Income Tax

Defining Capital Assets
What is Capital Gains Tax In India?
Any profit or gain that arises from the sale of a ‘capital asset’ is known ‘income from capital gains’.
Such capital gains are taxable in the year in which the transfer of the capital asset takes place. This is
called capital gains tax. There are two types of Capital Gains: short-term capital gains (STCG) and
long-term capital gains(LTCG).
Investment in a house property is one of the most sought out investments primarily because you get
to own a house. While others may invest with the intention of earning a profit upon selling the
property in the future. It is important to note that a house property is regarded as a capital asset for
income tax purposes. Consequently, any gain or loss incurred from the sale of a house property may
be subject to tax under the 'Capital Gains' head. Similarly, capital gains or losses may arise from sale
of different types of capital assets. We will delve into the chapter on ‘Capital gains’ in detail here.
Land, building, house property, vehicles, patents, trademarks, leasehold rights, machinery, and
jewellery are a few examples of capital assets. This includes having rights in or in relation to an Indian
company. It also includes the rights of management or control or any other legal right.
The following do not come under the category of capital asset:
a. Any stock, consumables or raw material, held for the purpose of business or profession
b. Personal goods such as clothes and furniture held for personal use
c. Agricultural land in rural(*) India
d. 6½% gold bonds (1977) or 7% gold bonds (1980) or National Defence gold bonds (1980) issued by
the central government
e. Special bearer bonds (1991)
f. Gold deposit bond issued under the gold deposit scheme (1999) or deposit certificates issued
under the Gold Monetisation Scheme, 2015
*Definition of rural area (effective from AY 2014-15) – Any area which is outside the jurisdiction of a
municipality or cantonment board, having a population of 10,000 or more is considered a rural area.
Also, it should not fall within a distance given below
Distance Population
(to be measured aerially) (as per the last census).
2 kms from local limit of municipality or If the population of the municipality/cantonment board is more than
cantonment board but not more than 1 lakh
8 kms from local limit of municipality or
If the population of the municipality/cantonment board is more than
cantonment board
Types of Capital Assets?
1. STCA ( Short-term capital asset ) An asset held for a period of 36 months or less is a short-term
capital asset.
The criteria is 24 months for immovable properties such as land, building and house property from
FY 2017-18. For instance, if you sell house property after holding it for a period of 24 months, any
income arising will be treated as a long-term capital gain, provided that property is sold after 31st
March 2017.
The reduced period of the aforementioned 24 months is not applicable to movable property such as
jewellery, debt-oriented mutual funds etc.
Some assets are considered short-term capital assets when these are held for 12 months or less. This
rule is applicable if the date of transfer is after 10th July 2014 (irrespective of what the date of
purchase is). These assets are:
• Equity or preference shares in a company listed on a recognized stock exchange in India
• Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock exchange
in India
• Units of UTI, whether quoted or not
• Units of equity oriented mutual fund, whether quoted or not
• Zero coupon bonds, whether quoted or not
2. LTCA ( Long-term capital asset ): An asset held for more than 36 months is a long-term capital
asset. They will be classified as a long-term capital asset if held for more than 36 months as earlier.
Capital assets such as land, building and house property shall be considered as long-term capital
asset if the owner holds it for a period of 24 months or more (from FY 2017-18).
Whereas, below-listed assets if held for a period of more than 12 months, shall be considered as
long-term capital asset.
in India

Tax Rates – Long-Term Capital Gains
and Short-Term Capital Gains
Tax Type Condition Applicable Tax
Sale of:
10% over and above
- Equity shares
Rs 1 lakh
Long-term capital gains - units of equity oriented mutual
tax (LTCG) fund
Others 20%
When Securities Transaction Tax

Normal slab rates
Short-term capital gains (STT) is not applicable
tax (STCG)
When STT is applicable 15%.
Tax on Equity and Debt Mutual Funds
Gains made on the sale of debt funds and equity funds are treated differently. Any fund that invests
heavily in equities (more than 65% of their total portfolio) is called an equity fund.
Effective 1 April 2023

On or before 1 April 2023
Funds
Short-Term Gains Long-Term Gains Short-Term Gains Long-Term Gains
Debt At tax slab rates of 10% without indexation or 20% At tax slab rates of At tax slab rates of
Funds the individual with indexation whichever is lower the individual individual
10% over and abov
Equity 10% over and above Rs 1 lakh
15% 15% lakh without indexa
Funds without indexation
Calculation of Capital Gains
The calculations of capital gains are dependent on the type of assets and their holding period. A few
terms that an individual must know before calculating gains against their capital investments are
here as follows –
• Full value consideration –
It is the consideration that is received by a seller in return for a capital asset.
• Cost of acquisition –
The cost of acquisition is the value of an asset when a seller acquires it.
• Cost of improvement –
The cost of improvement is the amount of expenses incurred by a seller in making any additions or
alterations to a capital asset.
To calculate the value of short term capital gain, the full amount of consideration is required to be
determined at first. From the obtained value, cost of acquisition, cost of improvement and the total
expenditure incurred concerning the transfer of ownership has to be deducted. This resultant value
will be the capital gain on investments.
Indexed Cost of Acquisition
The cost of acquisition is calculated on the present terms by applying the CII (Cost Inflation Index). It
is done to adjust the values by taking into account the inflation that takes place over the years while
holding the asset.
The indexed cost of acquisition can be estimated as the ratio of the Cost Inflation Index (CII) of the
year when an asset was sold by a seller and that of the year when the property was acquired or the
financial year 2001-2002, whichever is later multiplied by the Cost of acquisition.
Suppose, a person acquired an asset at Rs. 50 Lakh in the financial year 2004-2005 and she decided
to transfer the property in the fiscal year 2018-19. The CII of the financial year 2004-05 and 2018-19
were 113 and 280 respectively.
Therefore, the indexed cost of acquisition will be 50 X 280 / 113 = Rs. 123.89 Lakh.
Indexed Cost of Improvement
The indexed cost of the improvement is calculated by multiplying the associated cost of
improvement that was required to the CII of the year divided by the CII of the year in which the
improvement took place.
How to Calculate Short-Term Capital Gains?
Step 1: Start with the full value of consideration
Step 2: Deduct the following:

• Expenditure incurred wholly and exclusively in connection with such transfer
• Cost of acquisition
• Cost of improvement
Step 3: This amount is a short-term capital gain
Full value consideration

Less: Expenses incurred exclusively for such transfer
Short-term capital gain =
Less: Cost of acquisition
Less: Cost of improvement
How to Calculate Long-Term Capital Gains?
• Indexed cost of acquisition
• Indexed cost of improvement
Step 3: From this resulting number, deduct exemptions provided under sections 54, 54EC, 54F, and
54B

Less : Expenses incurred exclusively for such transfer
Long-term capital gain= Less: Indexed cost of acquisition
Less: Indexed cost of improvement
Less: Expenses that can be deducted from full value for consideration*
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Capital Gains Tax & What is Capital Gains Tax In India, Types, Tax Rates, Calculation, Exemptions &
Tax Saving
Updated on: May 22nd, 2023
|
27 min read
What is Capital Gains Tax In India?
Any profit or gain that arises from the sale of a ‘capital asset’ is known ‘income from capital gains’.
Such capital gains are taxable in the year in which the transfer of the capital asset takes place. This is
called capital gains tax. There are two types of Capital Gains: short-term capital gains (STCG) and
long-term capital gains(LTCG).
Investment in a house property is one of the most sought out investments primarily because you get
to own a house. While others may invest with the intention of earning a profit upon selling the
property in the future. It is important to note that a house property is regarded as a capital asset for
income tax purposes. Consequently, any gain or loss incurred from the sale of a house property may
be subject to tax under the 'Capital Gains' head. Similarly, capital gains or losses may arise from sale
of different types of capital assets. We will delve into the chapter on ‘Capital gains’ in detail here.
Land, building, house property, vehicles, patents, trademarks, leasehold rights, machinery, and
jewellery are a few examples of capital assets. This includes having rights in or in relation to an Indian
company. It also includes the rights of management or control or any other legal right.
The following do not come under the category of capital asset:
a. Any stock, consumables or raw material, held for the purpose of business or profession
b. Personal goods such as clothes and furniture held for personal use
c. Agricultural land in rural(*) India
d. 6½% gold bonds (1977) or 7% gold bonds (1980) or National Defence gold bonds (1980) issued by
the central government
e. Special bearer bonds (1991)
f. Gold deposit bond issued under the gold deposit scheme (1999) or deposit certificates issued
under the Gold Monetisation Scheme, 2015
*Definition of rural area (effective from AY 2014-15) – Any area which is outside the jurisdiction of a
municipality or cantonment board, having a population of 10,000 or more is considered a rural area.
Also, it should not fall within a distance given below
Distance Population
(to be measured aerially) (as per the last census).
8 kms from local limit of municipality or

If the population of the municipality/cantonment board is more than
cantonment board
Types of Capital Assets?
1. STCA ( Short-term capital asset ) An asset held for a period of 36 months or less is a short-term
capital asset.
The criteria is 24 months for immovable properties such as land, building and house property from
FY 2017-18. For instance, if you sell house property after holding it for a period of 24 months, any
income arising will be treated as a long-term capital gain, provided that property is sold after 31st
March 2017.
The reduced period of the aforementioned 24 months is not applicable to movable property such as
jewellery, debt-oriented mutual funds etc.
Some assets are considered short-term capital assets when these are held for 12 months or less. This
rule is applicable if the date of transfer is after 10th July 2014 (irrespective of what the date of
purchase is). These assets are:
in India
2. LTCA ( Long-term capital asset ): An asset held for more than 36 months is a long-term capital
asset. They will be classified as a long-term capital asset if held for more than 36 months as earlier.
Capital assets such as land, building and house property shall be considered as long-term capital
asset if the owner holds it for a period of 24 months or more (from FY 2017-18).
Whereas, below-listed assets if held for a period of more than 12 months, shall be considered as
long-term capital asset.
in India
Classification of Inherited Capital Asset

In case an asset is acquired by gift, will, succession or inheritance, the period for which the asset was
held by the previous owner is also included when determining whether it’s a short term or a long-
term capital asset. In the case of bonus shares or rights shares, the period of holding is counted from
the date of allotment of bonus shares or rights shares respectively.
Tax Rates – Long-Term Capital Gains and Short-Term Capital Gains
Tax Type Condition Applicable Tax
Sale of: 10% over and above Rs 1

- Equity shares lakh
Long-term capital gains tax - units of equity oriented mutual fund
(LTCG)
Others 20%
When Securities Transaction Tax (STT) is not

Normal slab rates
Short-term capital gains applicable
tax (STCG)
When STT is applicable 15%.
Tax on Equity and Debt Mutual Funds
Gains made on the sale of debt funds and equity funds are treated differently. Any fund that invests
heavily in equities (more than 65% of their total portfolio) is called an equity fund.
Effective 1 April 2023

