CA INTERMEDIATE

TAXATION
PART- A
 CA INTERMEDAITE
TAXATION
INDEX
PART – A

UPDATED (09.08.2023)

Chapter 3 Heads of Income Page No.

Unit I : Salaries 3.01 – 3.103 103

Unit II : Income from House Property 3.01 – 3.39 39

Unit III : Profit and Gains of Business

3.01 – 3.100 100
or Profession

Unit IV : Capital Gains 3.01 – 3.90 90

Unit V : Income from Other Sources 3.01 – 3.31 31

Income Tax Liability - Computation

Chapter 9 9.01–9.46 46
And Optimisation
409
 Salaries (Unit - i) | 3.1

CHAPTER -3 (Unit – I) Salaries

CHAPTER – 3 Unit - I
Salaries
Any person employed gets compensated by way of remuneration for services rendered.
This is called Salary'. It is received in cash or in kind - by way of amenities, benefits,
perquisites. Which emoluments are 'salary' how to value perquisites and what deductions
are available from 'salary' has been dealt with under this head of income. In a recently
enacted law, certain perquisites are taxed. Certain tax-free items of remuneration have been
enumerated under section 10.
Meaning of Salary
The meaning of term 'salary' for purposes of income tax is much wider than what is
normally understood. Every payment made by an employer to his employee for service
rendered would be chargeable to tax as income from salaries. The term 'salary' for the
purposes of Income Tax Act will include both monetary payments (e.g. basic salary, bonus,
commission, allowances etc.) as well as non-monetary facilities (e.g. housing
accommodation, medical facility, interest free loans etc.)
1. Employer Employee Relationship:
Before an income can become chargeable under the head 'salaries', it is vital that
there should exist between the payer and the payee, the relationship of an employer
and an employee.
2. Full time or part-time employment:
It does not matter whether the employee is a full time employee or a part time one.
Once the relationship of employer and employee exists, the income is to be charged
under the head "salaries". If, for example, an employee works with more than one
employer, salaries received from all the employers should be clubbed and brought to
charge for the relevant previous years.
3. Foregoing :
Once salary accrues, the subsequent waiver by the employee does not absolve him
from liability to income-tax. Such waiver is only an application and hence chargeable to
tax.
4. Surrender ofsalary :
However, if an employee surrenders his salary to the Central Government u/s 2 of the
Voluntary Surrender of Salaries (Exemption from Taxation) Act, 1961, the salary so
surrendered would be exempt while computing his taxable income.
Basis of Charge (sec. 15)
 Due or receipt whichever falls earlier: Salary is taxable on due basis or on receipt basis,
whichever is earlier. Hence,
1. Receipt
2. Due Which ever is earlier
 Salaries (Unit - i) | 3.2

(a) Salary due in a previous year is taxable, even if it not received.

(b) Salary received in a previous year is taxable, even if it is not due.
(c) Arrears of salary received during the current previous year shall be taxable in the
current year if not charged to tax in an earlier previous year.
 No double taxation: once salary is taxed on due/receipt basis, it will not be taxed again on
receipt/falling due, as the case may be.
 Loan from employer is not salary. Advance salary is taxable, while advance against salary is not
taxable.
 For Government employees, the period of chargeability of salary is from March to February.
For example, Salary from 1st March 2023 to 28th February 2024 is chargeable as Income of the
Assessment Year 2024- 2025.
Particulars Amt(`)
(i) Basic Salary xx
(ii) Fees/Commission x
(iii) Bonus xx
(iv) Allowances: x
xx
(a) Dearness Allowance [Fully taxable]
x
(b) House Rent Allowance (HRA) [Fully taxable]
(c) Children Education Allowance [Fully taxable] xx
(d) Children Hostel Allowance [Fully taxable] x
(e) Transport allowance xxx xx
Less: ` 3,200 per month only in case of blind/ deaf x
and dumb/orthopedically handicapped employee xx
xxx
x
xx
(f) Entertainment Allowance [Fully taxable]
x
(g) Travelling Allowance/Daily Allowance/ xxx
Conveyance Allowance
Less: Exempt if the amount is fully utilised for the
purpose xxx xxx
(h) Other Allowances including overtime allowance, city xxx
compensatory allowance etc. [Fully taxable]
(v) Taxable Perquisites
(a) Value of rent-free accommodation provided to the xxx
employee*
xxx
(b) Value of any accommodation provided to the
employee at a concessional rate*
I) Where the accommodation is provided by the Govt.
to its employees xxx
 Salaries (Unit - i) | 3.3

