequent transfer: Period of holding of Demerged
Company’s Shares shall be included.
b) Cost of acquisition of Resulting Company’s Shares on demerger [Sec. 49(2C)]
[Net Worth of demerged Company = Paid up share Capital and General reserve before demerger.]
c) Cost of Acquisition of Demerged Company’s Shares after demerger [Sec. 49(2D)]

Original Cost of Acquisition of shares in Demerged Company XXX
Less: Cost of acquisition of resulting company shares as per Section 49(2C) (XXX)


Taxability of Transfer of Capital Assets between Holding and 100% Subsidiary
Companies
1. Transfer of Capital Asset (not by way of Stock in Trade) by Holding Company to its subsidiary is not
considered as transfer and not chargeable to capital gain tax [Sec 47(iv)]
a) Conditions to be fulfilled:
 Holding Company or its Nominees shall hold 100% Shares in Subsidiary Company.
 Subsidiary Company should be an Indian Company.
b) Holding period in the hands of the Transferee in case of subsequent transfer Sec. 2(42A): Previous
owner’s holding periods shall be included.
c) Cost in the hands of Transferee [Sec 49]: Cost to Previous Owner.
2. Transfer of Capital Asset (not by way of SIT) by Subsidiary Company to its Holding Company is not
considered as transfer and not chargeable to capital gain tax [Sec. 47(v)]
a) Conditions to be fulfilled:
 Whole of the Share Capital of the subsidiary Company shall be held by Holding Company
 Holding Company should be an Indian Company.
b) Holding period in the hands of the Transferee in case of subsequent transfer Sec. 2(42A): Previous
owner’s holding periods shall be included.
c) Cost in the hands of Transferee [Sec 49]: Cost to Previous Owner.


Section 47 – Few Transaction not regarded as a transfer
1. Any transfer of Capital asset, being government securities carrying a periodic payment of interest, made
outside India through an intermediary dealing in settlement of securities, by a NR to another NR shall not
be considered as transfer.
2. Transfer of Rupee Denominated Bond outside India by a Non-Resident to another Non-Resident: Any
transfer, made outside India, of a Capital Asset being rupee denominated bond of an Indian Company
issued outside India, by a non-resident to another non-resident.
3. Any transfer of Sovereign Gold Bond issued by the Reserve Bank of India under the Sovereign Gold Bond
Scheme, 2015, by way of redemption, by an assessee being an individual [Indexation benefit is
available in case of LTCG arising from transfer of such bond]
4. Conversion of Preference Shares into Shares:

Section 47(xb) - Any Transfer by way of conversion of preference shares of a company into equity shares of
that company shall not be regarded as a Transfer.


Class Notes

COST INFLATION INDEX
F/Y CII F/Y 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 2019-20 289
2009-10 148 2020-21 301
2010-11 167 2021-22 317
2011-12 184

Capital Gain SATC 8A.1

1. Kaif purchased a commercial building in Udaipur for ₹ 3,31,000 on 27.11.2004. She gifted the property to her
friend Salman on 18.12.2007. On 15.1.2022 salman sold this house for ₹ 18,50,000. The expenses on
transfer were ₹ 48,000. Compute capital gains in hands of Salman and state in which year it shall be
chargeable to tax.
2. Rekha purchases a house property for ₹ 6,50,000 on 28.12.1998. She paid registration fees of ₹ 65,000. The
fair market value of the property as on 1st April, 2001 was ₹ 7,25,000 and Stamp duty value was ₹ 7,50,000.
She constructed first floor on 10.12.2009 and spent ₹ 3,89,000 on the said construction. On 15.12.2021, She
sold this house for ₹ 96,00,000. The expenses on transfer were ₹ 96,000. Compute his capital gain.
3. Mr. F sells a plot of land on 1-8-2021 for ₹ 30,00,000. He inherited the plot from his father on 1-4-2004. His
father had acquired the plot on 1-3-2001 for ₹ 30,000. His father had incurred land development charges
₹ 10,000 on 31-3-2001 and ₹ 20,000 on 1-5-2003. Mr. F had incurred land development charges ₹ 50,000 on
1-9-2007. The sale stamp deed expenses were 1% of the selling price. The FMV of the plot as on 1-4-2001
was ₹ 29,000 and Stamp duty value was ₹ 29,500. Compute the capital gains.
4. Mr. I, a manufacturer of bricks since 2005, sells the following assets on 12-3-2022 - [Intangible Assets]
Name of asset Goodwill Trademark Tenancy rights in respect Manufacturing
of business premises licence
Mode of acquiring Self-generated Purchased Self-generated Purchased
Purchase price & date N.A. ₹ 1,00,000 N.A. ₹ 30,000 12-3-2019

thereof 11-3-2007
Cost of improvement ₹ 2,00,000 ₹ 10,000 ₹ 20,000 NIL

and date thereof
1-4-2009 1-5-2009 31-3-2010
Sale price 18,00,000 500,000 500,000 200,000
Compute the capital gains for AY 2022-23.
5. Mr. Rakesh purchased a house property on 14th April, 1999 for ₹ 1,05,000. He entered into an agreement
with Mr. B for the sale of house on 15th September, 2004 and received an advance of ₹ 25,000. However,
since Mr. B did not remit the balance amount, Mr. Rakesh forfeited the advance. Later on, he gifted the house
property to his friend Mr. A on 15th June, 2006. Following renovations were carried out by Mr. Rakesh and
Mr. A to the house property:
Particulars ₹
By Mr. Rakesh during FY 2000-01 10,000
By Mr. Rakesh during FY 2005-06 50,000
By Mr. A during FY 2008-09 1,90,000
The fair market value of the property as on 1.4.2001 is ₹ 1,50,000 and Stamp duty value was ₹ 1,70,000.
Mr. A entered into an agreement with Mr. C for sale of the house on 1st June, 2009 and received an advance
of ₹ 80,000. The said amount was forfeited by Mr. A, since Mr. C could not fulfil the terms of the agreement.
Finally, the house was sold by Mr. A to Mr. Sanjay on 2nd January, 2022 for a consideration of ₹ 12,00,000.
Compute the capital gains chargeable to tax in the hands of Mr. A for the assessment year 2022-23.
Cost inflation indices are as under:
Financial Year Cost inflation index
2001-02 100
2005-06 117
2006-07 122
2008-09 137
2021-22 317


6. Mrs. X, an individual resident woman, wanted to know whether income-tax is attracted on sale of gold and
jewellery gifted to her by her parents on the occasion of her marriage in the year 1979 which was purchased
at a total cost of ₹ 2,00,000?
7. Ms. Chhaya transferred a vacant site to Ms. Dayama for ₹ 4,25,000. The stamp valuation authority fixed the
value of vacant site for stamp duty purpose at 6,00,000. The total income of Chhaya and Dayama before
considering the transfer of vacant site are ₹ 50,000 and ₹ 2,05,000, respectively. The indexed cost of
acquisition for Ms. Chhaya in respect of vacant site is ₹ 4,00,000 (computed). Determine the total income of
both Ms. Chhaya and Ms. Dayama taking into account the above said transaction.
8. Mr. Raj Kumar sold a house to his friend Mr. Dhuruv on 1st November, 2021 for a consideration of
₹ 25,00,000. The Sub-Registrar refused to register the document for the said value, as according to him,
stamp duty had to be paid on ₹ 45,00,000, which was the Government guideline value. Mr. Raj Kumar
preferred an appeal to the Revenue Divisional Officer, who fixed the value of the house as ₹ 32,00,000
(₹ 22,00,000 for land and the balance for building portion). The differential stamp duty was paid, accepting the
said value determined. Assuming that the fair market value is ₹ 32,00,000, what are the tax implications
in the hands of Mr. Raj Kumar and Mr. Dhuruv for the assessment year 2022-23? Mr. Raj Kumar had
purchased the land on 1st June, 2011 for ₹ 5,19,000 and completed the construction of house on 1st
October, 2020 for ₹ 14,00,000.
9. Mr. Y submits the following information pertaining to the year ended 31st March, 2022:
(i) On 30.11.2021, when he attained the age of 60, his friends in India gave a flat at Surat as a gift, each
contributing a sum of ₹ 20,000 in cash. The cost of the flat purchased using the various gifts was ₹ 3.40
lacs.
(ii) His close friend abroad sent him a cash gift of ₹ 75,000 through his relative for the above occasion.
(iii) Mr. Y sold the above flat on 30.1.2022 for ₹ 3.2 lacs. The Registrar’s valuation for stamp duty purposes
was ₹ 3.7 lacs. Neither Mr. Y nor the buyer, questioned the value fixed by the Registrar.
(iv) He had purchased some equity shares in X Pvt. Ltd., on 5.2.2007 for ₹ 3.5 lacs. These shares were sold
on 15.3.2022 for ₹ 2.8 lacs.
You are requested to calculate the total income of Mr. Y for the assessment year 2022-23.
[Cost Inflation Index for F.Y. 2006-07 – 122, F.Y. 2011-12 – 184, FY 2021-22: 317]
10. Dinesh received a vacant site as gift from his friend in November 2007. The site was acquired by his friend for
₹ 3,00,000 in April 2002. Dinesh constructed a residential building during the year 2008-09 in the said site for
₹ 15,00,000. He carried out some further extension of the construction in the year 2011-12 for ₹ 5,00,000.
Dinesh sold the residential building for ₹ 55,00,000 in January 2022 but the State stamp valuation authority
adopted ₹ 65,00,000 as value for the purpose of stamp duty.
Compute his long term capital gain, for the assessment year 2022-23 based on the above information.
The cost inflation indices are as follows:
Financial Year Cost inflation index
2002-03 105
2007-08 129
2008-09 137
2011-12 184
2021-22 317
11. Mr. Thomas inherited a house in Jaipur under will of his father in May, 2005. The house was purchased by his
father in January, 2000 for ₹ 2,50,000. He invested an amount of ₹ 7,00,000 in construction of one more floor
in this house in June, 2007. The house was sold by him in November, 2021 for ₹ 37,50,000. The valuation
adopted by the registration authorities for charge of stamp duty was ₹ 47,25,000 which was not contested by
the buyer, but as per assessee’s request, the Assessing Officer made a reference to Valuation officer. The
value determined by the Valuation officer was ₹ 47,50,000. Brokerage @ 1% of sale consideration was paid
by Mr. Thomas to Mr. Sunil. The fair market value of house as on 01.04.2001 was ₹ 2,70,000 and Stamp
duty value was ₹ 3,70,000.
You are required to compute the amount of capital gain chargeable to tax for A.Y. 2022-23 with the
help of given information and by taking CII for the F.Y. 2005-06 : 117, F.Y. 2007-08: 129 and for F.Y.
2021-22: 317.


12. X owns a piece of land situated in Noida (date of acquisition: March 1, 2003, cost of acquisition:
₹ 70,503, value adopted by Stamp duty authority at the time of purchase: ₹ 80,000). On March 30, 2022,
the piece of land is transferred for ₹ 4 lakh. Find out the capital gains chargeable to tax in the
following situations:
1. The value adopted by Stamp duty authority is ₹ 5.5 lakh. X does not dispute it.
2. The value adopted by the Stamp duty authority is ₹ 5.75 lakh. X files on appeal under the Stamp Act and
Stamp duty valuation has been reduced to ₹ 4.90 lakh by the Allahabad High Court.
3. The value adopted by the Stamp duty authority is ₹ 5.60 lakh. X does not challenge it under the Stamp
Act. However, he claims before the Assessing Officer that ₹ 5.60 lakh is more than the fair market value
of the land. The Assessing Officer refers it to the Valuation Officer who determines ₹ 5.25 lakh as fair
market value.
4. In Situation (3), suppose the value adopted by the Valuation Officer is ₹ 6.10 lakh.
13. Amin is the holder of 1,000 debentures of Amin Ltd. having a face value of ₹ 1,000 each. The company has
offered an option to the debenture - holder either to redeem the debenture at ₹ 1,200 each or to convert the
debentures into equity shares of equivalent value. The market value of the shares on the date of exercising
the option is ₹ 1,200 per share [face value ₹ 1,000]. What will be the tax consequences of the two options
in the hands of the debenture-holder Amin?
14. X holds 1,000 equity shares (unlisted) in A Ltd. since 1998 (cost of acquisition: ₹ 10,000, fair market value on
April 1, 2001: ₹ 14,000). A Ltd. offers 2,000 rights shares of ₹ 10 each to X on May 1, 2021 at a premium of
₹ 50. X subscribes for 800 rights shares and renounces 1,200 shares in favour of C by transferring the right
entitlement for a consideration of ₹ 4,800. X sells 1,800 shares in A Ltd. on March 30, 2022 @ ₹ 90 per share.
Compute CG
15. In April, 2004, ‘S’ subscribed to the first issue to Convertible Debentures of a listed public limited company
(face value of each Debentures was ₹ 100) to the extent of ₹ 25,000. In May 2008, the company converted
the same into Shares with face value of ₹ 10 each. Half of the holdings of the shares held by S was sold by
him in September 2021 for ₹ 50,000. S had to pay a brokerage of 2% on sale. What is the nature of gains-
realised and compute the same?
16. Ms. Paulomi has transferred 1,000 shares (unlisted) of Hetal Ltd., (which she acquired at a cost of ₹ 10,000 in
the financial year 2002-03) to Dhaval, her brother, at a consideration of ₹ 3,12,934 on 15.5.2021 privately.
During the financial year 2021-22, she has paid through e-banking ₹ 15,000 towards medical premium,
₹ 50,000 towards life insurance premium and ₹ 25,000 towards PPF. Assuming she has no other source of
income, compute her total income and tax payable for the Assessment Year 2022-23.
17. Mr. C inherited from his father 8 plots of land in 2000. His father had purchased the plots in 1980 for ₹ 5 lakhs.
The fair market value of the plots as on 1-4-2001 was ₹ 8 lakhs (₹ 1 lakh for each plot). On 1st June 2006, C
started a business of dealer in plots and converted the 8 plots as stock-in-trade of his business. He recorded
the plots in his books at ₹ 45 lakhs being the fair market value on that date. In June 2010, C sold the 8 plots
for ₹ 50 lakhs. In the same year, he acquired a residential house property for ₹ 35 lakhs. He invested an
amount of ₹ 5 lakhs in construction of one more floor in his house in June 2012. The house was sold
by him in June 2021 for ₹ 68,50,000.
The valuation adopted by the registration authorities for charge of stamp duty was ₹ 94,50,000. As per the
assessee's request, the Assessing Officer made a reference to a Valuation Officer. The value determined by
the Valuation Officer was ₹ 95,20,000. Brokerage of 1 % of sale consideration was paid by C.
The relevant Cost Inflation Indices are :

F.Y. 2001-02 100
F.Y. 2006-07 122
F.Y. 2010-11 167
F.Y. 2012-13 200
F.Y. 2021-22 317
Give the tax computation for the Assessment Year 2022-23.


18. For the AY 2022-23, Mrs. X (29 years), a resident individual, gives the following information. Compute
the tax liability-
₹
Short-term capital gain which satisfies conditions given in 1,27,000
Section 111A
Other income 2,53,000
Amount deductible under section 80G 1,000
PPF contribution 6,000
Net income 3,73,000
19. X a resident HUF, has the following income for the PY 2021-22: ₹
Business income (-) 15,000
Short-term capital gain 63,000
Long-term capital gain on sale of land 8,41,000
Find out the tax liability for the AY 2022-23 assuming that the family pays life insurance premium of
₹ 65,000 (sum assured: ₹ 8,00,000)
20. Mr. X purchased gold and diamond jewellery on 1.11.1998 for ₹ 1,33,000. The FMV of jewellery on 1.4.2001
was ₹ 2,00,000. Mr. X commence the business of trading in gold and diamond jewellery w.e.f. 1.4.2005. The
above said jewellery was brought into the business and the amount recorded in the books was ₹ 15,00,000
whereas its FMV on the date of conversion i.e. 31.10.2021 was ₹ 25,00,000. The said stock was sold in the
business on 31.3.2022 for ₹ 40,00,000. Compute the amount chargeable to capital gains tax.
21. The house property of Abhinav is compulsorily acquired by the Government for ₹ 10,00,000 vide Notification
issued on 12th March 2008. Abhinav has purchased the house in 2002-03 for ₹ 2,00,000. The compensation
is received on 15th April 2021. The compensation is further enhanced by an order of the court on 5th April
2022 and a sum of ₹ 2,00,000 is received as enhanced compensation on 25th May 2022. Compute the
capital gains and determine the year in which it is taxable.
22. S, an owner of 3 houses, sells a residential house property in Chennai for ₹ 12,40,000 on 23-5-2021. This
house was purchased by him in April 2004 for ₹ 2,80,000. On 30-5-2021, he purchased a flat in Mumbai of
₹ 8,70,000 for the purpose of the residence of his son-in-law. On 1-3-2022, S sells the flat in Mumbai for
₹ 12,10,000. Compute the capital gains arising on the two transactions. Is S eligible for exemption
under section 54 in respect of the second sale? S, has an other income of ₹ 10,00,000.
23. ‘X’ give the following information

Residential house property situated of Kolkata X
₹
Date of transfer December 30, 2021
Date of purchase June 30, 2002
Cost of acquisition 2,00,000
Expenses on transfer 40,000
Amount deposited in capital gains deposit account scheme on July 20, 2022 21,00,000
To get the exemption under section 54, the following residential house
properties are purchased in Chennai by X by withdrawing from the
deposit account
Date of purchase June 20, 2022
Find out the following In the case of X—

a. capital gain chargeable to tax for different assessment years;
b. X does not want to purchase or construct another property, what is the earliest date when he can
withdraw the unutilised amount from the deposit account; and
c. is it possible to take back the exemption given under section 54 in a subsequent year.


24. Mr. Pranav, a resident individual had purchased a plot of land at a cost of ₹ 75,000 in June, 2003. He
constructed a house for his residence on that land at a cost of ₹ 1,25,000 in August, 2007. He sold that house
in May, 2021 at ₹ 17,00,000 and purchased another residential house in June, 2021 for ₹ 8,00,000. He
furnishes other income and investment as follows :
Particulars ₹
Interest on fixed deposit with a bank (Net of TDS ₹ 5,000) 45,000
Investment in PPF 20,000
Cost inflation index for financial year 2003-2004, 2007-08 and 2021-22 are 109, 129 and 317 respectively.
You are required to compute taxable income and tax payable by Mr. Pranav for the AY 2022-23.
25. X Sells agricultural land situated within the municipal limits of Calcutta for ₹ 50,00,000 on July 1, 2021, which
was purchased by him on March 1, 2003 for ₹ 4,00,000. On July 15, 2022, he purchases agricultural land in
rural area for ₹ 4,30,000 and deposits ₹ 10,80,000 in a deposit account for availing exemption under section
54B. He purchases another agricultural land (situated within the limit of Delhi Municipal Corporation) on June
30, 2023 for ₹ 8,47,000 by withdrawing from the deposit account. Amount left in the deposit account is
withdrawn on July 10, 2023. The agricultural land in rural area is transferred on April 1, 2024 for ₹ 4,90,000
and the land in Delhi is transferred on July 17, 2024 for ₹ 8,70,000. Determine the amount of capital gains.
26. During the previous year ending on March 31, 2022, X sells the following:
Assets Dale of sale Sale Cost of Year of Fair Market
proceeds acquisition purchase value on April
₹ ₹ 1, 2001 ₹
Shares (non-listed) April 10, 2021 4,60,000 1,70,000 2004-05 1,80,000
Agricultural land
in rural area (outside May 25, 2021 17,00,000 2,30,000 1993-94 3,40,000
the municipal limits)
Agricultural land in June 10, 2021 9,00,000 2,50,000 1999-00 2,00,000
urban area
Debentures (non-listed) April 10, 2021 2,90,000 1,70,000 2005-06 1,80,000
Personal car July 1, 2021 1,25,000 70,000 2006-07 NA
On July 31, 2022 (being the due dale of furnishing return of income), X deposits ₹ 1,00,000 under section 54B
for claiming exemption in future by purchasing agricultural land. By withdrawing from the deposit account, he
purchases agricultural land for ₹ 40,000 till June 9, 2023. Assuming that the income of X from the other
sources for the previous years 2021-22 and 2023-24 is ₹ 5,86,000 and ₹ 2,92,000, respectively. Find out the
taxable income of X for the AYs 2022-23 and 2024-25.
27. Mr. Roy, aged 55 years owned a Residential House in Ghaziabad. It was acquired by Mr. Roy on 10-10-2006
for ₹ 6,00,000. He sold it for ₹ 30,00,000 on 4-11-2021. The stamp valuation authority of the State fixed value
of the property at ₹ 35,00,000. The assessee paid 2% of the sale consideration as brokerage on the sale of
the said property.
Mr. Roy acquired a residential house property at Kolkata on 10-12-2021 for ₹ 10,00,000 and deposited
₹ 3,00,000 on 10-4-2022 and ₹ 5,00,000 on 15-6-2022 in the capital gains bonds of Rural Electrification
Corporation Ltd. He deposited ₹ 4,00,000 on 6-7-2022 and ₹ 5,00,000 on 1-11-2022 in the capital gain
deposit scheme in a Nationalized Bank for construction of an additional floor on the residential house property
in Kolkata.
Compute the Capital Gain chargeable to tax for the Assessment Year 2022-23 and income-tax
chargeable thereon assuming Mr. Roy has no other income. Cost Inflation Index for Financial Year
2006-07: 122 and Financial Year 2021-22: 317


28. Ms. Anshu transfers land and building on 02-01-2022 and furnishes the following information:
Particulars (₹)
(a) Net consideration received 22,00,000
(b) Value adopted by Stamp Valuation Authority 25,00,000
(c) Value ascertained by Valuation Officer on reference by the Assessing Officer 27,00,000
(d) This land was acquired by Anshu on 1-04-2001. Fair Market Value of the land as
1,10,000
on 01-04-2001 was (FMV was lower than SDV)
(e) Anshu constructed a residential building on the land at a cost of ₹ 3,20,000
(construction completed on 01-12-2008 during the financial year 2008-09)
(f) Brought forward short term capital loss incurred on sale of shares during financial
year 2013-14 ₹ 1,50,000,
Anshu seeks your advice regarding the amount to be invested in NHAI bonds so as to be exempt from
capital gain tax under the Income-tax Act, 1961.
Cost inflation index for FY 2001-2002: 100
29. Mr. Selvan, acquired a residential house in April, 2005 for ₹ 10,00,000 and made some improvements by way
of additional construction to the house, incurring expenditure of ₹ 2,00,000 in October, 2009. He sold the
house property in October, 2021 for ₹ 72,00,000. The value of property was adopted as ₹ 80,00,000 by the
State stamp valuation authority for registration purpose.
He acquired a residential house in January, 2022 for ₹ 25,00,000. He deposited ₹ 20,00,000 in capital gains
bonds issued by National Highways Authority of India (NHAI) in June, 2022.
Compute the capital gain chargeable to tax for the assessment year 2022-23. What would be the tax
consequence and in which assessment year it would be taxable, if the house property acquired in
January, 2022 is sold for ₹ 40,00,000 in March, 2023?
Cost inflation index : F.Y. 2005-2006 = 117

F.Y. 2009-2010 = 148
F.Y. 2021-2022 = 317
30. Mr. Chandru transferred a vacant site on 28.10.2021 for ₹ 100 lakhs. The site was acquired for ₹ 9,99,300 on
30.6.2005. He invested ₹ 50 lakhs in eligible bonds issued by Rural Electrification Corporation Ltd. (RECL) on
20.3.2022.
Again, he invested ₹ 20 lakhs in eligible bonds issued by National Highways Authority of India (NHAI) on
16.4.2022.
Compute the chargeable capital gain in the hands of Chandru for the A.Y. 2022-23.
2005-06 117
2021-22 317
31. X Ltd. sells the following assets -

Agricultural land Bonus shares House prp
(unlisted) (let out)
Date of sale January 31, 2022 November 7, 2021 March 25, 2022
Date of acquisition May 9, 2003 April 4, 2004 June 6, 2002
₹ ₹ ₹
Sale consideration 9,00,000 3,50,000 10,40,000
Purchase consideration 70,000 Nil 1,00,000
The agricultural land is situated in on urban area and used for agricultural purpose since 2003
X Ltd. invests in the following assets on April 2, 2022
1. Bonds of the National Highways Authority of India (redeemable on June 1, 2027): ₹ 4,00,000.
2. Bonds (redeemable on May 10, 2027) of the Rural Electrification Corporation : ₹ 5,00,000
3. Agricultural land: ₹ 75,000.
Find out the capital gain chargeable to tax.


32. X, sells the following long-term capital assets on January 11, 2022:
Residential Gold Silver Diamonds
house property
₹ ₹ ₹ ₹
Sale consideration 3,90,000 8,10,000 2,96,000 6,40,200
Indexed cost of acquisition 70,000 1,15,000 1,78,000 4,30,000

Expenses on Transfer 10,000 81,000 6,000 32,000
The due date of filing return of income for the AY 2022-23 is July 31, 2022. For claiming exemption
under sections 54 and 54EC, X purchases the following assets —
Assets Date of Amount
Acquisition ₹
Land (for constructing a residential house) April 2, 2022 1,00,000
Bank deposit (for constructing house) August 5, 2022 60,000
Bonds of Rural Electrification Corporation
(redeemable on July 6, 2027) July 5, 2022 7,50,000
Bonds of National Highways Authority of India
(redeemable on August 10, 2030) July 10, 2022 3,05,000
Find out the amount of capital gain chargeable to tax for the AY 2022-23.
33. Arjun furnishes the following particulars and requests your advice as to liability to capital gains for
the assessment year 2022-23:
i. Jewellery purchased by him on 10.3.2003, for ₹ 1,05,000 was sold by him for a consideration of
₹ 3,85,000 on 2.11.2021.
ii. He incurred expenses:
a. at the time of purchase ₹ 2,000
b. at the time of sale (for brokerage) ₹ 4,000
iii. He invested ₹ 70,000 in bonds with National Highway Authority of India out of sale consideration.
On these facts:
a. Compute the capital gains chargeable to tax.
b. Whether Arjun would be entitled to any exemption?
34. Compute the net taxable capital gains of Smt. Megha on the basis of the following information- A
house was purchased on 1.5.2007 for ₹ 4,50,000 and was used as a residence by the owner. The owner had
contracted to sell this property in June, 2011 for ₹ 10 lacs and had received an advance of ₹ 70,000 towards
sale. The intending purchaser did not proceed with the transaction and the advance was forfeited by the
owner. The property was sold in April, 2021 for ₹ 17,00,000. The owner, from out of sale proceeds, invested
₹ 4 lacs in a new residential house in January, 2022.
Cost inflation index :- 2007-08 - 129
2021-22 – 317
35. Mr. Malik owns a factory building on which he had been claiming depreciation for the past few years.
It is the only asset in the block. The factory building and land appurtenant thereto were sold during
the year. The following details are available:
Particulars ₹
Building completed in September, 2008 for 10,00,000
Land appurtenant thereto purchased in April, 2002 for 12,00,000
Advance received from a prospective buyer for land in May, 2003, forfeited in favour 50,000
of assessee, as negotiations failed
WDV of the building block as on 1.4.2021 8,74,800
Sale value of factory building in November, 2021 8,00,000
Sale value of appurtenant land in November, 2021 40,00,000
The assessee is ready to invest in long-term specified assets under section 54EC, within specified time.
Compute the amount of taxable capital gain for the assessment year 2022-23 and the amount to be
invested under section 54EC for availing the maximum exemption. Cost inflation indices are as under
: Financial Year Cost inflation index
2002-03 105
2003-04 109
2021-22 317


36. Mr. A who transfers land and building on 02.01.2022, furnishes the following information:
(i) Net consideration received ₹ 12 lakhs.
(ii) Value adopted by stamp valuation authority, which was not contested by Mr. A ₹ 21.5 lakhs.
(iii) Value ascertained by Valuation Officer on reference by the Assessing Officer ₹ 22 lakhs.
(iv) This land was distributed to Mr. A on the partial partition of his HUF on 1.4.2001. Fair market value of the
land as on 1.4.2001 was ₹ 1,10,000 and Stamp duty value was ₹ 1,70,000.
(v) A residential building was constructed on the above land by Mr. A at a cost of ₹ 3,20,000 (construction
completed on 1.12.2003) during the financial year 2003-04.
(vi) Brought forward unabsorbed short-term capital loss (incurred on sale of shares during the financial year
2013-14) ₹ 75,000.
Mr. A seeks your advice as to the amount to be invested in NHAI/RECL bonds so as to be exempt
from clutches of capital gain tax. Cost inflation indices for the financial years 2001-02, 2003-04 &
2021-22 are 100, 109 and 317, respectively.
37. Mr. X is in possession of agricultural land situated within urban limits, which is used for agricultural purposes
during the preceding 3 years by his father. On 4.4.2021, this land is compulsorily acquired by the Central
Government of India on a compensation fixed and paid by it for ₹ 10 lakhs. Advise X as to the tax
consequences, assuming that the entire amount is invested in purchase of shares.
38. Mr. Sagar, a resident individual acquired a plot of land at a cost of ₹ 75,000 in June, 2009. He constructed a
house for his residence on that land at a cost of ₹ 1,25,000 in the financial year 2011-12. He transferred the
house for ₹ 15,00,000 in May, 2021 and acquired another residential house in June, 2021 for ₹ 8,00,000.
He furnishes other particulars as under
Insurance agency commission earned 45,000
(Net of TDS of ₹ 5,000)
Investment in NSC 20,000
(i.e. on 20-3-2022)
Cost inflation index details are given below:
2009 – 2010 148
2011 – 2012 184
2021 – 2022 317
Compute the total income of Mr. Sagar for the assessment year 2022-23.
39. Mr. A owns a residential house, which is self-occupied, and also a plot of land (He has no other house). He
sells the house on January 31, 2022 and the plot on February 15, 2022 for ₹ 12,00,000 and ₹ 7,00,000
respectively. The house was purchased on January 30, 2004 for ₹ 4,00,000 and the plot on March 30, 2004
for ₹ 2,00,000. A has purchased a new residential house on April 25, 2022 for ₹ 5,00,000 and claims
exemption in respect of such house. On 31-1-2023, he transfers the said residential house for ₹ 8,00,000 and
purchases a new house on 31-3-2024 for ₹ 11,00,000. Compute the capital gains for relevant years.
40. Mr. A sold share (unlisted) of a public limited company for ₹ 5,00,000 on 1.9.2021, which had been acquired
by him in October, 2004 for ₹ 50,000, He wants to utilize the said amount of sale consideration for purchase
or construction of a new residential house. He already owns one residential house at the time of sale of
shares i.e., on 1.9.2021. He had deposited ₹ 4,00,000 under the Capital Gains Deposit Account Scheme with
a specified Bank on 30.4.2022. Ascertain the capital gain taxable in A's hands for AY 2022-23 and
advice him as to what further action he has to take to avail the exemption.
41. X sells (non-listed) shares in a private sector company on July 10, 2021 for ₹ 8,05,000 (cost of acquisition on
June 16, 2004 : ₹ 60,000, expenses on sale : ₹ 5,000). On July 10, 2021, he owns one residential house
property. To get the benefit of exemption under section 54F, X deposits on May 30, 2022 ₹ 6,00,000 in
Capital Gains Deposit Account Scheme. By withdrawing from the Deposit Account, he purchases a residential
house properly at Delhi on July 6, 2023 for ₹ 4,80,000. Ascertain -
a. The amount of CG chargeable to tax for the AY 2022-23
b. Tax treatment of the unutilized amount,
c. When can be withdraw the unutilized amount and
d. What X has to do to ensure that the exemption under section 54F is never taken back.


