UNIT 3

What is House Property?

Any land appurtenant or building owned by an individual comes under 'house
property'. It includes shops, ats, factory sheds, of ce spaces, farm houses,
and agricultural land. It also includes all kinds of house properties such as
residential houses, cinema building, godowns, hotel building, workshop
building, etc.

What is Income from House Property?

The legal owner of the property is liable to pay tax on the income from the
house property. Self-occupied and rental property can be treated as sources
of income from house property. To be taxed under the head 'Income from
House Property', the income of the property should satisfy the below-given
conditions:

• The owner of the house property should be the assessee.

• The property should comprise buildings, house, and/or land.
• The property can be used for any purpose except for the owner using it
for any business or profession.
The taxable value of any property that falls under the House Property
category is the annual value of the property or any land belonging to it. The
tax will be accountable to the owner whom the income from the property is
payable to.

What is Taxable as Income from House Property?

Annual Value of Property
The annual value of a property is the amount of money that the property can
ideally or actually realise in any given nancial year.

The annual value of house properties other than those which are used for
business or professional purposes is accountable as income from house
property and needs to be calculated in order to gure out the tax for the
same.

As per the Income Tax Act, the Annual Value of the property is the inherent
capacity of the property to earn income and is taxed to the owner. As per the
same, the taxable income could be either the Gross Annual Value (GAV), Net
Annual Value (NAV) or Annual Value.

1. Gross Annual Value of the property will be the highest of

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 • Rent received or receivable
• Fair Market Value
• Municipal valuation
2. Net Annual Value will be the Gross Annual Value less the municipal
taxes paid by the owner
3. Annual Value is Net Annual Value less the Deductions as per section 24
In effect, if a person, rm or organisation has the ownership of a house
property and has been paying the municipal taxes for the property as well as
has the property let out, point 3, or the Annual Value will be amount that is
nally taxable.

What are the conditions for taxability of “Income from House

Property”?
The income from house property is added to your gross total income only
when it ful ls three basic conditions -

•
You are the owner of that property.
•
Property consist of any buildings and/or land.Building can be residential
house, factory building, shops, of ces etc.
• The property is used for any purpose except used by you(owner)for the
purpose of running your business or profession.
Important Note: The rent from the vacant land is considered as income from
other sources.

Determining Annual Value

The annual value of a property is the inherent capacity of the property to yield
income. Keeping this statement in mind, the annual value of the property can
be one of the following –

1. The reasonable annual amount for which the property might be let out
(determined by municipal valuation or market trends)
2. The actual amount of annual rent received or receivable which exceeds
the amount in point 1

The annual value of the property will be the higher of –

1. Where Rent Control Act is applicable –

• Standard Rent under the Rent Control Act
• Actual Rent received
2. Where Rent Control Act is not applicable –
• Municipal Value
• Fair Rent
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 • Actual Rent Received

The annual value of a property will be taken as ‘nil’ if the property –

1. Is occupied by the owner as his/her own residence

2. Can’t be occupied by the owner because of limitations imposed due to
employment, business or profession at another location and the owner
needs to reside in the other location in a place of residence that doesn’t
belong to him/her (if more than one house is owned, any other houses
will have an annual value calculated as mentioned above)
Further to the valuation of the property, it is important to remember that
municipal taxes borne by the landlord and paid on time are acceptable as
exclusions, if an overdue tax is paid within the next nancial year, it will be
counted as an exclusion along with the paid municipal tax of the same year.

Points to note while calculating house property income

• Tax on the house is calculated on the property's NAV.

• If the taxpayer’s house is vacant for the whole year and the individual is
living in another city due to his or her employment, but is still paying
municipal taxes, then this can be set off against income from other
sources during the same year.
• If the taxpayer’s house is vacant for a certain period of time and later let
out, the computation of Income from House Property should be done
only for the rent received - not for the entire year.

Deductions on Income from House Property

The deductions applicable for Income from House Property can be
considered as the following as per Section 24:

1. Deduction under Section 24(a) – 30% of Net Annual Value

2. Deduction under Section 24(b) - interest on capital borrowed for the
purpose of purchase, construction, repair, renewal or reconstruction of
the property
Interest here is categorised as pre-construction and post-construction
interest. While the former deals with the interest on loan from the date of
borrowing to the day of repayment, the latter deals with the interest that is
applicable after the house is completed and is considered the interest for the
relevant year. Pre-construction interest can be aggregated and claimed for
ve successive nancial years starting with the year in which the house was
completed.
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The interest on borrowed capital is calculated on payable basis and can be
claimed even if no actual interest has been paid in the particular year and it is
also claimable only by the actual person who used the borrowed funds for the
purpose of construction.