License fee determined by the Govt. xxx xxx

Less: Rent actually paid by the employer xxx
II) Where the accommodation is provided by any
other employer
If accommodation is owned by the employer
(i) Cities having population > 25 lakh as per
2001 census
15% of salary in respect of the period of
occupation (–) rent recovered from employee
xx
x
(ii) Cities having population > 10 lakh ≤ 25
lakh as per 2001 census
10% of salary in respect of the period of
occupation (–) rent recovered from employee
xx
x
(iii) In other cities
7.5% of salary in respect of the period of
occupation (–) rent recovered from employee xxx
If accommodation is taken on lease/rent by the employer
Lower of lease rental paid or payable by the xxx
employer (or) 15% of salary
Less: Rent recovered from the employee xxx
(c) Obligation of employee discharged by employer: For xxx
e.g., Professional tax paid by the employer
(d) Any sum payable by the employer to effect an assurance xxx
on the life of the employee or to effect a contract for
annuity: Actual expenditure incurred by the employer

(e) Amount or aggregate of amounts of any contribution made xxx

- in a recognised provident fund,
- in NPS referred to in section 80CCD(1)
- in an approved superannuation fund
by the employer to the account of the assessee, to the
extent it exceeds `7,50,000 in a P.Y.
 Salaries (Unit - i) | 3.4

(f) Annual accretion by way of interest, dividend or any xxx

other amount of similar nature during the P.Y. to the
balance at the credit of the recognized provident fund or
NPS or approved superannuation fund to the extent it
relates to the employer’s contribution which is included
in total income in any P.Y. under section 17(2)(vii)

(g) Value of use of motor car [Refer Table below] xxx

(h) Any other perquisite: For example, xxx
(1) Provision of services of a sweeper, gardener,
watchman or personal attendant: Actual cost to
employer by way of salary paid or payable for such
services (-) amount paid by the employee
(2) Gas, electricity, or water supplied by employer for
household consumption of the employee: Amount
paid on that account by the employer to the agency
supplying gas etc. (-) amount paid by the employee
(3) Provision of free or concessional education facilities
for any member of employee’s household: Sum equalto
the expenditure incurred by the employer (-) amount
paid or recovered from the employee
Where educational institution is maintained and
owned by employer: Cost of such education in similar
institution in or near the locality (-) amount paid or
recovered from employee [However, there would be
no perquisite if the value of benefit per child does
not exceed `1,000 p.m.]
Note: Above perquisites in (g) and (h) are taxable only in
case of specified employees.
(4) Interest-free or concessional loan exceeding
` 20,000: Interest computed at the rate charged by SBIas
on 1st day of relevant P.Y. in respect of loans for similar
purposes on the maximum outstanding monthly balance
(-) interest actually paid by employee
(5) Free food and non-alcoholic beverages through
paid vouchers
(6) Value of gift, voucher: Sum equal to the amount of
such gift [If value of gift, voucher is below
` 5,000, there would be no perquisite]
(7) Use of moveable assets
(8) Transfer of moveable assets: Actual cost of asset to
employer – cost of normal wear and tear – Amount paid or
(vi) recovered from employee xxx

Leave travel concession [Fully taxable]

 Salaries (Unit - i) | 3.5

(vii) Gratuity xxx

(a) Received during the tenure of employment (fully xxx
taxable)
(b) Received at the time of retirement or otherwise xxx
Less: Exempt u/s 10(10) xxx xxx
(viii) Uncommuted pension (fully taxable) xxx
(ix) Commuted pension xxx
Less: Exempt u/s 10(10A) xxx xxx
(x) Leave encashment
(a) Received during the employment (fully taxable) xxx
(b) Received at the time of retirement or otherwise xxx
Less: Exempt u/s 10(10AA) xxx xxx
(xi) Voluntary retirement compensation xxx
Less: Exempt u/s 10(10C) - Least of the following: xxx xxx
(a) Compensation received / receivable on xxx
voluntary retirement
(b) ` 5,00,000 xxx
(c) 3 months’ salary x completed years of service xxx

(d) Last drawn salary x remaining months of xxx

(xii) Retrenchment compensation etc. xxx

Less: Exempt u/s 10(10B)] – Least of the following: xxx xxx

(a) Compensation actually received xxx

(b) `5,00,000 xxx
(c) 15 days average pay x completed years of xxx
service and part thereof in excess of 6 months
Gross Salary xxx