42. X sells agricultural land situated in an urban area for ₹ 10,31,000 (brokerage paid @ 2 percent) on March 31,
2022 (cost of acquisition : ₹ 1,05,000 on March 1, 2003; it was used for agricultural purposes since 2006). On
March 31, 2022, he owns one residential house property. On April 6, 2022, he purchases the following assets
a. agricultural land : ₹ 1,50,000 ; and
b. a residential house property : ₹ 5,00,000.
Find out the capital gains chargeable to tax for the AY 2022-23.
43. Mr. ‘ X’ furnishes the following data for the previous year ending 31.3.2022:
(a) Unlisted Equity Shares of AB Ltd., 10,000 in number were sold on 31.5.2021, at ₹ 200 for each share.
(b) The above shares of 10,000 were acquired by ‘X’ in the following manner:
(i) Received as gift from his father on 1.6.2000 (5,000 shares) the fair market value on 1.4.2001 ₹ 50 per
share.
(ii) Bonus shares received from AB Ltd. on 21.7.2005 (2,000 shares).
(iii) Purchased on 1.2.2007 at the price of ₹ 125 per share (3,000 shares).
(c) Purchased one residential house at ₹ 10 lakhs, on 1.5.2022 from the sale proceeds of shares.
(d) ‘X’ is already owning a residential house, even before the purchase of above house.
You are required to compute the taxable capital gain. He has no other source of income chargeable to
tax. (Cost Inflation Index – Financial year 2005-06: 117; 2006-07: 122; Financial year 2021-22: 317)
44. Mr. A is a proprietor of Akash Enterprises having 2 units. He transferred on 1.4.2021 his Unit 1 by way of
slump sale for a total consideration of ₹ 25 lacs. The fair market value of the unit on 1.4.2021 is ` 30
lacs. Unit 1 was started in the year 2005-06. The expenses incurred for this transfer were ₹ 28,000. His
Balance Sheet as on 31.3.2021 is as under:
Liabilities Total (₹) Assets Unit 1 (₹) Unit 2 (₹) Total (₹)
Own Capital 15,00,000 Building 12,00,000 2,00,000 14,00,000
Revaluation Reserve (for 3,00,000 Machinery 3,00,000 1,00,000 4,00,000
building of unit 1)
Bank loan (70% for unit 1) 2,00,000 Debtors 1,00,000 40,000 1,40,000
Trade creditors (25%for unit1) 1,50,000 Other assets 1,50,000 60,000 2,10,000
Total 21,50,000 Total 17,50,000 4,00,000 21,50,000
Other information:
(i) Revaluation reserve is created by revising upward the value of the building of Unit 1.
(ii) No individual value of any asset is considered in the transfer deed.
(iii) Other assets of Unit 1 include patents acquired on 1.7.2019 for ₹ 50,000 on which no depreciation has
been charged.
Compute the capital gain for the assessment year 2022-23.
45. Shri Aniket purchased 1,00,000 shares of Nahar Spinning mills Limited (50% of total shares of the company)
in 2002-03 for ₹ 8,00,000. The company was liquidated on 17.12.2021 and on liquidation he received ₹ 20 per
share and immovable property whose market value worth ₹ 25,50,000. On liquidation the company
possessed accumulated profits of ₹ 8,00,000. Find out the capital gains in hands of Aniket for the
46. Ms. Vasumathi purchased 10,000 equity shares of ABC Co. Pvt. Ltd. on 28.2.2005 for ₹ 1,20,000. The
company was wound up on 31.7.2021. The following is the summarized financial position of the
company as on 31.7.2021:
Liabilities ₹ Assets ₹
60,000 Equity shares 6,00,000 Agricultural lands 42,00,000
General reserve 40,00,000 Cash at bank 6,50,000
Provision for taxation 2,50,000
48,50,000 48,50,000
The tax liability was ascertained at ₹ 3,00,000. The remaining assets were distributed to the shareholders in
the proportion of their shareholding. The market value of 6 acres of agricultural land (in an urban area) as on
31.7.2021 is ₹ 10,00,000 per acre. The agricultural land received above was sold by Ms. Vasumathi on
28.2.2022 for ₹ 15,00,000.
Discuss the tax consequences in the hands of the company and Ms. Vasumathi. The cost inflation
indices are: F.Y. 2004-05: 113; F.Y. 2021-22: 317


47. Mr. Abhishek a senior citizen, pledged his residential house with a bank, under a notified reverse mortgage
scheme. He was getting loan from bank in monthly installments. Mr. Abhishek did not repay the loan on
maturity and hence gave possession of the house to the bank, to discharge his loan. How will the treatment
of long-term capital gain be on such reverse mortgage transaction?
48. Sachin received ₹ 15,00,000 on 23.01.2022 on transfer of his residential building in a transaction of reverse
mortgage under a scheme notified by the Central Government. The building was acquired in March 2003 for
₹ 8,00,000.
Is the amount received on reverse mortgage chargeable to tax in the hands of Sachin under the head ‘Capital
gains’?
Cost inflation index for the Financial year 2002-03 - 105 Financial year 2021-22 - 317
49. Mr. Kumar, aged 50 years, is the owner of a residential house which was purchased in September, 2003 for
₹ 5,00,000. He sold the said house on 5th August, 2021 for ₹ 24,00,000. Valuation as per stamp valuation
authority of the said residential house was ₹ 30,50,000. He invested ₹ 5,00,000 in NHAI Bonds on 12th
January, 2022. He purchased a residential house on 5th July, 2022 for ₹ 10,00,000. He gives other particulars
as follows:
Interest on Bank Fixed Deposit ₹ 32,000
Investment in public provident fund ₹ 50,000
You are requested to calculate the taxable income for the assessment year 2022-23 and the tax
liability, if any. Cost inflation index for F.Y. 2003-04 and 2021-22 are 109 and 317, respectively.

Capital Gain SATC 8B.1

SOLUTION – SET A
1. Computation of capital gain of Salman for the Assessment Year 2021-22 (amounts in ₹)
Full value of consideration 18,50,000
Less: Expenses in connection with transfer 48,000
Less: Indexed cost of acquisition (3,31,000 x 317 ÷ 129) 8,13,388 8,61,388
Long term Capital Gains 9,88,612
[If HC Ruling is followed: CII of PY 2004-05 will be used]
2. Computation of Taxable Capital Gains of Ms. Rekha for A.Y. 2022-23 (amounts in ₹) :
Less: Expenses in connection with transfer 96,000
Less: Indexed cost of acquisition (725,000 x 317 ÷100) 22,98,250
Less: Indexed cost of improvement (3,89,000 x 317 ÷ 148) 8,33,196 32,27,446
Long term Capital Gains 63,72,554
COA shall be higher of

(a) Actual Cost (6,50,000 + 65,000) = 7,15,000 or
(b) Lower of Fair market value i.e.,₹ 7,25,000 and Stamp duty value i.e., ₹ 7,50,000, on April 1, 2001
3. In case of property acquired in modes specified under section 49(1) (here, inheritance), higher of cost to the
previous owner or FMV as on 1-4-2001 will be taken. Further, FMV should not exceeds SDV of
property as on 1.4.2001. Cost of improvement incurred after 1-4-2001 by previous owner or the assessee, is
deductible.
For determining long-term or short-term nature of land, the period of holding of Mr. F's father will be included,
as a result of which, the plot of land becomes long-term capital asset for Mr. F.
For indexation purposes, CII of the year in which property was held by the assessee i.e. year of inheritance
being 2004-05 will be taken as denominator.

Less; Expenses on transfer being sale stamp deed expenses @ 1% of 30,00,000 30,000
Net consideration 29,70,000
Less: Indexed cost of acquisition (30,000 x 317 ÷ 113) 84,159
Less: Cost of improvement incurred after 1-4-2001
Mr. F's father (20,000 × 317 ÷ 109 = 58,165) + Mr. F (50,000 x 317 ÷ 129 = 122,868) 1,81,033 2,65,192
Long-term capital gains 27,04,808
4.
Name of asset Goodwill Trademark Tenancy rights Mfg. licence
Full value of consideration 18,00,000 5,00,000 5,00,000 2,00,000
Less: Cost of Acquisition 0 2,59,836* 0 30,000
Less: Cost of Improvement 0 21,419** 42,838*** 0
Long-term capital gains 18,00,000 2,18,745 4,57,162
* 100000 x 317 / 122
** 10000 x 317 / 148
*** 20000 x 317 / 148
Notes:
1. Trademark is a long-term capital asset as it was held for more than 36 months before date of transfer.
However, manufacturing license was held for exactly 36 months (i.e. not more than 36 months) before
date of transfer, hence, it is short-term capital asset. Goodwill and tenancy rights are long-term capital
assets as they were held since 2005.
2. In case of goodwill of a business, cost of improvement is always NIL.


5.
Computation of capital gains chargeable to tax in the hands of Mr. A
Particulars ₹
Less: Indexed cost of acquisition (Note 1) 1,81,885
Indexed cost of improvement (Note 2) 5,75,105
Long term capital Gain 4,43,010
Note 1
Indexed cost of acquisition is determined as under:
Cost to the previous owner i.e. Mr. Rakesh is ₹ 1,05,000
Fair Market Value on 1st April, 2001 is ₹ 1,50,000
(SDV as on 01/04/2001 is 170,000 & FMV is lower)
Cost to the previous owner or FMV on 1st April, 2001,

whichever is more, is to be taken as cost of acquisition of Mr. A ₹ 1,50,000
Less: Advance money forfeited by Mr. A (as per section 51)
(Note : Advance forfeited by Mr. Rakesh, the previous owner,
should, however, not be deducted) ₹ 80,000
Cost of acquisition ₹ 70,000
Indexed cost of acquisition (₹ 70,000 × 317/122) ₹ 1,81,885
122 is the Cost Inflation Index for F.Y. 2006-07, being the first year in which property is held by Mr. A and 317
is the Cost Inflation Index for F.Y. 2021-22, being the year in which the property is sold.
Alternative view: In the case of CIT v. Manjula J. Shah, the Bombay High Court held that the indexed cost of
acquisition in case of gifted asset can be computed with reference to the year in which the previous owner
first held the asset. As per this view, the indexation cost of acquisition of house would be ₹ 2,10,700 taking
Cost Inflation Index of 100 for the F.Y. 2001-02 since F.M.V. as on 1st April, 2001 is taken as cost of
acquisition of Mr. A.
Note: Clause (ix) of Section 56(2) provides that the advance which is forfeited on or after 01/04/2014 would
be chargeable to tax under the head “Income from Other sources” and hence, such forfeited amount shall not
be reduced from the cost of acquisition of the transferred capital asset. In the present case, the advance
was forfeited in a previous year prior to P.Y. 2014-15. Therefore, such amount would be deductible
from the cost of acquisition while determining the Capital gains on transfer of such asset.
Note 2
Indexed cost of Improvement is determined as under:
Expenditure incurred before 1st April, 2001 should not be considered NIL
Expenditure incurred on or after 1st April, 2001
- During 2005-06 Indexed cost of Improvement [₹ 50,000 × 317/117] ₹ 1,35,470
- During 2008-09 Indexed cost of Improvement [₹ 1,90,000 × 317/137] ₹ 4,39,635
Total indexed cost of improvement ₹ 5,75,105
6. The definition of capital asset under section 2(14) includes jewellery. Therefore, capital gains is attracted on
sale of jewellery, since jewellery is excluded from personal effects. The cost to the previous owner or the fair
market value as on 1.4.2001, whichever is more beneficial to the assessee, would be treated as the cost of
acquisition. Accordingly, in this case, long term capital gain @ 20% will be attracted in the year in which the
gold and jewellery is sold by Mrs. X.
7. Transfer of immovable property for inadequate consideration will have any tax implication in the hands of
transferee under section 56(2)(x) as difference exceeds higher of ₹ 50,000 or 10% of sales consideration.
Therefore, in the hands of transferee, i.e., Ms. Dayama, Income under the head IOS will be ₹ 1,75,000.
Further, for the transferor, Ms. Chhaya, the value adopted for stamp duty purpose will be taken as the
deemed sale consideration under section 50C for computation of capital gains.

Particulars Chhaya Dayama

(Transferor) ₹ (Transferee) ₹
Capital gains
Deemed sale consideration under section 50C 6,00,000
Less: Indexed cost of acquisition 4,00,000
LTCG 2,00,000
Difference between stamp duty value and sale consideration of 1,75,000
immovable property, taxable under section 56(2)(x)
Other income (computed) 50,000 2,05,000
Total income 2,50,000 3,80,000
8. In the hands of the seller, Mr. Raj Kumar

As per section 50C(1), where the consideration received or accruing as a result of transfer of land or building
or both, is less than the value adopted or assessed or assessable by the stamp valuation authority, the value
adopted or assessed or assessable by the stamp valuation authority shall be deemed to be the full value of
consideration received or accruing as a result of transfer if such value exceeds 110% of the actual sales
consideration.
Where the assessee appeals against the stamp valuation and the value is reduced in appeal by the appellate
authority (Revenue Divisional Officer, in this case), such value will be regarded as the consideration received
or accruing as a result of transfer.
In the given problem, land has been held for a period exceeding 24 months and building for a period less than
24 months immediately preceding the date of transfer. So land is a long-term capital asset, while building is a
short-term capital asset.
Particulars ₹
Long term capital gain on sale of land
Consideration received or accruing as a result of transfer of land 22,00,000
Less: Indexed cost of acquisition ₹ 5,19,000 x 317/184 8,94,147
Long-term capital gain (A) 13,05,853
Short-term capital loss on sale of building

Consideration received or accruing from transfer of building 10,00,000
Less: Cost of acquisition 14,00,000
Short term capital loss (B) 4,00,000
As per section 70, short-term capital loss can be set-off against long-term capital gains. Therefore, the net
taxable long-term capital gains would be ₹ 9,05,853 (i.e., ₹ 13,05,853 – ₹ 4,00,000).
In the hands of the buyer Mr. Dhuruv

As per section 56(2)(x), where an individual or HUF receives from a non-relative, any immovable property for
a consideration which is less than the stamp value (or the value reduced by the appellate authority, as in this
case) by an amount exceeding ₹ 50,000 or 10% of the sales consideration, whichever is higher, then the
difference between such value and actual consideration of such property is chargeable to tax as income from
other sources. Therefore, ₹ 7,00,000 ( i.e. ₹ 32,00,000 - ₹ 25,00,000) would be charged to tax as income from
other sources under section 56(2)(x) in the hands of Mr. Dhuruv.


9.
Computation of total income of Mr. Y for A.Y. 2022-23
Particulars ₹ ₹ ₹
Capital Gains
Short term capital gains (on sale of flat)
(i) Sale consideration 3,20,000
(ii) Stamp duty valuation 3,70,000
Consideration for the purpose of capital gains as per section 50C 3,70,000
(stamp duty value, since it is higher than sale consideration)
Less: Cost of acquisition [As per section 49(4), cost to be taken into
consideration for 56(2)(x) will be the cost of acquisition] 3,40,000 30,000
Long term capital Gain on sale of equity shares of X Pvt. Ltd

Long term capital loss to be carried forward (See Note 1 below) 6,29,426
Income from other sources:
Gift from friends by way of immovable property on 30.11.2021

[See Note 3 below]. 3,40,000
Gift received from a close friend (unrelated person)
[See Note 2 below ] 75,000
Notes:
1. In the given problem, unlisted shares of X Pvt. Ltd. have been held for more than 24 months and hence,
constitute a long term capital asset. The loss arising from sale of such shares is, therefore, a long-term
capital loss. As per section 70(3), long term capital loss can be set-off only against long-term capital
gains. Therefore, long-term capital loss cannot be set-off against short-term capital gains. However, such
long-term capital loss can be carried forward to the next year for set-off against long-term capital gains
arising in that year.
2. Any sum received from an unrelated person will be deemed as income and taxed as income from other
sources if the aggregate sum received exceeds ₹ 50,000 in a year [Section 56(2)(x)].
3. Receipt of immovable property without consideration would attract the provisions of section 56(2)(x).
10.
Computation of long term capital gain of Dinesh for the A.Y. 2022-23
Particulars ₹ ₹
Full value of consideration (Note 1) 65,00,000
Less: Indexed cost of acquisition-land (₹ 3,00,000 × 317/129) (Note 2 & 3) 7,37,209
Indexed Cost of acquisition-building (₹ 15,00,000 × 317/137) (Note 3) 34,70,803
Indexed Cost of improvement-building (₹ 5,00,000 x 317/184) 8,61,413 50,69,425
Long-term capital gain 14,30,575
Notes:
1. As per section 50C, where the consideration received or accruing as a result of transfer of a capital asset,
being land or building or both, is less than the value adopted by the Stamp Valuation Authority and
Value exceeds 110% of the consideration, such value adopted by the Stamp Valuation Authority shall
be deemed to be the full value of the consideration received or accruing as a result of such transfer.
Accordingly, full value of consideration will be ₹ 65 lakhs in this case.
2. Since Dinesh has acquired the asset by way of gift, therefore, as per section 49(1), cost of the asset to
Dinesh shall be deemed to be cost for which the previous owner acquired the asset i.e., ₹ 3,00,000, in this
case.
3. Indexation benefit is available since both land and building are long-term capital assets. However, as per
the definition of indexation cost of acquisition, indexation benefit for land will be available only from the
previous year in which Mr. Dinesh first held the asset i.e., P.Y. 2007-08.
Alternative view: In the case of CIT v. Manjula J. Shah, the Bombay High court held that indexation cost
of acquisition in case of gifted asset can be computed with reference to the year in which the previous
owner first held the asset. As per this view, the indexation cost of acquisition of land would be ₹ 8,60,000
(Based on PY 2002-03).


11.
Computation of Long term Capital Gain for A.Y. 2022-23
Particulars ₹ ₹
Sale consideration as per section 50C (Note-1) 47,25,000
Less: Expenses incurred on transfer being brokerage @ 1% of sale 37,500
consideration of ₹ 37.50 lacs 46,87,500
Less: Indexed cost of acquisition (Note-2) (₹ 2,70,000 × 317/117) 7,31,538

Indexed cost of improvement (₹ 7,00,000 × 317/129) 17,20,155 24,51,693
Notes:
1. As per section 50C, where the consideration received or accruing as a result of transfer of a capital asset,
being land or building or both, is less than the valuation by the stamp valuation authority, such value
adopted or assessed by the stamp valuation authority shall be deemed to be the full value of
consideration if value exceeds 110% of the sales consideration. Where a reference is made to the
valuation officer, and the value ascertained by the valuation officer exceeds the value adopted by the
stamp valuation authority, the value adopted by the stamp valuation authority shall be taken as the full
value of consideration.
Sale consideration ₹ 37,50,000

Valuation made by registration authority for stamp duty ₹ 47,25,000
Valuation made by the valuation officer on a reference ₹ 47,50,000
Applying the provisions of section 50C to the present case, ₹ 47,25,000, being, the value adopted by the
registration authority for stamp duty, shall be taken as the sale consideration for the purpose of charge of
capital gain.
2. The house was inherited by Mr. Thomas under the will of his father and therefore, the cost incurred by the
previous owner shall be taken as the cost. Fair market value as on 01.04.01, accordingly, shall be
adopted as the cost of acquisition of the house property. Here, FMV as on 01.04.2001 does not exceeds
SDV of the same. However, indexation benefit will be given from the year in which Mr. Thomas first held
the asset i.e. P.Y. 2005-06
Alternative view: In the case of CIT v. Manjula J. Shah, the Bombay High Court held that the indexed
cost of acquisition in case of gifted asset can be computed with reference to the year in which the
previous owner first held the asset. As per this view, the indexation cost of acquisition of house would be
₹ 8,55,900
12.
Situations
(1) (2) (3) (4)
₹ ₹ ₹ ₹
Full.value of consideration 5,50,000 4,90,000 5,25,000 5,60,000
Less: Indexed cost of acquisition [₹ 70,503 x 317 ÷ 105] 2,12,852 2,12,852 2,12,852 2,12,852
Long-term capital gains 3,37,148 2,77,148 3,12,148 3,47,148

Note : Value adopted by the Stamp duty authority at the time of acquisition cannot be taken as cost off
acquisition.
13.
(1) Redemption: The first option of redemption of debentures will result in the levy of capital gains tax.
Capital gains = (1200 - 1000) x 1000 debentures = ₹ 2 lakh. Indexation benefit is not allowed.
(2) Conversion : There will be no capital gain on conversion of debentures into equity shares, as thel
conversion of debenture into shares is not 'transfer' as per section 47(x).
14.
Assessment of X for the assessment year 2022-23 ₹
Sale proceeds of 1,000 original shares 90,000
Less : Indexed cost of acquisition [₹ 14,000 x 317/100) 43,380
Long-term capital gain 45,620


Sale proceeds of 800 rights shares [₹ 90 x 800| 72,000
Less : Cost of acquisition [i.e., ₹ 60 x 800] 48,000
Sale proceeds of right entitlement of 1,200 shares 4,800

Less: Cost of acquisition Nil
15.
Computation of Capital gain : ₹
Sale proceeds of half holding 50,000
Less: Brokerage (2% of 50,000) (1,000)
Less: Indexed cost of acquisition [₹ 12,500 x 317/137] (28,923)
Long term Capital gain 20,077
16.
Computation of total income and tax liability of Ms. Paulomi for A.Y. 2022-23
Particulars ₹
Less: Indexed cost of acquisition (₹ 10,000 × 317/105) 30,190
Tax liability
Income-tax @ 20% on ₹ 32,740 (₹ 2,82,740 – ₹ 2,50,000) 6,548
Less: Rebate under section 87A 6,548
Tax after Rebate NIL
Note:
1. As per section 112, deductions under Chapter VI-A are not allowable against long term capital gain.
Therefore, Paulomi is not entitled to deduction under section 80C in respect of payment of life insurance
premium and contribution to PPF. She is also not entitled to deduction under section 80D in respect of
medical insurance premium paid by her.
2. She is, however, entitled to reduce the long-term capital gain by the unexhausted basic exemption limit
and pay tax on the balance @20% as per section 112. In this case, since she has no other source of
income, the entire basic exemption limit of ₹ 2,50,000 to the extent of long-term capital gain can be
reduced from the long-term capital gain.
17. Computation of total income and tax liability of Mr. C for A.Y. 2022-23
Particulars ₹ ₹
Capital Gains on sale of residential house property Value declared by Mr. C ₹ 68,50,000
Value adopted by Stamp Valuation Authority ₹ 94,50,000
Valuation as per Valuation Officer ₹ 95,20,000
Gross Sale consideration (See Note 1) 94,50,000
Less: Brokerage@1% of sale consideration 68,500
Net Sale consideration 93,81,500

Indexed cost of improvement (₹ 5,00,000 × 317/200) 7,92,500 74,36,213
Long-term capital gains (Total Income) 19,45,287
19,45,290
Tax on total income (See Note 2)

Long-term capital gain taxable@20% (₹ 19,45,290 – ₹ 2,50,000) 3,39,058
Less: Rebate u/s 87A NIL
Tax before cess 3,39,058
Add: Health & Education cess @ 4% 13,562
Total tax liability 3,52,620


Notes:
1. As per section 50C, in case the value of sale consideration declared by the assessee is less than the
value adopted by the Stamp Valuation Authority for the purpose of charging stamp duty, then, the value
adopted by the Stamp Valuation Authority shall be taken to be the full value of consideration if it exceeds
10% of the sales consideration. In case the valuation is referred to the Valuation Officer and the value
determined is more than the value adopted by the Stamp Valuation Authority, the value determined by the
Valuation Officer shall be ignored. Therefore, in the present case, the full value of consideration would
be the stamp valuation of ₹ 94,50,000, since the same is more than the sale value declared by Mr. C and
less than the value determined by the Valuation Officer.
2. As per section 112, the unexhausted basic exemption limit can be exhausted against the long-term capital
gains. Since Mr. C does not have any other income in the current year, the whole of the basic exemption
limit of ₹ 2,50,000 is exhausted against the long-term capital gains and the balance long-term capital
gains shall be taxable@20%. It is assumed that Mr. C is a resident individual below the age of 60 years.
18. In this case, the two conditions of section 111A are satisfied [i.e., the taxpayer is a resident individual and NI--
ST is ₹ 2,46,000 (which is lower than the exemption limit of ₹ 2,50,000).
Consequently, from the short-term capital gain the following shall be deducted—
Compilation of net income and tax
Short-term capital gain Other
under section 111A incomes
₹ ₹
Income 1,27,000 2,53,000
Less: Deduction under section 80C 6,000
Under section 80G 1,000
Net income 1,27,000 2,46,000
Income-tax on net income [15% of ₹ 1,23,000 (i.e., 18,450 Nil
₹ 1,27,000 — ₹ 4,000 (Unexhausted Limit)]
Less: Rebate 12,500 Nil
Tax after Rebate 5,950
Add: H&EC – 4% 238 Nil
Tax liability 6,190 Nil
19.
Long-term Capital gain Short-term Capital gain
₹ ₹
Capital gain 8,41,000 63,000
Less: Business loss (-) 15,000
Gross total income 8,26,000 63,000
Less: Deduction under section 80C — 65,000
Net income 8,26,000 Nil
Tax [i.e., 20% of (₹ 8,26,000 - ₹ 2,50,000)] 1,15,200
Add: Health & Education Cess – 4% 4,608
Tax liability 1,19,808
Note : If the net income (other thon long-term capital gain) is below the amount of first slab which is not
taxable (i.e., ₹ 2,50,000), then the long-term capital gain shall be reduced by the amount by which the total
income (other than long-term capital gain) falls short of the maximum amount which is net chargeable to tax.
In this case, net income (other than long-term capital gain) is nil. Therefore, long-term capital gain shall be
reduced by ₹ 2,50,000.
20. Computation of taxable capital gain

Period of holding: 1.11.1998 to 31.10.2021 = More than 36 months. Therefore, long term ₹
Less: Expenses on transfer Nil
Less : Indexed cost of acquisition ₹ 2,00,000 × 317/ 100 6,34,000

Business income:
Actual selling price 40,00,000
Less : FMV as on the date of conversion 25,00,000
Business income 15,00,000


21. The compulsory acquisition of Mr. Abhinav's house property took place in the financial year 2007-08.
Accordingly, the year of transfer is the financial year 2007-08. However, by virtue of specific provisions of
section 45(5), the capital gains so computed shall be charged to tax in the year in which the compensation or
part thereof is first received i.e. in the financial year 2021-22 or assessment year 2022-23.
Computation of long term capital gain for the assessment year 2022-23
Less: Indexed cost of acquisition (2,00,000 x 129 ÷ 105) 2,45,714
Taxability of enhanced compensation : LTCG due to enhanced compensation = ₹ 2,00,000, which will be
chargeable to tax in the previous year 2022-23 (Assessment year 2023-24).
22. Computation of capital gains of Mr. S for the AY 2022-23 (amounts in ₹)
Sale proceeds of the property located in Chennai 12,40,000
Less : Indexed Cost of Acquisition (₹ 2,80,000 x 317 ÷ 113) 7,85,487
Long Term Capital Gain (1) 4,54,513
Sales Consideration from the flat 12,10,000

Less : Cost of Acquisition 8,70,000
Short Term Capital Gain (2) 3,40,000
Total Capital Gains (1 + 2) 7,94,513

Note : In this case, after transfer of residential house, Mr. S has purchased a new flat during the previous
year 2021-22 and sold the same in the previous year 2021-22 itself. If Mr. S claims exemption in respect of
the flat while computing long-term capital gains, then, on sale of the flat, the cost of the flat will be reduced by
the amount of exemption claimed. This will have the effect of decreasing the amount of long-term capital
gains and increasing the amount of short-term capital gains. While long-term capital gains are taxable @
20%; short-term capital gains are taxable as per normal rates (highest slab being 30% due to other income of
₹ 10,00,000).
Therefore, in order to avoid higher tax liability, Mr. S should not claim exemption in respect of the flat. It is
assumed that Mr. S has other incomes also, so as to take his tax rate at highest slab of 30%.
Further, no exemption is available in respect of sale of new house, as the same is a short-term capital asset.
23.
Assessment year 2022-23 ₹
Sale consideration (being stamp duty value) 35,00,000
Less: Indexed cost of acquisition [₹ 2,00,000 x 317 ÷ 105] 6,03,810
Expenses on transfer 40,000
Balance 28,56,190
Less: Exemption under section 54 [amount deposited in capital gain deposit account scheme, i.e., 21,00,000
₹ 21,00,000 or amount of capital gain, i.e., ₹ 28,56,190, whichever is lower]
Long -term capital gains chargeable to tax for the assessment year 2022-23 7,56,190
Assessment Year 2024-25

Amount deposited in capital gains deposit account scheme 21,00,000
Less: Amount utilized by purchasing a new residential property at Chennai 15,00,000
Unutilized amount 6,00,000
Notes:
1. In this case, X can purchase a new residential property, by withdrawing from the deposit account, up to
December 29, 2023 or he can complete construction of a residential property up to December 29, 2024. if
he does not want to purchase or complete construction of another property, he can withdraw the
unutilized amount of ₹ 6,00,000 in the deposit account at any time after December 29, 2024.
2. ₹ 6,00,000 would be taxable as long-term capital gains of the previous year 2024-25, i.e., assessment
year 2025-26.
3. The new residential property purchased at Chennai should not be transferred before 3 years from the
date of its purchase (in other words, the new residential property should not be transferred up to June 19,
2026). If the new residential property is transferred before June 20, 2026, then the exemption given
under section 54 (i.e., ₹ 21,00,000 minus ₹ 6,00,000) would be taken back.