On or before 1 April 2023
Funds
Short-Term Gains Long-Term Gains Short-Term Gains Long-Term Gains
Debt At tax slab rates of 10% without indexation or 20% At tax slab rates of At tax slab rates of
Funds the individual with indexation whichever is lower the individual individual
10% over and abov

Equity 10% over and above Rs 1 lakh
15% 15% lakh without indexa
Funds without indexation
Tax Rules for Debt Mutual Funds
Recently in amendment to Finance Bill 2023, gains from debt mutual funds will now be taxed at slab
rates and they will be considered as short-term irrespective of the holding period. Which means you
will lose out the indexation benefit. Prior to 1st April 2023, debt mutual funds had to be held for
more than 36 months to qualify as a long-term capital asset. It means you need to remain invested in
these funds for at least three years to get the benefit of long-term capital gains tax. If redeemed
within three years, the capital gains will be added to your income and will be taxed as per your
income tax slab rate.
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Calculating Capital Gains
Capital gains are calculated differently for assets held for a longer period and for those held over a
shorter period.
Terms You Need to Know:
Full value consideration The consideration received or to be received by the seller as a result of
transfer of his capital assets. Capital gains are chargeable to tax in the year of transfer, even if no
consideration has been received.
Cost of acquisition The value for which the capital asset was acquired by the seller.
Cost of improvement Expenses of a capital nature incurred in making any additions or alterations to
the capital asset by the seller.
Note:
• In certain cases where the capital asset becomes the property of the taxpayer otherwise
than by an outright purchase by the taxpayer, the cost of acquisition and cost of
improvement incurred by the previous owner would also be included.
• Improvements made before April 1, 2001, is never taken into consideration.
How to Calculate Short-Term Capital Gains?
• Cost of acquisition
• Cost of improvement
Step 3: This amount is a short-term capital gain

Less: Expenses incurred exclusively for such transfer
Short-term capital gain =
Less: Cost of acquisition
Less: Cost of improvement
How to Calculate Long-Term Capital Gains?

• Indexed cost of acquisition
• Indexed cost of improvement
Step 3: From this resulting number, deduct exemptions provided under sections 54, 54EC, 54F, and
54B

Less : Expenses incurred exclusively for such transfer
Long-term capital gain= Less: Indexed cost of acquisition
Less: Indexed cost of improvement
Less: Expenses that can be deducted from full value for consideration*
(*Expenses from sale proceeds from a capital asset, that wholly and directly relate to the sale or
transfer of the capital asset are allowed to be deducted. These are the expenses which are necessary
for the transfer to take place.)
Exception: As per Budget 2018, long-term capital gains on the sale of equity shares/ units of equity
oriented fund, realised after 31st March 2018, will remain exempt up to Rs. 1 lakh per annum.
Moreover, tax at @ 10% will be levied only on LTCG on shares/units of equity oriented fund
exceeding Rs 1 lakh in one financial year without the benefit of indexation.
Tax Exemptions on Capital Gains
Tax exemptions can be claimed under the following sections on the profit earned against assets –
1. Section 54 –
If an amount earned by selling a residential property is invested to purchase another property, then
the capital gains earned by transferring the ownership of a property is tax exempted. However,
deductions can be claimed only if the following conditions are met –
• Individuals are required to purchase a second property within 2 years of sale or 1 year before
transferring the ownership.
• In the case of an under-construction property, the purchase of a second property should be

completed within 3 years of transferring the ownership of the first property.
• Newly acquired property cannot be sold within 3 years of purchase.
• The newly acquired property is required to be located in India.
2. Section 54F –
Exemptions under Section 54F can be claimed when there are capital gains earned from a long-term
asset other than a residential property. However, the exemption stands invalid if you sell the new
asset within 3 years after purchasing or construction.
The purchase of a new property should be made within 2 years of earning the capital. Also, in the
case of construction, it has to be completed within 3 years from the date of sale.
3. Section 54EC –
Individuals can claim tax exemptions under Section 54EC if the capital gains statements are
submitted for investments into specific bonds with the amount earned by selling a property.
The invested amount can be redeemed after 3 years from the date of sale, but the bonds cannot be
sold within the period. This period has been increased to 5 years with effect from the financial year
2018-19. Individuals are required to invest in these special bonds within 6 months of a property sale.
Earing capital gains is much convenient with various beneficial investment options in the market.
Also, if reinvested correctly, tax incurred on capital gains can be reduced ensuring higher savings.
Deductible Expenses
A. Sale of house property: These expenses are deductible from the total sale price:
• Brokerage or commission paid for securing a purchaser
• Cost of stamp papers
• Travelling expenses in connection with the transfer – these may be incurred after the transfer
has been affected
• Where property has been inherited, expenditure incurred with respect to procedures
associated with the will and inheritance, obtaining succession certificate, costs of the
executor, may also be allowed in some cases
B. Sale of shares: You may be allowed to deduct these expenses:
• a. Broker’s commission related to the shares sold
• STT or securities transaction tax is not allowed as a deductible expense
C. Where jewellery is sold: In case of sale of broker’s jewellery and where a broker’s services were
involved in securing a buyer, the cost of these services can be deducted.
Note, that expenses deducted from the sale price of assets for calculating capital gains are not
allowed as a deduction under any other head of income, and you can claim them only once.
Transfer of Capital Assets to arise Capital Gain
Capital gain arises only when there is a transfer of capital asset. If the capital asset is not transferred
or if there is any transaction which is not regarded as transfer (See para 7.3b), there will not be any
capital gain. However, in case of profits or gains from insurance claim due to damage or destruction
of property, there will be capital gain although no asset has been transferred in such case.
1. What is Transfer of Capital Assets [Section 2(47)]:
Transfer, in relation to capital asset, includes:
i. the sale, exchange or relinquishment of the asset; or
ii. the extinguishment of any rights therein; or
iii. the compulsory acquisition thereof under any law; or
iv. in a case where the asset is converted by the owner thereof into, or is treated by him, as
stockin-trade of a business carried on by him, such conversion or treatment; or
v. the maturity or redemption of zero coupon bonds; or
vi. any transaction involving the allowing of the possession of any immovable property to be
taken or retained in part performance of a contract of the nature referred to in section 53A
of the Transfer of Property Act, 1882; or
vii. any transaction (whether by way of becoming a member of, or acquiring shares in a
cooperative society, company or other association of persons 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.
2. Transactions Not regarded as Transfer of Capital Assets [Sections 46 and 47]:
The meaning of transfer is given in section 2(47), whereas transactions not regarded as transfer are
covered u/ss 46 and 47. In many transactions although there is a transfer, but these are not
considered to be transfer for purposes of capital gains.
Some of the relevant transactions which are not regarded as transfer are:
i. where the assets of a company are distributed to its shareholders on liquidation of a

company, such distribution shall not be regarded as transfer in the hands of the company
[Section 46(1)];
ii. any distribution of capital assets on the total or partial partition of Hindu Undivided Family
[Section 47(i)];
iii. any transfer of a capital asset under a gift or will or an irrevocable trust [Section 47(iii)];
iv. any transfer of a capital asset by a company to its 100% subsidiary company provided the
subsidiary company is an Indian company [Section 47(iv)];
v. any transfer of a capital asset by a 100% subsidiary company to its holding company, if the
holding company is an Indian company [Section 47(v)];
vi. any transfer in a scheme of amalgamation of a capital asset by the amalgamating company to
the amalgamated company, if the amalgamated company is an Indian company [Section
47(vi)];
vii. any transfer in a scheme of amalgamation of shares held in an Indian company by the
amalgamating foreign company to the amalgamated foreign company if certain conditions
are satisfied.
viii. any transfer, in a demerger, of a capital asset by the demerged company to the resulting
company, if the resulting company is an Indian company [Section 47(vib)];
ix. any transfer in a demerger, of a capital asset, being a share or shares held in an Indian
company, by the demerged foreign company to the resulting foreign company, if certain
conditions are satisfied.
x. any transfer or issue of shares by the resulting company, in a scheme of demerger to the
shareholders of the demerged company if the transfer or issue is made in consideration of
demerger of the undertaking [Section 47(vid)];
xi. any transfer by a shareholder, in a scheme of amalgamation, of shares held by him in the
amalgamating company if certain conditions are satisfied:
xii. 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; [Section
47(viiaa)]
3. Transfer in case of Immovable and Movable Property
Different rules are applicable in case of movable/immovable assets to find out when a capital asset is
“transferred”.
1. Transfer in case of Immovable property when documents are registered -
Title to immovable assets will not pass till the conveyance deed is executed or registered.
2. Transfer in case of Immovable Property when documents are not registered -
Even if the documents are not registered but the following conditions of section 53A of the Transfer
of Property Act are satisfied, ownership in an immovable property is “transferred”—
a. there should be a contract in writing;
b. the transferee has paid consideration or is willing to perform his part of the contract; and
c. the transferee should have taken possession of the property.
When these conditions are satisfied, the transaction will constitute “transfer” for the purpose of
capital gains.
3. Transfer in case of Movable Property -
Title to a movable property passes at the time when property is delivered pursuant to a contract to
sell. Entries in the books of account are not relevant for determining date of transfer.
6. Capital Gain should arise in the previous year in which Transfer took place.
Normally, capital gain arises in the previous year in which the transfer of the asset takes place even if
the consideration for the transfer is received or realised in a later year.
There are, however, 4 exceptional cases where capital gain is taxable not in the year of transfer of the
asset, but in some other year. These exceptions are:
1. damage or destruction of any capital asset by fire or other calamities
2. conversion of capital asset into stock-in-trade (discussed in para 7.13c);
3. compulsory acquisition of an asset (discussed in para 7.13f).
4. transfer of capital asset, being land or building or both by an individual HUF under a specified
agreement with the developer [Section 45(5A)]
. Income Computation and Disclosure Standards (ICDS).
INCOME COMPUTATION DISCLOSURE STANDARDS (ICDS)
Overview
Income Computation and Disclosure Standards (ICDS) were issued by the Government of India in
exercise of powers conferred to it under section 145(2) of The Income Tax Act, 1961.
The Ministry of Finance published 12 draft ICDS, out of which 10 ICDS were notified by the
government on 31 March 2015. The notified ICDS were applicable from the assessment year 2016-17
and onwards.
However, in January 2016, Income-tax Simplification Committee recommended deferment of ICDS.