If in case the interest on borrowed capital is payable to a non-resident of

India, and there is no instance of tax paid on the same interest, such an
interest will not be acceptable as a deduction. Additionally, interest payable
on outstanding interest is also not an acceptable deduction. Brokerages and
commissions on the loan or borrowed capital are not allowed as deductions
and if the owner decides to take a fresh loan to pay off the earlier loan, the
interest on the latest loan will be deductible.

Ways to Save on Income from House Property

There are multiple ways to save on income from house property, they are as
follows:

• Be co-owners: If the individual and his or her spouse have jointly taken
a home loan, both can claim tax exemption towards payment of
principal and interest.
• Get a second home: If the assesse already has one property registered
in his or her name, it is a good idea to register the second property in
the name of individual's spouse or relative so as to avoid excess
taxation.
• Multiple properties ownership: The Income Tax Act, 1961, states that if
an individual owns multiple house properties, only one of these will be
regarded as self-occupied. The taxpayer needs to evaluate the tax
liability on all the properties he or she owns and occupy the one with
the highest tax liability and give out the others on rent.

Which conditions should be met for ‘Income from house property’ to be

taxable?
The following conditions should be met for ‘Income from house property’ to be
taxable:

• You are the owner of that property.

• The property is used for any purpose except used by you(owner)for the
purpose of running your business or profession.
• Property consists of any buildings and/or land. Building can be
residential house, factory building, shops, of ces etc.
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 Profits and Gains of Business and Profession
Meaning of Business and Profession
Business simply means any economic activity carried on for earning profits.
According to Sec 2(3) business is “any trade, commerce, manufacture or any
adventure in the nature of trade commerce and manufacture”. Any transaction with a
motive of selling at profits included under this concept. It is not necessary that there
should be a series of transaction in a business and it should be carried on
permanently.
Profession is an occupation requiring purely intellectual skills or manual skills
controlled by the intellectual skill of the operator. e.g. Lawyer, doctor, engineer etc.
So profession refers to those activities where the livelihood is earned by the persons
through their intellectual or manual skill.

The following income shall be chargeable to income-tax under the head Profits and
gains of business or profession,
1) The profits and gains of any business or profession which was carried on by the
assessee at any time during the previous year
2) Any compensation or other payment due to or received by any person in
connection with a business or profession
3) Income derived by a trade, professional or similar association from specific
services performed for its members
4) Profits on sale of a license granted under the Imports (Control) Order, 1955, made
under the Imports and Exports (Control) Act, 1947 (18 of 1947) ;]
5) Cash assistance (by whatever name called) received or receivable by any person
against exports under any scheme of the Government of India ;]
6) Any duty of customs or excise re-paid or re-payable as drawback to any person
against exports under the Customs and Central Excise Duties Drawback Rules, 1971 ;
7) Value of any benefit or perquisite, whether convertible into money or not, arising
from business or the exercise of a profession;
8) Any interest, salary, bonus, commission or remuneration, by whatever name called,
due to, or received by, a partner of a firm from such firm:
9) Any sum received under a Key man insurance policy including the sum allocated
by way of bonus on such policy.
10) Interest on securities held as stock in trade

Computation of income from business or profession

The following are the general principles to be followed while computing income of
business or profession.
1) Profit should be computed according to an accepted method of accounting
regularly employed by the assessee. E.g. cash system or mercantile system
2) Only expenses incurred in connection with the business or profession of the
assessee will be allowed.
3) Losses, if any should be incidental to the operation of the business
4) Profit and losses of speculation business should be kept separate.
5) If any sum is allowed as deduction in any previous year and subsequently
recovered, it will be taxable in the previous year in which it is received.
6) Any amount allowed as expenses in the earlier years if recovered during the
current

Expenses expressly allowed

1. Rent, rates, taxes, repairs and insurance for buildings[Sec 30]
Rent, rates, taxes, repairs and insurance for premises, used for the purposes of the
business or profession is allowed as a deduction. If the business premises are owned
by the assessee, no notional rent will be allowed.
2. Repairs and insurance of machinery, plant and furniture[Sec 31]
The amount paid on account of current repairs and the amount of any premium paid
in respect of insurance against risk of damage or destruction of machinery, plant and
furniture used in business or profession will be allowed as deduction
3. Depreciation [Sec32]
Depreciation is allowed in respect of tangible assets like buildings, machinery, plant
or furniture and intangible assets acquired on or after the 1st day of April, 1998, like
know-how, patents, copyrights, trademarks, licenses, franchises or any other business
or commercial rights of similar nature, owned wholly or partly, by the assessee and
used for the purposes of the business or profession.