24.
Computation of taxable income and tax payable by Mr. Pranav for the A.Y. 2022-23
Particulars ₹ ₹
1. Income from Capital Gains
Less : Indexed cost of acquisition of land (₹ 75,000 × 317/109) 2,18,119
14,81,881
Less : Indexed cost of construction of house (₹ 1,25,000 × 317/129) 3,07,171
11,74,710
Less : Deduction under section 54 - Cost of new residential house 8,00,000
2. Income from other sources

Interest on Bank deposit (Net) 45,000
Add : Tax deducted at source 5,000 50,000
Less: Deduction under section 80C :
Investment in PPF 20,000
Taxable income 4,04,710
Components of Total income

Special income - Long-term Capital gains 3,74,710
Normal Income (₹ 50,000 – ₹ 20,000) 30,000
4,04,710
Tax on normal income of ₹ 30,000 Nil

Tax on LTCG
[LTCG - (Maximum amount not chargeable to tax - Normal Income)] @ 20%
under section 112 = {₹ 3,74,710 – (2,50,000 – 30,000)} x 20% 30,942
Less: Rebate under section 87A 12,500
Tax before cess 18,442
Add: Health & Education cess@4% 738
Total Tax 19,180
Less: TDS 5,000
Net Tax Payable 14,180
25. Assessment Year 2022-23

Sale proceeds 50,00,000
Less : Indexed cost acquisition [₹ 4,00,000 × 317 ÷ 105] 12,07,619
Balance 37,92,381
Less : Exemption under section 54B
Cost of agricultural land purchased on July 15, 2022 4,30,000
Amount deposited in the deposit account 10,80,000
Assessment year 2024-25 (i.e., relevant to the previous year in which 2 years from the date of sale of
agricultural land expires)
₹
Amount deposited in the deposit account 10,80,000
Less : Amount utilized in purchasing agricultural land up to June 30, 2023 8,47,000
Assessment year 2025-26 (i.e., relevant to the previous year 2024-25 in which the new assets are transferred
before the expiry of 3 years)
Agricultural Agricultural
land in rural land in urban
area area
₹ ₹
Sale proceeds 4,90,000 8,70,000
Less : Cost of acquisition offer deduction of the amount of exemption Nil Nil
under section 54B as the new assets are transferred within 3 years
[i.e., ₹ 4,30,000-₹ 4,30,000, ₹ 8,47,000 - ₹ 8,47,000]
Short-term capital gain Not taxable* 8,70,000
*As the agricultural land is situated in rural area, it is not a "capital asset" and, consequently, capital gain
arising on its transfer is not chargeable to tax.


26. Previous year 2021-22 (assessment year 2022-23)
Urban Shares Debentures
agricultural
land
Capital gains ₹ ₹ ₹
Sale proceeds 9,00,000 4,60,000 2,90,000
Less : Cost of acquisition — — 1,70,000
Indexed cost of acquisition [₹ 1,70,000 x 317 ÷ 113
₹ 2,50,000 x 317 ÷ 100] 7,92,500 4,76,903
Capital gain
- Short-term — — —
- Long-term 107,500 7,168 1,20,000
Less: Exemption under section 54B 100,000 — —
Balance 7,500 7,168 1,20,000
Capital gains 1,34,668
Net income (rounded off) 7,20,670
Previous year 2023-24 (assessment year 2024-25)
Amount deposited in bank account on July 31, 2022
(to extent of exemption claimed) 1,00,000
Less : Amount utilised for purchase of agricultural land within 2 years
from sale of agricultural land (i.e., up to June 9, 2023) 40,000
Net income 3,52,000
Note : Agricultural land in rural area is not a capital asset. Surplus arising on sale of such land is not taxable
at all. Likewise, personal car is not a capital asset and, consequently, nothing is taxable in respect of sale of
car.
27. Computation of Capital Gains chargeable to tax in the hands of Mr. Roy for the A.Y. 2022-23
Particulars ₹ ₹
Gross Sale Consideration on transfer of residential house 35,00,000
[As per section 50C, in case the actual sale consideration is lower than the
stamp duty value fixed by the stamp valuation authority, the stamp duty value
shall be deemed as the full value of consideration if it exceeds 110% of the
sale consideration]
Less: Brokerage@2% of actual sale consideration of ₹ 30,00,000 60,000
Net Sale Consideration 34,40,000
Less: Indexed cost of acquisition [₹ 6,00,000 x 317/122] 15,59,016
Less: Exemption under section 54
 Acquisition of residential house property at Kolkata on 10.12.2021 (i.e.,
within the prescribed time of two years from 4.11.2021, being the date of
transfer of residential house at Ghaziabad). 10,00,000
 Amount deposited in Capital Gains Accounts Scheme on or before the due
date of filing return of income for construction of additional floor on the
residential house property at Kolkata. Since Mr. Roy has no other source of
income, his due date for filing return of income is 31st July, 2022
[Therefore, ₹ 4,00,000 deposited on 6.7.2022 will be eligible for exemption

whereas ₹ 5,00,000 deposited on 1.11.2022 will not be eligible for 4,00,000 14,00,000
exemption under section 54]
Exemption under section 54EC

 Amount deposited in capital gains bonds of RECL within six months from
the date of transfer (i.e., on or before 3.5.2022) would qualify for exemption.
[Therefore, in this case, ₹ 3,00,000 deposited in capital gains bonds of
RECL on 10.4.2022 would be eligible for exemption under section 54EC,
whereas ₹ 5,00,000 deposited on 15.6.2022 would not qualify for
exemption] 3,00,000


Computation of tax liability of Mr. Roy for A.Y. 2022-23
Particulars ₹
Long term capital gain ₹ 1,80,984 less basic exemption limit of ₹ 2,50,000 is charged @ 20% NIL
[Section 112]
(Since long-term capital gains is the only source of income, the entire LTCG can be
exhausted against basic exemption limit)
28. Computation of Capital Gains of Ms. Anshu for the A.Y. 2022-23
Particulars ₹ ₹
Full value of consideration [See Notes (i) & (ii) below] 25,00,000
Less: Indexed Cost of acquisition [See Note (iii) below]
Indexed cost of land (₹ 1,10,000 × 317/100) 3,48,700
Indexed cost of building (₹ 3,20,000 × 317/137) 7,40,438 10,89,138
Less: Brought forward short-term capital loss set off [See Note (iv) below] 1,50,000
Taxable capital gains (Amount to be invested in NHAI bonds to get full
exemption from tax on capital gains) [See Note (v) below] 12,60,862
Notes:
(a) As per section 50C(1), where the consideration received or accruing as a result of transfer of a capital
asset, being land or building or both, is less than the value adopted by the Stamp Valuation Authority for
the purpose of payment of stamp duty, such value adopted by the Stamp Valuation Authority shall be
deemed to be the full value of the consideration received if it exceeds 110% of the actual sales
consideration. Accordingly, full value of consideration would be ₹ 25 lacs in this case.
(b) As per section 50C(3), where the valuation is referred by the Assessing Officer to Valuation Officer and
the value ascertained by such Valuation Officer exceeds the value adopted by the Stamp Valuation
Authority for the purpose of payment of stamp duty, the value adopted by the Stamp Valuation Authority
shall be taken as the full value of the consideration received or accruing as a result of the transfer. Since
the value ascertained by the Valuation Officer (i.e. ₹ 27 lakhs), is higher than the value adopted by the
Stamp Valuation Authority (i.e. ₹ 25 lakhs), the full value of consideration in this case would be ₹ 25 lakhs.
(c) Since the cost of land acquired by Anshu on 1.4.2001 is not given in the question, the fair market value as
on 1.4.2001 is taken as the cost of acquisition. Indexation benefit is available since land and building are
both long-term capital assets, as they are held by Anshu for more than 24 months.
(d) As per section 74, brought forward unabsorbed short term capital loss can be set off against any capital
gains, short term or long term, for 8 assessment years immediately succeeding the assessment year for
which the loss was first computed. Therefore, short term capital loss on sale of shares during the F.Y.
2013-14 can be set-off against the current year long-term capital gains on sale of land and building.
(e) As per section 54EC, an assessee can avail exemption in respect of long-term capital gains, if such
capital gains are invested in the bonds issued by the NHAI redeemable after 5 years. Such investment is
required to be made within a period of 6 months from the date of transfer of the asset. The exemption
shall be the amount of capital gains or the amount of such investment made, whichever is less. Therefore,
in this case, if Anshu invests the entire capital gains in bonds of NHAI, she can get full exemption from tax
on capital gains.
29.
Computation of Capital Gains Chargeable to tax for A.Y. 2022-23
Particulars ₹ ₹
Sale consideration (i.e. Stamp Duty Value) (Note-1) 80,00,000
Less: Indexed Cost of Acquisition (₹ 10,00,000 × 317/117) 27,09,402
Indexed Cost of Improvement (₹ 2,00,000 × 317/148) 4,28,378 31,37,780
48,62,220
Less: Capital Gains exemption under section 54 (Note-2) 25,00,000
Taxable Capital Gains 23,62,220


Notes -
1. As per the provisions of section 50C, in case the stamp duty value adopted by the stamp valuation
authority is higher than 110% of the actual sale consideration, the stamp duty value shall be deemed
as the full value of consideration.
2. Exemption under section 54 is available if a new residential house is purchased within one year before or
two years after the date of transfer. Since the cost of new residential house is less than the capital gain,
capital gain to the extent of cost of new asset is exempt under section 54.
3. Exemption under section 54EC is available in respect of investment in bonds of National Highways
Authority of India only if the investment is made within a period of six months after the date of such
transfer. In this case, since the investment is made after six months, exemption under section 54EC
would not be available.
4. If the new asset purchased by the assessee on the basis of which exemption under section 54 is claimed,
is transferred within 3 years from the date of its acquisition, then for computing the taxable short-term
capital gain on such transfer, the cost of acquisition of such asset shall be reduced by the amount of
exemption taken in section 54 i.e. cost will be Nil. Such CG will be taxable in the PY in which such new
asset is transferred i.e. AY 23-24
Particulars ₹
Less: Cost of acquisition NIL
Short-term Capital Gains 40,00,000
30. Computation of chargeable capital gain of Mr. Chandru for the A.Y. 2022-23
Particulars ₹
Sale consideration 1,00,00,000
72,92,495
Less: Deduction under section 54EC
20.03.2022 RECL bonds 50,00,000
Note:
(1) Since the site was held for more than 24 months prior to the date of transfer, it is a long-term capital asset
and the capital gain arising upon its transfer is long-term capital gain.
(2) In order to claim exemption under section 54EC, Mr. Chandru has to invest in specified bonds of RECL or
NHAI or PFCL or IRFCL within a period of 6 months from the date of transfer of the asset.
(3) As per second proviso to section 54EC(1), out of capital gains arising from transfer of one or more capital
assets in a financial year, the investment eligible for exemption, cannot exceed ₹ 50 lakhs, whether such
investment is made in the same financial year or in the subsequent financial year or in both the years.
In this case, Mr. Chandru has invested ₹ 50 lakhs in RECL bonds in the F.Y. 2021-22 and ₹ 20 lakhs in
NHAI bonds in the F.Y. 2022-23, both within six months from the date of transfer. However, he would be
eligible for exemption of only ₹ 50 lakhs for investment made in such bonds.
31.
Land Bonus shares House property
₹ ₹ ₹
Sale consideration (a) 9,00,000 3,50,000 10,40,000
Indexed cost of acquisition (b) 2,03,578 Nil 3,01,905
Long-term capital gain [before any exemption] (c) 6,96,422 3,50,000 7,38,095
Less : Exemption under section 54EC [Note] 6,96,422 NIL 2,03,578
Income under the head "Capital gains" Nil 3,50,000 5,34,517
32.
House Gold Silver Diamonds
property
₹ ₹ ₹ ₹
Sale consideration 3,90,000 8,10,000 2,96,000 6,40,200
Less : Expenses on transfer 10,000 81,000 6,000 32,000
Net sale consideration (a) 3,80,000 7,29,000 2,90,000 6,08,200
Less : Indexed cost of acquisition 70,000 1,15,000 1,78,000 4,30,000
Long-term capital gain (b) 3,10,000 6,14,000 1,12,000 1,78,200
Exemption under section 54 [Note 1) (c) 1,00,000 — — —
Exemption under section 54EC [Note 2] (d) 2,10,000 NIL NIL NIL
Capital gain chargeable to tax [(b) —(c)—(d)] Nil 6,14,000 1,12,000 1,78,200,


Notes:
1. Exemption under section 54 - Since the due date of filing return of income is July 31, 2022, the deposit
made on August 5, 2022 is not considered. Exemption under section 54 is limited to amount utilised for
constructing residential house up to July 31, 2022 [i.e., ₹ 1,00,000).
2. Exemption under section 54EC - The amount of exemption available under section 54EC is ₹ 10,55,000
[i.e., ₹ 7,50,000 + ₹ 3,05,000) but it cannot be claimed against transfer of Capital asset other then
land or building.
33. Computation of capital gain for the AY 2022-23 (amounts in ₹)

Less: Expenses on Transfer 4,000
Net Sale Consideration 3,81,000
Less: Indexed cost of acquisition (₹ 1,07,000 x 317/105) 3,23,038
Less: Exemption u/s 54EC (not available now against transfer of jewellery) NIL
Taxable long-term capital gain 57,962
Note : It is assumed that the expense of ₹ 2,000 at the time of purchase is of capital nature.
34.
Computation of net taxable capital gains of Smt. Megha for the A.Y. 2022-23
Particulars ₹
Less: Expenses on transfer Nil
Less: Indexed cost of acquisition (See Working note below) 9,33,798
Long term capital gain (since the period of holding is more than 3 years) 7,66,202
Less: Exemption under section 54 (See Note 1 below) 4,00,000
Taxable long term capital gain 3,66,202
Working Note:
Indexed cost of acquisition ₹
Purchase price 4,50,000
Less: Amount forfeited (See Note 2 below) 70,000
Indexed cost of acquisition
3,80,000×317
129 9,33,798
Notes:
(1) Exemption under section 54 is available if a new residential house is purchased within two years from the
date of transfer of existing residential house, which is a long-term capital asset. Since the cost of new
residential house is less than the long-term capital gains, capital gains to the extent of cost of new house,
i.e., ₹ 4 lakh, is exempt under section 54.
(2) As per section 51, any advance received and retained by the assessee, as a result of earlier negotiations
for sale of the asset, shall be deducted from the purchase price for computing the cost of acquisition of
the asset.
35.
Computation of taxable capital gain of Mr. Malik for AY 2022-23
Particulars ₹ ₹
Factory building
Sale price of building 8,00,000
Less: WDV as on 1.4.2021 8,74,800
Short-term capital loss on sale of building (-) 74,800
Land appurtenant to the above building
Sale value of land 40,00,000
Long-term capital gains on sale of land 5,28,095
Chargeable long term capital gain 4,53,295
Investment under section 54EC: In this case, both land and building have been held for more than 24
months and hence, are long-term capital assets. Exemption under section 54EC is available if the capital
gains arising from transfer of a long-term capital asset are invested in specified long-term specified assets
within 6 months from the date of transfer. As per section 54EC, the amount to be invested for availing the
maximum exemption is the net amount of capital gain arising from transfer of long-term capital asset, which
is ₹ 4,53,295 in this case.


Notes:-
1. Where advance money has been received by the assessee, and retained by him, as a result of failure of
the negotiations, section 51 will apply. The advance retained by the assessee will go to reduce the cost of
acquisition. Indexation is to be done on the cost of acquisition so arrived at after reducing the advance
money forfeited i.e. ₹ 12,00,000 – ₹ 50,000 = ₹ 11,50,000. It may be noted that in cases where the
advance money is forfeited during the previous year 2014-15 or thereafter, the amount forfeited would be
taxable under the head “Income from Other Sources” and such amount will not be deducted from the cost
of acquisition of such asset while calculating capital gains.
2. Factory building on which depreciation has been claimed, is a depreciable asset. Profit / loss arising on
sale is deemed to be short-term capital gain/loss as per section 50, and no indexation benefit is available.
3. Land is not a depreciable asset, hence section 50 will not apply. Being a long-term capital asset (held for
more than 24 months), indexation benefit is available.
4. As per section 74, short term capital loss can be set-off against any income under the head “Capital
gains”, long term or short-term. Therefore, in this case, short-term capital loss of ₹ 74,800 can be set-off
against long-term capital gain
36.
Computation of Capital Gains of Mr. A for the Assessment Year 2022-23
Particulars ₹ ₹
Full value of consideration (deemed) (See Note-1&2) 21,50,000
(Indexation benefit is available since land and buildings are long-term capital
assets)
Less: Indexed cost of land (₹ 1,10,000 × 317/100) 3,48,700
Indexed cost of building (₹3,20,000 × 317/ 109) 9,30,642 12,79,342
Less: Brought forward short-term capital loss set off(See Note-4) 75,000
Amount to be invested in NHAI / RECL / PFCL / IRFCL bonds 7,95,658
Notes:
(1) Where the consideration received or accruing as a result of transfer of a capital asset, being land or
building or both, is less than the value adopted or assessed by any authority of a State Government
(Stamp Valuation Authority) for the purpose of payment of stamp duty in respect of such asset and
the same is not contested by the assessee, such value adopted or assessed shall be deemed to be
the full value of the consideration received or accruing as a result of such transfer if SDV exceeds
110% of the actual sales consideration [Section 50C(1)]. Accordingly, the full value of
consideration will be ₹ 21.5 lakhs in this case.
(2) It is further provided in section 50C(3) that where the valuation is referred by the Assessing Officer to
Valuation Officer and the value ascertained by such Valuation Officer exceeds the value adopted or
assessed by the Stamp Valuation Authority, the value adopted or assessed by the Stamp Valuation
Authority shall be taken as the full value of the consideration received or accruing as a result of the
transfer. Since the value ascertained by the valuation officer (i.e. ₹ 22 lakhs) is higher than the
value adopted by the stamp valuation authority (i.e. ₹ 21.5 lakhs), the full value of
consideration in this case is ₹ 21.5 lakhs.
(3) Cost of land which is acquired on partition of HUF is the cost to the previous owner. Since date and
cost of acquisition to the previous owner are not given, fair market value as on 1.4.2001 is taken as
the cost and indexed. Here, FMV does not exceeds SDV of the land as on 01.04.2001.
(4) Brought forward unabsorbed short term capital loss can be set off against any capital gains, short
term or long term, for 8 assessment years immediately succeeding the assessment year for which the
loss was first computed.
(5) As per section 54EC, an assessee can avail exemption in respect of long-term capital gains, if such
capital gains are invested in the bonds issued by the NHAI / RECL / PFCL / IRFCL redeemable
after 5 years. Such investment is required to be made within a period of 6 months from the date of
transfer of the asset. The exemption shall be the amount of capital gain or the amount of such
investment made, whichever is less.
37. Section 10(37) exempts the capital gains arising to an individual or a Hindu Undivided Family from transfer of
agricultural land by way of compulsory acquisition, or a transfer, the consideration for which is determined or
approved by the RBI or the Central Government. Such exemption is available where the compensation or the
enhanced compensation or consideration, as the case may be, is received on or after 1st April, 2004 and the
land has been used for agricultural purposes during the preceding two years by such individual or a parent of
his or by such Hindu undivided family. Since all the above conditions are fulfilled in this case, X is entitled to
exemption under section 10(37) of the entire capital gains arising on sale of agricultural land.


38. Computation of total income of Mr. Sagar for the A.Y. 2022-23
Particulars ₹ ₹
Capital Gains: 15,00,000
Sale consideration
Less: Indexed cost of land (₹ 75,000 X 317/148) 1,60,642
Indexed cost of building (₹ 1,25,000 X 317/184) 2,15,353 3,75,995
11,24,005
Less: Exemption under section 54 (See Note 2 below) 8,00,000
Profit and gains from business or profession/Income from other sources

Insurance agency commission earned (Gross) (₹ 45,000 + ₹ 5,000) 50,000
Less: Deduction under Chapter VI-A 20,000
Section 80C - Investment in NSC VIII 3,54,005
Notes:
(1) Since the building and the land are held for more than 24 months, the same are long-term capital assets
and the capital gain arising on sale of such assets is a long-term capital gain.
(2) As per the provisions of section 54, the capital gain arising on transfer of a long-term residential property
shall not be chargeable to tax to the extent such capital gain is invested in the purchase of a residential
house property one year before or two years after the date of transfer of original asset or constructed a
residential house property within three years after such date. Since Mr. Sagar has purchased another
residential house in June, 2021 for ₹ 8,00,000, the capital gain arising on transfer of residential house
property in May, 2021 is exempt under section 54 to that extent.
39. A can claim exemption u/s 54 in respect of capital gains on sale of residential house and exemption u/s 54F in
respect of capital gains on sale of plot. Since the exemption u/s 54 is available in on investment of capital
gains, therefore, first of all, exemption u/s 54 will be claimed. Thereafter, exemption u/s 54F, which is
available on investment of net consideration, shall be claimed. The exemption u/s 54F will be available only in
respect of balance cost of new house i.e. Original cost of new house - Exemption u/s 54.
Computation of Capital Gains for AY 2022-23 (amounts in ₹)

Residential house Plot
Full Value of consideration 12,00,000 7,00,000
Less: Indexed cost [(4,00,000 × 317 ÷ 109); (2,00,000 x 317 ÷ 109)] 11,63,303 5,81,651
Long term capital gains 36,697 1,18,349
Less: Exemption u/s 54 36,697
Exemption u/s 54F i.e.
Capital gain – ₹ 1,18,349 x (Cost of new house–Exemption u/s 54) i.e. {5,00,000 – 36,697}
Net consideration of plot = 700000 78,331
Taxable capital gains NIL 40,018
Computation of capital gains on sale of residential house for assessment year 2023-24 (amounts in ₹)
Sale price of the residential house (acquired on 25-4-2022) 8,00,000
Less: Cost of Acquisition (5,00,000 - exemption claimed u/s 54 ₹ 36,697) 4,63,303
Short-term capital gains for assessment year 2023-24 3,36,697
Long-term capital gains (Exemption claimed u/s 54F shall be chargeable as long-term
capital gains of the year in which the house is transferred i.e. assessment year 2023-24) 78,331
Note: No exemption will be available in respect of second new house acquired on 31-3-2024. Exemption u/s
54 or 54F cannot be claimed because the house transferred on 31-1-2023 is a short-term capital asset.
40. Since, these shares are transferred outside a recognized stock exchange the manner of income
computation will be as under:-
₹
Sales Consideration 5,00,000
Less: Indexed cost of acquisition (₹ 50,000 x 317/113) 1,40,265
Long Term Capital Gain 3,59,735
Less: Exemption under Section 54F
(₹ 4,00,000 x 3,59,735 / ₹ 5,00,000) 2,87,788
Long term capital gain 71,947


41.
Assessment year 2022-23 ₹
Less :
Expenses 5,000
Indexed cost of acquisition [₹ 60,000 x 317/113] 1,68,319
Balance 6,31,681
Less : Exemption under section 54F [₹ 6,00,000, being the amount deposited in Deposit
Account x ₹ 6,31,681 being the amount of capital gain /₹ 8,00,000 being net sale consideration) 4,73,761
Notes:
1. In this case, X has not fully utilised the deposit account for acquiring the residential house property. Out of
₹ 6 lakh deposited in the deposit account, ₹ 4.80 lakh is utilised for purchasing the house. Tax treatment
of ₹ 1.20 lakh (being the unutilised amount) will be as follows —
₹
Unutilised amount (a) 1,20,000,
Net sale consideration (b) 8,00,000
Original capital gain (c) 6,31,681
Notional long-term capital gain [i.e., (a)/(b) x (c)] 94,752
Effective exemption under section 54F [i.e., ₹ 4,73,761 — ₹ 94,752] 3,79,009
₹ 94,752 will be chargeable to tax as long-term capital gain after the expiry of 3 years from date of transfer
of shares (i.e., July 9, 2024). Consequently, it will be taxable for the assessment year 2025-26.
2. The unutilised amount of ₹ 1.20 lakh can be withdrawn by X at any time after July 9, 2024.
3. If X sells the new house at Delhi before July 6, 2026, then ₹ 3,79,009 (exemption under section 54F) will
be taken as long-term capital gains of the year in which the house is sold.
4. If X purchases any other residential house before July 10, 2023 or constructs any other residential house
before July 10, 2024, then ₹ 3,79,009 (exemption under section 54F) will be deemed as long-term capital
gains of the year in which another house is purchased or constructed.
42. ₹
Less: Brokerage (2% of ₹ 10,31,000) (20,620)
Indexed cost of acquisition (i.e., ₹ 1,05,000 x 317/105) (3,17,000)
Less : Exemptions
Under section 54B 1,50,000
Under section 54F [i.e., ₹ 6,93,380 x ₹ 5,00,000/(₹ 10,31,000- ₹ 20,620)] 3,43,128
43. Computation of taxable capital gain of Mr. ‘X’ for A.Y. 2022-23
Particulars ₹ ₹
Sale consideration received on sale of 10,000 shares @ ₹ 200 each 20,00,000
Less: Indexed cost of acquisition
(a) 5,000 shares received as gift from father on 1.6.2000
Indexed cost 5,000 x ₹ 50 x 317/100 7,92,500
(b) 2,000 bonus shares received from AB Ltd
Bonus shares are acquired on 21.7.2005 i..e after 01.04.2001. Nil
Hence, the cost is Nil.
(c) 3000 shares purchased on 1.2.2007 @ ₹ 125 per share. The indexed 9,74,385 17,66,885
cost is 3000 x 125 x 317/122 2,33,115
Long term capital gain
Less : Exemption under section 54F (See Note below)
₹ 2,33,115 x ₹ 10,00,000 / ₹ 20,00,000 1,16,557
Taxable long term capital gain 1,16,557
Note: Exemption under section 54F can be availed by the assessee subject to fulfillment of the
following conditions :
(a) The assessee should not own more than one residential house on the date of transfer of the long-term
capital asset;
(b) The assessee should purchase a residential house within a period of 1 year before or 2 years after the
date of transfer or construct a residential house within a period of 3 years from the date of transfer of the
long-term capital asset.
In this case, the assessee has fulfilled the two conditions mentioned above. Therefore, he is entitled to
exemption under section 54F.


44. Computation of capital gains on slump sale of Unit 1
Particulars ₹
Sale value [FMV as on 01.04.2021] 30,00,000
Less: Expenses on sale 28,000
Less: Net worth (See Note 1 below) 12,50,625
Notes:
1. Computation of net worth of Unit 1 of Akash Enterprises
Particulars ₹ ₹
Building (excluding ₹ 3 lakhs on account of revaluation) 9,00,000
Machinery 3,00,000
Debtors 1,00,000
Patents (See Note 2 below) 28,125
Other assets (₹1,50,000 – ₹ 50,000) 1,00,000
Total assets 14,28,125
Less: Creditors 37,500
Bank Loan 1,40,000 1,77,500
Net worth 12,50,625
2. Written down value of patents as on 1.4.2021

Value of patents: ₹
Cost as on 1.7.2019 50,000
Less: Depreciation @ 25% for Financial Year 2019-20 12,500
WDV as on 1.4.2020 37,500
Less: Depreciation for Financial Year 2020-21 9,375
WDV as on 1.4.2021 28,125
For the purposes of computation of net worth, the written down value determined as per section 43(6) has
to be considered in the case of depreciable assets. The problem has been solved assuming that the
Balance Sheet values of ₹ 3 lakh and ₹ 9 lakh (₹ 12 lakh – ₹ 3 lakh) represent the written down
value of machinery and building, respectively, of Unit 1.
3. Since the Unit is held for more than 36 months, capital gain arising would be long term capital gain.
However, indexation benefit is not available in case of slump sale.
45. Computation of capital gains in case of Shri Aniket for the Assessment Year 2022-23
₹
Amount received on liquidation (₹ 20 x 1,00,000 + ₹ 25,50,000) 45,50,000
Less: Amount taxable as deemed dividend i.e. share in accumulated profits (50% of 8,00,000) 4,00,000
Less: Indexed cost of acquisition (₹ 8,00,000 x 317 ÷ 105) 24,15,238
Long term capital Gain 17,34,762
46. In the hands of the company

As per section 46(1), distribution of capital assets amongst the shareholders on liquidation of the company is
not regarded as “transfer” in the hands of the company. Consequently, there will be no capital gains in the
hands of the company.
In the hands of Ms. Vasumathi (shareholder) Section 46(2) provides that such capital gains would be
chargeable in the hands of the shareholder.
Particulars ₹
Ms. Vasumathi holds 1/6th of the shareholding of the company 10,00,000
Market value of agricultural land received (1 acre @ ₹ 10 Lakhs) Cash at bank [1/6th of 58,333
(₹ 6,50,000 – ₹ 3,00,000)] 10,58,333
Less: Deemed dividend under section 2(22)(c) - 1/6th of (₹ 40,00,000- ₹ 50,000) 6,58,333
Consideration for computing Capital Gain 4,00,000
Less: Indexed cost of acquisition of Shares (₹ 1,20,000 x 317/ 113) 3,36,637
Long term capital gains 63,363


Notes:
1. Where the capital asset became the property of the assessee on the distribution of the capital assets of a
company on its liquidation and the assessee has been assessed to capital gains in respect of that asset
under section 46, the cost of acquisition means the fair market value of the asset on the date of
distribution. Hence, the short-term capital gains in the hands of Ms. Vasumathi (shareholder) at the time
of sale of urban agricultural land should be computed as follows:
Particulars ₹
Less: Fair market value of the agricultural land on the date of distribution 10,00,000
Short term capital gain 5,00,000
2. Dividend under section 2(22)(c) amounting to ₹ 6,58,333 will be taxable in the hands of shareholder
under the head “income from other sources.
3. The tax liability ascertained at ₹ 3,00,000 has to be reduced from bank balance while computing full value
of consideration under section 46(2). ₹ 50,000, being the difference between ₹ 3,00,000 and ₹ 2,50,000,
has to be reduced from General Reserve for calculating deemed dividend under section 2(22)(c).
4. TDS compliance u/s 194 is required by company.
47. Section 47(xvi) provides that any transfer of a capital asset in a transaction of reverse mortgage under a
scheme made and notified by the Central Government shall not be considered as a transfer for the purpose of
capital gain.
Accordingly, the pledging of residential house with bank by Mr. Abhishek will not be regarded as a transfer.
Therefore, no capital gain will be charged on such transaction.
Further, section 10(43) provides that the amount received by the senior citizen as a loan, either in lump sum
or in installment, in a transaction of reverse mortgage would be exempt from income-tax. Therefore, the
monthly installment amounts received by Mr. Abhishek would not be taxable.
However, capital gains tax liability would be attracted at the stage of alienation of the mortgaged property by
the bank for the purposes of recovering the loan.
48. As per section 47(xvi), any transfer of a capital asset in a transaction of Reverse Mortgage under a scheme
made and notified by the Central Government will not be regarded as a transfer. Therefore, capital gains tax
liability is not attracted.
Section 10(43) provides that the amount received by a senior citizen as a loan, either in lump sum or in
installments, in a transaction of Reverse Mortgage would be exempt from income tax. Therefore, the amount
received by Sachin in a transaction of Reverse Mortgage of his residential building is exempt under section
10(43).