On July 6, 2016, via a press release, the application of ICDS was postponed by one year, to become
applicable from AY 2017-18 and onwards.
On September 29, 2016, Revised ICDS were notified with effect from AY 2017-18.
On March 23, 2017, the Central Board of Direct Taxes has issued certain clarifications by way of
Frequently Asked Questions.
Further, vide Finance Act 2018, certain provisions of ICDS have been incorporated in the Income Tax
Act itself.
ICDS was issued to bring uniformity between accounting policies governing computation of income
with tax-related provisions and reducing the irregularities between them.
Form 3CD (Tax Audit Report) is revised for making mandatory disclosures in compliance with ICDS.
Applicability
ICDS is to be followed by all assesses (except individuals or Hindu Undivided Families who are not
covered under tax audit provisions) following the Mercantile System of accounting.
ICDS is applicable for computation of income chargeable under the following heads:
• Profits and gains of business or profession; and
• Income from other sources.
ICDS is not applicable for the maintenance of books of account.
In case of conflict between the provisions of the Income-tax Act, 1961, (‘the Act’) and ICDS, the
provisions of the Act will prevail.
ICDS I – Accounting Policies
Fundamental accounting assumptions considered for ICDS:
• Going Concern;
• Consistency;
• Accrual.
As per ICDS, the True and Fair view is to be reflected by the accounting policy adopted by the
assessee for business or profession. For the said purpose, the following should be considered:
• Substance over legal form for treatment and presentation of the transaction;
• Marked to market loss or an expected loss shall not be recognized unless another ICDS
allows it.
As per ICDS, an accounting policy shall not be changed without reasonable cause.
ICDS II – Valuation of inventories
ICDS II to be applied for valuation of inventories, except the following:
• Work in progress arising in construction contracts or which is dealt with by other ICDS;
• Shares, debentures and other financial instruments held as stock in trade which are dealt
with by other ICDS;
• Producers inventories of livestock, agriculture and forest products, minerals oils, ores and
gases to the extent they are measured at net realizable value (‘NRV’);
• Machinery spares dealt with by ICDS on tangible fixed assets.
Inventories shall be valued at cost or NRV, whichever is lower.
The cost of inventories shall comprise of all cost of purchase, cost of services, cost of conversion and
other costs incurred, in bringing the inventories to their present location and condition.
Interest and other borrowing costs shall not be included in the cost of inventories unless they meet
the criteria for recognition of interest as a component of the cost as specified in the ICDS on
borrowing cost. Also, selling costs, administrative overheads, storage costs (unless necessary in the
production process) and abnormal amounts of wasted material, labour etc. to be excluded from the
cost of inventories.
Cost of inventories shall be assigned by using First In First Out or weighted average cost formula.
Techniques for the measurement of the cost of inventories, such as the standard cost method or the
retail method, may be used for convenience if the results approximate the actual cost.
Inventories shall be written down to net realizable value on an item-by-item basis. Where 'items of
inventory' relating to the same product line having similar purposes or end uses and are produced
and marketed in the same geographical area and cannot be practicably evaluated separately from
other items in that product line, such inventories shall be grouped together and written down to net
realisable value on an aggregate basis.
The method of valuation of inventories once adopted by a person in any previous year shall not be
changed without reasonable cause.
ICDS III – Construction contracts
ICDS III is applicable for the determination of income for a construction contract of a contractor.
The construction contract is defined as a contract specifically negotiated for the construction of an
asset or a combination of assets that are closely interrelated or interdependent in terms of their
design, technology and function or their ultimate purpose or use and includes the following:
• Contract for the rendering of services that are directly related to the construction of the
asset e.g. those for the services or project managers and architects;
• Contract for destruction or restoration of assets and the restoration of the environment
following the demolition of assets.
Where a contract covers a number of assets, the construction of each asset should be treated as a
separate construction contract when a separate proposal has been submitted for each asset, each
asset has been subject to separate negotiation and the cost and the revenue of each asset is
identified.
A group of contracts, whether with a single customer or with several customers, should be treated as
a single construction contract when the group of contracts is negotiated as a single package, the
contracts are closely interrelated as part of a single project and the contracts are performed
concurrently or in a continuous sequence.
The construction of an asset shall be treated as a separate construction contract when:
• The asset differs significantly in design, technology, or function from the asset/assets covered
by the original contract; or
• The price of the asset is negotiated without having regard to the original contract price.
Contract revenue shall comprise of the following:
• The initial amount of revenue plus retentions; and
• Variations in contract work, claims and incentive payments to the extent they will result in
revenue and are capable of reliably measured.
Contract revenue shall be recognized when there is reasonable certainty of its ultimate collection.
Contract cost shall comprise of direct cost, allocable cost attributable to contract activity and
borrowing cost.
Contract costs include costs attributable to the contract from the date of securing the order to the
final completion of the contract. Cost of securing an order to be included in contract cost if the same
is separately identifiable and it is probable that the contract shall be obtained.
The stage of completion of a contract shall be determined with reference to the following:
• the proportion of contract cost to estimated cost;
• survey of work performed;
• completion of physical proportion of contract work.

During the early stages of a contract, revenue is recognized only to the extent of the cost incurred.
The early stage of a contract shall not extend beyond 25% of the stage of completion.
ICDS IV – Revenue Recognition
In a case where there is a transfer of property but no transfer of significant risk and reward of
ownership, the property in goods is considered as transferred when significant risk and reward is
transferred.
Revenue including price escalation to be recognized when there is reasonable certainty of its
ultimate collection.
Revenue from service transactions is to be recognized by the percentage of completion method.

However, where services are provided by an indeterminate number of acts over a specific period of
time, revenue may be recognized on a straight-line basis over a specific period.
Revenue from a service contract with a duration not more than 90 days may be recognized when
completed or substantially completed.
Interest shall accrue on time basis, based on the amount outstanding and rate applicable. Interest on
refund of tax, duty or cess is to be recognized when received.
Discount/ premium on debt securities shall accrue over period of maturity.
Royalty shall accrue in accordance with the terms of the agreement.
Dividend is to be recognized as per the provisions of the Act.
ICDS V – Tangible Fixed Assets
Tangible Fixed Assets means asset in the nature of land, building, furniture, plant & machinery used
for production or providing any goods/services and is not held for sale in the ordinary course of
business.
Stand-by equipment and servicing equipment are to be capitalized. Machinery spares to be charged
to revenue as and when consumed unless they can be used only in connection with an item of Fixed
Asset and their use is expected to be irregular.
The actual cost of an acquired tangible fixed asset shall comprise its purchase price, import duties
and other taxes, excluding those subsequently recoverable, and any directly attributable expenditure
on making the asset ready for its intended use. Any trade discounts and rebates shall be deducted in
arriving at the actual cost.
The cost of a tangible fixed asset may undergo changes subsequent to its acquisition or construction
on account of
i. price adjustment, changes in duties or similar factors; or
ii. exchange fluctuation as specified in Income Computation and Disclosure Standard on the
effects of changes in foreign exchange rates.
Administration and other general overhead expenses are to be excluded from the cost of tangible
fixed assets if they do not relate to a specific tangible fixed asset. Expenses which are specifically
attributable to construction of a project or to the acquisition of a tangible fixed asset or bringing it to
its working condition, shall be included as a part of the cost of the project or as a part of the cost of
the tangible fixed asset.
Expenses on startup and commissioning of the project, including expenditure on test runs and
experimental production shall be capitalized. Expenses incurred after the plant has started
commercial production shall be revenue in nature.
When a tangible fixed asset is acquired in exchange for another asset or share, the fair value of the
asset acquired shall be the actual cost.
An expense that increases the future benefits from the existing asset beyond its previously assessed
standard of performance shall be added to the actual cost.
Addition/ extension to an asset, which has a separate identity and is capable of being used after the
asset is disposed off, shall be treated as a separate asset.
If a consolidated price is paid for various assets then, consideration is to be apportioned based on
the fair value of each asset.
ICDS VI – Effect of changes in foreign exchange rates
Foreign currency monetary items are those items where there is the right/obligation to deliver a
fixed/ determinable amount of currency units e.g. cash, receivable, payable.
Foreign currency non-monetary items are items other than foreign currency monetary items e.g.
fixed assets, inventories, investment in equity etc.
Initial recognition of a foreign currency transaction is to be done based on the exchange rate
prevailing on the date of transaction. An average rate for a week/month that approximates the actual
rate may also be used.
On the last date of the previous year the following treatment to be given:
• Foreign currency monetary items – to be converted into reporting currency based on closing
rate and the difference shall be recognized as income/expense.
• Foreign currency non-monetary items – to be converted into reporting currency by using the
exchange rate at the date of transaction and the difference shall not be recognised as
income/expense. Inventory if carried at Net Realisable Value, shall be reported using the
exchange rate that existed when such value was determined.
Any premium or discount at the inception of a forward contract shall be amortised as expense or
income over the life of the contract. Exchange difference on such a contract shall be recognised as
income or expense in the previous year in which the exchange rates change. Any profit or loss arising
on cancellation or renewal shall be recognized as income or expense for the previous year.
Premium, discount or exchange difference on contracts intended for trading or speculation or to

hedge foreign currency risk of a firm commitment or highly probable forecast transaction, shall be
recognized at the time of settlement.
ICDS VII – Government Grants
Government Grant shall not be recognized unless there is reasonable assurance that the person shall
comply with the conditions attached to the grant and the grant shall be received.
Recognition of government grant shall not be postponed beyond the date of receipt.
Where the government grant relates to a depreciable fixed asset, the same shall be reduced from the
cost of fixed asset/ written down value of the block of fixed assets.
Where the government grant relates to a non-depreciable asset, the same shall be recognized as
income over the same period over which the cost of meeting such obligations is charged to income.
Grant for compensation of expense or loss is recognized as income when receivable.
Grant in the form of a non-monetary asset given at a concessional rate shall be accounted for based
on the acquisition cost.
ICDS VIII – Securities
ICDS deals with securities held as “stock in trade” but does not include derivatives.
When a security is acquired in exchange for another security or an asset, the fair value of the security
acquired shall be its actual cost.
At the end of the year, the security shall be valued at cost or net realizable value, whichever is lower,
category-wise. For the said purpose, securities shall be classified into the following categories viz
shares, debt, convertible securities and others. The exception to the same shall be securities not
listed/ listed but not quoted and such securities shall be valued at actual cost.
Where the actual cost of a security cannot be ascertained by reference to specific identification, the
cost of such security shall be determined based on the first-in-first-out method or weighted average
cost formula.
Securities held by a scheduled bank or public financial institutions formed under Central or State Act
or so declared under Companies Act shall be classified, recognized and measured in accordance with
the extant guidelines issued by Reserve Bank of India and any claim for deduction in excess of the
said guidelines shall not be taken into account.
ICDS IX –Borrowing Costs
Borrowing costs are interest and other costs incurred by a person in connection with the borrowing
of funds.
For ICDS IX, Qualifying Asset means land, building, machinery, plant or furniture being Tangible
Assets; know-how, patents, copyrights, trademarks, licenses, franchises or any other business or
commercial rights of similar nature, being intangible assets; and inventory that requires atleast 12
months to bring it to a saleable condition.
Borrowing costs directly attributable to acquisition, construction or production of a Qualifying Asset

shall be capitalized.
The extent of capitalization of borrowing cost:
• Directly attributable and borrowed specifically to purchase a qualifying asset – to be fully