Depreciation is allowed on block of assets at the prescribed rates on the written down
value of such block of asset. Block of assets means the group of assets falling within
a same class of assets for which same rate of depreciation is prescribed.
Depreciation will be allowed only when the assets are owned wholly or partly by the
assessee. If an asset is used partly for business purpose and partly for personal
purpose, depreciation shall be allowed only for that part which is used in business or
profession.

Treatment of depreciation
a. If depreciation given P&L A/c and adjustment
i. Add depreciation given in the P&L a/c to Net profit
ii. Subtract depreciation given in the adjustment to net profit
b. If depreciation is given only in P&L a/c[ and not in the adjustment
i. Ignore depreciation given in P&L a/c
c. If the depreciation is given only in the adjustment [ and not in the P&L a/c
i. Subtract depreciation from the net profit
Unabsorbed depreciation [Sec 32(2)]
If the full amount of depreciation cannot be charged due to absence or inadequacy of
profit, the balance amount of depreciation which cannot be so allowed is called
unabsorbed depreciation. Unabsorbed depreciation relating to the previous year can
be set off against profit of other business and balance, if any can be set off against his
income chargeable under any other head for that year. If still some part of such
allowance remains unabsorbed, it can be carried forward. No time limit is fixed for
the purpose of carrying forward of unabsorbed depreciation. It can beset off against
 any income. In the matter of set off, the order of priority is , first, current
depreciation, second brought forward business losses and last ,unabsorbed
depreciation.

Additional depreciation
Additional depreciation is available from the assessment year 2003-04, subject to the
following conditions

1. It is available only in respect of plant and machinery acquired and installed after
31-3-2005
2. Additional depreciation is available at the rate of 20% of the actual cost. If
however, the asset is put to use for less than 180 days in the year in which it is
acquired, the rate of depreciation will be 10%

4. Tea development account [Sec 33AB]

If an assessee , who carrying on the business of growing and manufacturing tea,
coffee or rubber, deposits an amount in the tea development account , he can avail
this deduction . The amount of deduction least of the following

(a) a sum equal to the amount or the aggregate of the amounts so deposited ; or
(b) a sum equal to 40% per cent of the profits of such business

Withdrawal from deposits will not be allowed except for the specified purposes
specified below.

They are:
(a) Closure of business;
(b) Death of an assessee ;
(c) Partition of a Hindu undivided family;
(d) Dissolution of a firm;
(e) Liquidation of a company.

Capital Gains

The tax that is levied on capital gains is termed as capital gain tax. Such
taxes are levied when an asset is transferred between owners.

Though all capital gains are liable for taxation, the tax approach for long-term
gains tend to differ from that of short-term gain. Taxpaying individuals can use
tax-ef cient nancial strategies to reduce the burden of their capital gains
taxes.

Here is an example of how it works –

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 Mr. B purchased a house for Rs. 50 Lakh in July 2004. The full value of
consideration in the nancial year of 2016-2017 stood at Rs. 1.8 Crore. The
said property was held for over 36 months and was, therefore, deemed as a
long-term capital asset.

After taking into consideration the in ation, the cost price was adjusted, and
the indexed cost of acquisition was also taken into account.

The adjusted cost of the property was then settled at Rs. 1.17 Crore, which
means Mr. B accrued a net capital gain worth Rs. 63 Lakh. After a long-term
capital gains tax rate of 20% was levied on the net capital gain, the tax liability
that was to be paid by Mr. B arrived at a total of Rs. 12,97,800.

De ning Capital Assets

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.

What is a Capital Gain Tax?

Types of Capital Gains Taxation

There are two types of capital gains –

1) Short-term Capital Gain Tax

Any asset that is held for less than 36 months is termed as a short-term
asset. In the case of immovable properties, the duration is 24 months. The
pro ts generated through the sale of such an asset would be treated as short-
term capital gain and would be taxed accordingly.

2) Long-term Capital Gain Tax

Any asset that is held for over 36 months is termed as a long-term asset. The
pro ts generated through the sale of such an asset would be treated as long-
term capital gain and would attract tax accordingly.

Assets like preference shares, equities, UTI units, securities, equity-based

Mutual Funds and zero-coupon bonds are also considered as long-term
capital asset if they are held for over a year.
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Illustration

Mr. Kumar is a salaried employee. In the month of April, 2015 he purchased a

piece of land and sold the same in December, 2023. In this case, land is a
capital asset for Mr. Kumar. He purchased land in April, 2014 and sold in
December, 2023 i.e. after holding it for a period of more than 24 months.
Hence, land will be treated as long-term capital asset.

Illustration

Mr. Raj is a salaried employee. In the month of April, 2022, he purchased a

piece of land and sold the same in December, 2023. In this case land is a
capital asset for Mr. Raj. He purchased land in April, 2022 and sold it in
December, 2023, i.e., after holding it for a period of less than 24 months.
Hence, land will be treated as short-term capital asset.