Capital Gain SATC 8C.1
PRACTICAL QUESTIONS – SET B

1. How will you calculate the period of holding in case of the following assets?
(a) Shares held in a company in liquidation
(b) Bonus shares
(c) Flat in a co-operative society
Solution:
Shares held in a company in liquidation - The period after the date on which the company goes into
liquidation shall be excluded while calculating the period of holding. Therefore, the period of holding shall
commence from the date of acquisition and end with the date on which the company goes into liquidation.
Bonus shares - The period of holding shall be reckoned from the date of allotment of bonus shares and will
end with the date of transfer.
Flat in a co-operative society - The period of holding shall be reckoned from the date of allotment of
membership in the society and will end with the date of transfer.
2. A is the owner of a car. On 1-4-2021, he starts a business of purchase and sale of motor cars. He
treats the above car as part of the stock-in-trade of his new business. He sells the same on 31-3-2022
and gets a profit of ₹ 1 lakh. Discuss the tax implication in his hands under the head “Capital gains”.
Solution:
Since car is a personal asset, conversion or treatment of the same as the stock-in- trade of his business will
not be trapped by the provisions of section 45(2). Hence, A is not liable to capital gains tax.
3. X converts his capital asset (acquired on June 10, 2003 for ₹ 60,000) into stock-in- trade on March 10,
2021. The fair market value on the date of the above conversion was ₹ 5,50,000. He subsequently sells
the stock-in-trade so converted for ₹ 6,00,000 on June 10, 2021. Discuss the year of chargeability of
capital gain.
Solution:
Since the capital asset is converted into stock-in-trade during the previous year relevant to the A.Y. 2021-22,
it will be a transfer under section 2(47) during the P.Y. 2020-21. However, the profits or gains arising from the
above conversion will be chargeable to tax during the A.Y. 2022-23, since the stock-in-trade has been sold
only on June 10, 2021. For this purpose, the fair market value on the date of such conversion (i.e. 10th March,
2021) will be the full value of consideration.
4. M held 2000 shares in a company ABC Ltd. This company amalgamated with another company during
the previous year ending 31-3-2022. Under the scheme of amalgamation, M was allotted 1000 shares
in the new company. The market value of shares allotted is higher by ₹ 50,000 than the value of
holding in ABC Ltd. The Assessing Officer proposes to treat the transaction as an exchange and to
tax ₹ 50,000 as capital gain. Is he justified?
Solution:
In the above example, assuming that the amalgamated company is an Indian company, the transaction is
squarely covered by the exemption explained above and the proposal of the Assessing Officer to treat the
transaction as a transfer is not justified.
5. In which of the following situations capital gains tax liability does not arise?
(i) Mr. A purchased gold in 1970 for ₹ 25,000. In the P.Y. 2021-22, he gifted it to his son at the time of
marriage. Fair market value (FMV) of the gold on the day the gift was made was ₹ 1,00,000.
(ii) A house property is purchased by a Hindu undivided family in 1945 for ₹ 20,000. It is given to one
of the family members in the P.Y. 2021-22 at the time of partition of the family. FMV on the day of
partition was ₹ 12,00,000.
(iii) Mr. B purchased 50 convertible debentures for ₹ 40,000 in 1995 which are converted into 500
shares worth ₹ 85,000 in November 2021 by the company.


Solution:
We know that capital gains arise only when we transfer a capital asset. The liability of capital gains tax
in the situations given above is discussed as follows:
(i) As per the provisions of section 47(iii), transfer of a capital asset under a gift is not regarded as transfer
for the purpose of capital gains. Therefore, capital gains tax liability does not arise in the given situation.
(ii) As per the provisions of section 47(i), transfer of a capital asset (being in kind) on the total or partial
partition of Hindu undivided family is not regarded as transfer for the purpose of capital gains. Therefore,
capital gains tax liability does not arise in the given situation.
(iii) As per the provisions of section 47(x), transfer by way of conversion of bonds or debentures, debenture
stock or deposit certificates in any form of a company into shares or debentures of that company is not
regarded as transfer for the purpose of capital gains. Therefore, capital gains tax liability does not arise in
the given situation.
6. Mr. Abhishek a senior citizen, mortgaged his residential house with a bank, under a notified reverse
mortgage scheme. He was getting loan from bank in monthly installments. Mr. Abhishek did not repay
the loan on maturity and hence gave possession of the house to the bank, to discharge his loan. How
will the treatment of long-term capital gain be on such reverse mortgage transaction?
Solution:
Section 47(xvi) provides that any transfer of a capital asset in a transaction of reverse mortgage under a
scheme made and notified by the Central Government shall not be considered as a transfer for the purpose of
capital gain.
Accordingly, the mortgaging of residential house with bank by Mr. Abhishek will not be regarded as a transfer.
Therefore, no capital gain will be charged on such transaction.
Further, section 10(43) provides that the amount received by the senior citizen as a loan, either in lump sum
or in installment, in a transaction of reverse mortgage would be exempt from income-tax. Therefore, the
monthly installment amounts received by Mr. Abhishek would not be taxable.
However, capital gains tax liability would be attracted at the stage of alienation of the mortgaged property by
the bank for the purposes of recovering the loan.
7. Examine, with reasons, whether the following statements are True or False.
1. Alienation of a residential house in a transaction of reverse mortgage under a scheme made and
notified by the Central Government is treated as "transfer" for the purpose of capital gains.
2. Zero coupon bonds of eligible corporation, held for 14 months, will be long-term capital assets.
3. Zero Coupon Bond means a bond on which no payment and benefits are received or receivable
before maturity or redemption.
Solution:
1. False: As per section 47(xvi), such alienation in a transaction of reverse mortgage under a scheme made
and notified by the Central Government is not regarded as "transfer" for the purpose of capital gains.
2. True: Section 2(42A) defines the term 'short-term capital asset'. Under the proviso to section 2(42A), zero
coupon bond held for not more than 12 months will be treated as a short-term capital asset.
Consequently, such bond held for more than 12 months will be a long-term capital asset.
3. True: As per section 2(48), ‘Zero Coupon Bond’ means a bond issued by any infrastructure capital
company or infrastructure capital fund or a public sector company, or Scheduled Bank on or after 1st June
2005, in respect of which no payment and benefit is received or receivable before maturity or redemption
from such issuing entity and which the Central Government may notify in this behalf.


8. Mr. A converts his capital asset acquired for an amount of ₹ 50,000 in June, 2003 into stock-in-trade in
the month of November, 2016. The fair market value of the asset on the date of conversion is
₹ 4,50,000. The stock-in-trade was sold for an amount of ₹ 6,50,000 in the month of September, 2021.
What will be the tax treatment?

2003-04 109
2016-17 264
2021-22 317
Solution:
The capital gains on the sale of the capital asset converted to stock-in-trade is taxable in the given case. It
arises in the year of conversion (i.e. P.Y. 2016-17) but will be taxable only in the year in which the stock-in-
trade is sold (i.e. P.Y. 2021-22). Profits from business will also be taxable in the year of sale of the stock-in-
trade (P.Y. 2021-22).
The long-term capital gains and business income for the A.Y. 2022-23 are calculated as under:
Particulars ₹ ₹
Profits and Gains from Business or Profession
Sale proceeds of the stock-in-trade 6,50,000
Less: Cost of the stock-in-trade (FMV on the date of conversion) 4,50,000 2,00,000
Long Term Capital Gains

Full value of the consideration (FMV on the date of the conversion) 4,50,000
Less: Indexed cost of acquisition (₹ 50,000 x 264/109) 1,21,101 3,28,899
Note: For the purpose of indexation, the cost inflation index of the year in which the asset is converted into
stock-in-trade should be considered.
9. On January 31, 2022, Mr. A has transferred self-generated goodwill of his profession for a sale
consideration of ₹ 70,000 and incurred expenses of ₹ 5,000 for such transfer. You are required to
compute the capital gains chargeable to tax in the hands of Mr. A for the A.Y. 2022-23.
Solution:
The transfer of self-generated goodwill of profession is not chargeable to tax. It is based upon the Supreme
Court’s ruling in CIT vs. B.C. Srinivasa Shetty.
NOW THE LAW IS AMENDED VIDE FINANCE ACT 2021 [SECTION 55(2)]
10. [Refer Depreciation Chapter] Singhania & Co., a sole proprietorship own six machines, put in use for
business in March, 2020. The depreciation on these machines is charged@15%. The written down
value of these machines as on 1st April, 2021 was ₹ 8,50,000. Three of the old machines were sold on
10th June, 2021 for ₹ 11,00,000. A second hand plant was bought for ₹ 8,50,000 on 30th November,
2021.
You are required to:
(i) determine the claim of depreciation for Assessment Year 2022-23.
(ii) compute the capital gains liable to tax for Assessment Year 2022-23.
(iii) If Singhania & Co. had sold the three machines in June, 2021 for ₹ 21,00,000, will there be any
difference in your above workings? Explain.
Solution:
(a) Computation of depreciation for A.Y. 2022-23
Particulars ₹
W.D.V. of the block as on 1.4.2021 8,50,000
Add: Purchase of second hand plant during the year 8,50,000
17,00,000
Less: Sale consideration of old machinery during the year 11,00,000
W.D.V of the block as on 31.03.2022 6,00,000


Since the value of the block as on 31.3.2022 comprises of a new asset which has been put to use for less
than 180 days, depreciation is restricted to 50% of the prescribed percentage of 15% i.e. depreciation is
restricted to 7½%. Therefore, the depreciation allowable for the year is ₹ 45,000, being 7½% of
₹ 6,00,000.
(b) The provisions under section 50 for computation of capital gains in the case of depreciable assets
can be invoked only under the following circumstances:
(i) When one or some of the assets in the block are sold for consideration more than the value of the
block.
(ii) When all the assets are transferred for a consideration more than the value of the block.
(iii) When all the assets are transferred for a consideration less than the value of the block.
Since in the first two cases, the sale consideration is more than the written down value of the block, the
computation would result in short term capital gains.
In the third case, since the written down value of the block exceeds the sale consideration, the resultant
figure would be a short-term capital loss of the block.
In the given case, capital gains will not arise as the block of asset continues to exist, and some of the
assets are sold for a price which is lesser than the written down value of the block.
(c) If the three machines are sold in June, 2021 for ₹ 21,00,000, then short term capital gains would arise,
since the sale consideration is more than the aggregate of the written down value of the block at the
beginning of the year and the additions made during the year.
Particulars ₹ ₹
Less: W.D.V. of the machines as on 1.4.2021 8,50,000
Purchase of second plant during the year 8,50,000 17,00,000
Short term capital gains 4,00,000
11. Calculate the income-tax liability for the assessment year 2022-23 in the following cases:
Mr. A Mrs. B Mr. C Mr. D

(age 45) (age 62) (age 81) (age 82)
Status Resident Non- resident Resident Non-
resident
Total income other than 2,40,000 2,80,000 5,90,000 4,80,000
long- term capital gain
Long-term capital gain 15,000 10,000 60,000 from sale Nil
from sale of from sale of listed equity of agricultural
vacant site shares (STT paid on sale land in rural
and purchase of shares) area
Note - Assume that Mr. A, Mrs. B, Mr. C and Mr. D do not opt for section 115BAC.
Solution:
Computation of income-tax liability for the A.Y. 2022-23
Mr. A Mrs. B (age 62) Mr. C Mr. D
(age 45) (age 81) (age 82)
Residential Status Resident Non-resident Resident Non- resident
Applicable basic ₹ 2,50,000 ₹ 2,50,000 ₹ 5,00,000 ₹ 2,50,000
exemption limit
Asset sold Vacant site Listed equity shares (STT paid on Rural -
both sale and purchase of shares) agricultural
land
Long-term capital ₹ 15,000 ₹ 10,000 ₹ 60,000 -

gain (on sale of [Taxable@20% [exempt u/s 112A since it is less (Exempt –
above asset) u/s 112] than ₹ 1,00,000] not a capital
asset)


Other income ₹ 2,40,000 ₹ 2,80,000 ₹ 5,90,000 ₹ 4,80,000
Tax liability
On LTCG (after ₹ 1,000 - - -
adjusting Basic
Exemption limit)
On Other income Nil ₹ 1,500 ₹ 18,000 ₹ 11,500
Less: Rebate u/s 87A ₹ 1,000

₹ Nil ₹ 1,500 ₹ 18,000 ₹ 11,500
Add: Health and
education cess @4% Nil ₹ 60 ₹ 720 ₹ 460
Total tax liability Nil ₹ 1,560 ₹ 18,720 ₹ 11,960
Notes:
1. Since Mrs. B and Mr. D are non-residents, they cannot avail the higher basic exemption limit of ₹ 3,00,000
and ₹ 5,00,000 for persons over the age of 60 years and 80 years, respectively.
2. Since Mr. A is a resident whose total income does not exceed ₹ 5 lakhs, he is eligible for rebate of ₹
12,500 or the actual tax payable, whichever is lower, under section 87A.
12. [IMPORTANT] Mr. Mithun purchased 100 equity shares of M/s Goodmoney Co. Ltd. on 01-04-2005 at
rate of ₹ 1,000 per share in public issue of the company by paying securities transaction tax.
Company allotted bonus shares in the ratio of 1:1 on 01.12.2020. He has also received dividend of ₹ 10
per share on 01.05.2021.
He has sold all the shares on 01.10.2021 at the rate of ₹ 4,000 per share through a recognized stock
exchange and paid brokerage of 1% and securities transaction tax of 0.02% to celebrate his 75th
birthday.
Compute his total income and tax liability for Assessment Year 2022-23, assuming that he is having
no income other than given above. Fair market value of shares of M/s Goodmoney Co. Ltd. on
31.1.2018 is ₹ 2,000.
Solution:
Computation of total income and tax liability of Mr. Mithun for A.Y. 2022-23
Particulars ₹
Long term capital gains on sale of original shares
Gross sale consideration (100 x ₹ 4,000) 4,00,000
Less: Brokerage@1% 4,000
Less: Cost of acquisition (100 x ₹ 2,000) (Refer Note 2) 2,00,000
Long term capital gains (Taxable u/s 112A) 1,96,000
Short term capital gains on sale of bonus shares
Gross sale consideration (100 x ₹ 4,000) 4,00,000
Less: Brokerage@1% 4,000
Less: Cost of acquisition of bonus shares NIL
Short term capital gains (Taxable u/s 111A) 3,96,000
Dividend received from M/s Goodmoney Co. Ltd. is taxable in the hands of shareholders 2,000
[200 shares x 10 per share]


Tax Liability
Tax on dividend Nil
15% of (₹ 3,96,000-₹ 2,98,000, being unexhausted basic exemption limit) 14,700
10% of (₹ 1,96,000 - ₹ 1,00,000) 9,600
24,300
Add: Health and education cess @4% 972
Tax payable 25,272
Tax payable (rounded off) 25,270
Notes:
1. Long-term capital gains exceeding ₹ 1 lakh on sale of original shares through a recognized stock
exchange (STT paid at the time of acquisition and sale) is taxable under section 112A at a concessional
rate of 10%, without indexation benefit.
2. Cost of acquisition of such equity shares acquired before 1.2.2018 is higher of
Cost of acquisition i.e., ₹ 1,000 per share and

lower of
Fair market value of such asset i.e., ₹ 2,000 per share
and Full value of consideration i.e., ₹ 4,000 per share.
So, the cost of acquisition of original share is ₹ 2,000 per share.
3. Since bonus shares are held for less than 12 months before sale, the gain arising there from is a short-
term capital gain chargeable to tax@15% as per section 111A after adjusting the unexhausted basic
exemption limit. Since Mr. Mithun is over 60 years of age, he is entitled for a higher basic exemption limit
of ₹ 3,00,000 for A.Y. 2022-23.
4. Brokerage paid is allowable since it is an expenditure incurred wholly and exclusively in connection with
the transfer. Hence, it qualifies for deduction under section 48.
5. Cost of bonus shares will be Nil as such shares are allotted after 1.04.2001.
6. Securities transaction tax is not allowable as deduction.
13. Aarav converts his plot of land purchased in July, 2003 for ₹ 80,000 into stock-in- trade on 31st March,
2021. The fair market value as on 31.3.2021 was ₹ 3,00,000. The stock-in-trade was sold for ₹ 3,25,000
in the month of January, 2022.
Find out the taxable income, if any, and if so under which head of income and for which Assessment
Year?
Cost Inflation Index: F.Y. 2003-04:109; F.Y. 2020-21: 301; F.Y. 2021-22: 317.
Solution:
Conversion of a capital asset into stock-in-trade is a transfer within the meaning of section 2(47) in the
previous year in which the asset is so converted. However, the capital gains will be charged to tax only in the
year in which the stock-in-trade is sold.
The cost inflation index of the financial year in which the conversion took place should be considered for
computing indexed cost of acquisition. Further, the fair market value on the date of conversion would be
deemed to be the full value of consideration for transfer of the asset as per section 45(2). The sale price less
the fair market value on the date of conversion would be treated as the business income of the year in which
the stock-in-trade is sold.


Therefore, in this problem, both capital gains and business income would be charged to tax in the
A.Y. 2022-23.
Particulars ₹
Capital Gains
Sale consideration (Fair market value on the date of conversion) 3,00,000
Less: Indexed cost of acquisition (₹ 80,000 × 301/109) 2,20,917
Profits & Gains of Business or Profession
Sale price of stock-in-trade 3,25,000
Less: Fair market value on the date of conversion 3,00,000
25,000
Computation of taxable income of Mr. Aarav for A.Y. 2022-23

Particulars ₹
Profits and gains from business or profession 25,000
Long term capital gains 79,083
Taxable Income (rounded off) 1,04,080
14. [Section 45(2) + Section 54EC] Mrs. Harshita purchased a land at a cost of ₹ 35 lakhs in the financial
year 2003-04 and held the same as her capital asset till 20th March, 2021.
She started her real estate business on 21st March, 2021 and converted the said land into stock-in-
trade of her business on the said date, when the fair market value of the land was ₹ 210 lakhs.
She constructed 15 flats of equal size, quality and dimension. Cost of construction of each flat is ₹ 10
lakhs. Construction was completed in February, 2022. She sold 10 flats at ₹ 30 lakhs per flat in March,
2022. The remaining 5 flats were held in stock as on 31st March, 2022.
She invested ₹ 50 lakhs in bonds issued by National Highways Authority of India on 31st March, 2022
and another ₹ 50 lakhs in bonds of Rural Electrification Corporation Ltd. in April, 2022.
Compute the amount of chargeable capital gain and business income in the hands of Mrs. Harshita
arising from the above transactions for Assessment Year 2022-23 indicating clearly the reasons for
treatment for each item.
[Cost Inflation Index: F.Y. 2003-04: 109; F.Y. 2020-21: 301].
Solution:
Computation of capital gains and business income of Harshita for A.Y. 2022-23
Particulars ₹
Capital Gains
Fair market value of land on the date of conversion deemed as the full value of 2,10,00,000
consideration for the purposes of section 45(2)
Less: Indexed cost of acquisition [₹ 35,00,000 × 301/109] 96,65,138
1,13,34,862
Proportionate capital gains arising during A.Y. 2022-23 75,56,575
[₹1,13,34,862 x 2/3]
Less: Exemption under section 54EC 50,00,000
Capital gains chargeable to tax for A.Y. 2022-23 25,56,575
Business Income
Sale price of flats [10 × ₹ 30 lakhs] 3,00,00,000
Less: Cost of flats
Fair market value of land on the date of conversion [₹ 210 lacs × 2/3] 1,40,00,000
Cost of construction of flats [10 × ₹ 10 lakhs] 1,00,00,000
Business income chargeable to tax for A.Y. 2022-23 60,00,000


Notes:
(1) The conversion of a capital asset into stock-in-trade is treated as a transfer under section 2(47). It would
be treated as a transfer in the year in which the capital asset is converted into stock-in-trade (i.e., P.Y.
2020-21, in this case).
(2) However, as per section 45(2), the capital gains arising from the transfer by way of conversion of capital
assets into stock-in-trade will be chargeable to tax only in the year in which the stock-in-trade is sold.
(3) The indexation benefit for computing indexed cost of acquisition would, however, be available only up to
the year of conversion of capital asset into stock-in-trade (i.e. PY 2020-21) and not up to the year of sale
of stock-in-trade (i.e. PY 2021-22).
(4) For the purpose of computing capital gains in such cases, the fair market value of the capital asset on the
date on which it was converted into stock- in-trade shall be deemed to be the full value of consideration
received or accruing as a result of the transfer of the capital asset.
In this case, since only 2/3rd of the stock-in-trade (10 flats out of 15 flats) is sold in the P.Y. 2021-22, only
proportionate capital gains (i.e., 2/3rd) would be chargeable to tax in the A.Y.2022-23.
(5) On sale of such stock-in-trade, business income would arise. The business income chargeable to tax
would be the difference between the price at which the stock-in-trade is sold and the fair market value on
the date of conversion of the capital asset into stock-in-trade.
(6) In case of conversion of capital asset into stock-in-trade and subsequent sale of stock-in-trade, the period
of 6 months is to be reckoned from the date of sale of stock-in-trade for the purpose of exemption under
section 54EC [CBDT Circular]. In this case, since the investment in bonds of NHAI has been made within
6 months of sale of flats, the same qualifies for exemption under section 54EC.
With respect to long-term capital gains arising on land or building or both in any financial year, the
maximum deduction under section 54EC would be ₹ 50 lakhs, whether the investment in bonds of NHAI
or RECL are made in the same financial year or next financial year or partly in the same financial year
and partly in the next financial year.
Therefore, even though investment of ₹ 50 lakhs has been made in bonds of NHAI during the P.Y. 2021-22
and investment of ₹ 50 lakhs has been made in bonds of RECL during the P.Y. 2022-23, both within the
stipulated six month period, the maximum deduction allowable for A.Y. 2022-23, in respect of long-term
capital gain arising on sale of long-term capital asset(s) during the P.Y. 2021-22, is only ₹ 50 lakhs.
15. [After Depreciation/PGBP chapter] Mr. A is an individual carrying on business. His stock and
machinery were damaged and destroyed in a fire accident.
The value of stock lost (total damaged) was ₹ 6,50,000. Certain portion of the machinery could be
salvaged. The opening WDV of the block as on 1-4-2021 was ₹ 10,80,000.
During the process of safeguarding machinery and in the fire fighting operations, Mr. A lost his gold
chain and a diamond ring, which he had purchased in April, 2004 for ₹ 1,20,000. The market value of
these two items as on the date of fire accident was ₹ 1,80,000.
Mr. A received the following amounts from the insurance company:

(a) Towards loss of stock ₹ 4,80,000
(b) Towards damage of machinery ₹ 6,00,000
(c) Towards gold chain and diamond ring ₹ 1,80,000
You are requested to briefly comment on the tax treatment of the above three items under the
provisions of the Income-tax Act, 1961.
Solution:
(a) Compensation towards loss of stock: Any compensation received from the insurance company towards
loss/damage to stock in trade is to be construed as a trading receipt. Hence, ₹ 4,80,000 received as
insurance claim for loss of stock has to be assessed under the head “Profit and gains of business or
profession”.


Note - The assessee can claim the value of stock destroyed by fire as revenue loss, eligible for deduction
while computing income under the head “Profits and gains of business or profession”.
(b) Compensation towards damage to machinery: The question does not mention whether the salvaged
machinery is taken over by the Insurance company or whether there was any replacement of machinery
during the year. Assuming that the salvaged machinery is taken over by the Insurance company, and
there was no fresh addition of machinery during the year, the block of machinery will cease to exist.
Therefore, ₹ 4,80,000 being the excess of written down value (i.e. ₹ 10,80,000) over the insurance
compensation (i.e. ₹ 6,00,000) will be assessable as a short-term capital loss.
Note – If new machinery is purchased in the next year, it will constitute the new block of machinery, on
which depreciation can be claimed for that year.
(c) Compensation towards loss of gold chain and diamond ring: Gold chain and diamond ring are capital
assets as envisaged by section 2(14). They are not “personal effects”, which alone are to be excluded. If
any profit or gain arises in a previous year owing to receipt of insurance claim, the same shall be
chargeable to tax as capital gains. The capital gains has to be computed by reducing the indexed cost of
acquisition of jewellery from the insurance compensation of ₹ 1,80,000.
16. [VERY IMP. FOR EXAM] Mr. Sarthak entered into an agreement with Mr. Jaikumar to sell his
residential house located at Kanpur on 16.08.2021 for ₹ 1,50,00,000.
The sale proceeds were to be paid in the following manner:

(i) 20% through account payee bank draft on the date of agreement.
(ii) 60% on the date of the possession of the property.
(iii) Balance after the completion of the registration of the title of the property.
Mr. Jaikumar was handed over the possession of the property on 15.12.2021 and the registration
process was completed on 14.01.2022. He paid the sale proceeds as per the sale agreement.
The value determined by the Stamp Duty Authority-

(a) on 16.08.2021 was ₹ 1,70,00,000;
(b) on 15.12.2021 was ₹ 1,71,00,000; and
(c) on 14.01.2022 was ₹ 1,71,50,000.
Mr. Sarthak had acquired the residential house at Kanpur on 01.04.2001 for ₹ 30,00,000. After
recovering the sale proceeds from Jaikumar, he purchased two residential house properties, one in
Kanpur for ₹ 20,00,000 on 24.3.2022 and another in Delhi for ₹ 35,00,000 on 28.5.2022.
Compute the income chargeable under the head "Capital Gains" of Mr. Sarthak for the Assessment
Year 2022-23.
Cost Inflation Index for Financial Year(s): 2001-02 - 100; 2021-22 - 317
Solution:
Computation of income chargeable under the head “Capital Gains” of Mr. Sarthak for A.Y. 2022-23
Particulars ₹
Capital Gains on sale of residential house
Actual sale consideration ₹ 1,50,00,000
Value adopted by Stamp Valuation Authority on the date of ₹ 1,70,00,000
agreement


[As per section 50C, where the actual sale consideration is less than the value adopted by
the Stamp Valuation Authority for the purpose of charging stamp duty, and such stamp
duty value exceeds 110% of the actual sale consideration, then, the value adopted by
the Stamp Valuation Authority shall be taken to be the full value of consideration.
In a case where the date of agreement is different from the date of registration,
stamp duty value on the date of agreement can be considered provided the whole or
part of the consideration is paid by way of account payee cheque/bank draft or by way of
ECS through bank account or through such other electronic mode as may be prescribed,
on or before the date of agreement.
In this case, since 20% of ₹ 150 lakhs is paid through account payee bank draft on the 1,70,00,000
date of agreement, stamp duty value on the date of agreement would be considered for
determining the full value of consideration]
Full value of sale consideration [Stamp duty value on the date of agreement, since it
exceeds 110% of the actual sale consideration]
Less: Indexed cost of acquisition of residential house
[₹ 30 lakhs x 317/100] 95,10,000
Long-term capital gains [Since the residential house property was held by Mr. Sarthak 74,90,000
for more than 24 months immediately preceding the date of its transfer]
Less: Exemption u/s 54
Since, long-term capital gains does not exceed ₹ 2 crore, he would be eligible for
exemption in respect of both the residential house properties purchased in India. The
capital gain arising on transfer of a long-term residential property shall not be
chargeable to tax to the extent such capital gain is invested in the purchase of these
residential house properties in India within one year before or two years after the date of
transfer of original asset. Thus, he would be eligible for exemption of ₹ 55,00,000 being 55,00,000
₹ 20,00,000 and ₹ 35,00,000 invested on acquisition of residential house property in
Kanpur and Delhi, respectively.
Long term capital gains chargeable to tax 19,90,000
17. [VERY IMP. FOR EXAM] Mrs. Yuvika bought a vacant land for ₹ 80 lakhs in May 2004. Registration and
other expenses were 10% of the cost of land. She constructed a residential building on the said land
for ₹ 100 lakhs during the financial year 2006-07.
She entered into an agreement for sale of the above said residential house with Mr. Johar (not a
relative) in April 2015. The sale consideration was fixed at ₹ 700 lakhs and on 23-4-2015, Mrs. Yuvika
received ₹ 20 lakhs as advance in cash by executing an agreement. However, due to failure on part
of Mr. Johar, the said negotiation could not materialise and hence, the said amount of advance was
forfeited by Mrs. Yuvika.
Mrs. Yuvika, again entered into an agreement on 01.08.2021 for sale of this house at ₹ 810 lakhs. She
received ₹ 80 lakhs as advance by RTGS. The stamp duty value on the date of agreement was ₹ 890
lakhs. The sale deed was executed and registered on 14-1-2022 for the agreed consideration.
However, the State stamp valuation authority had revised the values, hence, the value of property
for stamp duty purposes was ₹ 900 lakhs. Mrs. Yuvika paid 1% as brokerage on sale consideration
received.
Subsequent to sale, Mrs. Yuvika made following investments:

(i) Acquired two residential houses at Delhi for ₹ 130 lakhs and ₹ 50 lakhs on 31.1.2022 and
15.5.2022
(ii) Acquired a residential house at UK for ₹ 180 lakhs on 23.3.2022.
(iii) Subscribed to NHAI capital gains bond (approved under section 54EC) for ₹ 50 lakhs on 29-3-
2022 and for ₹ 40 lakhs on 12-5-2022.
Compute the income chargeable under the head 'Capital Gains' of Mrs. Yuvika for A.Y. 2022-23. The
choice of exemption must be in the manner most beneficial to the assessee.
Cost Inflation Index: F.Y. 2004-05 – 113; F.Y. 2006-07 – 122; F.Y. 2021-22 - 317.