capitalized from the date on which the funds were borrowed;
• Not directly attributable for a qualifying asset – To be capitalized as per the following
formula:
Borrowing cost x (i.e. multiply by) Average of cost of Qualifying Asset on the first and last day of
previous year /(i.e. divide by) Average of the amount of total assets on the first and last day of the
previous year .
The borrowing cost to be capitalized from the date on which funds were utilized.
Cessation of capitalization:
• In the case of tangible and intangible assets – from the date, the asset is first put to use
• In case of inventory – when substantially all activities necessary to prepare inventory for its
intended sale are complete.
ICDS X –Provisions, Contingent Liabilities and Contingent Assets
A provision shall be recognized when a person has a present obligation as a result of past events, it is
reasonably certain that an outflow of resources embodying economic benefits will be required to
settle the obligation and a reliable estimate can be made of the amount of obligation.
No provision shall be recognized for costs that need to be incurred to operate in the future.
A person shall not recognize a contingent liability or a contingent asset.
Contingent assets are assessed continually and when it becomes reasonably certain that inflow of
economic benefit will arise, the asset and related income are recognized in the previous year in
which the change occurs.
The amount recognized as a provision shall be the best estimate of the expenditure required to settle
the present obligation at the end of the previous year. The amount of provision shall not be
discounted to its present value.
An obligation, for which a person is jointly and severally liable, is a contingent liability, to the extent
that it is expected that the obligation will be settled by the other parties.
Provision shall be reviewed at the end of each previous year and adjusted to reflect the best
estimate. If it is no longer reasonably certain that an outflow of resources embodying economic
benefits is required to settle the obligation, the provision shall be reversed.
An asset and related income shall be reviewed at the end of each previous year and adjusted to
reflect the best estimate. If it is no longer reasonably certain that an inflow of economic benefits will
arise, the asset and related income shall be reversed.
Writ petition by Chamber of Tax Consultants
Pursuant to the writ petition filed by the Chamber of Tax Consultant against the provision of ICDS
which has the effect of overruling the decisions of various Courts and Legal Provisions, Delhi High
Court has held as follows:-
• Section 145(2), as amended, has to be read down to restrict the power of the Central
Government, to notify ICDS that do not seek to override binding judicial precedents or
provisions of the Act. The power to enact a validation law is an essential legislative power
that can be exercised, in the context of the Act, only by the Parliament and not by the
executive. If Section 145 (2) of the Act as amended, is not so read down, it would be ultra
vires the Act and Article 141 read with Article 144 and 265 of the Constitution.
• The ICDS is not meant to overrule the provisions of the Act, the Rules thereunder and the
judicial precedents applicable thereto as they stand.
• Article 265 of the Constitution of India states that no tax shall be levied or collected except
under the authority of law. The power under section 145(2) of the Act cannot permit the
changing the basic principles of accounting that have been recognized in the various
provisions of the Act, unless corresponding amendments are carried out to the Act itself.
• Where ICDS seeks to alter the taxing treatment to a particular transaction, it will require the
legislature to step in to amend the Act to incorporate such change.
• The system of checks and balances in the Constitution of India recognizes the power of the
legislature to enact validating laws to overcome the defects or plug the loopholes as it was
pointed out by judicial precedents.
• As regards each ICDS, the key observations of the Hon’ble Court were as under:
o ICDS I – Non-acceptance of the concept of “Prudence” in ICDS I is per se contrary to

the provisions of the Act.
o ICDS II – Section 145A of the Act begins with a non-obstance clause and is
independent of section 145(2) under which ICDS has been notified. Section 145A
provides that inventory of goods shall be valued in accordance with the method of
accounting regularly employed by the assessee. Therefore, where the Assessee
regularly follows a certain method for valuation of goods, then that will govern
irrespective of the ICDS notified under section 145(2) of the Act.
o ICDS III – Taxing retention money at the earliest possible stage when the receipt of
the same is uncertain/conditional, is contrary to the settled position of law. To the
extent that ICDS III is interpreted and applied in a manner contrary to the law settled
by various decisions of the Courts, it cannot be sustained.
o ICDS IV – Recognising income from export incentives in the year of making the claim
if there is reasonable certainty of its ultimate collection, is not consistent with the
law laid down by the Supreme Court in Excel Industries and hence not tenable. Also,
recognition of proportionate completion method only as against contract completion
method as a valid method of accounting under the mercantile system is contrary to
decisions laid down by Courts and is therefore, ultra vires.
o ICDS VI – Marked to market gain/loss in case of foreign currency derivatives held for
trading or speculation purposes are not allowed as per ICDS. The same is not in
consonance with the ratio laid down by the Supreme Court in the case of Sutlej
Cotton Mills, insofar as it relates to marked to market loss arising out of forward
exchange contracts held for trading or speculation purpose and is thus ultra vires.
o ICDS VII – Taxing government grant even when the conditions attached to the same
are not fulfilled is not as per the judicial principles laid down by various courts.
o ICDS VIII – Bucket approach for valuation of securities cannot be effectuated without
corresponding amendment to the Act.
Amendments to the Act

Finance Act 2018 inserted certain sections/ amended certain provisions of the Act to nullify the
effect of the above ruling viz:
• 36(1)(xviii) – Marked to market losses or expected losses shall be allowed as deduction as

per ICDS.
• 40A(13) – No deduction for marked to market losses or expected losses except as allowable
as per section 36(1)(xviii).
• 43AA – Gain or loss arising on account of foreign exchange rates to be allowed as

income/expense as per ICDS.
• 43CB – Gain or loss arising on construction contracts to be computed as per ICDS.
• 145A – Valuation of inventory to be made as per ICDS.
• 145B –Taxability of interest received on compensation, claim for escalation price, export
incentives, government grants.
Amendment to Tax Audit Report pursuant to ICDS
In clause 13D of 3CD Report for sub-clause (d), the following has been substituted, namely:
• Sub-clause (d):
Whether any 00774A is required to be made to the profits or loss for complying with the provisions
of income computation and disclosure standards notified under section 145(2).
• Sub-clause (e):
If the answer to (d) above is in the affirmative, details of such 00774As leading to an increase/
decrease in profit and their net effect has to be given.
• Sub-clause (f):
Disclosures to be given as per various ICDS

Meaning of Company :
Corporate sector is the most widely used form of business Organisation particularly for medium and
large scale business. Under corporate sector, a business is carried on by floating a company duly
registered with appropriate authority.
Corporate taxation refers to taxation of companies (as defined under Income Tax Act, 1961) and is a
major source of revenue to the Government. Under Income Tax Act, 1961, a company is liable to pay
tax on its income at a flat rate (just as partnership firm) without any basic exemption limit as
applicable to an individual or FIUF.
'Corporate Tax' or 'Company Tax'
The tax collected from companies (as defined under the Income Tax Act, 1961) is called ‘Company
Tax’ or ‘Corporate tax’. It is interesting to note that the proceeds of corporate tax are retained by the
Central Government and are not shared with state governments
Definition of 'Company' :
1. Company: As per section 2(17), Company means:
1. any Indian company, or
2. any body corporate incorporated by or under the laws of a country outside India, or
3. any institution, association or body which was assessed as a company for any assessment
year under the Income-tax Act, 1922 or was assessed under this Act as a company for any
assessment year commencing on or before 1.4.1970, or
4. Any institution, association or body, whether incorporated or not and whether Indian or
NonIndian, which is declared by a general or special order of CBDT to be a company.
2. A Company in which the public are substantially interested (Section 2(18) :
Section 2(18) of the Income-tax Act, has defined "a company in which the public are substantially
interested". It includes:
1. A company owned by Government or Reserve Bank of India.
2. A company having Govt. participation i.e. A company in which not less than 40% of the
shares are held by Government or the RBI or a corporation owned by the RBI.
3. Companies registered under section 25 of the Indian Companies Act, 1956: Companies
registered under section 25 of the Companies Act, 1956 are companies which are promoted
with special object such as to promote commerce, art, science, charity or religion or any
other useful object and these companies do not have profit motive. However, if at any time
these companies declare dividend they would loose the status of a company in which the
public are substantially interested.
4. A company declared by the CBDT: It is a company without share capital and which having
regard to its object, nature and composition of its membership or other relevant
consideration is declared by the Board to be a company in which public are substantially
interested.
5. Mutual benefit finance company, where principal business of the company is acceptance of
deposits from its members and which has been declared by the Central Government to be a
Nidhi or a Mutual Benefit Society.
6. A company having co-operative society participation: It is a company in which at least 50% or

more equity shares have been held by one or more co-operative societies.
7. A public limited company: A company is deemed to be a public limited company if it is not a

private company as defined by the Companies Act, 1956 and is fulfilling either of the
following two conditions:
a. Its equity shares were listed on a recognised stock exchange, as on the last day of
the relevant previous year; or
b. Its equity shares carrying at least 50% of the voting power (in the case of an
industrial company the limit is 40%) were beneficially held throughout the relevant
previous year by Government, a statutory corporation, a company in which the
public is substantially interested or a wholly owned subsidiary of such a company.
3. Widely held company:
It is a company in which the public are substantially interested.
4. Closely held company:
It is a company in which the public are not substantially interested.
5. Indian company [Section 2(26)]:
'Indian Company' means a company formed and registered under the Companies Act, 1956 and
includes—
1. a company formed and registered under any law relating to companies formerly in force in
any part of India (other than the State of Jammu and Kashmir and the Union Territories;
i. a corporation established by or under a Central, State or Provincial Act;
ii. any institution, association or body which is declared by the Board to be a company;
2. in the case of the state of Jammu and Kashmir, a company formed and registered under any
law for the time being in force in that State;
3. in the case of any of the Union territories of Dadra and Nagar Haveli, Goa, Daman and Diu,
and Pondicherry, a company formed and registered under any law for the time being in force
in that Union Territory.
Provided that the registered or, as the case may be, principal office of the company, corporation,
institution, association or body, in all cases is in India.
6. Domestic company [Section 2(22A)]:
A domestic company means an Indian company or any other company which in respect of its
income, liable to tax under the Income-tax Act, has made the prescribed arrangements for the
declaration and payment within India, of the dividends (including dividends on preference shares)
payable out of such income.
7. Foreign company [Section 2(23A)]:
Foreign company means a company which is not a domestic company.
8. Investment company:
Investment company means a company whose gross total income consists mainly of income which is
chargeable under the heads Income from house property, Capital gains and Income from other
sources.
Tax rates applicable
Taxes on Income
The following rates are applicable to the domestic companies for AY 2020-21 based on their
turnover:
Sections Tax rate Surch
Section 115BA (Companies having turnover up to Rs 400 crore in FY 2017-18) 25% 7%/1
Section 115BAA 22% 10%
Section 115BAB 15% 10%
Any other case 30% 7%/1
*Plus surcharge in case a company gets taxed under section 115BA. The rate of surcharge is 7% in
case the total income is above one crore rupees and up to Rs 10 crore. The surcharge is 12% in case
total income is above Rs 10 crore. However, if a company opts for taxation under section 115BAA or
section 115BAB, the surcharge is 10% irrespective of the total income.
The following rates are applicable to foreign companies for AY 2020-21 based on their turnover :
Nature of Income
Royalty received or fees for technical services from government or any indian concern under an agreement made
before April 1, 1976 and approved by central government
Any other income
In addition to above rates:
Surcharge rate :
Particulars Tax Rate
If total income exceeds Rs. 1 crore but not 7% of tax calculated on domestic company/ 2 % of tax calculated on fo
Rs. 10 Crore company as per above rates
12% of tax calculated on domestic company/ 5 % of tax calculated on f