Regulations on Short-Term Gains and Long-Term Gains Taxation

Under Section 80C of Income Tax Act –

The short-term capital gains would attract a tax at the rate of 15% of the
investor decides to sell it within a year. A long-term Mutual Funds capital
gains tax would be charged 10% on pro ts exceeding Rs. 1 Lakh generated
through equity-oriented funds and shares.

Condition Applicable Tax

Type of Tax
Long-term Capital Gains • Sale of Equity 10% over and
Tax shares above Rs 1 lakh
• Sale of units of
equity-oriented
mutual fund
• Others 20%
Short-term Capital Gains • When Securities Normal Tax Slab
Tax Transaction Tax Rates
isn't applicable
• When STT is 15%
applicable
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Treatment of Equity and Debt Mutual Funds Capital Gains Tax

On or before 1 April 2023

Type of Funds Short-Term Gains Long-Term Gains

Debt Funds At tax slab rates of the 10% without indexation

individual or 20% with indexation,
whichever is lower
Equity Funds 15% 10% over and above Rs
1 lakh without
indexation

Effective 1 April 2023

Type of Funds Short-Term Gains Long-Term Gains
Debt Funds At tax slab rates of the At tax slab rates of the
individual individual
Equity Funds 15% 10% over and above
Rs 1 lakh without
indexation

Exemption on Capital Gains Tax in India

• Section 54

States exemptions on gains incurred through the sale of an existing

residential property and reinvesting the proceeds to purchase another
residential property. As per the budget, individuals would be able to avail an
exemption on their long-term capital gains amassed through the sale of a
residential property.

They can do so by investing the sale proceeds into a maximum of two

residential properties. In this case, capital gains accumulated should not be
more than Rs. 2 Crore. If the cost of the new property is lower than that of the
sold unit, the deduction would be liable to attract taxes per the Income Tax
Act of India. But such an exemption can be availed only once by a tax-paying
individual.

• Section 54F
States exemptions on gains incurred through the sale of any asset
 besides a residential property. Individuals can avail of this bene t when
capital gains have been accrued through the sale of a long-term asset
that is not a residential property. To avail of such an exemption,
individuals have to reinvest their sale consideration (inclusive of capital
gains) to purchase a new property. Such a purchase should be made
12 months before the sale or at least 24 months post-sale.

• Section 54EC

States exemptions on gains incurred through sale of an existing residential

property and reinvesting its proceeds in particular bonds. Individuals can avail
exemptions under the said Section when they reinvest the proceeds earned
through the sale of the rst property into speci c bonds within six months.
The funds invested in such bonds can be redeemed only after 60 months.

Capital Gains Tax Strategies to Reduce the Tax Burden

Individuals have the option to reduce their tax liability by adopting the
following strategies.

• Holding Assets Longer

One of the simplest strategies to reduce the tax burden is by holding on to the
assets for a longer period. Individuals can reduce their tax liability to a
signi cant extent by holding onto their assets for over 12 months before
selling. The fact that the capital gain tax on long-term capital gains is lower
than that of short-term capital gains will act in their favour.

• Reinvest Proceeds

Individuals can reduce their liability of capital gains tax on the property by
reinvesting the pro ts into a new asset within a stipulated time. Individuals
need to be careful about the terms and conditions that are associated with
such a strategic investment option to maximise their bene ts and minimise
the tax burden. Individuals can further lower their tax liability on their capital
gains by reinvesting them for constructing a new property or investing them
into capital gain bonds.

• Invest in Capital Gain Account scheme

As a strategic move to reduce the capital gains tax, individuals can park their
earnings into a capital gains account. This strategy can be adopted at times
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when they fail to invest in a new residential property within the stipulated time
to save on their tax liability.

Besides these, several tax-saving strategies can be adopted by individuals to

lower their capital gains tax in India. Having a thorough knowledge of such
taxes, their exemptions and associated terms and conditions come in handy
while availing of a tax exemption on capital gains.

Income from Other Sources

It is residuary head of Income which must satisfy the following conditions:-
1. There must be an income;
2. This income is NOT exempt under the IT Act 1961; and
3. This income is not chargeable to tax under the other heads of income viz. "Salary",
"House property", "Business or Profession" and "Capital Gains".