Solution:
Computation of income chargeable under the head “Capital Gains”
of Mrs. Yuvika for A.Y. 2022-23
Particulars ₹ ₹
(in lakhs) (in lakhs)
Capital Gains on sale of residential building
Actual sale consideration ₹ 810 lakhs
Value adopted by Stamp Valuation Authority ₹ 890 lakhs
[Where the actual sale consideration is less than the value adopted by the
Stamp Valuation Authority for the purpose of charging stamp duty, and such
stamp duty value exceeds 110% of the actual sale consideration, then, the
value adopted by the Stamp Valuation Authority shall be taken to be the full
value of consideration as per section 50C.
However, where the date of agreement is different from the date of

registration, stamp duty value on the date of agreement can be considered
provided the whole or part of the consideration is received by way of account
payee cheque/bank draft or by way of ECS through bank account or through
prescribed electronic modes on or before the date of agreement.
In this case, since advance of ₹ 80 lakh is received by RTGS, i.e., one of the
prescribed modes, stamp duty value on the date of agreement can be adopted
as the full value of consideration. However, in the present case since stamp
duty value on the date of agreement does not exceed 110% of the actual
consideration, actual sale consideration would be taken as the full value of
consideration)
Gross Sale consideration (actual consideration, since stamp duty value on the 810.00
date of agreement does not exceed 110% of the actual consideration)
Less: Brokerage @1% of sale consideration (1% of ₹ 810 lakhs) 8.10
Net Sale consideration 801.90
Less: Indexed cost of acquisition
 Cost of vacant land, ₹ 80 lakhs, plus registration and other
expenses i.e., ₹ 8 lakhs, being 10% of cost of land [₹ 88 lakhs × 246.87
317/113]
 Construction cost of residential building (₹ 100 lakhs x
317/122) 259.84 506.71
Long-term capital gains 295.19

Since the residential house property was held by Mrs. Yuvika for more than 24
months immediately preceding the date of its transfer, the resultant gain is a
long-term capital gain]
Less: Exemption under section 54 130.00

Where long-term capital gains exceed ₹ 2 crore, the capital gain arising
on transfer of a long-term residential property shall not be chargeable to
tax to the extent such capital gain is invested in the purchase of one
residential house property in India, one year before or two years after
the date of transfer of original asset.
Therefore, in the present case, the exemption would be available only

in respect of the one residential house acquired in India and not in
respect of the residential house in UK. It would be more beneficial for
her to claim the cost of acquisition of residential house at Delhi,
i.e., ₹ 130 lakhs as exemption.


Less: Exemption under section 54EC 50.00
Amount invested in capital gains bonds of NHAI within six months after
the date of transfer (i.e., on or before 13.7.2022), of long-term capital
asset, being land or building or both, would qualify for exemption, to the
maximum extent of ₹ 50 lakhs, whether such investment is made in the
current financial year or subsequent financial year.
Therefore, in the present case, exemption can be availed only to the

extent of ₹ 50 lakh out of ₹ 90 lakhs, even if the both the investments
are made on or before 13.7.2022(i.e., within six months after the date of
transfer).
Long term capital gains chargeable to tax 115.19
Note: Advance of ₹ 20 lakhs received from Mr. Johar, would have been chargeable to tax under the head
“Income from other sources”, in the A.Y. 2016-17, as per section 56(2)(ix), since the same was forfeited on or
after 01.4.2014 as a result of failure of negotiation. Hence, the same should not be deducted while computing
indexed cost of acquisition.
18. [VERY IMP. FOR EXAM] Mr. Shiva purchased a house property on February 15, 1979 for ₹ 3,24,000. In
addition, he has also paid stamp duty value @10% on the stamp duty value of ₹ 3,50,000.
In April, 2007, Mr. Shiva entered into an agreement with Mr. Mohan for sale of such property for
₹ 14,35,000 and received an amount of ₹ 1,11,000 as advance. However, the sale consideration did
not materialize and Mr. Shiva forfeited the advance.
In May 2014, he again entered into an agreement for sale of said house for ₹ 20,25,000 to Ms.
Deepshikha and received ₹ 1,51,000 as advance. However, as Ms. Deepshikha did not pay the
balance amount, Mr. Shiva forfeited the advance. In August, 2014, Mr. Shiva constructed the first
floor by incurring a cost of ₹ 3,90,000.
On November 15, 2021, Mr. Shiva entered into an agreement with Mr. Manish for sale of such house
for ₹ 30,50,000 and received an amount of ₹ 1,50,000 as advance through an account payee cheque.
Mr. Manish paid the balance entire sum and Mr. Shiva transferred the house to Mr. Manish on
February 20, 2022. Mr. Shiva has paid the brokerage @1% of sale consideration to the broker.
On April 1, 2001, fair market value of the house property was ₹ 11,85,000 and Stamp duty value was
₹ 10,70,000. Further, the Valuation as per Stamp duty Authority of such house on 15 th November, 2021
was ₹ 39,00,000 and on 20th February, 2022 was ₹ 41,00,000.
Compute the capital gains in the hands of Mr. Shiva for A.Y. 2022-23.
CII for F.Y. 2001-02: 100; F.Y. 2007-08: 129; F.Y. 2014-15: 240; F.Y. 2021-22: 317


Solution:
Computation of Capital gains in the hands of Mr. Shiva for A.Y. 2022-23
Particulars Amount (₹) Amount (₹)

Actual sale consideration 30,50,000
Valuation as per Stamp duty Authority on the date of agreement 39,00,000
(Where the actual sale consideration is less than the value adopted by the
Stamp Valuation Authority for the purpose of charging stamp duty, and such
stamp duty value exceeds 110% of the actual sale consideration
(Amended) then, the value adopted by the Stamp Valuation Authority shall
be taken to be the full value of consideration as per section 50C.
However, where the date of agreement is different from the date of

registration, stamp duty value on the date of agreement can be considered
provided the whole or part of the consideration is received by way of account
payee cheque/bank draft or by way of ECS through bank account or such
other electronic mode as may be prescribed on or before the date of
agreement.
In the present case, since part of the payment is made by account payee
cheque on the date of agreement, the stamp duty value on the date of
agreement would be considered as full value of consideration)
Deemed Full value of consideration [Since stamp duty value on the date 39,00,000
of agreement exceeds 110% of the actual consideration, stamp duty
value would be deemed as Full Value of Consideration]
Less: Expenses on transfer (Brokerage @1% of ₹ 30,50,000) 30,500
Less: Indexed cost of acquisition (Note 1) 30,40,030
Less: Indexed cost of improvement (Note 2) 5,15,125 35,55,155
Long term capital Loss 3,14,345
Notes:
(1) Computation of indexed cost of acquisition
Particulars Amount (₹) Amount
(₹)
Cost of acquisition, 10,70,000
Being the higher of
(i) Lower of Fair market value i.e.,₹ 11,85,000 and Stamp duty 10,70,000
value i.e., ₹ 10,70,000, on April 1, 2001
(ii) Actual cost of acquisition (₹ 3,24,000 + ₹ 35,000, being stamp duty 3,59,000
@10% of ₹ 3,50,000
Less: Advance money taken from Mr. Mohan and forfeited 1,11,000
Cost of acquisition for indexation 9,59,000
Indexed cost of acquisition (₹ 9,59,000 x 317/100) 30,40,030
(2) Computation of indexed cost of improvement

Cost of construction of first floor in August, 2014 3,90,000
Indexed cost of improvement (₹ 3,90,000 x 317/240) 5,15,125


(3) Where advance money has been received by the assessee, and retained by him, as a result of failure of the
negotiations, section 51 will apply. The advance retained by the assessee will go to reduce the cost of
acquisition. Indexation is to be done on the cost of acquisition so arrived at after reducing the
advance money forfeited i.e. ₹ 10,70,000 – ₹ 1,11,000 = ₹ 9,59,000.
However, where the advance money is forfeited during the previous year 2014-15 or thereafter, the
amount forfeited would be taxable under the head “Income from Other Sources” and such amount will not
be deducted from the cost of acquisition of such asset while calculating capital gains. Hence, ₹ 1,51,000,
being the advance received from Ms. Deepshikha and retained by him, is taxable under the head
“Income from other sources” in PY 2014-15.
19. Mr. Cee purchased a residential house on July 20, 2019 for ₹ 10,00,000 and made some additions to
the house incurring ₹ 2,00,000 in August 2019. He sold the house property in April 2021 for
₹ 20,00,000. Out of the sale proceeds, he spent ₹ 5,00,000 to purchase another house property in
September 2021.
What is the amount of capital gains taxable in the hands of Mr. Cee for the A.Y.2022-23?
Solution:
The house is sold before 24 months from the date of purchase. Hence, the house is a short-term capital asset
and no benefit of indexation would be available.
Particulars ₹
Less: Cost of acquisition 10,00,000
Cost of improvement 2,00,000
Note: The exemption of capital gains under section 54 is available only in case of long-term capital asset. As
the house is short-term capital asset, Mr. Cee cannot claim exemption under section 54. Thus, the amount of
taxable short-term capital gains is ₹ 8,00,000.
20. Long term capital gain of ₹ 75 lakh arising from transfer of building on 1.5.2021 will be exempt from
tax if such capital gain is invested in the bonds redeemable after five years, issued by NHAI under
section 54EC. Examine with reasons whether the given statement is true or false having regard to the
provisions of the Income-tax Act, 1961.
Solution:
False: The exemption under section 54EC has been restricted, by limiting the maximum investment in long
term specified assets (i.e. bonds of NHAI or RECL or any other bond notified by Central Government in this
behalf, redeemable after 5 years) to ₹ 50 lakh, whether such investment is made during the relevant previous
year or the subsequent previous year, or both.
Therefore, in this case, the exemption under section 54EC can be availed only to the extent of ₹ 50 lakh,
provided the investment is made before 1.11.2021 (i.e., within six months from the date of transfer).


Class Notes


Class Notes

Deduction SATC 9.1

DEDUCTIONs FROM GROSS TOTAL INCOME
[Section 80C to 80U]
GENERAL FEATURES RELATING TO DEDUCTIONS UNDER CHAPTER VI-A:
1. Deductions to be made [Section 80A]
The Total Income of an assessee is to be computed after making deductions permissible under
sections 80C to 80U. But,
Aggregate Amount of Deductions ≤ Gross Total Income
2. No Double Deduction
Where any deduction is allowed to AOPs/BOIs (at Entity level), the same will not be allowed as
deduction while computing the income of the members of the AOPs/BOIs(in their Individual
Capacity).
3. No deduction u/s 10AA& u/s 80-IA to 80-RRB, if not claimed in the return of income
Where the assessee fails to make a claim in his return of income for any deduction u/s 10AA
or under any provision of sections 80-IA to 80-RRB, no deduction shall be allowed to him
thereunder.
Further, Benefit of deduction from 80-IA to 80RRB will not be available if return is not
filed within due date of Section 139(1).
4. No deduction from certain Incomes: Examples (not an exhaustive list)

(a) Long Term Capital Gains referred u/s 112 [20% or 10% (in specified cases)] or u/s
112A, and Short Term Capital gains referred u/s 111A [15%].
(b) Winnings from lotteries, races, etc. as referred to in Section 115BB [30%].
5. If Individual/HUF has opted for the provisions of Sec 115BAC:

No Deduction under chapter VIA is available except
a. Employer’s contribution towards NPS under Section 80CCD(2)
b. Deduction under section 80JJAA
c. Deduction under Section 80LA (IFSC Units)
At CA-Intermediate level, Profit-linked deductions provided under section 80-IA to 80-IE (80-IA,
80IAB, 80-IAC, 80-IB, 80-IBA, 80-IC, 80-ID & 80-IE) , section 80JJA, 80LA, Section 80M, 80P and
80PA have been excluded from the scope of syllabus by way of Study Guidelines.
Amendment: Only Section 80EEA is amended by Finance Act 2021 for May & Nov 2022 Exam
For Section 80GGA, 80GGB & 80GGC – Refer PGBP Notes/Class

Deduction SATC 9.2

Class Notes

Deduction SATC 9.3

Deduction in respect of investment in specified assets
[Section 80C]
Applicability: Individual or HUF
Maximum Qualifying Amount: ₹ 150,000
The following are the investments/contributions eligible for deduction –
Name of the investment / payment Payment made by the

Individual HUF
Subscription to NSC Self Any member

(including Interest Accrued thereon)
Note: Interest will first added as Income u/h IOS)
Tuition Fees (only) paid at the time of Admission or otherwise to any Maximum
university/college/educational institution in India for full time up to two
education. children NA
Contribution to Unit-Linked Insurance Plan (ULIP) of UTI Self, Spouse Any member
& Child
Contribution to Unit-Linked Insurance Plan (ULIP) of LIC-Mutual Fund
Contribution to Units of Mutual Funds or UTI Self Any member
Contribution to Notified Annuity Plan of LIC or other approved Self Any member
insurer.
Life Insurance Premium on Life Policy or Endowment Policy Self, Spouse Any member
& child
Maximum Amount of Deduction:
 10% of Sum Assured in case of policy issued on or after April

1, 2012
[15% of sum assured in case of policy issued on or after April

1, 2013 on life of any person with disability (u/s 80U) or any
person suffering from specified disease (u/s 80DDB)]
 20% of Sum Assured in case of policies issued before April 1,

2012.
Contribution towards
 Statutory Provident Fund/Recognized Provident Fund Self NA
 PPF – Minimum: ₹ 500 & Maximum: ₹ 150,000 Self, Spouse Any member
& Child
 Approved Superannuation Fund (ASF) Self NA

Deduction SATC 9.4

Contribution to Notified Pension Fund of Mutual fund or UTI Self NA
Term Deposit of 5 year or more with a scheduled bank; Self NA
Subscription to 5 year Time Deposit in an a/c under the Post Office; Self Any member
Subscription to an account under the Senior Citizens Saving Self Any member
Scheme;
Subscription to notified NABARD Bonds Self Any member
Any sum paid to any scheme of-
 PSU/PSC engaged in providing Long Term finance for Self Any member
construction of residential houses in India
 Housing board for the purpose of planning, development or

improvement Self Any Member
Any payment towards the cost of purchase/construction of a

residential property where loan is taken from Self Any Member
 Govt., bank, co-operative bank, LIC, NHB
 Assessee’s employer where such employer is public Co./public

sector Co./university/co-operative society
Note:
1. Income from such property should be chargeable to tax

under the head House Property.
2. Payment through installment under Self financing scheme is also

covered.
3. STAMP DUTY & REGISTRATION FEE PAID IS ALSO ELIGIBLE
Amount invested in
 Approved debentures/ equity shares in a public Co. engaged in Self Any Member
infrastructure facility; or
 Units of MF proceeds of which are utilized for the developing,

maintaining, etc., of a new infrastructure facility. Self Any Member
Amount deposited in Sukanya Samriddhi Account Scheme Self, Girl Child or Girl Child
(No Deduction to HUF) for whom Individual is a
Legal Guardian.

Deduction SATC 9.5

Contribution to additional account under NPS Contribution by a Central
Inserted by Finance (No. 2) Act 2019 – W.e.f. AY 20-21 Government employee to
(No Deduction to HUF) additional account under
NPS (specified account)
There are two types of NPS account i.e., Tier I and Tier II, to which referred to in section 80CCD
an individual can contribute. for a fixed period of not less
than 3 years and which is in
Section 80CCD provides deduction in respect of contribution to accordance with the scheme
notified by the Central
individual pension account [Tier I account] under the NPS [referred to in
section 20(2)(a) of the Pension Fund Regulatory and Development Government for this purpose
Authority Act, 2013 (PFRDA)] whereas deduction under section 80C qualifies for deduction under
is allowable in respect of contribution by Central Government section 80C.
employee to additional account [Tier II account] of NPS [referred
to in section 20(3) of the PFRDA], which does not qualify for It may be noted that only the
deduction under section 80CCD. contribution to the
additional account under
Thus, Tier II account is the additional account under NPS, contribution NPS will qualify for deduction
to which would qualify for deduction under section 80C only in the under section 80C.
hands of a Central Government employee.
Note: Child may be Dependent/Independent/Male/Female/Minor/Major/Married/Unmarried.

Deduction SATC 9.6

Amount paid on Life Insurance Policies – Exempt [Section 10(10D)]
1) As per section 10(10D), any sum received on maturity of life insurance policy (including bonus) is not
chargeable to tax.
2) Exemption is not available in respect of:
a) Any Sum received under Section 80DD
b) Any Sum received under a Keyman Insurance Policy
3) Exemption u/s 10(10D) for insurance policies issued on or after 1.4.2012 would only be available for policies
where the premium payable for any of the years during the term of the policy does not exceed 10% of the
actual capital sum assured (as against 20% upto 31.03.2012)
[If the premium payable during any PY for a policy issued on or after 1.4.2012 exceeds 10% of the
actual capital sum assured, the entire amount received under such policy shall be taxable.]
However, the above provision shall not apply to any sum received on the death of a person.
4) The limit of 10% has been increased to 15 per cent for insurance (if policy is issued on or after
1.4.2013) on the life of any person who is
a. a person with disability or a person with severe disability as referred to in section 80U; or
b. suffering from disease or ailment as specified in the rules made under section 80DDB.
Section 10(10D) is amended by Finance Act 2021 effective from AY 2021-22

A. Nothing contained in this clause (i.e. clause 10D of Section 10) shall apply with respect to any unit
linked insurance policy, issued on or after the 1st day of February, 2021, if the amount of premium
payable for any of the previous year during the term of such policy exceeds ` 250,000.
B. Further, if the premium is payable, by a person, for more than one unit linked insurance policies,
issued on or after the 1st day of February, 2021, the provisions of this clause shall apply only with
respect to those unit linked insurance policies, where the aggregate amount of premium does not
exceeds ` 250,000 in any of the previous year during the term of any of those policies:
C. Exemptions shall continue to apply to any sum received on the death of a person.
D. Guidelines by Board: If any difficulty arises in giving effect to the provisions of this clause, the Board
may, with the previous approval of the Central Government, issue guidelines for the purpose of
removing the difficulty and every guideline issued by the Board under this proviso shall be laid
before each House of Parliament, and shall be binding on the income-tax authorities and the
assessee.
IMPORTANT NOTE:
If the exemption under section 10(10D) is not available to units of ULIP, income would be taxable under
section 45(1B) under the head “Capital Gain” and tax liability may be calculated as per Section 111A or
112A [Refer CG Class Notes].

Deduction SATC 9.7

Class Notes

Deduction SATC 9.8

Class Notes

Deduction SATC 9.9

Contribution to certain pension funds [Section 80CCC]
1) Applicability: ANY INDIVIDUAL Maximum Limit: ₹ 150,000
2) Amount paid or deposited for any annuity plan of LIC/ Any other Insurer for receiving Pension
from the Pension Fund,
3) Taxable as Income on Withdrawal:
 Where any amount standing to the credit of the assessee in a PENSION FUND in respect
of which a deduction has been allowed,
 together with interest or bonus accrued or credited to the assessee’s account is received
by the assessee or his nominee
 on account of the surrender of the annuity plan in any previous year or as pension
received from the annuity plan,
 such amount will be deemed to be the income of the assessee or the nominee in that
previous year in which such withdrawal is made or pension is received.
Deduction in respect of contribution to NPS of CG [Sec 80CCD]

(ATAL PENSION YOJNA IS ALSO ELIGIBLE FOR DEDUCTION U/S 80CCD)
1) Applicability: ANY INDIVIDUAL [Employed (CG or any other employer) or Self Employed]
2) Nature of Payment: Employee’s Contribution (including Self employed) as well as Employer
Contributions to New Pension Scheme [NPS]
3) Quantum of Deduction:
(A) In Case of Employment:
a. Contribution made by the employee or 10% of Salary whichever is lower [80CCD(1)] &
b. Contribution made by the employer or 10% of Salary (14% of salary, in case of
contribution made by the Central Government - NEW) whichever is lower [80CCD(2)]
(B) In Case of Self Employment: Contribution made or 20% of GTI, whichever is less [80CCD(1)]
4) The entire employer’s contribution would be included in the Salary of the employee. However,
deduction under section 80CCD would be restricted to 10% of salary (14% - CG Employee).
5) “Salary” includes Dearness Allowance, if the terms of employment so provide, but excludes all
other allowances and perquisites. [Basic Salary + DA (R)]
6) 80CCD(1B) – An Individual is eligible for additional deduction of upto ₹ 50,000 in respect of the
whole of the amount paid or deposited under NPS, whether or not any deduction is allowed
under section 80CCD(1).
7) Any amount received from Pension account shall be taxed as income in the year of receipt in the
hands of the assessee. However, amount received by nominee on the death of the assessee
shall not be taxable.
8) However, amount received on maturity will not be taxable if the same is used for purchasing
an annuity plan in the same previous year. Pension received from such annuity plan will be
taxable to assessee/nominee
9) Any payment from NPS to assessee on closure of account/scheme as referred in Section
80CCD, to the extent of 60% amount payable is Exempt. [Sec 10(12A)]
10) Any payment from NPS to an Employee on partial withdrawal made out of his account, to
the extent it does not exceed 25% of the amount of contributions made by him is Exempt.
[Section 10(12B)]

Deduction SATC 9.10

Limit on deductions under sections 80C, 80CCC & 80CCD
[Section 80CCE]
This section restricts the aggregate amount of deduction under section 80C, 80CCC and 80CCD
(1) to ₹ 1,50,000 lakh.
Consequently, deduction to assessee in relation to employer’s contribution to pension scheme

shall be available over and above ₹ 1,50,000 lakh limit.
Further, Assessee’s contribution to CG Pension fund as per section 80CCD(1B) is also not
covered in limit specified in Section 80CCE.

Deduction SATC 9.11

Deduction in respect of Health insurance premium [Section 80D]
1. Applicability: INDIVIDUAL or HUF
2. Nature of payment:
(a) Premium towards Mediclaim Health Insurance Policy taken
a. In case of an Individual: In the name of Individual, Spouse, Parents and dependent

children
b. In case of HUF: In the name of any Member
(b) In case of Senior Citizen, Medical expenditure incurred if no payment is made for health
insurance premium. (HUF – Any Member being Senior Citizen)
(c) Contribution to Central Government Health Scheme [CGHS] or other health scheme as
notified by CG is also eligible for deduction if it is taken in the name of Individual, Spouse
or Dependent Children.
(d) Any payment made by an individual on account of preventive health check up of self, spouse,
dependent children or parent(s) during the PY [maximum amount – 5,000 within overall limit]
3. Maximum Amount of Deduction:
Particulars Individual HUF
Premium/Contribution Individual, Spouse & Parents (Whether Any Member

for Dependent Children dependent or not)
Deduction being a. Premium Paid, or a. Premium Paid, or a. Premium Paid, or

lower of
b. ₹ 25,000 p.a. b. ₹ 25,000 p.a. b. ₹ 25,000 p.a.
Additional Deduction
for Senior Citizen
₹ 25,000 ₹ 25,000 ₹ 25,000
[The person who is
insured]
4. Senior Citizen means an Individual + Resident in India +the age of 60 years or more
5. Payment shall be made
a. by any mode, including cash, in respect of any sum paid on account of preventive health
check up (maximum limit – ₹ 5,000);
b. by any mode, other than cash, in all other cases.
6. In case of single premium health insurance policies having cover of more than one year,
Deduction under section 80D shall be allowed on proportionate basis for the number of
years for which health insurance cover is provided, subject to the specified monetary limit.

Deduction SATC 9.12

Example:
Mr. Arjun (42 years old) furnishes the following particulars in respect of the following payments:
S. No. Particulars Amount (₹)
1. Premium paid for insuring the health of -
 Self 10,000
 spouse 8,000
 dependant son 4,000
 mother 18,000
2. Paid for Preventive Health Check up of
 himself 2,000
 spouse 1,500
 mother 4,000
3. Incurred medical expenditure of ₹ 25,000 and ₹ 15,000 for his mother,
aged 61 years and father, aged 65 years. Both mother and father are
resident in India.
Compute the deduction available to Mr. Arjun under section 80D for the A.Y. 2022-23
Solution:
Computation of deduction under section 80D for the A.Y. 2022-23
S. Particulars Amount (₹) Amount (₹)
No.
1. In respect of premium paid for insuring the health of -
 Self 10,000
 spouse 8,000
 dependant son 4,000
22,000
Paid for Preventive Health Check up of
 self 2,000
 spouse 1,500
3,500
Restricted to [₹ 25,000 – ₹ 22,000, since maximum deduction 3,000
is ₹ 25,000]
Aggregate of deduction (I+II) under (1) restricted to 25,000
2. (i) In respect of payment towards health insurance premium 18,000

for his mother
(ii) In respect of preventive health check up of his mother 2,000
[₹ 4,000, restricted to ₹ 2,000, (₹ 5,000 – ₹ 3,000), since
maximum deduction for preventive health check up under
section 80D is ₹ 5,000]
(iii) Medical expenditure for father would only be eligible for 15,000
deduction [See Note below] 35,000
Amount of deduction under (2) restricted to 35,000
Total deduction under section 80D [(1) + (2)] 60,000
Note: Irrespective of the fact that the mother of Arjun is a senior citizen the deduction under section
80D would not available to him in respect of the medical expenditure incurred for his mother, since
Mr. Arjun has taken a health insurance policy for his mother.

Deduction SATC 9.13

Deduction in respect of maintenance including medical treatment
of a dependent disabled [Section 80DD]
1) Applicability: Resident INDIVIDUAL OR RESIDENT HUF.
2) Assessee must have a Dependent Disabled Relative:

Situation Relative Includes
In case of Individual Spouse, Children, Parents, Brothers & Sisters of the Individual
In case of HUF Any Member
1. Dependents means who is wholly or mainly dependent on the assessee and has not
claimed any deduction under section 80U in the computation of his income.
2. Disability includes Blindness, Low Vision, Hearing impairment, mental illness etc.
3) Nature of Expenditure on Such Relative: Assessee has

 paid any amount for the medical treatment (including nursing), training and rehabilitation of
a dependant, being a person with disability, or
 any amount paid or deposited under a scheme of LIC or any other insurer for the
maintenance of a dependant, being a person with disability, qualifies for deduction.
4) Quantum of Deduction:
Relative suffering with Disability ₹ 75,000
Relative suffering with Severe Disability [80% or more] ₹ 125,000
Tax Point: Deduction shall be irrespective of actual expenditure incurred.
5) CERTIFICATE: The assessee shall have to furnish a copy of the certificate issued by the
medical authority in respect of the assessment year for which the deduction is claimed. Where the
condition of disability requires reassessment, a fresh certificate is required.
6) Where the Assessee has deposited any amount in annuity plan of LIC or UTI etc for the
benefit of disabled person and such person predeceases – than any amount received from
such annuity plan shall be deemed to be income of the assessee of the previous year in which
such amount is received by the assessee.
Deduction in the case of a Person with Disability [Section 80U]

1) ELIGIBLE ASSESSEE: Applicable to a RESIDENT INDIVIDUAL, who, at any time during the
previous year, is certified by the medical authority to be a person with disability (Blindness,
Low Vision, Hearing impairment etc.).
2) FIXED DEDUCTION: In case of

Person with Disability - ₹ 75,000
Person with severe disability - ₹ 1,25,000
[Irrespective of any expenditure]
3) Individuals also include persons suffering from autism, cerebral palsy and multiple
disabilities.
4) CERTIFICATE: The assessee shall have to furnish a copy of the certificate issued by the
medical authority in respect of the assessment year for which the deduction is claimed. Where
the condition of disability requires reassessment, a fresh certificate is required.

Deduction SATC 9.14

Class Notes

Deduction SATC 9.15

Deduction in respect of medical treatment etc. [Section 80DDB]
1) Applicability: RESIDENT INDIVIDUAL & RESIDENT HUF
2) Nature of Expenditure:
The assessee has actually paid any amount for the medical treatment of such disease or
ailment as may be specified in the rules made in this behalf by the Board [Specified Disease –
Rule 11DD] for
Situation Relative Includes
In case of Individual Himself/Herself or for dependent relative being Spouse,
Children, Parents, Brothers & Sisters of that Individual
In case of HUF Any Member
Dependents means who is wholly or mainly dependent on the assessee for his support and
maintenance
3) Quantum of Deduction: Lower of the Two:

(a) Amount actually paid or
(b) ₹ 40,000 / In case of Senior Citizen – ₹ 100,000
4) Senior Citizen means an Individual + Resident in India + the age of 60 years or more
5) Certificate: No such deduction shall be allowed unless the assessee furnishes a certificate
from specialist working in a Government hospital
6) The final deduction under this section shall be reduced by the amount received, if any,
under insurance from an insurer, or reimbursed by an employer, for the medical treatment
of the assessee or the dependent. [Amount derived as above Less Insurance claim received]
Question Find the amount of deduction u/s 80DDB for the following cases:
Name of the Assessee P Q R S T
Residential status of the assessee Ordinarily Not Non Resident but Resident
resident ordinarily Resident not Indian
resident Citizen
Expenditure incurred for medical ₹ 6000 ₹ 80000 ₹ 100000 ₹ 72000 ₹ 80000
treatment (specified disease) of
dependent brother
Age of Brother 28 62 62 64 52
Residential status of dependent Resident Non resident Resident Resident Resident
Medical Insurance claim received. - - - - ₹ 8000
Solution:
Amount of deduction available u/s 80DDB shall be as under:
Particulars P Q R s T
Deduction u/s 80DDB 6000 40000 1 -- 2 720003 32000 4
Notes
1. As the brother is non-resident, therefore, senior citizen benefit is not available.
2. As the assessee himself is a non-resident, hence no deduction u/s 80DDB is available.
3. As the brother is resident having age of 64 years, hence he is a senior citizen. However, actual expenditure
incurred by the assessee is less than ₹ 100,000, therefore deduction shall be restricted to actual expenditure
incurred.
4. As the medical insurance claim is received, hence the amount of deduction (i.e. ₹ 40,000) shall be reduced
by the amount of claim received.

Deduction SATC 9.16

Interest on loan taken for higher education [Section 80E]
1) Applicability: Individual
2) Nature of Payment:
He has paid any interest on loan taken by him from any Financial Institution or Approved
Charitable Institution.
3) Purpose of Loan:
The loan must have been taken for the purpose of pursuing his/her own higher education or for
higher education of his or her relative. Relative means:
(a) Spouse or
(b) Children (Dependent or Independent) or
(c) the student for whom the individual is the legal guardian.
4) Quantum of Deduction: Amount of Interest paid during the PY
5) Maximum Permissible Period: 8 Assessment Years

Deduction is available for 8 Assessment years starting from the AY in which the assessee starts
paying the interest on loan OR until the interest is paid by the assessee in full, whichever is
earlier.
6) “Higher Education” means any course of study (including vocational studies) pursued after
passing the Senior Secondary Examination or its equivalent.
Deduction in respect of interest on loan taken for residential

house property [Sec. 80EE] w.e.f. AY 2017-18
 Conditions - The following conditions should be satisfied in order to claim deduction
under section 80EE -
1. The assessee is an Individual. He may be resident or non-resident.
2. He has taken a loan.
3. Loan is taken for acquisition of residential house property.
4. Loan is taken from Financial Institution (includes Banks/Housing finance Companies).
5. Loan has been sanctioned during April 1, 2016 and March 31, 2017.
6. The amount of loan sanctioned for residential house property does not exceed ₹ 35 lakh.
7. The value of residential house property does not exceed ₹ 50 lakh.
8. The assessee does not own any residential house property on the date of sanction of
loan.
 Amount of Deduction:
Deduction will be available in respect of interest payable on the above loan or ₹ 50,000,
whichever is less.
 Double deduction not possible - If deduction is claimed under section 80EE, no deduction will be
allowed in respect of such income under any other provision of the Act for the same or any other
assessment year.
NO DEDUCTION FROM AY 18-19 IN RESPECT ON NEW LOAN

[If loan is sanctioned in PY 16-17 & above conditions are satisfied then assessee is eligible for
deduction in PY 17-18 or other succeeding years.]