If total income exceeds Rs. 10 crore
company as per above rates
Health & education Cess:Further 4% of income tax calculated and applicable surcharge will be added
to the amount of total tax liability before this cess.
Minimum Alternate Tax (MAT): Alternatively, all the companies (including foreign companies) are
required to pay minimum alternate tax at the rate of 15% on book profits if the tax calculated as per
above rates are less than 15% of book profits. This will be applicable if the company does not opt for
Section 115BAA or Section 115BAB.
Everything about filing income tax return
Due date for filing Income tax return
Companies including foreign companies have to file their income tax return on or before 30 October
every year. Even if the company came into existence during the same financial year, then too, it has
to file the income tax return for that period on or before 31 October. For FY 2019-2020 (AY 2020-21),
the due date has been extended to 30 November 2020, due to the pandemic.
Tax return forms to be filed by the company
ITR 6 : All the companies except companies claiming deduction under section 11 need to file their
return using Form ITR 6. ITR 7 : All the companies registered under section 8 of companies act, 2013
are required to file their return using Form ITR 7.
Tax Audit
Income tax act requires a class of companies to get their accounts audited and submit an audit
report to the IT department along with the Income tax return. This audit is known as Tax Audit. This
tax audit report is also required to be mandatorily submitted by eligible companies by 30 September.
However, for FY 2019-20 (AY 2020-21), the due date for submitting the tax audit report is 31 October
2020.Corporate Tax is an ocean full of provisions which all the companies need to comply with. Keep
reading to know what are those provisions, rules that the companies need to follow.
Residential Status for Income Tax – Individuals & Residents
Updated on: Jun 20th, 2023
7 min read
It is important for the Income Tax Department to determine the residential status of a tax paying
individual or company. It becomes particularly relevant during the tax filing season. In fact, this is one
of the factors based on which a person’s taxability is decided.
Let us explore the residential status and taxability in detail.
Budget 2021 update: FM proposes to notify rules for removing hardship for NRI due to double
taxation.
Meaning and importance of residential status
The taxability of an individual in India depends upon his residential status in India for any particular
financial year. The term residential status has been coined under the income tax laws of India and
must not be confused with an individual’s citizenship in India. An individual may be a citizen of India
but may end up being a non-resident for a particular year. Similarly, a foreign citizen may end up
being a resident of India for income tax purposes for a particular year. Also to note that the
residential status of different types of persons viz an individual, a firm, a company etc is determined
differently. In this article, we have discussed about how the residential status of an individual
taxpayer can be determined for any particular financial year.
How to determine residential status?
For the purpose of income tax in India, the income tax laws in India classifies taxable persons as:
• A resident
• A resident not ordinarily resident (RNOR)
• A non-resident (NR)
The taxability differs for each of the above categories of taxpayers. Before we get into taxability, let
us first understand how a taxpayer becomes a resident, an RNOR or an NR.
Resident
A taxpayer would qualify as a resident of India if he satisfies one of the following 2 conditions :
1. Stay in India for a year is 182 days or more or
2. Stay in India for the immediately 4 preceding years is 365 days or more and 60 days or more in the
relevant financial year
Exceptions to Residential Status
In the event an individual who is a citizen of India or person of Indian origin leaves India for
employment during an FY, he will qualify as a resident of India only if he stays in India for 182 days or
more. Such individuals are allowed a longer time greater than 60 days and less than 182 days to stay
in India. However, from the financial year 2020-21, the period is reduced to 120 days or more for
such an individual whose total income (other than foreign sources) exceeds Rs 15 lakh.
In another significant amendment from FY 2020-21, an individual who is a citizen of India who is not
liable to tax in any other country will be deemed to be a resident in India. The condition for deemed
residential status applies only if the total income (other than foreign sources) exceeds Rs 15 lakh and
nil tax liability in other countries or territories by reason of his domicile or residence or any other
criteria of similar nature.
The amendment can be further simplified as below-
Resident Not Ordinarily Resident
If an individual qualifies as a resident, the next step is to determine if he/she is a Resident ordinarily
resident (ROR) or an RNOR. He will be a ROR if he meets both of the following conditions:
1. Has been a resident of India in at least 2 out of 10 years immediately previous years and
2. Has stayed in India for at least 730 days in 7 immediately preceding years
Therefore, if any individual fails to satisfy even one of the above conditions, he would be an RNOR.
From FY 2020-21, a citizen of India or a person of Indian origin who leaves India for employment
outside India during the year will be a resident and ordinarily resident if he stays in India for an
aggregate period of 182 days or more. However, this condition will apply only if his total income
(other than foreign sources) exceeds Rs 15 lakh. Also, a citizen of India who is deemed to be a
resident in India (w.e.f FY 2020-21) will be a resident and ordinarily resident in India.
NOTE: Income from foreign sources means income which accrues or arises outside India (except
income derived from a business controlled in India or profession set up in India).
Non-resident
An individual satisfying neither of the conditions stated in (a) or (b) above would be an NR for the
year.
Taxability
Resident: A resident will be charged to tax in India on his global income i.e. income earned in India as
well as income earned outside India.
NR and RNOR: Their tax liability in India is restricted to the income they earn in India. They need not
pay any tax in India on their foreign income. Also note that in a case of double taxation of income
where the same income is getting taxed in India as well as abroad, one may resort to the Double
Taxation Avoidance Agreement (DTAA) that India would have entered into with the other country in
order to eliminate the possibility of paying taxes twice.
Resident Status of a Company
• Indian companies consistently maintain their presence within the borders of India only.
• A foreign company can be recognised as an Indian resident solely if it has been efficiently
managed within India throughout the preceding year.
• If a foreign company's place of effective management was not located in India during the
previous year, it is classified as a non-resident.
• Even if there is the slightest possibility of a foreign company being managed effectively from
a location outside India, it will be classified as a non-resident.
Taxability
Persons are taxed according to their respective residential status for a financial year. Here are the tax
liability depending on the residential status.
• Ordinarily Residents:
Ordinarily, Indian residents need to pay taxes on their entire income, which includes earnings
from within and outside of the nation.
• Non-Residents and Not Ordinarily Residents:

The tax responsibility in India of non-residents and not ordinarily residents are confined to
the money they generate in the nation. The entities classified as not ordinarily resident and
non-residents do not need to pay any amount of tax on their earnings sourced from outside
the geographical boundaries of India. In the situation of double income taxation, when the
exact same revenue is taxed both in India and the taxpayer’s homeland,one may count on
the DTAA to avoid double tax payments.
Difference Between Capital Receipts and Revenue Receipts
Before understanding the concept of capital receipts and revenue receipts, let's start with
understanding what receipts are. Receipts are a written record or recognition that a sum of money
was paid in exchange for goods or services. Sellers of goods or service providers issue receipts in
exchange for the customer's payment. The receipts must necessarily be supplied in business-to-
consumer (B2C) and business-to-business (B2B) transactions.
What Are Capital Receipts?
Capital receipts are payments received by a company that are not income in nature and enhance the
company's overall capital. These are funds generated by a company's non-operating operations and
appear on the balance sheet rather than the income statement.
They are non-recurring, meaning they do not occur regularly and cannot be used for profit
distribution. Unlike revenue receipts, which can be used to fund reserves, capital receipts are not
utilised to fund reserves. They end up increasing a company's obligations or decreasing its assets.
These types of receipts have no impact on an organization's total profit or loss and are recorded on
an accrual basis, which means they are recorded as soon as the right of receipt is established.
Basic Conditions for Capital Receipts
Capital receipts must mandatorily satisfy the following conditions:
• Create a Liability: If your company obtains a loan from a bank or other financial institution, a
liability would be created. As a result, it is a capital receipt. However, if your company
received a commission for applying its knowledge to build a unique kind of product for
another business, that wouldn't be considered a capital receipt because no liability was
created.
• Reduce Company Assets: The asset would be reduced if your company sold all of its shares to
the public, which would lead to increased revenue in the future. You would consider it as a
capital receipt in this situation.
Types of Capital Receipts
• Borrowings:- Borrowings involve money raised from outside sources to cover the company's
expenses. Because it creates responsibility for the corporation, it is classified as a capital
receipt.
• Loan Recoveries:- Sometimes, the corporation separates a portion of an asset to collect

future loans, reducing the company's assets.
• Other Capital Receipts:- "Other capital receipts" also includes disinvestment and modest
savings. Disinvestment is the act of selling off a portion of a company. It lessens your
company's assets. Small savings generate liability for the company; thus, they are regarded
as capital receipts.
Capital Receipts Examples
• Cash received from the sale of fixed assets:- The Cash or Cash equivalent from fixed tangible
and intangible assets.
• Amount received from Shareholders and debenture holders
• Borrowings include loans, disinvestment, insurance claims, etc.:- These loans create liability
for the company. These loans are non-recurring in nature.
Characteristics of Capital Receipts
• Capital revenues are one-time events.
• Capital receipts produce funds for non-operating activities.
• It either increases the responsibility or decreases the asset.
• It makes no difference to the income statement.
What are Revenue Receipts?
Revenue receipts are funds a company receives due to its primary business operations. It leads to an
increase in the company's total revenue. Because a company's operating activities create these
funds, they are recorded in the trade and profit and loss account rather than the balance sheet. They
are recurrent and can be seen frequently and used for profit distribution.
Basic Conditions to be Met

The following conditions must be satisfied by revenue receipts:
• No Liability Creation: Revenue receipts do not create any liability for the government. For
example, taxes received by the government, unlike borrowings, do not create liabilities.
• No Asset Reduction: Revenue receipts do not affect the government's assets. As a result, the
government cannot disclose revenue inflows from the sale of a stake in a public-sector
venture because the stake sale resulted in asset reduction.
Revenue Receipts Examples
Some instances of revenue receipts in an organisation are:
• Money received for services provided to customers
• Rent received
• Discounts received from suppliers, vendors, or creditors
• Dividend received
• Interest earned
• Commission received
• Bad-debts recovered
• Revenue earned by the sale of scrap material or waste, etc.
Characteristics of Revenue Receipts
• Benefits from revenue receipts are available for a limited time, such as one accounting or
financial year.
• Revenue receipts provide benefits for a limited time; another trait is that they are recurring
in nature.
• Revenue is generated directly from a company's operational activity.
• It has a direct impact on a company's profit and loss. When a corporation receives income, it
either increases its profit or contributes to its loss.
• Disclosure occurs in the trading and profit or loss account rather than the balance sheet.
• Short-term money obtained: Revenue receipts are money received for a brief time. Revenue
receipts are only advantageous for one accounting year and never longer.
• Revenue receipts must be recurrent since they provide advantages for only a brief time. The
firm wouldn't be able to last very long without recurring revenue.
• Impacts the business's profit or loss: Getting paid directly impacts the company's profit or
loss. When the money is received, the profit or the loss changes.
Differences Between Capital Receipts and Revenue Receipts
Basis for Comparison Capital Receipts Revenue Receipts