Less: Deduction under section 16

Standard deduction u/s 16(ia) -amount of salary or ` xxx

50,000, whichever is less

Income under the head “Salaries” xxx

 Salaries (Unit - i) | 3.6

Proforma for computation of income under the head “Salaries” under theoptional tax
regime (i.e., the normal provisions of the Act)
Particulars Amt
(`)
(i) Basic Salary xxx
(ii) Fees/Commission xxx
(iii) Bonus xxx
(iv) Allowances:
(a) Dearness Allowance [Fully taxable] xxx
(b) House Rent Allowance (HRA) xxx
Less: Least of the following is exempt [Section
10(13A)] xxx xxx
(i) HRA actually received xxx
(ii) Rent paid (-)10% of salary for the xxx
relevant period
(iii) 50% of salary, if accommodation is
located in Mumbai, Kolkata, Delhi or
Chennai or 40% of salary in any other
city for the relevant period xxx
(c) Children Education Allowance xxx
Less: Exempt upto `100 per month per child upto
maximum of two children
Children Hostel Allowance xxx xxx
(d) Less: Exempt upto ` 300 per month per child upto xxx
maximum of two children
Transport allowance xxx xxx
Less: ` 3,200 per month only in case of blind/ deaf
(e) xxx
and dumb/ orthopedically handicapped
employee

xxx xxx
(f) Entertainment Allowance xxx
(g) Travelling Allowance/ Daily Allowance/ xxx
Conveyance Allowance
Less: Exempt if the amount is fully utilised for the
purpose xxx xxx
(h) Other Allowances including overtime allowance, city xxx
compensatory allowance etc.
 Salaries (Unit - i) | 3.7

(v) Taxable Perquisites

(a) Value of rent free accommodation† provided to the xxx
employee
(b) Value of any accommodation provided to the xxx
employee at a concessional rate
I) Where the accommodation is provided by the Govt.to
its employees
License fee determined by the Govt. xxx
Less: Rent actually paid by the employer xxx
II) Where the accommodation is provided by anyother
employer
If accommodation is owned by the employer
(i) Cities having population > 25 lakh as per
2001 census
15% of salary in respect of the period of occupation (–)
rent recovered from employee xxx
(ii) Cities having population >10 lakh < 25 lakhas
per 2001 census
10% of salary in respect of the period of occupation (–)
rent recovered from employee xxx
(iii) In other cities
7.5% of salary in respect of the period of occupation (–)
rent recovered from employee xxx
If accommodation is taken on lease/rent by the employer

Lower of lease rental paid or payable by theemployer xxx

(or) 15% of salary
Less: Rent recovered from the employee xxx
(c) Obligation of employee discharged by employer: Fore.g., xxx
Professional tax paid by the employer
(d) Any sum payable by the employer to effect an assurance on xxx
the life of the employee or to effect a contract for annuity:
Actual expenditure incurred by the employer
(e) Amount or aggregate of amounts of any contribution made – xxx

- in a recognised provident fund,

- in NPS referred to in section 80CCD(1)
- in an approved superannuation fund
 Salaries (Unit - i) | 3.8

- by the employer to the account of the assessee, to the extent

it exceeds ` 7,50,000
-
(f) Annual accretion by way of interest, dividend or any other xxx
amount of similar nature during the P.Y. to the balance at the
credit of the recognized provident fund or NPS or approved
superannuation fund to the extent it relates to the employer’s
contribution which is included in total income in any P.Y.
under section 17(2)(vii)
(g) Value of use of motor car [Refer Table below] xxx

(h) Any other perquisite: For example, xxx

(1) Provision of services of a sweeper, gardener, watchman

or personal attendant: Actual cost to employer by way of
salary paid or payable for such services (-) amount paid
by the employee

(2) Gas, electricity, or water supplied by employer for

household consumption of the employee: Amount paid on
that account by the employer to the agency supplying gas
etc. (-) amount paid by the employee

(3) Provision of free or concessional education facilities for any

member of employee’s household: Sum equal to the
expenditure incurred by the employer (-) amount paid or
recovered from the employee

Where educational institution is maintained and

owned by employer: Cost of such education in similar
institution in or near the locality (-) amount paid or
recovered from employee [However, there would be no
perquisite if the value of benefit per child does not exceed
` 1,000 p.m.]

Note: Above perquisites in (g) and (h) are taxable only in case
of specified employees.

(4) Interest-free or concessional loan exceeding

`20,000: Interest computed at the rate charged by SBI
as on 1st day of relevant P.Y. in respect of loans for
similar purposes on the maximum outstanding
monthly balance (-) interest actually paid by employee
(5) Free food and non-alcoholic beverages: Expenses
incurred by employer (-) amount recovered from
employee [Free food and non-alcoholic beverages
provided during office hours or paid vouchers upto
 Salaries (Unit - i) | 3.9

` 50 per meal is exempt]

(6) Value of gift, voucher: Sum equal to the amount of

such gift [If value of gift, voucher is below ` 5,000,
there would be no perquisite]
(7) Use of moveable assets
(8) Transfer of moveable assets: Actual cost of asset to
employer – cost of normal wear and tear – Amount paid
or recovered from employee
(vi) Leave travel concession xxx
Less: Exempt u/s 10(5) xxx
(vii) Gratuity
(a) Received during the tenure of employment (fully xxx
taxable)