Deduction SATC 9.17

Deduction in respect of interest payable on loan taken for
acquisition of residential house property [Section 80EEA]
Inserted by Finance (No. 2) Act 2019 – W.e.f. AY 20-21
Eligible assessee: An individual who has taken a loan for acquisition of residential house property
from any financial institution. Interest payable on such loan would qualify for deduction under this
section.
Conditions: The conditions to be satisfied for availing this deduction are as follows –
1) the loan has been sanctioned by the financial institution during the
period beginning on the 1st day of April, 2019 and ending on the 31st
day of March, 2021 March, 2022;
2) the stamp duty value of residential house property does not exceed 45 lakh rupees;
3) the assessee does not own any residential house property on the date of sanction of loan.
4) The individual is not eligible to claim deduction under section 80EE,
Period of benefit: The benefit of deduction under this section would be available from A.Y. 2020-21
and subsequent assessment years till the repayment of loan continues.
Quantum of deduction: The maximum deduction allowable is ₹ 1,50,000.
The deduction of upto ₹ 1,50,000 under section 80EEA is over and above the deduction available
under section 24(b) in respect of interest payable on loan borrowed for acquisition of a residential
house property.
In respect of self-occupied house property, interest deduction under section 24(b) is restricted to
₹ 2,00,000. In case of let out or deemed to be let out property, even though there is no limit under
section 24(b), section 71(3A) restricts the amount of loss from house property to be set-off against
any other head of income to ₹ 2,00,000.
Accordingly, if interest payable in respect of acquisition of eligible house property is more than
₹ 2,00,000, the excess can be claimed as deduction under section 80EEA, subject to fulfilment of
conditions.
No deduction under any other provision:

The interest allowed as deduction under section 80EEA will not be allowed as deduction under any
other provision of the Act for the same or any other assessment year.
Meaning of “Financial Institution”

 A banking company to which the Banking Regulation Act, 1949 applies; or
 Any bank or banking institution referred to in section 51 of the Banking Regulation Act, 1949;
or
 A housing finance company.

A public company formed or registered in India with the main object of carrying on the business
of providing long-term finance for construction or purchase of houses in India for residential
purposes.

Deduction SATC 9.18

Class Notes

Deduction SATC 9.19

Deduction in respect of interest payable on loan taken for
purchase of electric vehicle [Section 80EEB]
Inserted by Finance (No. 2) Act 2019 – W.e.f. AY 20-21
Eligible Assessee:
An Individual who has taken a loan for purchase of an electric vehicle from any financial institution,
Interest payable on such loan would qualify for deduction under this section.
Conditions:
 The assessee should be an individual.
 Loan should be taken for purchase of an electric vehicle
 loan has been sanctioned by the financial institution during the period beginning on the
1st day of April, 2019 and ending on the 31st day of March, 2023.
Period of benefit: The benefit of deduction under this section would be available from A.Y. 2020-21
and subsequent assessment years till the repayment of loan continues.
Quantum of deduction: Interest payable, subject to a maximum of ₹ 1,50,000.
No deduction under any other provision:

The interest allowed as deduction under section 80EEB will not be allowed as deduction under any
other provision of the Act for the same or any other assessment year.
Financial institution
- A banking company to which the Banking Regulation Act, 1949 applies;
- Any bank or banking institution referred to in section 51 of the Banking Regulation Act, 1949;
- Any deposit taking NBFC; or
- A systemically important non-deposit taking NBFC i.e., a NBFC which is not accepting or
holding public deposits and having total assets of not less than ₹ 500 crore as per the last
audited balance sheet and is registered with the RBI.
Electric Vehicle
A vehicle which is powered exclusively by an electric motor whose traction energy is supplied
exclusively by traction battery installed in the vehicle. The vehicle should have electric regenerative
braking system, which during braking provides for the conversion of vehicle kinetic energy into electrical
energy.

Deduction SATC 9.20

Example:
The following are the particulars relating to Mr. A, Mr. B, Mr. C and Mr. D, salaried individuals,
for A.Y. 2022-23:
Particulars Mr. A Mr. B Mr. C Mr. D
Amount of loan taken 43 lakhs 45 lakhs 20 lakhs 15 lakhs
Loan taken from HFC Deposit Deposit Public

taking NBFC taking sector
NBFC Bank
Date of sanction of 1.4.2021 1.4.2020 1.4.2020 30.3.2019
Loan
Date of disbursement 1.5.2021 1.5.2020 1.5.2020 1.5.2019

of loan
Purpose of loan Acquisition Acquisition Purchase of Purchase of

of residential of residential electric electric
house house vehicle for vehicle for
property for self property for self personal use personal
occupation occupation use
Stamp duty value of 45 lakhs 48 lakhs

house property
Cost of electric 22 lakhs 18 lakhs

Vehicle
Rate of interest 9% p.a. 9% p.a. 10% p.a. 10% p.a.
Compute the amount of deduction, if any, allowable under the provisions of the Income-tax Act,
1961 for A.Y. 2022-23 in the hands of Mr. A, Mr. B, Mr. C and Mr. D. Assume that there has been
no principal repayment during the P.Y. 2021-22.
SOLUTION:
Mr. A
Interest deduction for A.Y. 2022-23
Deduction allowable while computing income under the head “Income from house property”
Deduction u/s 24(b) ₹ 3,54,750
[₹ 43,00,000 × 9% x 11/12]
Deduction under Chapter VI-A from Gross Total Income

Deduction u/s 80EEA ₹ 1,54,750
(₹ 3,54,750 – ₹ 2,00,000)
Mr. B
Deduction allowable while computing income under the head “Income from house property”
Deduction u/s 24(b) ₹ 4,05,000 Restricted to ₹ 2,00,000
[₹ 45,00,000 × 9%]
[Loan was taken in last PY – hence 12 months here]

Deduction SATC 9.21

Deduction u/s 80EEA is not permissible since:
i. loan is taken from NBFC
ii. stamp duty value exceeds ₹ 45 lakh.
Deduction under section 80EEA would not be permissible due to either violation listed above.
Mr. C
Deduction u/s 80EEB for interest payable on loan taken for purchase of electric vehicle ₹ 20 lakhs x
10% (12 months, as loan was taken in last year) = ₹ 2,00,000 restricted to ₹ 1,50,000, being the
maximum permissible deduction.
Mr. D
Deduction u/s 80EEB is not permissible since loan was sanctioned before 01/04/2019

Deduction SATC 9.22

Class Notes

Deduction SATC 9.23

Class Notes

Deduction SATC 9.24

Donation [Section 80G] - Applicability: All assessee
Nature: Donation in Kind is not eligible.
No deduction shall be allowed u/s 80G in respect of donation exceeding ₹ 2,000 if paid in cash.
A. No ceiling limit for amount of donation and deduction of such donation

(1) Deduction = 100% of donation (2) Deduction = 50% of
donation
1. The National Defence Fund 1. The Jawaharlal Nehru

2. Prime Minister’s National Relief Fund Memorial Fund
3. The National Foundation for Communal Harmony
2. Prime Minister’s Drought Relief
4. Approved University or educational institution of national
eminence Fund
5. Maharashtra Chief Minister’s Earthquake Relief Fund 3. Indira Gandhi Memorial
6. Gujarat Relief Fund for earthquake victims
Trust
7. Zila Saksharta Samiti
8. National Blood Transfusion Council 4. Rajiv Gandhi Foundation
9. Any State Government Fund set up to provide medical relief to the
poor
10. The National illness Assistance Fund
11. The Chief Minister’s Relief Fund or Lieutenant Governor’s Relief
Fund
12. National Sports Fund
13. National Cultural Fund
14. Fund for Technology Development and Application
15. National Trust for welfare of persons with Autism, Cerebral Palsy,
Mental Retardation and Multiple Disabilities
16. The National Children’s Fund
17. National Fund for Control of Drug Abuse
18. Swachh Bharat Kosh
19. Clean Ganga Fund
[Point 18 & 19: Donation does not qualify for deduction if it is a
Part of CSR Expenses]
20. Prime Minister's Citizen Assistance and Relief in Emergency
Situations Fund (PM Cares Fund)

Deduction SATC 9.25

B. Deduction of some donation is subject to QUALIFYING AMOUNT [In aggregate]
3) 100% deduction shall be allowed 4) 50% deduction shall be allowed subject to the
subject to the qualifying amount if qualifying amount if the donation are made-
the donation are made –  To Govt., or local authority, for charitable purpose
except for promoting family planning;
 To Govt., or any approved  To Approved Charitable Institution u/s. 80G (Refer
association / institution for note below).
promoting family planning;
 To any authority or corporation for the benefit of
 By company to the Indian minority community.
Olympic Association or Notified
 For renovation or for repair of any temple, mosque,
association / institution in India
Gurudwara, church, or other place notified to be of
for the development of
historic / archeological / artistic importance or as a
Infrastructure for sports & games
place of public worship of renown;
or the sponsorship for sports &
games in India.  To housing development authority constituted in
India.
QUALIFYING AMOUNT: It means 10% of Adjusted GTI or the Donations given [in Aggregate]
whichever is less.
Adjusted GTI means:

Gross Total Income – LTCG – STCG u/s 111A – All deduction of Chapter VIA
except 80G – Few Sections related to Non-Residents/Foreign Companies
WORKING FORMAT:
Donation to - Qualifying Sum % Eligible Deduction

(A) Donation without any qualifying limit:
1. PMNRF 100%
2. Zila Saksharta Samiti 100%
3. Indra Gandhi Memorial Trust 50%
(B) Donation subject to qualifying limit of total donation of 10% of Adjusted GTI:
1. Government for the promotion of family planning. 100%
2. An approved charitable institution (the qualifying 50%
amount = 10% of Adj. GTI - Donation for family
planning, which is eligible for 100% deduction)
Qualifying amount under (B) = 10% of Adj. GTI
Total Deduction u/s 80G
Note: The claim of the assessee for deduction in respect of any donation made to an institution or fund
in the return of income for any assessment year filed by him, will be allowed on the basis of information
relating to said donation furnished by the institution or fund to the prescribed income-tax
authority or person authorized by such authority, subject to verification as per the risk management
strategy formulated by the CBDT from time to time.

Deduction SATC 9.26

Deduction in respect of Rent paid [Section 80GG]
1) Applicability: In respect of RENT paid by an Individual.
2) The following conditions have to be satisfied for claiming deduction under section 80GG:
a) No House Rent Allowances [HRA] or No Rent Free Accommodation [RFA]: The assessee
should not be receiving any HRA exempt u/s 10(13A) and also should not be provided with
RFA.
b) No House at Place of Employment:
The Individual or his spouse or his minor child or an HUF of which he is a member
should not own any accommodation at the place where he ordinarily resides or perform duties
of his office or employment or carries on his business or profession.
c) No Claim for the benefit of Self-occupied House Property:
Assessee should not treat any residential house situated at other places as Self-occupied
Property u/s 23 i.e. Annual Value = NIL.
d) Rent: The assessee must be paying rent for the Residential Accommodation occupied by him
for the purposes of his own residence.
e) Proof of Rent Payment is required to file.
3) Quantum of deduction: Least of the following DON’T

a) Actual rent paid minus 10% of the Adjusted GTI, or FORGET ME
b) 25% of the Adjusted GTI, or
c) ₹ 5,000 p.m.
Adjusted GTI means Gross Total Income XXX

Less: LTCG u/s 112 or 112A (XXX)
Less: STCG u/s 111A (XXX)
Less: Deduction u/s 80C to 80U except 80GG (XXX)

Deduction SATC 9.27

Question:
Rohit, a Doctor in Delhi, furnishes following particulars relevant to PY 2021-22
(a) Income from Profession 1,26,000
(b) Short-Term Capital Gains on sale of Shares (listed & STT Paid) 20,000
(c) Long-Term Capital Gains on sale of Land 25,000
(d) Interest on Government securities (Gross) 14,000
(e) Repayment of loan (Principal Only) taken from a Bank for higher studies 15,000
(f) Payment made for Mediclaim Policy on his health and the health of his wife 6,000
(g) Rent paid for a house in Delhi 25,000
Determine his Total Income for the AY 2022-23
Assessee: Rohit . Previous Year: 2021-22 Assessment Year: 2022-23

Computation of Total Income
Particulars ₹ ₹
Profits and Gains of Business or Profession: Profession of Medicine 1,26,000
Capital Gains: Short-term 20,000
Long-term 25,000 45,000
Income from Other Sources: Interest on Government Securities 14,000
80D Medical Insurance Premium 6,000
80E Repayment of Education Loan (Repayment of Principal not eligible) Nil
80GG Deduction for Rent Paid (See W.N. 2) 11,600 (17,600)
Computation of Deduction u/s 80GG:

1. Computation of Adjusted Total Income:
Particulars ₹ ₹
Less: Long-Term Capital Gain 25,000
Short-Term Capital Gain on Sale of Shares 20,000
Deduction u/s 80CCC to 80U 6,000 (51,000)
Adjusted Total Income 1,34,000
2. Deduction u/s 80GG

Particulars ₹
(a) Rent paid Less 10% Adjusted Total Income = ₹ 25,000 Less 10% of ₹ 1,34,000 11,600
(b) 25% of Adjusted Total Income = ₹ 1,34,000 x 25% 33,500
(c) ₹ 5,000 p.m. x 12 Months 60,000
Permissible Deduction = Least of the above 11,600
Note: STCG on sale of shares assumed to be covered u/s 111A.
Deduction in respect of profits and gains from business of collecting and processing of
bio-degradable waste [Sec 80JJA]
NOT IN CA - INTERMEDIATE SYLLABUS

Deduction SATC 9.28

DEDUCTION IN RESPECT OF ROYALTY INCOME ON BOOKS [Sec 80QQB]
1. ELIGIBLE ASSESSEE:
Resident individual being an author who’s GTI includes INCOME in the nature of
(a) Lump sum consideration for his interests in the copyright of any book being a work of
literary, artistic, scientific nature or
(b) Royalty or copyright fees in respect of such book.
2. Books shall not include brochures, guides, journal, diaries, commentaries, magazines,
newspapers, pamphlets, textbooks for schools / tracts & other publications of similar nature.
3. DEDUCTION: LOWER OF
a) 100% of such lump sum income [15% of the value of books in case of Royalty]
(Less: Related Expenses)
OR
RESIDENT INDIVIDUAL BEING AUTHORS (Royalty Income)
b) ₹ 3,00,000
DEDUCTION IN RESPECT OF ROYALTY INCOME ON PATENTS

[Sec 80RRB]
1. ELIGIBLE ASSESSEE:
RESIDENT Individual whose GTI includes Royalty Income from Patent.
2. The deduction shall not be available on

a. any capital sum received for sale of patent, which is chargeable u/h Capital Gains
b. any consideration for sale of product manufactured with the use of the patented article
3. DEDUCTION: lower of
a. 100% of such income; or RESIDENT INDIVIDUAL BEING PATENTEE (Royalty Income)
b. ₹ 3,00,000
COMMON FOR 80QQB/80RRB BOTH
If income earned from foreign sources: Deduction is allowed to the extent the income is brought into
India in Convertible Foreign Exchange within 6 months from end of Previous Year or such extended
period as allowed by RBI / competent authority.
Claim in Return of Income: Mandatory for deduction

Deduction SATC 9.29

Class Notes

Deduction SATC 9.30

Class Notes

Deduction SATC 9.31

Deduction in respect of interest on deposits in saving accounts to the
extent of ₹ 10,000 [Section 80TTA]
1. Applicability: Individual or HUF
(Other than senior citizen covered u/s 80TTB)
2. Maximum Qualifying Amount of deduction under section 80TTA: ₹ 10,000
3. GTI includes interest on deposits (not being time deposit) in a Saving Bank Account with
a) Banks,
b) Co-operative society into Banking Business or
c) Post Office.
4. However, where such income is derived by Firm/AOPs/BOIs, no deduction shall be allowed to

any partner/member as the case may be.
Deduction in respect of interest on deposits to the extent of ₹ 50,000

[Section 80TTB]
1. Applicability: Senior Citizen
2. Maximum Qualifying Amount of deduction under section 80TTB: ₹ 50,000
3. GTI includes interest on deposits with

a) Banks,
b) Co-operative society into Banking Business or
c) Post Office.
4. However, where such income is derived by Firm/AOPs/BOIs, no deduction shall be allowed to

any partner/member as the case may be.
Note: Senior citizen who is eligible for deduction u/s 80TTB will not be able to claim deduction u/s
80TTA.

Deduction SATC 9.32

Deduction in respect of employment of new Workmen/Employees
[Section 80JJAA]
1. Where the GTI of an assessee (any person) to whom section 44AB applies, includes any profits
and gains derived from business, a deduction of an amount equal to 30% of additional employee
cost incurred in the course of such business in the previous year shall be allowed, for 3
assessment years including the assessment year relevant to the previous year in which such
employment is provided.
2. No deduction under sub-section (1) shall be allowed:

(a) if the business is formed by splitting up, or the reconstruction, of an existing
business:
Provided that nothing contained in this clause shall apply in respect of a business which is
formed as a result of re-establishment, reconstruction or revival by the assessee of the
business in the circumstances and within the period specified in Section 33B;
(b) if the business is acquired by the assessee by way of transfer from any other person
or as a result of any business reorganisation;
(c) unless the assessee furnishes the report [Form No. 10DA] of the accountant, as
defined in the Explanation below sub-section (2) of section 288, before the specified
date (date one month prior to the due date of furnishing return under Section 139)
referred to in section 44AB i.e. 30th Sept of the AY giving such particulars in the report
as may be prescribed
NOTE:
A. "Additional Employee Cost" means total emoluments paid or payable to additional employees
employed during the previous year:
Provided that in the case of an existing business, the additional employee cost shall be NIL, if-
(a) there is no increase in the number of employees from the total number of employees
employed as on the last day of the preceding year;
(b) emoluments are paid otherwise than by an account payee cheque or account payee
bank draft or by use of electronic clearing system through a bank account or through
any other prescribed electronic mode;
The prescribed electronic modes notified are credit card, debit card, net banking, IMPS
(Immediate payment Service), UPI (Unified Payment Interface), RTGS (Real Time Gross
Settlement), NEFT (National Electronic Funds Transfer), and BHIM (Bharat Interface for
Money) Aadhar Pay as other electronic modes of payment.
Provided further that in the first year of a new business, emoluments paid or payable to
employees employed during that previous year shall be deemed to be the additional employee
cost;
B. "Additional Employee" means an employee who has been employed during the previous year
and whose employment has the effect of increasing the total number of employees employed by
the employer as on the last day of the preceding year, but does not include,-
(a) an employee whose total emoluments are more than ₹ 25,000 per month; or
(b) an employee for whom the entire contribution is paid by the Government under the
Employees' Pension Scheme; or
(c) an employee employed for a period of less than 240 days during the previous year (150
days in case of Apparel, footwear or leather products); or
(d) an employee who does not participate in the recognised provident fund;

Deduction SATC 9.33

where an employee is employed during the previous year for a period of less than two
hundred and forty days or one hundred and fifty days, as the case may be, but is employed
for a period of two hundred and forty days or one hundred and fifty days, as the case may
be, in the immediately succeeding year, he shall be deemed to have been employed in the
succeeding year and the provisions of this section shall apply accordingly.
C. "emoluments" means any sum paid or payable to an employee in lieu of his employment by
whatever name called, but does not include-
(a) any contribution paid or payable by the employer to any pension fund or provident fund or
any other fund for the benefit of the employee under any law for the time being in force; and
(b) any lump-sum payment paid or payable to an employee at the time of termination of his
service or superannuation or voluntary retirement, such as gratuity, severance pay, leave
encashment, voluntary retrenchment benefits, commutation of pension and the like.
D. From A.Y. 2018-19, it is not necessary that the employee should qualify as a “workman”
under the Industrial Disputes Act, 1947 for the employer to avail benefit under section
80JJAA.

Deduction SATC 9.34

Class Notes

Deduction SATC 9A.1

“PRACTICAL QUESTIONS – SET A”
Ignore the provisions of Section 115BAC
1) From the following particulars in respect of Adarsh, an author of books, find out the deduction
allowable to him under section 80C for the AY 2022-23 (amounts in ₹):
Life insurance premium (on his own life) 22000
Sum assured on the above policy 300000
Contribution to unrecognised provident fund 1000
Contribution to public provident fund 25000
Subscription to National Savings Certificates VIII issue 8000
Accrued interest for one year completed National Savings Certificates VIII issue 8000
Life insurance premium on his mother's life policy 5000
Repayment of bank loan borrowed for the construction of the house 21000
2) Mr. A, aged about 66 years, has earned a lottery income of ₹ 1,20,000 (gross) during the PY 2021-22. He
also has a business income of ₹ 30,000. He invested an amount of ₹ 10,000 in Public Provident Fund account
and ₹ 24,000 in National Saving Certificates. What is the total taxable income of Mr. A for the AY 2022-
23? Ignore the provisions of section 115BAC.
3) X (age : 26 years), a resident individual, has income of ₹ 6,95,000 [i.e., ₹ 4,10,000 from a business in Delhi
and ₹ 2,85,000 from a property in Bombay) during the previous year 2021-22. Find out his net income for
the assessment year 2022-23 taking into consideration the following payments —
₹
1. Life insurance premium on own-life paid by X in cash on March 31, 2022 33,334
(sum assured ₹ 4,00,000)
2. Contribution towards pension fund of LIC 11,000
3. Mediclaim insurance premium on the life of dependent father (age : 67 years and last
foreign travel : during 1994-95) paid by cheque on April 20, 2021 19,000
4. Medical treatment of dependent brother (being a person with disability) 5,000
5. Deposit with LIC for the maintenance of the dependent brother (being a person with
disability) 20,000
Ignore the provisions of section 115BAC.
4) Discuss the allowability of the following:

i) Rajan has to pay to a Hospital for treatment ₹ 42,000 and spent nothing for Life Insurance or for
maintenance of dependant (being a person with disability).
ii) Rajan has incurred for treatment Rs. Nil in the previous year and deposited ₹ 25,000 with LIC for
maintenance of dependants (being persons with severe disability).
iii) Rajan has incurred ₹ 20,000 for treatment and ₹ 25,000 was deposited with LIC for maintenance of
dependants, (being person with disability)
5) A submits the following information regarding his income for the previous year 2021-22.
₹
1. Salary Income (computed) 1,90,000
2. Rent received from property in Delhi (per month) 4,000
3. Winning from lottery (Gross) 15,000
He makes the following deposits / payments during the year

1. Contribution towards PPF 10,000
2. Premium paid in cash on Mediclaim policy of his dependant father 8,000
He has a son being a person with disability, dependent on him, for whom he incurs expenses of his
medical treatment and rehabilitation. He also deposits a sum of ₹ 25,000 for the benefit of his son under a
scheme framed by the UTI for such a purpose.
Compute his total income for the assessment year 2022-23.

Deduction SATC 9A.2

6) Mr. X is a resident individual. He deposits a sum of ₹ 25,000 with Life Insurance Corporation every year for
the maintenance of his handicapped grandfather who is wholly dependent upon him. The disability is one
which comes under the Persons with Disabilities (Equal Opportunities, Protection of Rights and Full
Participation) Act, 1995. A copy of the certificate from the medical authority is submitted. Compute the
amount of deduction available under section 80DD for the A.Y. 2022-23. What will be the deduction if
Mr. X had made this deposit for his dependant father?
7) The Gross Total Income of A for the Previous Year 2021-22 as computed is ₹ 2,50,000 which includes
₹ 1,65,000 Long-Term Capital Gain and ₹ 10,000 on account of Short-Term Capital Gain. Besides the
above he provides you the following information –
(a) He has deposited ₹ 12,000 to effect a contract for annuity plan of LI.C.
(b) He paid the following premium to the New India Assurance Co. Ltd for Mediclaim scheme for himself &
his relatives. ₹
(i) his own health 1,000
(ii) for health of spouse 600
(iii) Major son not dependent on him 800
(iv) Mother dependent on him 1,200
(v) Brother dependent on him 1,100
(c) One of his brothers is totally blind and dependent on him for medical treatment and ₹ 10,000
rehabilitation. A spends on his blind brother.
(d) He has also deposited ₹ 25,000 in a Scheme framed by UTI for maintenance of his handicapped
dependent brother.
Compute his Total Income for the Assessment Year 2022-23.
8) X, suffers from disability duly certified by a specialist. X is employed as personal assistant to the Managing
Director in a private company on a monthly salary of ₹ 12,000. Besides, X submits the following particulars of
income for the year ending 31.3.2022:
Interest from Indian companies ₹ 5,000
Dividend from UTI ₹ 3,000
Interest from bank FD ₹ 5,000
Determine the taxable income for the assessment year 2022-23.
9) X is a Personal Secretary of a Managing director in a Public sector undertaking. X suffers from severe
physical disability, Monthly salary drawn is ₹ 12,000/-. Further, interest is earned on Fixed deposits with banks
₹ 15,000/-, from private companies ₹ 7,000/-. You are required to compute the taxable income of X for
A.Y. 2022-23.
10) Compute the total income of Mr. Sonu (blind from birth) (not opted for Section 115BAC) for the AY
2022-23, after taking into account the following information:
(1) Salary from a publishing house for working as an artist (no allowances received) 1,36,000p.a.
(2) Income from sale of paintings made by self 3,25,000
(3) Winnings from lottery 60,000
(4) Dividend from a foreign company 10,000
(5) Fixed deposit with scheduled Bank in accordance with notified scheme 10,000
(6) Payment of rent of self-occupied house 50,000
(7) Donation to PM's National Relief Fund 4,000
It was found during the year that he is suffering from cancer. Sonu spent ₹ 30,000 for treatment of
cancer, out of which ₹ 10,000 were reimbursed by his employer.

Deduction SATC 9A.3

11) X (35 years) is a resident individual. During the PY 2021-22, he incurs the following expenditure—
Actual re-imbursed by Amount re-
Amount insurance imbursed by
expenditure company ₹ employer of
X₹
₹
Medical treatment (specified disease) of X in a 30,000 Nil 28,000
Government hospital
Medical treatment (specified disease) of Mrs. X in a 14,000 3,000 6,000
hospital recognised by Chief Commissioner
Salary of X is ₹ 4,50,000 p.a. In the two cases, disease is specified in the rules made by the Board. Find out
the net income of X for the AY 2021-22.
12) Mr. B has taken three education loans on April 1, 2021, the details of which are given below:
Loan 1 Loan 2 Loan 3
For whose education loan was taken B Son of B Daughter of B
Purpose of loan MBA B. Sc. B.A.
Amount of loan (₹) 5,00,000 2,00,000 4,00,000
Annual repayment of loan (₹) 1,00,000 40,000 80,000
Annual repayment of interest (₹) 20,000 10,000 18,000
Compute the amount deductible under section 80E for the AY 2022-23.
13) X (34 years), a resident ind, submits the following particulars of his income for the PY 2021-22:
Business income 83,000
Interest on debentures 49,000
Long-term capital gains on transfer of gold 4,10,000
Short-term capital gain on sale of shares taxable under section 111A 20,000
Other short-term capital gain 10,000
Contribution towards public provident fund 40,000
Payment of medical insurance premium on own life 3,000
Donation to the National Trust for welfare of persons with Autism 4,000
Donation to the fund set up by the Gujarat Government for providing relief to victims of 3,000
earthquake in Gujarat
Donation to Rajiv Gandhi Foundation 1,000

Donation to the Prime Minister's Drought Relief Fund 5,000
Donation to approved public charitable institution 11,000
Donation to a poor boy for higher education 5,000
Donation of clothes to an approved institution 12,000
Donation to a charitable institution for construction of a rest house only for a particular
religious community 8,000
Determine the net income of X for the AY 2022-23.
14) X, an Indian citizen, gives the following particulars of his income and expenditure of the previous year
2021-22:
Winnings from lottery 1,04,500
Contribution towards public provident fund 70,000
Donation to the Prime Minister's National Relief Fund 51,000
Donation to the Government of India for promotion of family planning 33,000
Donation to a public charitable institute (being an approved institution for section 80G) 1,12,000
Determine the net income of X for the AY 2022-23.