Meaning Capital Receipts are the income Revenue Receipts are the income
generated from non-operating generated from the operating
Activities of the business. activities of the business.
Nature Non-Recurring Recurring
Term Long Term Short Term
Show in Position statement or Balance Income Statement or profit and

Sheet loss Statement
Matching Concepts These are not matched with the These are matched with the
capital expenditure. revenue Receipts to know the
profit/ loss for the year.
Value of asset or liability Decrease the value of the asset or Increases or decreases the value
increase the value of a liability. of asset or liability.
Capitalised These receipts will be capitalised. These receipts will not be

capitalised.
Distribution These amounts are not available Excess revenue receipts over the
for distribution as profits. revenue expenses can be used for
distribution as profits.
Future Obligations In the case of certain capital There are no future obligations to
receipts, there are future return the amount.
obligations to return the amount
along with interest.
Examples Loan by the government Tax receipts
Conclusion:
Capital receipts can lower financial assets or produce liabilities. Both non-debt and debt receipts may
be included in this list. Capital receipts include money obtained through the sale of fixed assets, the
sum borrowed from a bank, and capital contributed to the company by a new partner. Revenue
receipts are funds a company receives due to its primary business operations.
You will be able to manage your daily operations much more successfully if you comprehend these
two principles, when they occur, and how they affect your organisation. Your capital receipts will
reflect this, for instance, if your company is expanding quickly and has to borrow money through a
bank loan or an initial public offering (IPO). If the frequency and volume of your revenue receipts are
low, you will know to consider borrowing money instead and, where practical, reducing costs.
Understanding the ideas of capital & revenue receipts, aids investors in making wise decisions
regarding whether or not to invest in a firm. You should think hard before investing if a company has
more capital receipts than income. Additionally, you can accept the risk if the company has more
revenue receipts and fewer capital receptions (occurrence, not volume), as this indicates that it has
moved past the point of survival.
Q: What are receipts?

Ans:
Receipts are a written record or recognition that signifies a sum of money paid in exchange for goods
or services.
Q: What are the key differences between capital receipts and revenue receipts?
Ans:
The key differences between capital receipts and revenue receipts are as follows:-
• Capital receipts are generated by investing and financing operations, whereas operating
activities generate revenue receipts.
• Capital Receipts are uncommon since they are non-recurring and irregular. However, revenue
receipts occur repeatedly, i.e., they are recurring and consistent.
• The benefit of capital reception can be realised over multiple years. However, the benefit of
revenue receipt can only be realised in the present year.
Q: What are the main features of revenue receipts?
Ans:
The main features of revenue receipts include means for survival and short-term application.
Q: What are the examples of revenue receipts?
Ans:
The examples of revenue receipts in an organization are money received for services provided to
customers, discounts given by suppliers, vendors, or creditors, received a dividend, recovery of
debts, and much more,
Q: What are Capital receipts and Revenue receipts?
Ans:
Capital receipts are those that create liability or reduce an asset, while revenue receipts neither
reduce nor generate liability for the company.
Capital Expenditure Vs. Revenue Expenditure - under the 'Income Tax Act.'
As the Act does not define the terms “capital expenditure” and “revenue expenditure”, one has to
depend upon its natural meaning as well as decided cases:
• Acquisition of fixed assets v. Routine expenditure -
Capital expenditure is incurred in acquiring, extending or improving a fixed asset, whereas revenue
expenditure is incurred in the normal course of business as a routine business expenditure.
• Several previous years v. One previous year -
Capital expenditure produces benefits for several previous years, whereas revenue expenditure is
consumed within a previous year.
• Improvement v. Maintenance -
Capital expenditure makes improvements in earning capacity of a business. Revenue expenditure, on

the other hand, maintains the profit-making capacity of a business.
• Non-recurring v. Recurring -
Usually capital expenditure is a non-recurring outlay, whereas revenue expenditure is normally a

recurring item.
• Lump sum payment v. Periodic payment -
In order to determine whether an expenditure is capital or revenue in nature, the fact that it is a
lump sum payment or periodic payment is not important.
Though the dividing line between a capital and revenue expenditure is real, yet sometimes it
becomes difficult to draw. Therefore, the distinction depends on facts and surrounding
circumstances of each case.
For computing profits of a business taxable under this Act, only revenue expenses are allowed to be
deducted. Hence it becomes essential to distinguish a revenue expenditure from a capital
expenditure. The following tests can be applied for this purpose :
(i) Nature of the assets. Any expenditure incurred to acquire a fixed asset or in connection with
installation of fixed asset is capital expenditure.
Whereas
Any expenditure incurred as price of goods purchased for resale along with other necessary
expenses incurred in connection with such purchase are revenue expenses.
(ii) Nature of liability. A payment made by a person to discharge a capital liability is a capital
expenditure.
Whereas
An expenditure incurred to discharge a revenue liability is revenue expenditure, e.g., amount paid to
a contractor for cancellation of contract to construct a factory building is capital expenditure
whereas amount paid by a person—with whom he has entered into contract for supply of goods for
a period of 5 years—but he fails to supply goods after 3 years, the compensation will be a revenue
expenditure as it is to discharge the revenue liability.
(iii) Nature of transaction. If an expenditure is incurred to acquire a source of income, it is capital

expenditure, e.g., purchase of patents to produce picture tubes of T.V. sets.
Whereas
An expenditure incurred to earn an income is revenue expenditure, e.g., salary of the staff,
advertisement expenses, etc.
(iv) Purpose of transaction. If the amount is spent on increasing the earning capacity of an asset, it is
capital expenditure, e.g., expenditure incurred for fitting new windows of factory building.
Whereas
Any expenditure incurred on keeping an asset in running condition is revenue expenditure, e.g.,
amount spent on protection of fixed assets which have already been acquired.
(v) Nature of payment in the hands of payer. If an expenditure is incurred by an assessee as a capital
expenditure, it will remain as capital expenditure even if the amount may be revenue receipt in the
hands of receiver, e.g., purchase of motor car by a businessman is capital expenditure in his hands
although it is revenue receipt in the hands of car dealer. Similarly, if the nature of payment in the
hands of payer is of revenue nature, it will be a revenue expenditure even if it is capital receipt in the
hands of receiver.
Capital Expenditure
1. Cost of reconstructing, refurnishing, etc. of a business building.
2. Payment made by the assessee with a view to keeping his competitor out of his field of
business.
3. Expenditure incurred in converting business premises when switching over from

manufacture of one product to another.
4. Expenditure on litigation in connection with acquiring or curing a defect in assessee’ s title

to the assets of the business.
5. Compensation paid for cancellation of contract for the purchase of machinery.
6. Price paid for the purchase of partner’s share in the firm.
7. Expenditure incurred on the maintenance of business reputation.
Revenue Expenditure
1. Payments made for use of quota rights, or for use of patents and trade marks.
2. Payment made for technical assistance and access to the fruits of continuing research [C.I. T.
v. Ciba of India Ltd. (1968) 69 1. T.R. 692 (S. C.)].
3. Expenditure incurred by professionals on study tour abroad to acquire latest knowledge [Dr.
Vadamalayan v. C.I. T. (1960) 40 I. T.R. 50].
4. Any expenditure necessary at the time of purchase to render the asset so purchased,
serviceable, will be added to the initial cost as capital expenditure. But any expenditure on
the replacement of part of a plant which does not bring any additional advantage to the
business of assessee is revenue expenditure [C.I. T. v. Shri Rama Sugar Mills Ltd. (1952) 91 1.
T.R. 191].
5. Expenditure incurred to send employees abroad for practical training in the field of the
business of the assessee.
6. Expenditure incurred by way of fee paid to valuer for assessing the business premises.
7. Expenditure incurred in raising loans, e.g., stamp duty, registration and legal fees, brokerage
etc.
8. Expenditure to oppose threatened nationalization of the industry.

9. Expenditure incurred to secure overdraft facilities from a bank.
10. Payment to the government to obtain monopoly to run buses on a route.
11. Compensation or other payment made to get rid of a servant or a managing agent in the
interest of the business.
12. Any such expenditure incurred wholly, totally, necessarily for the business.
Revenue Expenditure [Section 35(1)(i)]:
All revenue expenses laid out or expended on scientific research during the previous year are fully
allowed as a deduction.
It has further been provided that following revenue expenses, expended or laid out during three
years immediately preceding the commencement of the business, shall be deemed to be the
expenditure of the previous year in which the business commences and therefore, shall be allowable
in that year to the extent these are certified by the prescribed authority:
(a) payment of salary to employees engaged in scientific research;
(b) purchase of material used in scientific research.
For example,
if the assessee commences its business on 15.12.2018 then all revenue expenses on scientific
research related to the business incurred, on or after 15.12.2018, will be allowed as a deduction.
Further, expenses incurred during the period 15.12.2015 to 14.12.2018 and which are certified by
the prescribed authority will be deemed to be expenses of the previous year 2018-19 and will be
allowable in that year.
Difference between Capital and Revenue Expenditure
The table below highlights the prominent differences between capital expenditure and revenue
expenditure –
Parameters Capital Expenditure Revenue Expenditure
Definition Capital expenditure is the money spent by a Revenue expenditure is the money spent by
firm to acquire assets or to improve the business entities to maintain their everyday
quality of existing ones. operations.
Time span Capital expenses are incurred for the long- Revenue expenses are incurred for a shorter-
term. duration and are mostly limited to an
accounting year.
Treatment in CAPEX is stated in a firm’s Cash Flow OPEX is stated in a firm’s Income Statement
accounting books Statement. It also appears in the Balance but is not necessarily reported in its Balance
Sheet of a company under fixed assets. Sheet.
Purpose Such expenses are borne by a company to Such expenses are borne by a company to
boost its earning capacity. sustain its profitability.
Yield The yield of these expenses is not limited to The yield of these expenses is mostly limited
a year and is usually long-term in nature. to the current accounting period.
Occurrence Typically, CAPEX is not quite recurrent. OPEX makes up recurrent expenses.
Capitalisation of Capital expenses are capitalised. Revenue expenses are not capitalised.
expenses
Treatment of Depreciation of assets is charged on capital Depreciation of assets is not levied on

depreciation expenses. revenue expenditure.
Examples Purchase of Machinery or patent, copyright, Wages, salary, utility bills printing and
installation of equipment and fixture, etc. stationery, inventory, postage, insurance,
taxes and maintenance cost, among others.
Hence, both capital expenditure and revenue expenditure are vital for the sustainable profitability of
a business venture. Mostly, revenue expenses are a periodic investment which does not result in
immediate or delayed benefit. However, it is used to keep operations running uninterruptedly.
Alternatively, capital expenditure is considered to be a long-term investment that proves beneficial