Example of Income from Other Sources

Some examples of certain incomes normally taxed under this head are given below:-
1. Interest on bank deposits, loans or company deposits,
2. Dividend;
3. Family pension (received by legal heirs of an employee),
4. Income from sub-letting of house property by a tenant,
5. Agricultural income from agricultural land situated outside India,
6. Interest received from IT Dept. on delayed refunds,
7. Remuneration received by Members of Parliament,
8. Casual receipts and receipts of non-recurring nature,
9. Insurance commission,
10.Examiner-ship fees received by a teacher (not from employer),
11.Income from royalty,
12.Director’s commission for standing as guarantor to bankers,
13.Winnings from Lotteries, Crossword Puzzles, Horse Races and Card Games,
14.Interest on securities,
15.Income from letting out of machinery, plant or furniture, etc.
16.Any sum exceeding Rs. 50,000/- received without consideration shall be treated
as income provided that the sum of money is not received from any relative or on the
occasion of marriage of the individual or under a will or inheritance etc.

Deductions allowed under 'income from other sources’

 The income, chargeable under the head 'income from other sources,' shall be
computed after making the following deductions

•In the case of interest on securities, any reasonable sum, paid by way of commission
or remuneration to a banker or to any other person for the purpose of realising such
dividend or interest on behalf of the assessee;

•In the case of income, received by the assessee from his employees as contributions
to any provident fund or Superannuation fund or any fund set up under the provisions
of the Employees'' State Insurance Act, 1948, or any other fund for the welfare of
such employees, which is chargeable to income tax under the head "Income from
other sources" deductions so far, as may be in accordance with provisions of
S. 36(1)(va).

•In the case of income from machinery, plant or furniture belonging to the assessee
and let on hire, if the income is not chargeable to income -- tax under the head
"Profits and gains of business or profession or where an assessee lets on hire
machinery, plant or furniture belonging to him and also buildings, and the letting of
the buildings is inseparable from the letting of the said machinery, plant or furniture,
the income from such letting, if it is not chargeable to income tax under the head
"Profits and gains of business or profession", deductions, so far as may, be in
accordance with the provisions of clause (a), clause (3)of Section 30, Section 31, and
subsections (1) and (2) of Section 32 and subject to the provisions of S 38.

•In the case of income in the nature of family pension, a deduction of a sum equal to
thirty three and one third per cent of such income or fifteen thousand rupees,
whichever is less.

•Any other expenditure (not being capital expenditure) laid out or used wholly and
exclusively for the purpose of making or earning such income.

Set Off and Carry Forward of Losses

Pro t and losses are two sides of a coin. Losses, of course, are hard to
digest. However, the Income-tax law in India does provide taxpayers some
bene ts of incurring losses too.

Set off of losses

Set off of losses means adjusting the losses against the pro t or income of
that particular year. Losses that are not set off against income in the same
year can be carried forward to the subsequent years for set off against
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 income of those years. A set-off could be an intra-head set-off or an inter-
head set-off.

Intra-head Set Off

The losses from one source of income can be set off against income from
another source under the same head of income.

For eg: Loss from Business A can be set off against pro t from Business B,
where Business A is one source and Business B is another source and the
common head of income is “Business”.

Exceptions to an intra-head set off:

• Losses from a Speculative business will only be set off

against the pro t of the speculative business. One cannot
adjust the losses of speculative business with the income from
any other business or profession.
• Loss from an activity of owning and maintaining race-horses
will be set off only against the pro t from an activity of owning
and maintaining race-horses.
• Long-term capital loss will only be adjusted towards long-term
capital gains. However, a short-term capital loss can be set off
against both long-term capital gains and short-term capital
gain.
• Losses from a speci ed business will be set off only against
pro t of speci ed businesses. But the losses from any other
businesses or profession can be set off against pro ts from
the speci ed businesses.

Inter-head Set Off

After the intra-head adjustments, the taxpayers can set off remaining losses
against income from other heads. Eg. Loss from house property can be set
off against salary income.

Few more such instances of an inter-head set off of losses:

• Loss from House property can be set off against income

under any head
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 • Business loss other than speculative business can be set off
against any head of income except income from salary.
One needs to also note that the following losses can’t be set off against any
other head of income:

a. Speculative Business loss

b. Speci ed business loss

c. Capital Losses

d. Losses from an activity of owning and maintaining race-horses

Carry forward of losses

After making the appropriate and permissible intra-head and inter-head

adjustments, there could still be unadjusted losses. These unadjusted losses
can be carried forward to future years for adjustments against income of
these years. The rules as regards carry forward differ slightly for different
heads of income.