Deduction SATC 9A.4

15) Mr. Brown supplies you the following information for the year ended 31.3.2022.
₹
Interest on bank deposits (Time) 59,000
Dividend on shares of foreign companies received abroad 50,000
Interest from deposits in Indian Companies (gross) 30,000
Income from horse races in India 17,500
Mr. Brown is a non-resident. He has donated a sum of ₹ 15,000 to Municipal Corporation of Delhi for family
planning. He has paid ₹ 2,000 by cheque to New India Assurance Company for mediclaim for himself. He has
also spent ₹ 6,000 on medical treatment of his minor son who is physically handicapped.
Compute total income of Mr. Brown for the assessment year 2022-23.
16) A has computed his income under various heads for the previous year 2021-22 as under:
₹
(a) Income under the head salary (computed) 2,51,000
(b) Income under the head house property (-) 10,000
(c) Profits and Gains of business or profession 40,000
(d) Capital Gains - Short-term 20,000
- Long-term 30,000 50,000
(e) Income from other sources
- Winnings of lotteries 10,000
- Interest on Government Securities 12,000 22,000
A also submits the following information :

(1) Payment made by cheque for Mediclaim policy 6,000
(2) Expenses on Medical treatment of dependent son being a person 15,000
with disability
(3) Payment of interest to Canara Bank, which was taken for pursuing
approved higher education 25,000
(4) Donations to :
Prime Minister's Drought Relief Fund 1,000
National Fund for Communal Harmony 2,000
Jawaharlal Nehru Memorial Fund . 2,000
Prime Minister's National Relief Fund 1,200
Government for Family Planning 27,000
Approved Charitable Institution 3,000
Compute the Total Income for assessment year 2022-23 if he deposits ₹ 20,000 in his PPF Account
during the previous year.
17) Compute the total income of Mr. Kamal (not opted for Section 115BAC) for the assessment year 2022-
23 (All Amounts in ₹) :
Salary received 2,55,000

Rent received from let out property 1,20,000
Short term capital loss 80,000
Agricultural income from Nepal 1,00000
He has made the following payments :

Donation to Scientific research association 50,000
Repayment of loan taken for his higher education (Interest included ₹ 80,000) 1,24000
Donation to National Children's Fund 5,000
Donation to approved charitable institution 16000
Donation Prime Minister's National Relief Fund 8,000
Payment by cheque to General Insurance Corporation for insuring health of his 15,000
dependant father, being a senior citizen
Expenses on medical treatment of his dependant disabled mother (severe 3,000
disability)

Deduction SATC 9A.5

18) X, a professional tax consultant, based at New Delhi furnishes the following particulars of his income/
expenditure relevant for the AY 2022-23:
₹
Income from profession 6,80,000
Short-term capital gain (covered by section 111A) 4,000
Winning from a camel race 1,700
Winning from a horse race 2,000
Income from other sources (except above) 10,000
₹
Payment of medical insurance premium on own life 13,000
Payment of rent 80,000
Contributions towards public provident fund 70,000
Determine the amount deductible under section 80GG and the net income for the AY 2022-23
19) X, a Qualified Accountant, derives ₹ 1,63,000 as taxable professional income. Income of X from other sources
is ₹ 32,000. He pays Mediclaim insurance premium ₹ 2,000 for insuring-the health of his non - dependent
parents; ₹ 3,000 for self and spouse and ₹ 2,000 for his brother. He incurs ₹ 12,000 expenditure on medical
treatment of his dependent mentally retarded (severe disability) sister in approved hospital duly certified. He
pays rent of ₹ 2,500 per month. Calculate his TI for AY 2022-23 after claiming deductions u/c VI-A.
20) Anand is a retired Government Officer aged 65 years, who derived the following income in respect of
FY 2021-22. He resides in Cochin:
₹
Pension p.a. 130,000
Interest from bank deposits (time) 102,000
He has paid ₹ 20,000 as premium to effect insurance on his health. He pays a rent of ₹ 3,000 per month in
respect of furnished accommodation. What is his eligibility for deduction under section 80GG? What are
the conditions to be satisfied by him to qualify for the deduction?
21) For the previous year 2021-22, the business income of X (age : 29 years) is ₹ 10,23,000. During the
year, he pays the following by cheque to get tax benefit—
Insured person Mediclaim Life insurance

insurance premium ₹
premium ₹
Taxpayer, spouse and children—
X 22,000 15,000*
Mrs. X (not dependent upon X) [sum assured is ₹ 160,000] 4,500 20,000
Son (not dependent upon X) 800 2,000*
Daughter (dependent upon X) 2,500 700*
Parents of the taxpayer—

Father (age: 67 years, resident in India, not dependent upon X) 1,000 1,200*
Mother (age: 59 years, dependent upon X) 36,000 6,000*
Others—
Grand parents (dependent upon X) 500 2,000*
Father of Mrs. X (dependent upon X) 800 7,000*
Brother (dependent upon X) 900 4,500*
*Less than 10 percent of sum assured.
Besides, X pays ₹ 16,000 towards pension fund of LIC. Find out the net income of ‘X’ for AY 2022-23.

Deduction SATC 9A.6

22) A, an individual has made the following payments in the previous year 2021-22:
 ₹ 17,000 paid by cheque to GIC for insuring A’s own health.

 ₹ 6,000 paid by credit card to GIC for insuring health of A’s wife, not dependant on him.
 ₹ 6,000 paid by credit card to GIC for insuring health of A’s dependant major child.
 ₹ 1,000 paid in cash to GIC for insuring the health of A’S dependant minor daughter.
 ₹ 1,000 paid in cheque to GIC for insuring the health of A’S dependant brother.
 ₹ 42,000 paid by credit card to GIC for insuring health of A’s father (aged 66 years & resident), not
dependent upon him.
 ₹ 9,000 paid by cheque to GIC for insuring health of A’s mother (59 Yr), dependent upon A.
 ₹ 1,000 paid by debit card to GIC for insuring health of A’s grandfather dependent upon A.
 ₹ 1,000 paid by cheque to GIC for insuring health of A’s minor son, not dependent upon him.
 ₹ 100 p.m. paid by cheque to LIC for group insurance of which he is a member
a) Compute the deduction allowable u/s. 80D.

b) What will be the deduction if A’s father is a non-resident in India.

Deduction SATC 9B.1
“SOLUTIONs – SET A”
Solution 1:
Computation of deduction allowable to Adarsh under section 80C
Life insurance premium on his own life (fully allowed as premium is less than 10% of sum 22000
assured)
Contribution to PPF 25000
Subscription to National Savings Certificates VIII issue 8000
Accrued interest for one year completed NSC VIII issue - It is reinvested, hence, eligible 8000
Repayment of bank loan borrowed for the construction of the house 21000
Total 84000
Note: Life insurance premium on mother's life policy is not eligible for deduction u/s 80C.
Solution 2:
Computation of total taxable income of Mr. A for AY 2022-23
Particulars ₹ ₹
Profits and gains from business or profession 30,000
Income from other sources - lottery income 1,20,000
Less: Deductions under Chapter VIA [See Note below ]
Under section 80C - Deposit in Public Provident Fund 10,000
- Investment in National Saving Certificate 24,000
34,000
Restricted to 30,000
Note: Though the value of eligible investments is ₹ 34,000, however, deductions under chapter VIA cannot
exceed the Gross Total Income exclusive of Long Term Capital Gain, Short Term Capital Gain covered under
section 111A, winnings of lotteries etc of the assessee. Therefore maximum permissible deduction under section
80C = ₹ 1,50,000 – ₹ 1,20,000 = ₹ 30,000.
Solution 3:
₹
Property income 2,85,000
Less : Deductions under sections 80C to 80U
Under section 80C [payment of life insurance] 33,334
Under section 80CCC [contribution towards pension fund of LIC] 11,000
Under section 80D [mediclaim insurance premium on the health of dependent father ] 19,000
Under section 80DD [the amount of deduction is ₹ 75,000 irrespective of the amount
incurred or deposited under Option 1 and/or Option 2] 75,000
Net Income (Rounded off) 5,56,670
Solution 4:
i) The deduction of ₹ 75,000 under section 80DD is allowed in full irrespective of the expenditure actually
incurred/paid by the assessee.
ii) The assessee Rajan (assumed to be resident in India) has deposited ₹ 25,000 for maintenance of
handicapped dependent. The assessee is, however, eligible to claim ₹ 125,000, since the deduction of
₹ 125,000 allowed in full irrespective of the amount deposited with LIC in case of severe disability.
iii) Section 80DD allows a deduction of ₹ 75,000 irrespective of the actual amount spent on maintenance of
handicapped dependent and/or actual amount deposited with LIC. Therefore, the deduction will be ₹ 75,000
even though the total amount incurred/deposited is ₹ 45,000.
Solution 5:
Income from salary 1,90,000

Rent received ₹ 4,000 x 12 48,000
Less: 30% as standard deduction 14,400 33,600
Income from Other sources

Deduction SATC 9B.2

Winnings from lotteries 15,000
Less deductions u/s 80C to 80U
i. 80C 10,000
ii. 80D(as payment is made in cash) Nil
iii. 80DD 75,000 85,000
Solution 6:
Since the amount deposited by Mr. X was for his grandfather, he will not be allowed any deduction under
section 80DD. The deduction is available if the individual assessee incurs any expense for a dependant
disabled relative. Grandfather does not come within the definition of dependant relative.
What will be the deduction if Mr. X had made this deposit for his dependant father?- Since the
expense was incurred for a dependant disabled relative, Mr. X will be entitled to claim a deduction of
₹ 75,000 under section 80DD, irrespective of the amount deposited. In case his father has severe
disability, the deduction would be ₹ 1,25,000.
Solution 7:
Computation of Total Income
Particulars ₹ ₹
Gross Total Income (including LTCG of ₹ 1,65,000) 2,50,000
Less: Deduction Under Chapter VIA
U/s 80C – Annuity Plan of LIC 12,000
U/s 80D - Medical Insurance Premium paid (₹ 1,000 + ₹ 600 + ₹ 1,200) 2,800
U/s 80DD - Medical Expenditure on Dependent 1,25,000
Total 1,39,800
Deduction restricted to ₹ 85,000 [Gross Total Income of ₹ 2,50,000 Less (85,000)
LTCG of ₹ 1,65,000] since (a) LTCG is not eligible for Chapter VI-A
deduction, and (b) Deductions cannot exceed Gross Total Income
exclusive of LTCG]
Notes:
1. Mediclaim Premium:
(a) Premium paid on Major Son not dependent on the assessee is not eligible for deduction.
(b) Premium paid on dependent brother is not eligible for deduction.
(c) It is assumed that the premium is not paid in cash.
2. Certificate: It is assumed that Mr. A has obtained the certificate from the Medical Authority and the same is
furnished/ along with the Return of Income.

Deduction SATC 9B.3

Solution 8: Computation of taxable income for the AY 2022-23
₹ ₹
I. Income from Salary: (12000 x 12 – 50,000) 94,000
II. Income from other sources:
- Interest from Companies 5,000
- UTI Income 3,000
- Interest from Bank FD 5.000 13,000
Less : Deduction under Chapter VI-A:
- Sec. 80U 75,000
Taxable Income 32,000
Solution 9:
GTI = (12,000 x 12 - 50,000) + 15,000 + 7,000 = ₹ 1,16,000
Deduction = 80U = ₹ 125000 maximum 116000.
Solution 10:
Computation of Net Income of Sonu for the Assessment Year 2022-23 (amounts in ₹)
Income from Salary (1,36,000 - 50,000) 86,000
Business Income (sale of paintings made by self) 3,25,000
Income from Other Sources:
Winnings from lottery 60,000
Dividend from a foreign company 10,000 70,000
Less: Deductions under Chapter VIA
Under section 80C (FD with Bank in accordance with notified scheme) 10,000
Under section 80DDB (Medical treatment of cancer) (₹ 30,000 - ₹ 10,000) 20,000
Under section 80G (100% of ₹ 4,000) 4,000
Under section 80GG (See Note) 17,800
Under section 80U 1,25,000 1,76,800
Note: Deduction under section 80GG shall be the least of the following -
a) 5,000 x 12 60,000
b) Rent paid - 10% of Adj. GTI = 50,000 - 10% of (4,81,000 - 10,000 - 20,000 –
4,000 -1,25,000) = 50,000 -10% of 3,22,000= 17,800
c) 25% of Adj. GTI i.e. 3,22,000 80,500
Solution 11:
₹
Salary 4,50,000
Perquisite in respect of medical treatment of X and his spouse Nil
Gross salary 4,50,000
Less : Standard deduction u/s 16(ia) 50,000
Salary 4,00,000
Any other income Nil
Less : Deduction under section 80DDB 3,000
Net income 3,97,000
Note - The amount deductible is as follows—
1. actual expenditure (i.e., ₹ 30,000 + ₹ 14,000); or
2. ₹ 40,000 (₹ 100,000 in the case of senior citizen), whichever is less.
₹ 40,000 is deductible if nothing is recovered from the insurance company or employer. From the amount
deductible (i.e., ₹ 40,000 in this case), the amount received from insurance company as well as employer shall be
deducted. Therefore, ₹ 40,000 - ₹ 3,000 - ₹ 28,000 - ₹ 6,000, i.e., ₹ 3,000 is deductible.
Solution 12:
Deduction under section 80E is available to an individual assessee in respect of any interest paid by him
in the previous year in respect of loan taken for pursuing his higher education or higher education of his
spouse or children. Higher education means any course of study pursued after senior secondary
examination. Therefore, interest repayment in respect of all the above loans would be eligible for
deduction.
Deduction under section 80E = ₹ 20,000 + ₹ 10,000 + ₹ 18,000 = ₹ 48,000

Deduction SATC 9B.4

Solution 13:
Business Income 83,000
Short-term capital gain under section 111A 20,000
Other short-term capital gain 10,000
Interest on debentures 49,000
Under section 80C in respect of public provident fund 40,000
Under section 80D in respect of medical insurance premium 3,000
Under section 80G in respect of donations [see Note 1] 14,950
Net income 5,14,050
Note 1 - computation of deduction under section 80G in respect of donations

Step 1 - Gross qualifying amount:
Donation to the National Trust for welfare of persons with Autism 4,000
Donation to the fund set up by the Gujarat Government for providing relief to victims of
earthquake in Gujarat 3,000
Donation to Rajiv Gandhi Foundation 1,000
Donation to the Prime Minister's Drought Relief Fund 5,000
Donation to public charitable institutions 11,000
Amount given to a poor student (*not eligible as the donee is not a public charitable institution) —*
Clothes to an institution (*donation in kind is not eligible) —*
Amount for construction of rest house (*not eligible as amount will be utilised for the
benefit of a particular community) —*
Gross qualifying amount 24,000
Step 2 - Net qualifying amount
Donation to the National Trust for welfare of persons with Autism (*without any maximum limit) 4,000*
Donation to the fund set up by the Gujarat Government for providing relief to victims of
earthquake in Gujarat (*without any maximum limit) 3,000*
Donation to Rajiv Gandhi Foundation (*without any maximum limit) 1,000*
Donation to the Prime Minister's Drought Relief Fund (*without any maximum limit) 5,000*
Donation to the public charitable institutions:
It is :
a. ₹ 11,000 (being amount of donation) ; or
b. ₹ 9,900 (being 10% of adjusted gross total income calculated under Note 2), whichever is lower.
₹ 9,900 is, therefore, eligible for net qualifying amount 9,900
Net qualifying amount 22,900
Step 3 - Amount deductible:
50% of ₹ 15,900 (1,000+5,000+9,900) + 100% of ₹ 7,000 14,950
Note 2 - adjusted gross total income is calculated as under:

Less : Long-term capital gains 4,10,000
Less: Short-term capital gain under section 111A 20,000
Less : Amount of deduction under sections 80C to 80U except section 80G 43,000
Adjusted gross total income 99,000
Solution 14:
Less : Deductions
Under section 80C 70,000
Under section 80G [see Note 1] 1,24,500
Net income 10,15,500
Notes :
Computation of Deduction Under Section 80G
Step 1 - Gross qualifying amount
Donation to the Prime Minister's National Relief Fund 51,000
Donation for family planning 33,000
Donation to the public charitable institute 1,12,000
Gross qualifying amount 1,96,000

Deduction SATC 9B.5

Step 2 - Net qualifying amount
Donation to the Prime Minister's National Relief Fund (*no maximum limit is prescribed) 51,000*
Donation for family planning and to public charitable institute, amount to be included in
net qualifying amount, is the lower of :
a) ₹ 1,45,000 (being amount of donation) ; or
b) ₹ 1,14,000 (being 10% of adjusted gross total income computed under Note 2),
₹ 1,14,000, being the least, is to be included.
As amount of ₹ 1,14,000 represents aggregate amount of net qualifying donation in respect
of donation for family planning and to public charitable institute, separate amount in respect
of these will be as follows :
Donation to the Government for promoting family planning 33,000
Donation to the public charitable institute (i.e., ₹1,14,000 - ₹ 33,000) 81,000
Net qualifying amount 1,65,000
Step 3 -Amount deductible
100% of amount qualified in respect of donation to the Prime Minister's National Relief
Fund and the Government for family planning 33,000
50% of remaining portion 40,500
Amount deductible under section 80G 1,24,500
2. Adjusted Gross Total Income is calculated as under:

Less: Amount of deductions under sections 80C to 80U (except section 80G) 70,000
Adjusted gross total income 11,40,000
Solution 15:-
Interest on bank deposits 59,000
Interest on deposits 30,000
Horse race 17,500
Gross Total income 1,06,500
Less : Deduction
U/s. 80D 2,000
U/s. 80DD Nil (as non resident)
U/s. 80G 100% of 10,450 [10% of (1,06,500- 2,000)] 12,450
Total Income 94,050
Solution 16:-
₹ ₹
Loss from house property (-) 10,000
Business income 40,000
Capital gain short-term 20,000
long-term 30,000 50,000
Income from other sources (10,000 + 12,000) 22,000
Less : Deduction u/s 80C to 80U
(i) U/s 80C 20,000
(ii) U/s. 80D 6,000
(iii) U/s. 80DD 75,000
(iv) U/s. 80E 25,000
(v) U/s. 80G (calculated as under) 25,400 1,51,400
(1) Donation to which qualifying limit is not applicable :

(a) Allowed® 100%
(i) National Fund for Communal Harmony 2,000
(ii) Prime Minister's National Relief Fund 1,200 3,200
(b) Allowed @ 50%
(i) Prime Minister's Drought Relief Fund (₹ 1,000) 500
(ii) Jawaharlal Nehru Memorial Fund (₹ 2,000) 1,000 1,500
(2) Donations to which qualifying limit is applicable :
(i) Government for family planning 27,000
(ii) Approved charitable institutions 3,000
30,000

Deduction SATC 9B.6

Limited to 10% of Adjusted
Gross Total Income i.e., ₹ 2,07,000 and it shall be ₹ 20,700. Since 20,700 20,700
donations to Family Planning are more than the maximum allowable,
hence 100% of the qualifying amount will be allowable
Total deduction for donations u/s 80G. 25,400
Adjusted Gross Total Income is computed as under:

₹ ₹
(A) Gross Total Income 3,53,000
Less : (i) Long-term Capital Gain [₹ 30,000 – ₹ 10,000 {HP Loss Setoff}] 20,000
(ii) Deductions u/s 80C to 80U
(20,000 + 6,000 + 75,000 + 25,000) 1,26,000 1,46,000
2,07,000
Solution 17:
Computation of Total Income of Shri Kamal for the Assessment Year 2022-23
₹ ₹
Salary received (2,55,000 – 50,000) 205000
Income from House Property (₹ 1,20,000 - 30% of ₹ 1,20,000) 84000
Capital Gains:
Long term capital gains 240000
Short term capital loss 80000 160000
Income from Other Sources (Agricultural income from Nepal) 100000
Gross Total Income 549000
Less : Deductions under Chapter VIA
(a) 80D for payment to GIC 15000
(b) 80DD (medical treatment of disabled mother) 125000
(c) 80E (interest on loan taken for higher education) 80000
(d) 80GGA (Donation to scientific research association) 50000
(e) 80G (See Note) 18950 288950
Total Income 260050
Note: Deduction u/s 80G = 100% of 5,000 + 100% of 8,000 + {50% of lower of - (a) 16,000 or (b) 10% of
(5,49,000 -1,60,000 -15,000 -1,25,000 - 80,000 - 50,000)} = 5,000 + 8,000 + 50% of 11,900 = ₹ 18,950.
Solution 18:
₹ ₹
Professional income 6,80,000
Capital gains 14,000
Winnings from races including horse races 3,700
Other income 10,000 15,300
Under section 80C in respect of public provident fund 70,000
Under section 80D in respect of medical insurance premium 13,000
Under section 80GG in respect of rent paid being the least of the following :
a. ₹ 60,000 (being ₹ 5,000 x 12);
b. ₹ 1,53,075 (being 25% of ₹ 6,12,300);
c. ₹ 18,770 (being excess of rent paid over 10% of total income, i.e.,
₹ 80,000 - 10% of ₹ 6,12,300)
₹ 18,770, being the least, is, therefore, deductible 18,770
Net income 6,07,530
Note - "Total income" for the purpose of section 80GG is, ₹ 6,12,300, i.e., ₹ 7,09,300 - ₹ 4,000 - ₹ 10,000 -
₹ 70,000 - ₹ 13,000.

Deduction SATC 9B.7

Solution 19: Computation of Total Income
Particulars ₹ ₹
Professional income 1,63,000
Income from other sources 32,000
Less : Deductions under Chapter VI-A
1. Mediclaim Insurance - 80D - (₹ 3,000 + ₹ 2,000) 5,000
2. Expenditure for dependant mentally retarded sister 1,25,000
- 80DD
3. Rent paid - 80GG - least of the following is eligible
for deduction
i. Excess of Rent paid over 10% of Adjusted GTI
(₹ 30,000- ₹ 6,500) = ₹ 23,500
ii. 25% of Adjusted GTI = ₹ 16,250
iii. Ceiling limit ₹ 5,000 p.m. = ₹ 60,000 16,250 1,46,250
Total income ₹ 48,750
Note:
i) Mediclaim insurance for insuring health of X's brother does not qualify for deduction u/s 80D.
ii) Mediclaim insurance for non - dependant parents shall qualify for deduction U/s. 80D
iii) Deduction u/s. 80DD is a flat amount of ₹ 1,25,000 irrespective of the actual expenditure incurred (for
persons with severe disability).
iv) Total income for the purpose of Sec 80GG
Less: Deduction u/s 80D & 80DD 1,30,000
Adjusted GTI 65,000
Solution 20: Deduction u/s 16(ia) – 50,000; 80D – 20,000, 80TTB – 50,000, 80GG – ₹ 24,800.
Solution 21:
₹
Any other income Nil
Less: Deductions under sections 80C to 80U
Under section 80C [see Note] 33,700
Under section 80CCC (being payment towards pension fund of LIC) 16,000
Under section 80D [see Note] 51,000
Net income 9,22,300
Note - Computation of deduction under sections 80C and 80D-

Life insurance for Mediclaim insurance
the purpose of for the purpose of
Insured person
section 80C section 80D
₹ ₹
Taxpayer, spouse and dependent children - X 15,000 22,000
Mrs. X [limited to 10% sum assured] 16,000* 4,500
Son (not dependent upon X) 2,000 —
Dependent daughter 700 2,500
Total 29,000
Amount deductible under section 80D (maximum: 25,000
₹ 25,000, extra deduction of ₹ 5,000 is not available as
X, Mrs. X and dependent children are not senior
citizens) (a)
Parents of X -
Father (not dependent) — 1,000
Dependent mother — 36,000
Grand parent, father-in-law, dependent brother — —
Total 37,000
Amount deductible under section 80D (maximum: 26,000
₹ 25,000, extra deduction of ₹ 1,000 is available as
father of X is resident in India and senior citizen) (b)
Amount deductible under sections 80C and 80D 33,700 51,000*
[*(a) + (b)]

Deduction SATC 9B.8
Solution 22:
Payments eligible for deduction u/s 80D: Amount paid for himself spouse and Amount paid
dependent children for parents
(₹) (₹)
Amount paid on own health 17,000

Amount paid on health of wife (ever though not dependant on A) 6,000
Amount paid on health of dependant major child 6,000
Amount paid on health of minor daughter (not allowed as paid in cash) Nil
Amount paid on health of brother (not allowed irrespective of whether he Nil
is dependent on A or not)
Amount paid on health of A’s father (senior citizen) allowed even if father 42,000
is not dependant on A
Amount paid on health of mother 9,000
Amount paid on health of grandfather(not allowed as grandparents are Nil
not covered)
Amount paid on health of A’s minor son (not allowed as he is not Nil
dependent on A)
Amount paid to LIC is not allowable u/s. 80D Nil
Total eligible amount 29,000 51,000
However, deduction will be restricted to a maximum of ₹ 25,000 in case of his family and ₹ 50,000 (including
₹ 25,000 for senior citizen) for parents. Hence the deduction will be restricted to maximum of ₹ 50,000 for both
parents. The total deduction shall be ₹ 75,000.

Deduction SATC 9C.1

“PRACTICAL QUESTIONS – SET B”
1. Examine the following statements with regard to the provisions of the Income-tax Act, 1961:
(a) For grant of deduction under section 80JJAA, filing of audit report in prescribed form is must for a
corporate assessee; filing of return within the due date laid down in section 139(1) is not required.
(b) Filing of belated return under section 139(4) of the Income-tax Act, 1961 will debar an assessee
from claiming deduction under section 80M.
Solution:
(a) The statement is not correct. Section 80AC stipulates compulsory filing of return of income on or before
the due date specified under section 139(1), as a pre-condition for availing the benefit of deduction,
inter alia, under section 80JJAA.
(b) The statement is correct. As per section 80AC, the assessee has to furnish his return of income on or
before the due date specified under section 139(1), to be eligible to claim deduction under, inter alia,
section 80M.
2. Compute the eligible deduction under section 80C for A.Y. 2022-23 in respect of life insurance
premium paid by Mr. Ganesh during the P.Y. 2021-22, the details of which are given hereunder -
Date of Person insured Actual Insurance premium
issue of capital sum paid during 2021-22
policy assured (₹) (₹)
(i) 30/3/2012 Self 5,00,000 51,000
(ii) 1/5/2016 Spouse 1,50,000 20,000
(iii) 1/6/2018 Handicapped Son 4,00,000 80,000
(section 80U disability)
Solution:
Date of Person Actual Insurance Deduction u/s Remark
issue of insured capital premium 80C for A.Y. (restricted to
policy sum paid during 2022-23 % of sum
assured 2021-22 (₹) assured)
(₹) (₹) (₹)
(i) 30/3/2012 Self 5,00,000 51,000 51,000 20%
(ii) 1/5/2016 Spouse 1,50,000 20,000 15,000 10%
(iii) 1/6/2018 Handicapped 4,00,000 80,000 60,000 15%
son (section
80U disability)
Total 1,26,000
3. An individual assessee, resident in India, has made the following deposit/ payment during the
previous year 2021-22:
Particulars ₹
Contribution to the public provident fund 1,50,000
Insurance premium paid on the life of the spouse (policy taken on 1.4.2015)
(Assured value ₹ 2,00,000) 25,000
What is the deduction allowable under section 80C for A.Y. 2022-23?
Solution:
Computation of deduction under section 80C for A.Y. 2022-23
Particulars ₹
Deposit in public provident fund 1,50,000
Insurance premium paid on the life of the spouse

(Maximum 10% of the assured value ₹ 2,00,000,
as the policy is taken after 31.3.2012) 20,000
Total 1,70,000
However, the maximum permissible deduction u/s 80C is restricted to 1,50,000

Deduction SATC 9C.2

4. The basic salary of Mr. A is ₹ 1,00,000 p.m. He is entitled to dearness allowance, which is 40% of basic
salary. 50% of dearness allowance forms part of pay for retirement benefits. Both Mr. A and his
employer, ABC Ltd., contribute 15% of basic salary to the pension scheme referred to in section
80CCD. Explain the tax treatment in respect of such contribution in the hands of Mr. A.
Solution:
Tax treatment in the hands of Mr. A in respect of employer’s and own contribution to pension scheme
referred to in section 80CCD:
(a) Employer’s contribution to such pension scheme would be treated as salary since it is specifically
included in the definition of “salary” under section 17(1)(viii). Therefore, ₹ 1,80,000, being 15% of basic
salary of ₹ 12,00,000, will be included in Mr. A’s salary.
(b) Mr. A’s contribution to pension scheme is allowable as deduction under section 80CCD(1). However, the
deduction is restricted to 10% of salary. Salary, for this purpose, means basic pay plus dearness
allowance, if it forms part of pay.
Therefore, “salary” for the purpose of deduction under section 80CCD for Mr. A would be –
Particulars ₹
Basic salary = ₹ 1,00,000 × 12 12,00,000
Dearness allowance = 40% of ₹ 12,00,000 = ₹ 4,80,000
50% of Dearness Allowance forms part of pay = 50% of ₹ 4,80,000 2,40,000
Salary for the purpose of deduction under section 80CCD 14,40,000
Deduction under section 80CCD(1) is restricted to 10% of ₹ 14,40,000 (as against 1,44,000
actual contribution of ₹ 1,80,000, being 15% of basic salary of ₹ 12,00,000)
As per section 80CCD(1B), a further deduction of up to ₹ 50,000 is allowable. 36,000
Therefore, deduction under section 80CCD(1B) is ₹ 36,000 (₹ 1,80,000 -
₹ 1,44,000).
₹ 1,44,000 is allowable as deduction under section 80CCD(1). This would be taken into consideration and
be subject to the overall limit of ₹ 1,50,000 under section 80CCE. ₹ 36,000 allowable as deduction under
section 80CCD(1B) is outside the overall limit of ₹ 1,50,000 under section 80CCE.
In the alternative, ₹ 50,000 can be claimed as deduction under section 80CCD(1B). The balance
₹ 1,30,000 (₹ 1,80,000 - ₹ 50,000) can be claimed as deduction under section 80CCD(1).
(c) Employer’s contribution to pension scheme would be allowable as deduction under section 80CCD(2),
subject to a maximum of 10% of salary. Therefore, deduction under section 80CCD(2), would also be
restricted to ₹ 1,44,000, even though the entire employer’s contribution of ₹ 1,80,000 is included in salary
under section 17(1)(viii).
However, this deduction of employer’s contribution of ₹ 1,44,000 to pension scheme would be outside the
overall limit of ₹ 1,50,000 under section 80CCE i.e., this deduction would be over and above the other
deductions which are subject to the limit of ₹ 1,50,000.
5. The gross total income of Mr. X for the A.Y. 2022-23 is ₹ 8,00,000. He has made the following
investments/payments during the F.Y. 2021-22:
Particulars ₹
(1) Contribution to PPF 1,10,000
(2) Payment of tuition fees to Apeejay School, New Delhi, for
education of his son studying in Class XI 45,000
(3) Repayment of housing loan taken from Standard Chartered Bank 25,000
(4) Contribution to approved pension fund of LIC 1,05,000
Compute the eligible deduction under Chapter VI-A for the A.Y. 2022-23.