for a firm. Business entities must understand that they need to adopt effective strategies to monitor
and regulate these expenses to boost overall profitability significantly.
Method of accounting. 71
145. (1) Income chargeable under the head "Profits and gains of business or profession" or "Income
from other sources" shall, subject to the provisions of sub-section (2), be computed in accordance
with either cash or mercantile system of accounting regularly 71 employed by the assessee.
(2) The Central Government may notify in the Official Gazette 72 from time to time accounting
standards to be followed by any class of assessees or in respect of any class of income.
(3) Where the Assessing Officer is not satisfied about the correctness or completeness of the
accounts of the assessee, or where the method of accounting provided in sub-section (1) or
accounting standards as notified under sub-section (2), have not been regularly followed by the
assessee, the Assessing Officer may make an assessment in the manner provided in section 144.]
Accounting methods for income tax calculation
1. Two permitted methods
The Income Tax Act permits two methods of accounting, mercantile system of accounting and cash
system of accounting.
. Mercantile or accrual system
Accrual basis of accounting is also known as Mercantile basis of accounting. In this system,
transactions are recorded when they arise. The incomes are recorded in the books of the accounts
when it is earned, irrespective of the fact that it is received or accrued. Mercantile system of
accounting requires recording all transactions when they accrue or when they become due.
Cash system
Under cash system of accounting, transactions are only recorded when actually paid or received. In
this method, the income or expense is recognised when the inflow or outflow of cash exists in reality.
Where/by whom are they used?
Mercantile system is applicable for salaries, income from property and capital gains. For profits and
gains of business or profession and income from other sources, one has to decide between the
systems.
The Cash basis accounting method is mostly used by sole traders, proprietors and other professionals
who record their income when there is an actual inflow of cash and expenses of the entity.
Tax liability under both
The cash method postpones tax liability to the year of actual receipt of income, and under the
mercantile method, the tax on the income has to be paid even if it has not been received.
India’s agricultural industry employs a large proportion of the country’s workforce especially in the
rural areas of the country. In order to promote the agricultural sector, the government provides
various incentives including special tax rules for income from agriculture.
How is Agricultural Income Taxed?
As mentioned earlier, the income from agricultural activities is exempted from income tax (i.e. no
direct tax is applicable) under Section 10(1) of the Income Tax Act, 1961. However, the extant Income
Tax Act has now laid down the methods of indirectly tax in agricultural income. This particular
concept or method is known as the ‘partial integration of agricultural income with non-agricultural
income’. This concept aims at taxing the non-agricultural income at higher rates of tax. This is
applicable when the following conditions are fulfilled:
• Individuals, Hindu Undivided Families (HUFs), BOIs, AOPs, Artificial Juridical Persons, etc.
have to calculate their taxable income by using this concept.
• Non-individual tax assessees such as firms, LLPs, companies, co-operative societies, local
authorities, etc. are not permitted to use this method of taxation.
• Net income from agriculture is above Rs. 5,000 during the year
• Non-agricultural income which is considered taxable is as follows:
• Above Rs. 2.50 lakh for individuals who are less than 60 years of age and for HUFs, BOIs,
AOPs, etc.
• Above Rs. 3 lakh for individuals who are between 60 to 80 years of age
• Above Rs. 5 lakh for those who are more than 80 years of age
To put it simply, the non-agricultural income must be more than the maximum amount which is not
chargeable as per the income tax slab rates.
What Qualifies as Agricultural Income?
Section 2 (1A) of the Income Tax Act, 1961 considers three activities as the main source of
agricultural income in India. These are:
1. Revenue or Rent Received from Let out Agricultural Land in India
Rent is payable to the owner of the land in lieu of use by another individual as agricultural land. In
this case, while the owner of the land often does not participate directly in agricultural activities, the
income derived through rent will be considered as agricultural income as long as the let out land is
used to carry out agriculture.
2. Income Derived through use of Agricultural Land by Owner:
(a) Agriculture: The definition of the agriculture, although not covered in the Income Tax Act, 1961
has been laid down by the Supreme Court of India in the case CIT vs. Raja Benoy Kumar Sahas Roy.
Under this definition, agriculture activities in India are broadly classified under two heads – basic
operations and subsequent operations. Key details of these types are as follows:
• Basic Operations: This would include land cultivation and consequent tilling of the
agricultural land, seeds sowing, planting and other related operations that need human skills
and efforts to be directly applied on the land itself.
• Subsequent Operations: This includes operations that are carried out with respect to
harvesting, preservation and ensuring growth of the produce through allied agricultural
activities such as weeding, tilling, irrigation, pruning, etc. Income generated from seeding or
sapling grown in the nurseries is also considered as agricultural income irrespective of
whether these basic operations of agriculture were carried out on the agricultural land or
not.
(b) Through performance of the process by the cultivators or the receivers of the rent in
any kind that result in the agricultural produce being fit to be sold in the market:
• These processes include mechanical or manual operations that are employed to make the
production market fit and the actual character of those produce is retained.
(c) Income through the sale of marketable agricultural produce
• The income received on the sale would normally be partially agricultural income that is
exempted and a part of it will be taxable non-agricultural income for any produce that does
not undergo any ordinary process to become marketable. The Income Tax Act has rules to
make this bifurcation about non-agricultural and cultural produce for products such as
rubber, tea, coffee, etc.
3. Agricultural Income Derived from the Farm Building Needed for Various Agricultural Operations
The conditions for categorizing the income derived from farm building as agricultural income are as
listed here:
1. The farm building must be in or on immediate vicinity of the agricultural land. It must be one
which the revenue or receivers of rent or the cultivators by reason of their connection with
the land, needs the building as a storehouse, house to stay or uses it for any other similar
situations.
2. Any of the following conditions must be satisfied –
• The agricultural land is assessed by either the land revenue or the local rates calculated and
collected by any concerned government officers
OR
• The land must be situated within any of the following regions –
Aerial Distance from the Municipality Population as per the Previous Census
Within 2 kilometres 10,000 to 1 lakh
Within 6 kilometres 1 lakh to 10 lakh
Within 8 kilometres More than 10 lakh
Please note down that even when the population is less than 10,000, the agricultural land must be
located within the local municipality’s jurisdiction or the cantonment board. In case the activities
only have some distant relation to the land such as breeding, dairy farming, poultry farming, rearing
of livestock, etc., they do not form any part of the agriculture income.
Examples of Agricultural and Non-Agricultural Income
The following are some of the key examples of agricultural and non-agricultural income:
Examples of Agricultural Income Examples of Non-Agricultural Income
Income by selling seeds and saplings Income from bee-keeping/dairy/poultry farming
Income from rent received from agricultural land Income from selling purchased standing crop
Income received by growing flowers/creepers Profits from butter/cheese making
Profits from agricultural activities Income from salt extracted from sea water
Profits from sale of agricultural produce Royalty received from mines
Calculation of Agricultural Income
The following is a schematic of how you can calculate your tax liability in case of agricultural and non-
agricultural income:
Income Head Amount
Net Agricultural Income X