These have been discussed here:

Losses from House Property :

• Can be carry forward up to next 8 assessment years from the

assessment year in which the loss was incurred
• Can be adjusted only against Income from house property
• Can be carried forward even if the return of income for the
loss year is belatedly led.
Losses from Non-speculative Business (Regular Business) Loss

• Can be carry forward up to next 8 assessment years from the

assessment year in which the loss was incurred
• Can be adjusted only against Income from business or
profession
• Not necessary to continue the business at the time of set off in
future years
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 • Cannot be carried forward if the return is not led within the
original due date.
Speculative Business Loss

• Can be carry forward up to next 4 assessment years from the

assessment year in which the loss was incurred
• Can be adjusted only against Income from speculative
business
• Cannot be carried forward if the return is not led within the
original due date.
• Not necessary to continue the business at the time of set off in
future years
Capital Losses

• Can be carry forward up to next 8 assessment years from the

assessment year in which the loss was incurred
• Long-term capital losses can be adjusted only against long-
term capital gains.
• Short-term capital losses can be set off against long-term
capital gains as well as short-term capital gains
• Cannot be carried forward if the return is not led within the
original due date
Let us understand with an example - Mr P has invested in equity shares.
Below are the details related to his capital gain/loss transactions for different
years.

Losses from owning and maintaining race-horses

• Can be carry forward up to next 4 assessment years from the

assessment year in which the loss was incurred
• Cannot be carried forward if the return is not led within the
original due date
• Can only be set off against income from owning and
maintaining race-horses only
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 Losses to be Can be set off Time upto Mandatory to
carried against which losses le return in
Section
forward Income can be carried the year of
forward loss
32(2) Unabsorbed Any income No time limit No
depreciation (other than
salary)
71B Loss from Income from 8 years No
House house
property property
72 Loss from Income from 8 years Yes
Normal business
business
73 Loss from Income from 4 years Yes
speculative speculative
business business
73A Loss from Income from No time limit Yes
speci ed speci ed
business business
74 Short term Short term 8 years Yes
capital loss capital gain
(STCL) (STCG) and
long term
capital gain
(LTCG)
Long term LTCG 8 years Yes
capital loss
(LTCL)
74A Loss from Income from 4 years Yes
owning and owning and
maintaining maintaining
horse races horse races

DEDUCTIONS, REFUND AND TAX AUTHORITIES

Meaning of Deduction

Tax deductions refer to reductions in the taxable income of a taxpayer which

leads to a lower tax liability. Taxable income is that income on which the tax is
to be levied or imposed. Deductions are a kind of bene t which helps people
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 to save tax. Deductions have been mentioned in Chapter VI A of the Income
Tax Act, 1961. [2]

Types of Deductions available under the Income Tax Act, 1961

• Deductions for Interest paid on Loans: An income tax assessee can

claim deduction on the interest which he/she has paid on loan taken
for Higher education and for purchase of residential property
• Deductions available for donations: Donations to any charitable
institution can be used to claim deduction. Apart from this, donation
towards scienti c research, rural development and even donation to
political parties can be used for claiming deductions.
• Deductions for Royalty: Any author who receives Royalty income can
claim deduction. Royalty on patents can also be used for claiming
deductions
• Deductions to disabled persons: A person with disability can claim a
deduction of up to Rs 75,000. In case of severe disability, a deduction of
up to 1.25 lakhs can also be claimed.
• Investing in LIC or Mutual Funds: Investments which are made in Life
Insurance Policies, Mutual Funds, PPF (Public Provident Funds),
Sukanya Samriddhi Accounts and even in pension funds can help to get
deductions up to maximum limit of 1.5 lakhs.
• National Pension Scheme (NPS): NPS is a government sponsored
pension scheme for the citizens of the country. Contributions made to
the National Pension Scheme can also help to provide deductions

Bene ts of Deductions

1. Saving Tax: One of the major bene ts of Tax deduction is that it helps to
reduce the total taxable income and thus saves the tax amount to be
paid by an assessee.
2. Promotes Investment: Less tax helps the taxpayers to save their income
and hence leads to greater investment in the economy, promoting GDP
growth.
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 REFUND
When an assessee pays excess tax as compared to their actual tax liability,
then he/she can get reimbursement for the extra tax paid. Section 237 of the
Income Tax Act deals with the refund of excess tax paid by the taxpayer.
Refund of tax is usually obtained in the case where the assessee has paid the
advanced tax or TDS (Tax Deducted at Source)

Example - Let’s say the person who paid you your income already deducted
15,000 Rupees from the income as tax and paid it to the government on your
behalf. Now, at the time of ling your Income Tax Return, the actual tax you
have to pay comes out to be 10,000 Rupees only. So, the remaining 5,000
would be considered the excess tax paid by you and will be refunded to you
by the Income Tax Department.

HOW TO CLAIM INCOME TAX REFUND?

As per the Finance (No. 2) Act, 2019 a refund can be claimed only by ling the
income tax return within the time limit which has been prescribed.

In order to claim a refund, there is a need to ful l the following requirements:

• It is necessary to le an income tax return for the relevant assessment

year.
• It is essential to have the details of the tax payments made by you
during the assessment year.
• It is important to have a proof of TDS or advance tax payments that
have been made by you.