Deduction SATC 9C.3

Solution:
Computation of deduction under Chapter VI-A for the A.Y. 2022-23
Particulars ₹
Deduction under section 80C
 Contribution to PPF 1,10,000
 Payment of tuition fees to Apeejay School, New Delhi, for education of his son
studying in Class XI 45,000
 Repayment of housing loan 25,000
1,80,000
Restricted to ₹ 1,50,000, being the maximum permissible deduction u/s 80C 1,50,000
Deduction under section 80CCC
 Contribution to approved pension fund of LIC ₹ 1,05,000 1,05,000
2,55,000
As per section 80CCE, the aggregate deduction under section 80C, 80CCC
and 80CCD(1) has to be restricted to ₹ 1,50,000
Deduction allowable under Chapter VIA for the A.Y. 2022-23 1,50,000
6. Mr. A, aged 40 years, paid medical insurance premium of ₹ 20,000 during the P.Y. 2021-22 to insure
his health as well as the health of his spouse. He also paid medical insurance premium of ₹ 47,000
during the year to insure the health of his father, aged 63 years, who is not dependent on him. He
contributed ₹ 3,600 to Central Government Health Scheme during the year. He has incurred ₹ 3,000 in
cash on preventive health check-up of himself and his spouse and ₹ 4,000 by cheque on preventive
health check-up of his father. Compute the deduction allowable under section 80D for the A.Y. 2022-
23.
Solution: Deduction allowable under section 80D for the A.Y. 2022-23
Actual Maximum
Particulars Payment deduction
₹ allowable
₹
A. Premium paid and medical expenditure incurred for self
and spouse
(i) Medical insurance premium paid for self and spouse 20,000 20,000
(ii) Contribution to CGHS 3,600 3,600
(iii) Exp. on preventive health check-up of self & spouse 3,000 1,400
26,600 25,000
B. Premium paid or medical expenditure incurred for
father, who is a senior citizen
(i) Mediclaim premium paid for father, who is over 60 years of age 47,000 47,000
(ii) Expenditure on preventive health check-up of father 4,000 3,000
51,000 50,000
Total deduction under section 80D (₹ 25,000 + ₹ 50,000) 75,000
Notes:
(1) The total deduction under A.(i), (ii) and (iii) above should not exceed ₹ 25,000. Therefore, the expenditure
on preventive health check-up for self and spouse would be restricted to ₹ 1,400, being (₹ 25,000 –
₹ 20,000 – ₹ 3,600).
(2) The total deduction under B. (i) and (ii) above should not exceed ₹ 50,000. Therefore, the expenditure on
preventive health check-up for father would be restricted to ₹ 3,000, being (₹ 50,000 – ₹ 47,000).
(3) In this case, the total deduction allowed on account of expenditure on preventive health check-up of self,
spouse and father is ₹ 4,400 (i.e., ₹ 1,400 + ₹ 3,000), which is less than the maximum permissible limit of
₹ 5,000.
7. Mr. Y, aged 40 years, paid medical insurance premium of ₹ 22,000 during the P.Y. 2021-22 to insure his
health as well as the health of his spouse and dependent children. He also paid medical insurance
premium of ₹ 33,000 during the year to insure the health of his mother, aged 67 years, who is not
dependent on him. He incurred medical expenditure of ₹ 20,000 on his father, aged 71 years, who is
not covered under mediclaim policy. His father is also not dependent upon him. He contributed
₹ 6,000 to Central Government Health Scheme during the year. Compute the deduction allowable
under section 80D for the A.Y. 2022-23.

Deduction SATC 9C.4

Solution:
Deduction allowable under section 80D for the A.Y. 2022-23
Particulars ₹ ₹
(i) Medical insurance premium paid for self, spouse and dependent 22,000
children
(ii) Contribution to CGHS 6,000
restricted to 28,000 25,000
(iii) Mediclaim premium paid for mother, who is over 60 years of age 33,000
(iv) Medical expenditure incurred for father, who is over 60 years of
age and not covered by any insurance 20,000
restricted to 53,000 50,000
75,000
8. Mr. X is a resident individual. He deposits a sum of ₹ 50,000 with Life Insurance Corporation every
year for the maintenance of his handicapped grandfather who is wholly dependent upon him. The
disability is one which comes under the Persons with Disabilities (Equal Opportunities, Protection of
Rights and Full Participation) Act, 1995. A copy of the certificate from the medical authority is
submitted. Compute the amount of deduction available under section 80DD for the A.Y. 2022-23.
Solution:
Since the amount deposited by Mr. X was for his grandfather, he will not be allowed any deduction under
section 80DD. The deduction is available if the individual assessee incurs any expense for a dependent
disabled person. Grandfather does not come within the definition of dependent.
9. What will be the deduction if Mr. X had made this deposit for his dependent father?
Solution:
Since the expense was incurred for a dependent disabled person, Mr. X will be entitled to claim a deduction of
₹ 75,000 under section 80DD, irrespective of the amount deposited. In case his father has severe disability,
the deduction would be ₹ 1,25,000.
10. Mr. B has taken three education loans on April 1, 2021, the details of which are given below:
Loan 1 Loan 2 Loan 3

For whose education loan was taken B Son of B Daughter of B
Purpose of loan MBA B. Sc. B.A.
Amount of loan (₹) 5,00,000 2,00,000 4,00,000
Annual repayment of loan (₹) 1,00,000 40,000 80,000
Annual repayment of interest (₹) 20,000 10,000 18,000
Compute the amount deductible under section 80E for the A.Y. 2022-23.
Solution:
Deduction under section 80E is available to an individual assessee in respect of any interest paid by him in
the previous year in respect of loan taken for pursuing his higher education or higher education of his spouse
or children. Higher education means any course of study pursued after senior secondary examination.
Therefore, interest repayment in respect of all the above loans would be eligible for deduction.
Deduction under section 80E = ₹ 20,000 + ₹ 10,000 + ₹ 18,000 = ₹ 48,000.
11. Mr. A purchased a residential house property for self-occupation at a cost of ₹ 45 lakh on 1.4.2017, in
respect of which he took a housing loan of ₹ 35 lakh from Bank of India@11% p.a. on the same date.
The loan was sanctioned on 28th March, 2017.
Compute the eligible deduction in respect of interest on housing loan for A.Y. 2022-23 under the
provisions of the Income-tax Act, 1961, assuming that the entire loan was outstanding as on 31.3.2022
and he does not own any other house property.

Deduction SATC 9C.5

Solution:
Particulars ₹
(i) Deduction allowable while computing income under the head “Income from
house property”
Deduction under section 24(b) ₹ 3,85,000 [₹ 35,00,000 × 11%]
Restricted to 2,00,000
(ii) Deduction under Chapter VI-A from Gross Total Income

Deduction under section 80EE ₹ 1,85,000 (₹ 3,85,000 – ₹ 2,00,000)
12. Mr. Shiva aged 58 years, has gross total income of ₹ 7,75,000 comprising of income from salary and
house property. He has made the following payments and investments:
(i) Premium paid to insure the life of her major daughter (policy taken on 1.4.2017) (Assured value
₹ 1,80,000) – ₹ 20,000.
(ii) Medical Insurance premium for self – ₹ 12,000; Spouse – ₹ 14,000.
(iii) Donation to a public charitable institution registered under 80G ₹ 50,000 by way of cheque.
(iv) LIC Pension Fund – ₹ 60,000
(v) Donation to National Children’s Fund - ₹ 25,000 by way of cheque
(vi) Donation to Jawaharlal Nehru Memorial Fund - ₹ 25,000 by way of cheque
(vii)Donation to approved institution for promotion of family planning - ₹ 40,000 by way of cheque
(viii) Deposit in PPF – ₹ 1,00,000
Compute the total income of Mr. Shiva for A.Y. 2022-23.
Solution:
Computation of Total Income of Mr. Shiva for A.Y. 2022-23
Particulars ₹ ₹
Less : Deduction under section 80C
Deposit in PPF 1,00,000
Life insurance premium paid for insurance of major daughter 18,000
(Maximum 10% of the assured value ₹ 1,80,000, as the policy is
taken after 31.3.2012)
Total (Section 80C) 1,18,000
Deduction under section 80CCC in respect of LIC pension fund 60,000
As per section 80CCE, deduction under section 80C & 80CCC is 1,78,000 1,50,000
restricted to Deduction under section 80D
Medical Insurance premium in respect of self and spouse 26,000
Deduction under section 80G (See Working Note below) 87,500
Working Note: Computation of deduction under section 80G
Particulars of donation Amount % of deduction Deduction u/s

donated (₹) 80G (₹)
(i) National Children’s Fund 25,000 100% 25,000
(ii) Jawaharlal Nehru Memorial Fund 25,000 50% 12,500
(iii) Approved institution for promotion 40,000 100%, subject to 40,000
of family planning qualifying limit
(iv) Public Charitable Trust 50,000 50% subject to 10,000
qualifying limit
(See Note below)
87,500

Deduction SATC 9C.6

Note - Adjusted total income = Gross Total Income – Amount of deductions under section 80C to 80U except
section 80G i.e., ₹ 6,00,000, in this case. ₹ 60,000, being 10% of adjusted total income is the qualifying limit,
in this case.
Firstly, donation of ₹ 40,000 to approved institution for family planning qualifying for 100% deduction subject
to qualifying limit, has to be adjusted against this amount. Thereafter, donation to public charitable trust
qualifying for 50% deduction, subject to qualifying limit is adjusted. Hence, the contribution of ₹ 50,000 to
public charitable trust is restricted to 20,000 (being, ₹ 60,000 - ₹ 40,000), 50% of which would be the
deduction under section 80G. Therefore, the deduction under section 80G in respect of donation to public
charitable trust would be ₹ 10,000, which is 50% of ₹ 20,000.
13. Mr. A has commenced the business of manufacture of computers on 1.4.2021. He employed 350 new
employees during the P.Y. 2021-22, the details of whom are as follows-
No. of Date of Regular/ Total monthly emoluments

employees employment Casual per employee (₹)
(i) 75 1.4.2021 Regular 24,000
(ii) 125 1.5.2021 Regular 26,000
(iii) 50 1.8.2021 Casual 25,500
(iv) 100 1.9.2021 Regular 24,000
The regular employees participate in recognized provident fund while the casual employees do not.
Compute the deduction, if any, available to Mr. A for A.Y. 2022-23, if the profits and gains derived from
manufacture of computers that year is ₹ 75 lakhs and his total turnover is 5.16 crores.
What would be your answer if Mr. A has commenced the business of manufacture of footwear on
1.4.2021?
Solution:
Mr. A is eligible for deduction under section 80JJAA since he is subject to tax audit under section 44AB for
A.Y. 2022-23, as his total turnover from business exceeds ₹ 1 crore and he has employed “additional
employees” during the P.Y. 2021-22.
1. If Mr. A is engaged in the business of manufacture of computers

Additional employee cost = ₹ 24,000 × 12 × 75 [See Working Note below] = ₹ 2,16,00,000
Deduction under section 80JJAA = 30% of ₹ 2,16,00,000 = ₹ 64,80,000.
Working Note:
Number of additional employees
Particulars No. of
workmen
Total number of employees employed during the year 350
Less:Casual employees employed on 1.8.2021 who do not participate 50
in recognized provident fund
Regular employees employed on 1.5.2021, since their total 125
monthly emoluments exceed ₹ 25,000
Regular employees employed on 1.9.2021 since they have been
employed for less than 240 days in the P.Y. 2021-22. 100 275
Number of “additional employees” 75
Notes –
(1) Since casual employees do not participate in recognized provident fund, they do not qualify as
additional employees. Further, 125 regular employees employed on 1.5.2021 also do not qualify as
additional employees since their monthly emoluments exceed ₹ 25,000. Also, 100 regular employees
employed on 1.9.2021 do not qualify as additional employees for the P.Y. 2021-22, since they are
employed for less than 240 days in that year.
Therefore, only 75 employees employed on 1.4.2021 qualify as additional employees, and the total
emoluments paid or payable to them during the P.Y. 2021-22 is deemed to be the additional
employee cost.

Deduction SATC 9C.7

(2) As regards 100 regular employees employed on 1.9.2021, they would be treated as additional
employees for previous year 2022-23, if they continue to be employees in that year for a minimum
period of 240 days. Accordingly, 30% of additional employee cost in respect of such employees would
be allowable as deduction under section 80JJAA in the hands of Mr. A for the A.Y. 2023-24.
2. If Mr. A is engaged in the business of manufacture of footwear

If Mr. A is engaged in the business of manufacture of footwear, then, he would be entitled to deduction
under section 80JJAA in respect of employee cost of regular employees employed on 1.9.2021, since
they have been employed for more than 150 days in the previous year 2021-22.
Additional employee cost = ₹ 2,16,00,000 + ₹ 24,000 × 7 × 100 = ₹ 3,84,00,000

Deduction under section 80JJAA = 30% of ₹ 3,84,00,000 = ₹ 1,15,20,000
14. Mr. A, a resident individual aged about 61 years, has earned business income (computed) of
₹ 1,35,000, lottery income of ₹ 1,20,000 (gross) during the P.Y. 2021-22. He also has interest on Fixed
Deposit of ₹ 30,000 with banks. He invested an amount of ₹ 1,50,000 in Public Provident Fund
account. What is the total income of Mr. A for the A.Y. 2022-23?
Solution:
Computation of total income of Mr. A for A.Y. 2022-23
Particulars ₹ ₹
Profits and gains of business or profession 1,35,000
- Interest on Fixed Deposit with banks 30,000
- lottery income 1,20,000
Less: Deductions under Chapter VIA [See Note
below]
Under section 80C
- Deposit in Public Provident Fund 1,50,000
Under section 80TTB
- Interest on fixed deposits with banks 30,000
1,80,000
Restricted to 1,65,000
Note: Though the value of eligible deductions is ₹ 1,80,000, however, deduction under Chapter VI-A cannot
exceed the gross total income exclusive of long term capital gains taxable under section 112 and section
112A, short-term capital gains covered under section 111A and winnings of lotteries of the assessee.
Therefore, the maximum permissible deduction under Chapter VI-A

= ₹ 2,85,000 – ₹ 1,20,000 = ₹ 1,65,000.
In case of resident individuals of the age of 60 years or more, interest on bank fixed deposits qualifies for
deduction upto ₹ 50,000 under section 80TTB.

Deduction SATC 9C.8

15. Mr. Gurnam, aged 42 years, has salary income (computed) of ₹ 5,50,000 for the previous year ended
31.03.2022. He has earned interest of ₹ 14,500 on the saving bank account with State Bank of India
during the year. Compute the total income of Mr. Gurnam for the assessment year 2022-23 from the
following particulars:
(i) Life insurance premium paid to Birla Sunlife Insurance in cash amounting to ₹ 25,000 for
insurance of life of his dependent parents. The insurance policy was taken on 15.07.2018 and the
sum assured on life of his dependent parents is ₹ 2,00,000.
(ii) Life insurance premium of ₹ 25,000 paid for the insurance of life of his major son who is not
dependent on him. The sum assured on life of his son is ₹ 2,50,000 and the life insurance policy
was taken on 30.3.2012.
(iii) Life insurance premium paid by cheque of ₹ 22,500 for insurance of his life. The insurance policy
was taken on 08.09.2017 and the sum assured is ₹ 2,00,000.
(iv) Premium of ₹ 26,000 paid by cheque for health insurance of self and his wife.
(v) ₹ 1,500 paid in cash for his health check-up and ₹ 4,500 paid in cheque for preventive health
check-up for his parents, who are senior citizens.
(vi) Paid interest of ₹ 6,500 on loan taken from bank for MBA course pursued by his daughter.
(vii)A sum of ₹ 5,000 donated in cash to an institution approved for purpose of section 80G for
promoting family planning.
Solution:
Computation of total income of Mr. Gurnam for the Assessment Year 2022-23
Particulars ₹ ₹ ₹
Interest on saving bank deposit 14,500
Less: Deduction under Chapter VIA
Under section 80C (See Note 1)
Life insurance premium paid for life insurance
of:
 major son 25,000
 self ₹ 22,500 restricted to 10% of ₹ 2,00,000 20,000 45,000
Under section 80D (See Note 2)
Premium paid for ₹ 26,000 health insurance of self and wife by
cheque, restricted to 25,000
Payment made for health check-up for parents 4,500 29,500
Under section 80E
For payment of interest on loan taken from bank for MBA course
of his daughter 6,500
Under section 80TTA (See Note 4) 91,000
Interest on savings bank account ₹ 14,500 restricted to 10,000
Notes:
1. As per section 80C, no deduction is allowed in respect of premium paid for life insurance of parents
whether they are dependent or not. Therefore, no deduction is allowable in respect of ₹ 25,000 paid as
premium for life insurance of dependent parents of Mr. Gurnam.
In respect of insurance policy issued on or after 01.04.2012, deduction shall be allowed for life insurance
premium paid only to the extent of 10% of sum assured. In case the insurance policy is issued before

Deduction SATC 9C.9

01.04.2012, deduction of premium paid on life insurance policy shall be allowed up to 20% of sum
assured.
Therefore, in the present case, deduction of ₹ 25,000 is allowable in full in respect of life insurance of Mr.
Gurnam’s son since the insurance policy was issued before 01.04.2012 and the premium amount is less
than 20% of ₹ 2,50,000. However, in respect of premium paid for life insurance policy of Mr. Gurnam
himself, deduction is allowable only up to 10% of ₹ 2,00,000 since, the policy was issued on or after
01.04.2012 and the premium amount exceeds 10% of sum assured.
2. As per section 80D, in case the premium is paid in respect of health of a person specified therein and for
health check-up of such person, deduction shall be allowed up to ₹ 25,000. Further, deduction up to
₹ 5,000 in aggregate shall be allowed in respect of health check-up of self, spouse, children and parents.
In order to claim deduction under section 80D, the payment for health-checkup can be made in any mode
including cash. However, the payment for health insurance premium has to be paid in any mode other
than cash.
Therefore, in the present case, in respect of premium of ₹ 26,000 paid for health insurance of self and
wife, deduction would be restricted to ₹ 25,000. Since the limit of ₹ 25,000 has been exhausted against
medical insurance premium, no deduction is allowable for preventive health check- up for self and wife.
However, deduction of ₹ 4,500 is allowable in respect of health check-up of his parents, since it falls
within the limit of ₹ 5,000.
3. No deduction shall be allowed under section 80G in case the donation is made in cash of a sum
exceeding ₹ 2,000. Therefore, deduction under section 80G is not allowable in respect of cash donation of
₹ 15,000 made to an institution approved for the purpose of section 80G for promotion of family planning.
4. As per section 80TTA, deduction shall be allowed from the gross total income of an individual or Hindu
Undivided Family in respect of income by way of interest on deposit in the savings account included in the
assessee’s gross total income, subject to a maximum of ₹ 10,000. Therefore, deduction of ₹ 10,000 is
allowable from the gross total income of Mr. Gurnam, though the interest from savings bank account is
₹ 14,500.
16. Examine the following statements with regard to the provisions of the Income-tax Act, 1961:
(i) During the financial year 2021-22, Mr. Amit paid interest on loan availed by him for his son's
higher education. His son is already employed in a firm. Mr. Amit will get the deduction under
section 80E.
(ii) Subscription to notified bonds of NABARD would qualify for deduction under section 80C.
(iii) In order to be eligible to claim deduction under section 80C, investment/ contribution/
subscription etc. in eligible or approved modes, should be made from out of income chargeable to
tax.
(iv) Where an individual repays a sum of ₹ 30,000 towards principal and ₹ 14,000 as interest in respect
of loan taken from a bank for pursuing eligible higher studies, the deduction allowable under
section 80E is ₹ 44,000.
(v) Mrs. Sheela, widow of Mr. Satish (who was an employee of M/s. XYZ Ltd.), received ₹ 7 lakhs on
1.5.2021, being amount standing to the credit of Mr. Satish in his NPS Account, in respect of which
deduction has been allowed under section 80CCD to Mr. Satish in the earlier previous years. Such
amount received by her as a nominee on closure of the account is deemed to be her income for
A.Y. 2022-23.
(vi) Mr. Vishal, a Central Government employee, contributed ₹ 50,000 towards Tier II account of NPS.
The same would be eligible for deduction under section 80CCD.
Solution:
(a) The statement is correct. The deduction under section 80E available to an individual in respect of
interest on loan taken for his higher education or for the higher education of his relative. For this purpose,
relative means, inter alia, spouse and children of the individual. Therefore, Mr. Amit will get the deduction
under section 80E. It is immaterial that his son is already employed in a firm. This would not affect Mr.
Amit’s eligibility for deduction under section 80E.

Deduction SATC 9C.10

(b) The statement is correct. Under section 80C(2) subscription to such bonds issued by NABARD (as the
Central Government may notify in the Official Gazette) would qualify for deduction under section 80C.
(c) The statement is not correct. There is no stipulation under section 80C that the investment,
subscription, etc. should be made from out of income chargeable to tax.
(d) The statement is not correct. Deduction under section 80E is in respect of interest paid on education
loan. Hence, the deduction will be limited to ₹ 14,000.
(e) The statement is not correct. The proviso to section 80CCD(3) provides that the amount received by the
nominee, on closure of NPS account on the death of the assessee, shall not be deemed to be the income
of the nominee. Hence, amount received by Mrs. Sheela would not be deemed to be her income for A.Y.
2022-23.
(f) The statement is not correct. Contribution to Tier II account of NPS would qualify for deduction under
section 80C and not section 80CCD.
17. Examine the allowability of the following:

(i) Rajan has to pay to a hospital for treatment ₹ 62,000 and spent nothing for life insurance or for
maintenance of handicapped dependent.
(ii) Raja, a resident Indian, has spent nothing for treatment in the previous year and deposited
₹ 25,000 with LIC for maintenance of handicapped dependent.
(iii) Rajan has incurred ₹ 20,000 for treatment and ₹ 25,000 was deposited with LIC for maintenance of
handicapped dependent.
(iv) Payment of ₹ 50,000 by cheque to an electoral trust by an Indian company.
Solution:
(i) The deduction of ₹ 75,000 under section 80DD is allowed in full, irrespective of the amount of expenditure
incurred or paid by the assessee. If the expenditure is incurred in respect of a dependent with severe
disability, the deduction allowable is ₹ 1,25,000.
(ii) The assessee Rajan has deposited ₹ 25,000 for maintenance of handicapped dependent. The assessee
is, however, eligible to claim ₹ 75,000 since the deduction of ₹ 75,000 is allowed in full, irrespective of the
amount deposited with LIC. In the case of dependent with severe disability, the deduction allowable is
₹ 1,25,000.
(iii) Section 80DD allows a deduction of ₹ 75,000 irrespective of the actual amount spent on maintenance of
handicapped dependent and/or actual amount deposited with LIC. Therefore, the deduction will be
₹ 75,000 even though the total amount incurred/deposited is only ₹ 45,000. If the dependent is a person
with severe disability the quantum of deduction is ₹ 1,25,000.
(iv) Amount paid by an Indian Company to an electoral trust is eligible for deduction under section 80GGB
from gross total income, since such payment is made otherwise than by way of cash.
18. For the Assessment year 2022-23, the Gross Total Income of Mr. Chaturvedi, a resident in India, was
₹ 8,18,240 which includes long-term capital gain of ₹ 2,45,000 taxable under section 112 and Short-
term capital gain of ₹ 58,000. The Gross Total Income also includes interest income of ₹ 12,000 from
savings bank deposits with banks and ₹ 40,000 interest on fixed deposits with banks. Mr. Chaturvedi
has invested in PPF ₹ 1,20,000 and also paid a medical insurance premium ₹ 51,000. Mr. Chaturvedi
also contributed ₹ 50,000 to Public Charitable Trust eligible for deduction under section 80G by way of
an account payee cheque.
Compute the total income and tax thereon of Mr. Chaturvedi, who is 70 years old as on 31.3.2022.


Solution:
Computation of total income and tax payable by Mr. Chaturvedi for the A.Y. 2022-23
Particulars ₹ ₹
Gross total income including long term capital gain 8,18,240
Less: Long term capital gain 2,45,000
GTI excluding LTCG 5,73,240

Less: Deductions under Chapter VI-A:
Under section 80C in respect of PPF deposit 1,20,000
Under section 80D (it is assumed that premium of ₹ 51,000 is paid by 50,000
otherwise than by cash. The deduction would be restricted to
₹ 50,000, since Mr. Chaturvedi is a senior citizen)
Under section 80G (See Notes 1 & 2 below) 17,662

Under section 80TTB (See Note 3 below) 50,000 2,37,662
Total income (excluding long term capital gains) 3,35,578

Total income (including long term capital gains) 5,80,578
Total income (rounded off) 5,80,580
Tax on total income
(including long-term capital gains of ₹ 2,45,000)
LTCG ₹ 2,45,000 x 20% 49,000
Balance total income ₹ 3,35,580 1,779
Tax before cess 50,779
Add: Health and Education cess @4% 2,031
Total tax liability 52,810
Notes:
(1) Computation of deduction under section 80G:
Particulars ₹
Gross total income (excluding long term capital gains) 5,73,240
Less : Deduction under section 80C, 80D & 80TTB 2,20,000
Adjusted GTI: 3,53,240
10% of the above 35,324
Contribution made 50,000
Lower of the two eligible for deduction under section 80G 35,324
Deduction under section 80G – 50% of ₹ 35,324 17,662
(2) Deduction under section 80G is allowed only if amount is paid by any mode other than cash, in case of
amount exceeding ₹ 2,000. Therefore, the contribution made to public charitable trust is eligible for
deduction since it is made by way of an account payee cheque.
(3) Deduction of upto ₹ 50,000 under section 80TTB is allowed to a senior citizen if gross total income
includes interest income on bank deposits, both fixed deposits and savings account.
(4) Mr. Chaturvedi, being a senior citizen is eligible for basic exemption of ₹ 3,00,000.
19. Mr. Rajmohan whose gross total income was ₹ 6,40,000 for the financial year 2021-22, furnishes you
the following information:
(a) Stamp duty paid on acquisition of residential house (self-occupied) - ₹ 50,000.
(b) Five year post office time deposit - ₹ 20,000.
(c) Donation to a recognized charitable trust ₹ 25,000 which is eligible for deduction under section
80G at the applicable rate.
(d) Interest on loan taken for higher education of spouse paid during the year - ₹ 10,000.
Compute the total income of Mr. Rajmohan for the Assessment year 2022-23.


Solution:
Computation of total income of Mr. Rajmohan for the A.Y. 2022-23.
Particulars ₹ ₹
Under section 80C
Stamp duty paid on acquisition of residential house 50,000
Five year time deposit with Post Office 20,000
TOTAL 70,000
Under section 80E
Interest on loan taken for higher education of spouse, being a relative. 10,000
Under section 80G (See Note below)
Donation to recognized charitable trust (50% of ₹ 25,000) 12,500 92,500
Note: In case of deduction under section 80G in respect of donation to a charitable trust, the net qualifying
amount has to be restricted to 10% of adjusted total income, i.e., gross total income less deductions under
Chapter VI-A except 80G. The adjusted total income is, therefore, ₹ 5,60,000 (i.e. 6,40,000 – ₹ 80,000), 10%
of which is ₹ 56,000, which is higher than the actual donation of ₹ 25,000.
Therefore, the deduction under section 80G would be ₹ 12,500, being 50% of the actual donation of ₹ 25,000.
20. Compute the eligible deduction under Chapter VI-A for the A.Y. 2022-23 of Ms. Roma, who has a gross
total income of ₹ 15,00,000 for the A.Y. 2022-23 and provides the following information about her
investments/ payments during the P.Y. 2021-22:
Sl. Particulars Amount (₹)

No.
1. Life Insurance premium paid (Policy taken on 01-01-2012 and sum assured is 35,000
₹ 3,40,000)
2. Public Provident Fund contribution 1,50,000
3. Repayment of housing loan to Bhartiya Mahila Bank, Bangalore 20,000
4. Payment to L.I.C. Pension Fund 1,40,000
5. Mediclaim Policy taken for self, wife and dependent children, premium paid by 30,000
cheque
6. Medical Insurance premium paid by cheque for parents (Senior Citizens) 52,000
Solution:
Computation of eligible deduction under Chapter VI-A of Ms. Roma for A.Y. 2022-23
Particulars ₹ ₹
Deduction under section 80C
Life insurance premium paid ₹ 35,000 (allowed in full since the same is within 35,000
the limit of 20% of the sum assured, the policy being taken before 1.4.2012)
Public Provident Fund 1,50,000
Repayment of housing loan to Bhartiya Mahila Bank, Bangalore 20,000
Total 2,05,000
Restricted to a maximum of ₹ 1,50,000 1,50,000
Deduction under section 80CCC for payment towards LIC pension fund 1,40,000
2,90,000
As per section 80CCE, aggregate deduction under, inter alia, section 80C 1,50,000
and 80CCC, is restricted to
Deduction under section 80D

Payment of medical insurance premium of ₹ 30,000 towards medical policy
taken for self, wife and dependent children restricted to 25,000
Medical insurance premium paid ₹ 52,000 for parents, being senior 50,000 75,000
citizens, restricted to
Eligible deduction under Chapter VI-A 2,25,000


21. Mr. Aakash received royalty of ₹ 2,88,000 from a foreign country for a book authored by him,
being a work of literary nature. The rate of royalty is 18% of value of books. The expenditure
incurred by him for earning this royalty was ₹ 40,000. The amount remitted to India till 30th
September, 2021 is ₹ 2,30,000. The remaining amount was not remitted till 31st March, 2022.
Compute the amount includible in the gross total income of Mr. Aakash and the amount of
deduction which he will be eligible for under section 80QQB.
Solution
The net royalty of ₹ 2,48,000 (i.e., royalty of ₹ 2,88,000 less ₹ 40,000, being expenditure to earn such
income) is includible in gross total income.
Deduction u/s 80QQB: ₹

Royalty ₹ 2,88,000 x 15/18 = ₹ 2,40,000
Restricted to Amount brought into India in convertible foreign exchange within 2,30,000
the prescribed time
Less: Expenses already allowed as deduction while computing royalty income 40,000
Deduction u/s 80QQB 1,90,000


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THIS BOOK HAS BEEN A REALITY

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 Updated with Finance Act 2021 (AY 2022-23)

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I dedicate this book to my beloved late grandparents & Papa.

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PROFILE – CA SURAJ AGRAWAL

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4. Residential Status 4.1 – 4.24

5. Income from House Property 5.1 – 5.32

6. Income under the head “Salaries” 6.1 – 6.78

7. Income from Other Sources 7.01 – 7.26

8. Capital Gains 8.01 – 8.58

9. Deduction [Section 80C to Section 80U] 9.01 – 9.34

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INTRODUCTION TO INCOME TAX SATC 1.1

INTRODUCTION & OVERVIEW

Why are taxes Levied?

Power to levy taxes

The following are the lists:

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INTRODUCTION TO INCOME TAX SATC 1.2

COMPONENTS OF INCOME TAX

 The Proviso(s) to a section/sub-section/clause spells out the

The Finance Act [or, Finance Act 2021]

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INTRODUCTION TO INCOME TAX SATC 1.3

 Rules also have sub-rules, provisos and Explanations.

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INTRODUCTION TO INCOME TAX SATC 1.4

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INTRODUCTION TO INCOME TAX SATC 1.5

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INTRODUCTION TO INCOME TAX SATC 1.6

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INTRODUCTION TO INCOME TAX SATC 1.7

Discuss the significance of Heads of Income

2. Relevance of method of accounting for heads of income:

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INTRODUCTION TO INCOME TAX SATC 1.8

Assessment year [Section 2(9)]

Previous year [Section 3]

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INTRODUCTION TO INCOME TAX SATC 1.9