Non-Agricultural Income Y
Maximum Exemption Limit Z
Taxable Income (A) X+Y (as per income tax slab rate)
Taxable Income (B) X+Z (as per income tax slab rate)
Actual Income Tax Liability A-B
Reporting If you have only agriculture income and your total income is below the minimum taxable
limit, then you are not required to file an Income Tax Return (ITR) in India. However, if your total
income exceeds the minimum taxable limit (which is currently INR 2.5 lakh for individuals below 60
years of age), then you are required to file an ITR, even if your income consists solely of agriculture
income. While agriculture income is exempt from income tax, it is still required to be reported in
your ITR under the head “Agriculture Income”. You need to report your agriculture income in your ITR
even if it is below the minimum taxable limit, and you are not required to pay any tax on it.
Fair Market Value - What is FMV and How to Calculate It
You may have encountered the term FMV or Fair Market Value while purchasing or selling assets like
a house, vehicle or shares. As its name suggests, this value is determined fairly by the consensus of
both buyers and sellers in the market.
Learn more about its meaning, calculation procedure, valuation methods and examples.
What is Fair Market Value?
Fair Market Value or FMV refers to the price set for selling or purchasing an asset in the open market.
Financial institutions like NBFCs and Government organisations use Fair Market Value while
assessing the valuation of collateralised or taxed assets.
Several conditions need to be fulfilled to determine an asset's FMV. Buyers and sellers must have full
knowledge of an asset before participating in a transaction. Their decision should not be influenced
by time or any other external factors. Insurance claims, charity, property taxes, stock ownership, etc.,
are some transactions requiring this value.
How to Calculate the Fair Market Value?
The calculation of FMV primarily depends on the type of assets. You need to consider some factors
while assessing an asset’s Fair Market Value. The uniqueness of an asset, its depreciation status,
sales, liquidity, etc., are some factors to look for.
Thus, FMV depends on an appraiser’s subjective decision after assessing a specific asset class. You
can also determine this value by considering the asset’s cost to its seller. You can assess it through
the details of similar objects that have been sold.
Fair Market Value Valuation Methods
You can use these four methods for Fair Market Value valuation:
• Selling price
You can evaluate the Fair Market Value of an asset based on information about its recent purchase or
sales price.
• Replacement charges
This method helps you determine the value of purchasing or building an asset or property using a
similar asset. It helps you prepare a tax return or file an insurance claim.
• Cost of comparable assets
Real estate agents often provide you with a list of sale prices for neighbouring homes or properties
when you intend to sell a property. This is known as a comparable value. You can determine an
asset’s FMV using comparable costs.
• Professional opinion
You can hire an expert appraiser to know a property’s valuation. The expert will provide you with
your property’s FMV.
Fair Market Value Example
Let’s assume you will sell your house. If you find a buyer willing to purchase it at your decided price
or a higher price, you get a Fair Market Value for the house. It goes the same when you are planning
to sell a used car. FMV is determined as per the highest bid you receive from a buyer.
As per the Indian Accounting Standard, the Fair Market Value of a property refers to the price a
seller earns by selling it. However, the market value of a property depends on certain conditions.
First, buyers and sellers must be aware of the property on sale and proceed in their own interest and
not under pressure. Secondly, the transaction needs to be completed within a given time.
While assessing and taxing a property, the government must also determine its FMV. The difference
between FMV and a property’s purchase price depends on its holding period. Generally, FMV is
higher than the assessed value of a property. However, you can file a dispute if it exceeds your
expected Fair Market Value.
Fair Market Value of Shares
It is assumed that marketing price data often contains errors. Thus, to assess the normal share price,
you need to consider the average trading price of a particular day. Thus, the Fair Market Value of a
share is determined by the latest trading price of a publicly-traded company.
Fair Market Value in Income Tax
As per Section 2(22B) of the Income Tax Act, the price of capital gains sold on a relevant period in the
open market is FMV. If FMV cannot be assessed hypothetically, it is determined using this rule.
Fair Market Value vs Market Value
In Fair Market Value, both buyers and sellers agree upon a certain price without any influence of
external pressure. It generally refers to an asset's current value. Both the sellers and buyers need to
agree upon a certain price in the open market to declare the FMV of a particular asset.
However, the demand and supply of a certain product determine its market value. It has little
influence on an asset’s current value. Transactions in the stock market usually take place on the
market value of the security.
Now that you know what is a Fair Market Value and how to assess it, you can determine the FMV of
your property, car, and other assets feasibly. However, it is advisable to opt for an expert suggestion
while assessing FMV to avoid miscalculations. Professionals remain updated with the recent market
trends, so they can help you with accurate figures.
Frequently Asked Questions
How do you calculate Fair Market Value?
You can calculate the Fair Market Value after assessing various factors related to the asset that needs
to be evaluated. An asset’s actual selling price, cost of other comparable assets, etc., are some
determining factors.
What is an example of a Fair Market Value?
Property taxes, charity, gifts, share market, etc., are some instances where FMV calculation is used.
Each asset type has its own features, which help determine its FMV or current value.
What is the difference between fair value and market value?
Fair value is decided when the seller and buyer agree on a certain asset price. However, market value
is decided based on the demand and supply of the asset.
How to find the Fair Market Value of a property?
The Fair Market Value of a property is determined depending on its holding period. You can set a
price for the property, and if the buyer is willing to purchase at that price, it will be the property’s
FMV. However, if the price is higher, it may remain unsold for a long period (holding period) and
eventually sell at a higher price
PROFITS AND GAINS OF BUSINESS OR PROFESSION
BUSINESS
As per section 2(13) of the Act, “Business” includes any trade, commerce or manufacture or any
adventure or concern in the nature of trade, commerce or manufacture.
PROFESSION
As per section 2(36) of the Act, “Profession” includes vocation.
Incomes Which Accrue Or Arise In India OR Are Deemed To Accrue Or Arise In India [Section 9]
(1) Accrue or Arise in India:
'Accrue' means 'to arise or spring as a natural growth or result', to come by way of increase. 'Arising'
means 'coming into existence or notice or presenting itself'. 'Accrue' connotes growth or
accumulation with a tangible shape so as to be receivable. In a secondary sense, the two words
together mean 'to become a present and enforceable right' and 'to become a present right of
demand'.
Frequently, in the context of 'accrual' or 'arisal', the word 'earned' is used. The two are different
concepts. A person may be said to have 'earned' his income in the sense that he has contributed to
its production by rendering services or otherwise and the parenthood of the income can be traced
to him. But in order that the income may be said to have 'accrued' to him, an additional element is
necessary, that he must have created a debt in his favour.
(2) Incomes which are Deemed to Accrue or Arise in India [Section 9]:
The following incomes shall be deemed to accrue or arise in India:
(a) Income from a Business Connection in India:
Any income which arises, directly or indirectly, from any activity or a business connection in India is
deemed to be earned in India.
Business connections may be in several forms e.g. a branch office in India or an agent or an
organization of a non-resident in India. Formation of a subsidiary company in India to carry on the
business of the non-resident parent company would also be a business connection in India. Any
profit of the non-resident which can be reasonably attributable to such part of operations carried out
in India through business connections in India are deemed to be earned in India.
(b) Income from any Property, Asset or Source of Income situated in India:
Any income which arises from any property movable or immovable, tangible or intangible which is
situated in India, is deemed to accrue or arise in India. Example: R who lives in London, has a house
property situated in India which has been given by him on rent. Rent derived by R shall be taxable in
India whether such rent is received by him in India or outside India as the house property is situated
in India.
(c) Income from the Transfer of any Capital Asset situated in India:
Where the capital asset is situate in India, regardless of the residential status of the transferor or the
transferee, capital gain, arising on its transfer, would be deemed to be income accruing or arising in
India and hence would be taxable.
Apportionment of profits [Explanation (d) to Section 9(1)(i)]

In the case of a business of which all the operations are not carried in India, only that part of income
shall be deemed to accrue or arise in India which is reasonably attributable to the operations carried
on in India.
Where the goods are manufactured in India and were sold out side India, the profit will be
apportioned in two parts—one for manufacturing operations and another for selling operations. The
profits which could be reasonably attributed to selling operations will not be deemed to accrue in
India.
In cases where the income attributable to operations carried out in India cannot be ascertained, Rule
10 of Income-tax Rules 1962 provides
a. such percentage of the turnover so accruing or arising as the Assessing Officer may consider
to be reasonable having regard to the facts and circumstances of the case; or
b. any amount which bears the same proportion to the total profits and gains of the business of
the assessee computed in accordance with the provisions of the Act as the receipts so-
accruing or arising bear to the total receipts of the business; or
c. in such other manner as the Assessing Officer may deem suitable.
(d) Any income which falls under the head 'Salaries' if it is earned in India:
This explanation provides an artificial place of accrual for income taxable under th head ‘Salaries’.
According to it the incomes chargeable to tax as salaries shall be deemed to accrue or arise in India if
they are earned in India. The place of receipt and actual accrual of the salary is immaterial. Any
income payable for
a. service rendered in India, and
b. the rest period or leave period which is preceded and succeeded by services rendered in
India and forms part of the service contract of employment,
Any income payable for services rendered in India shall be regarded as income earned in India
though it may be paid in India or outside.
(e) Income by way of Salary Payable by the Government to an Indian citizen/national for services
rendered outside India:
The following conditions have to be satisfied before such income is treated as deemed to accrue or
arise in India:
i. Income should be chargeable under the head 'Salaries';
ii. The payer should be Government of India;
iii. The recipient should be an Indian citizen — whether Resident or Non-Resident;
iv. The services should be rendered outside India.
While salary of Indian citizen in the above case shall be deemed to accrue or arise in India but all
allowances or perquisites paid outside India by the Government to the above Indian citizens for their
rendering services outside India are exempt under section 10(7).
(f) Income by way of Interest payable by:

i. Government; or
ii. A person who is a resident in India, except where interest is payable in respect of money
borrowed and used for the purpose of business or profession carried on outside India or
earning any income from any source outside India; or
iii. A person who is a non-resident in India provided interest is payable in respect of money
borrowed and used for a business or profession carried on in India, shall be income which is
deemed to accrue or arise in India in the hands of the recipient.
(g) Income by way of Royalty payable by:
i. Government; or
ii. A person who is a resident in India except where it is payable in respect of any
right/information/property used for the purpose of a business or profession carried on
outside India or earning any income from any source outside India; or
iii. A person who is a non-resident provided royalty is payable in respect of any

right/information/property used for the purpose of the business or profession carried on in
India or earning any income from any source in India, shall be income which is deemed to
accrue or arise in India in the hands of the recipient.
(h) Income by way of Fees for Technical Services payable by:
i. Government; or
ii. A person who is a resident in India, except where services are utilised for a business or
profession carried on outside India or earning any income from any source outside India; or
iii. A person who is a non-resident provided fee is payable in respect of services for a business
or profession carried on in India or earning any income from any source in India, shall be
income which is deemed to accrue or arise in India in the hands of the recipient.
APPLICABLE TAX RATES
The applicable rate of tax on income deemed to accrue or arise in India depends on the nature of
income. Generally, salary income and other income such as interest, royalty and capital gains are
taxable as per the prevailing rates prescribed under the Income Tax Act, 1961. In case of non-
residents, in certain cases, lower tax rates may be applicable as per the provisions of any Double
Taxation Avoidance Agreement entered between India and the country of residence of the non-
resident. In such cases, the lower rate of tax as prescribed under the applicable DTA will be
applicable for taxation of the income deemed to accrue or arise in India. CONCLUSION Section 9 of
the Income Tax Act, 1961, deals with the provisions related to income deemed to accrue or arise in
India. This provision ensures that all income earned, received or accruing in India is taxable under the
ITA 1961 and helps to bring in transparency in the taxation of income and prevents tax evasion. The
applicable rate of tax also depends on the nature of income and where applicable, the rate as
mentioned in the applicable DTA can be opted for taxation of income deemed to accrue or arise in
India.
Definition of Manufacture
The Ordinance to the Income Tax Act, 1961 does not define the term ‘manufacturing’ however, as
per Section 2(29BA) ‘manufacture’ means a change in a non-living physical object/article resulting in
transformation into new & distinct object having a different name, character and use.

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Defining Capital Assets

What is Capital Gains Tax In India?

Defining Capital Assets

c. Agricultural land in rural(*) India

e. Special bearer bonds (1991)

Types of Capital Assets?

• Equity or preference shares in a company listed on a recognized stock exchange in India

• Units of UTI, whether quoted or not

• Units of equity oriented mutual fund, whether quoted or not

• Zero coupon bonds, whether quoted or not

• Equity or preference shares in a company listed on a recognized stock exchange in India

• Units of UTI, whether quoted or not

• Units of equity oriented mutual fund, whether quoted or not

• Zero coupon bonds, whether quoted or not

Tax Type Condition Applicable Tax

tax (LTCG) fund

When Securities Transaction Tax

When STT is applicable 15%.

Tax on Equity and Debt Mutual Funds

Effective 1 April 2023

Short-Term Gains Long-Term Gains Short-Term Gains Long-Term Gains

Calculation of Capital Gains

• Full value consideration –

It is the consideration that is received by a seller in return for a capital asset.

Indexed Cost of Acquisition

Indexed Cost of Improvement

How to Calculate Short-Term Capital Gains?

Step 1: Start with the full value of consideration

Step 2: Deduct the following:

Step 3: This amount is a short-term capital gain

Full value consideration

How to Calculate Long-Term Capital Gains?

Step 1: Start with the full value of consideration

Step 2: Deduct the following:

• Expenditure incurred wholly and exclusively in connection with such transfer

• Indexed cost of acquisition

• Indexed cost of improvement

Full value consideration

Updated on: May 22nd, 2023

What is Capital Gains Tax In India?

Defining Capital Assets

c. Agricultural land in rural(*) India

e. Special bearer bonds (1991)

8 kms from local limit of municipality or

Types of Capital Assets?

• Equity or preference shares in a company listed on a recognized stock exchange in India

• Units of UTI, whether quoted or not

• Units of equity oriented mutual fund, whether quoted or not

• Zero coupon bonds, whether quoted or not

• Equity or preference shares in a company listed on a recognized stock exchange in India

• Units of UTI, whether quoted or not

• Units of equity oriented mutual fund, whether quoted or not

• Zero coupon bonds, whether quoted or not

Classification of Inherited Capital Asset

Tax Rates – Long-Term Capital Gains and Short-Term Capital Gains

Tax Type Condition Applicable Tax

Sale of: 10% over and above Rs 1

When Securities Transaction Tax (STT) is not

Tax on Equity and Debt Mutual Funds

Effective 1 April 2023