TAX AUTHORITIES
It is imperative to understand the functions, roles and powers of Income Tax
Authorities for the effective nancial management of the country. Income Tax
Authorities are organisations that are mainly concerned with collection and
administration of taxes and make sure that people do not violate the rules of
taxation. It is necessary for the tax authorities to ful l their obligations so as
to prevent tax evasion and harassment of assesses and at the same time
ensure that there is no discrimination in the collection of taxes.
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 VARIOUS TAX AUTHORITIES AND THEIR ROLES

For the effective implementation of the Income Tax Act, 1961 the government
has established various tax authorities:

1. Central Board of Direct Taxes (CBDT): It is a government body which is

responsible for the administration and enforcement of direct tax
legislation in India. It was established in 1963 and it comes under the
Ministry of Finance, Government of India. It consists of a Chairman and
6 other members. The roles of CBDT are mentioned below:
2. It controls all the Income Tax Authorities to ensure their effective
functioning.
3. It lays down all the policies and planning related to direct tax matters in
the country.
4. It also reviews the working of Income Tax Department.

ROLES

Director General of Income Tax: The Director General of Income Tax is

appointed by the Central government and has the following powers:
• Power to Search and Seizure
• Power to discover and produce evidence
• Power to make an inquiry
• To survey
• To give instructions to income tax of cers
• To take possession of book of accounts

Income Tax Commissioners: Income Tax Commissioners usually administer a

speci ed area and enjoy wide range of powers:
• Power to transfer a case from one assessing of cer to another of cer
• Power to grant approval to an order which has been issued
• Power to revise an order which has been passed by assessing of cers
• To foresee the functioning of direct taxes in a speci ed area.

Joint Commissioners: One of the major functions of a Joint Commissioner is

to issue directions to Assessing Of cers to make sure that there is effective
enforcement of all rules and regulations. The directions which are issued by
Joint Commissioner to Assessing Of cer are binding in nature.
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Income Tax Of cers: Some of the major powers of Income Tax Of cers
include:
• Power of Search and Seizure
• Power of Survey
• Power of assessment
• Power to call for any individual to provide information

Income Tax Inspectors: Inspectors of the Income Tax work in accordance to

the task which is given to them by their seniors.

NEW TAX REGIME vs. OLD TAX REGIME

A lot of chaos and confusion has been caused among the taxpayers by the
Budget of 2023. Assesses are confused whether they should opt for new tax
regime or continue with the old one. Let us try to understand the key
differences between the old and new tax regime so that it becomes easy for
the taxpayers to make their own choice.

• Change in the Tax Slabs: In Old tax regime, the number of slab rates are
4. However, in the case of New Regime there are 6 slab rates, that are,
0%, 5%, 10%, 15%, 20%, 30%. In the case of Old Regime, if the taxable
income is less than Rs 5 Lakh, then an individual need not pay any tax.
This limit has been increased to Rs 7 Lakh in the New Regime. This
means that if an individual has taxable income of less than Rs 7 Lakh,
then he/she does not need to pay any tax.
• Deductions and exemptions: A major difference in the New and Old
Tax Regime is of the deductions and exemptions available. The
deductions and exemptions available under the old tax regime would
not be applicable in the case of New Regime. So, those who opt for new
regime cannot claim several deductions like 80C, 80D, HRA (House
Rent Allowance), LTA (Leave Travel Allowance) etc. This is considered
as a major disadvantage of the new tax regime.
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 Penalty and Prosecution for Tax Evasion

What is Tax Evasion?

Tax evasion is an illegal act where you as an individual or company

avoid paying the tax liability. Tax evasion is a serious offence and
comes under criminal charges and substantial penalties. For
example, not paying taxes or paying less than what you should pay
is considered tax fraud and comes under tax evasion. It may also
include fabricating income, claiming deductions without proof,
failing to declare cash transactions, etc.

The penalty for not disclosing income can be anywhere between 100%
and 300% of the tax amount. You must pay the due taxes to avoid such
penalties and criminal charges.

1. Falsifying Financial Statements:

Falsifying nancial statements is a serious offence wherein individuals or

businesses manipulate accounting records to understate their actual income
or overstate their expenses. By presenting misleading nancial information,
tax evaders deceive tax authorities, leading to inaccurate tax assessments
and reduced tax payments.

2. Creating Fake Deductions:

Creating fake deductions involves fabricating business expenses or charitable

donations that never occurred. Tax evaders may generate ctitious invoices,
receipts, or payment records to support these deductions, arti cially lowering
their taxable income. This tactic aims to reduce the tax liability, allowing
evaders to retain a larger portion of their income unlawfully.

3. Hiding Income:

Hiding income is a fundamental form of tax evasion where individuals or

businesses conceal sources of income from tax authorities. This can include
unreported cash transactions, off-the-books income, or underreported sales.
By keeping income hidden, evaders ensure that tax authorities remain
unaware of their actual earnings, resulting in lower tax assessments.
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 4. In ating Expenses:

In ating expenses involves exaggerating legitimate business costs, such as

supplies, salaries, or operational expenses, to reduce taxable income. When
tax evaders increase their expenses, they're essentially lowering their pro ts
on paper, thereby avoiding higher tax payments. This move not only causes
nancial setbacks for the government but also gives the evaders an unjust
edge in the market.

5. Using Shell Companies to Hide Assets:

Shell companies are legal entities with little to no active business operations.
Tax evaders take advantage of these entities by moving their money through
them to hide who owns certain assets. Using complicated ownership setups
and offshore accounts, people can conceal their assets, making it challenging
for tax authorities to accurately follow the money trail. This strategy is often
connected to money laundering schemes, making investigations even more
complex.

Penalties for Tax Evasion

If one is found guilty of tax evasion, the income tax department can impose
various penalties. The penalties can apply to an individual or a company
failing to pay their due taxes. Below are some penalties for tax evasion:

a) You may have to pay 100% to 300% of the tax on the undisclosed
income.
b) If you fail to pay the due tax, the income tax department may impose a
penalty amount, but it cannot exceed the amount due in taxes.
c) If a company fails to deduct tax (like TDS) while making payments, then
the penalty could be payment of the tax due.
d) A company needs to get itself audited and provide an audit report. If it
fails to do so, a penalty of Rs 1.5 lakh or 0.5% of sales turnover (the
lesser of the two) may be charged.
e) The company may have to pay a Rs 1 lakh ne if a report from an
accountant is not provided as directed.
f) An individual will have to pay a penalty of Rs 200 per day every day if he
fails to le tax statements within the time allotted.
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 Search and Seizure
Search and survey operations' are conducted by the Income Tax Department,
also called raids, when they suspect an individual or business to hoard illegal
money.

What is Black Money?

Black money is funds earned illegally on which income and other taxes have
not been paid. The unaccounted money hoarded illegally and concealed from
the tax authorities is also called black money. So, one mustn't keep any
unaccounted or undeclared money, jewellery or any wealth. In the event of
such non-declaration, the chances of the income tax authorities conducting a
raid on the taxpayer will be pretty high.

When does a raid happen?

An income tax raid, technically known as the process of Search and Seizure,
is one of the crucial weapons that the Income-tax department possesses to
check black money. It is a measure that is known to be constitutionally valid
too. A raid gets triggered under any of the following circumstances:

• Credible information of tax evasion; for instance, any evasion

coming out of reports received from the Intelligence Wing of
the Income tax department.
• Information coming from government departments.
• Information procured from assessment records of taxpayers.
• Information received with regard to spending being
disproportionate to the income of the taxpayer i.e. an instance
of lavish spending without corresponding income to match the
same.
• Manipulation of books of accounts, vouchers, invoices etc.
• Illegal investment in real estate.
• Unexplained cash credits, share transactions etc.

Powers of tax authorities during a raid

The of cer authorised to carry out the raid can:

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• Enter and search any building, place, etc., where he has a reason to
suspect that the books of account, other documents, money, bullion,
jewellery or other valuable article or thing representing undisclosed income
is kept.
• Break open the locks where the keys are unavailable.
• Place identi cation marks and take extracts or copies of the books of
account and other documents.
• Make a note or inventory of the valuables found during the search.

Assets that cannot be seized

The authorised of cials cannot seize the following types of assets:

• Stock-in-trade (except cash) of a business
• Assets or cash which are disclosed before the Income Tax
and Wealth Tax Department
• Assets declared in books of account
• Cash which are duly explained
• Jewellery provided in wealth tax return
• Gold up to 500 gm for each married lady and 250 gm for each
unmarried woman, and 100gm per male member
Rights of a person during a tax raid

• To insist on a personal search of ladies being taken only by a

lady, with strict regard to decency
• To have at least two respectable and independent residents of
the locality as witnesses
• A lady occupying an apartment being searched has a right to
withdraw before the search party enters, if, according to
custom, she does not appear in public
• To call a medical practitioner in case of emergency
• To allow the children to go to school after checking their bags
• To have the facility of having meals, etc. at the usual time
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 • To have a copy of the panchanama together with all the
annexures
Duties of a person during a raid

• To allow free and unhindered ingress into the premises

• To identify all receptacles in which assets or books of account
and documents are kept and to hand over keys to such
receptacles to the authorised of cer
• To identify and explain the ownership of the assets, books of
account and documents found in the premises
• Not to allow or encourage the entry of any unauthorised
person into the premises
• To af x his signature on the recorded statement, inventories
and the panchanama
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