(b) Received at the time of retirement or otherwise xxx

Less: Exempt u/s 10(10) [Refer fig at Page 3.32] xxx xxx

(viii) Uncommuted pension (fully taxable) xxx

(ix) Commuted pension xxx xxx

Less: Exempt u/s 10(10A)
(x) Leave encashment
(a) Received during the employment (fully taxable) xxx
(b) Received at the time of retirement or otherwise xxx xxx
Less: Exempt u/s 10(10AA)
(xi) Voluntary retirement compensation xxx
Less: Exempt u/s 10(10C) - Least of the following: xxx
(a) Compensation received/receivable on voluntary xxx
retirement
(b) ` 5,00,000 xxx
(c) 3 months’ salary x completed years of service xxx
(d) Last drawn salary x remaining months of service xxx
left
(xii) Retrenchment compensation etc. xxx
Less: Exempt u/s 10(10B)] – Least of the following: xxx xxx
(a) Compensation actually received xxx
(b) ` 5,00,000 xxx
 Salaries (Unit - i) | 3.10

(c) 15 days average pay x completed years xxx

of service and part thereof in excess of 6
months
Gross Salary xxx
Less: Deduction under section 16

Standard deduction u/s 16(ia) -amount of salary or ` 50,000, xxx

whichever is less
Entertainment allowance u/s 16(ii) (only for Govt. xxx
employees)
Least of the following is allowable as deduction: xxx xxx
(a) ` 5,000 xxx
(b) 1/5th of basic salary xxx
(c) Actual entertainment allowance xxx
received
Professional Tax/Tax on employment (paid xxx
by employer/ employee) u/s 16(iii)
Income under the head “Salaries” xxx

Proforma for computation of income under the head “Salaries” under optional tax regime
taking Salaries computed as per default tax regime under section 115BAC as the starting point

Particulars Amount
Income under the head “Salaries” under default tax regime under section
xxx
115BAC
Less: HRA exempt under section 10(13A) – Least of the three limits xxx

Children Education Allowance (Upto ` 100 per month per child upto
xxx
maximum of two children)
Children Hostel Allowance (Upto ` 300 per month per child upto
xxx
maximum of two children)
Leave travel concession exempt u/s 10(5) xxx

xxx

Less: Deduction under section 16

Entertainment allowance u/s 16(ii) (only for Govt. employees) xxx

Professional Tax/Tax on employment (paid by employer/ employee)

xxx
u/s 16(iii)
Income under the head “Salaries” under optional tax regime xxx
 Salaries (Unit - i) | 3.11

II. Following deduction /exemption are not available if assesse opt new tax regime u/s
115BAC
S. No. Particulars
(1) The following deductions/exemptions would not be allowed: u/s 115BAC

Section Exemption/Deduction
10(5) Leave travel concession
10(13A) House rent allowance
10(14) Exemption in respect of special allowances or benefit to
meet expenses relating to duties or personal expenses
(other than those as may be prescribed for this purpose)
16 (i) Entertainment allowance
(ii) Professional tax

Sections 15, 16 and 17 of the income tax Act deal with the computation of income under the head
"Salaries"
Employer Employee Relationship:
There must be employer and employee relationship either in the present and in the past between the
person liable to pay the person entitle receive the amount if such relationship doesn't exist then the
income for outside the scope of the head "Salary"
For example :-
In case of lecture of a college who is appoint warden of the college and gets wardenship allowance the
allowance would be taxable under the head "Salary".
However the lecturer set the questions paper of the university the remuneration of setting the paper will
not be taxable under the head of salary. Such remuneration would be taxable under the head income from
other sources.
A member of the parliament is not a govt. employee and there for remuneration received by him is not
taxable as salary income but as income from other Sources.
Partner Remuneration: Any salary, bonus, commission or remuneration due to/received by an assessee
from a firm in which he is partner shall not be taxable under the head "Salaries" as there is no employer
employee relationship. It will however be taxable under the head "Profit and gains of business or
profession"
 Salaries (Unit - i) | 3.12

Allowances
Fully Taxable under both Fully Taxable under default tax Fully Exempt only under the
regimes regime/ Partly Exempt under optional tax regime
the optional tax regime
1. Dearness allowance 1. House Rent allowance 10(13A) 1. Allowance to Govt
employee outside India
2. City compensatory allowance 2. Entertainment allowance 16(II) 2. Allowance to high court
Only for Govt. Employee supreme Court judges
3. Rural allowance Exempted on a Actual payment Sec 3. Allowance from united
4. Entertainment allowance 10(14) nations organization
5. Wardenship allowance 1. travel on tour & transfer allow
6. Project allowance 2. helper allowance
7. Deputation allowance 3. Uniform allowance : Uniform
8. Overtime allowance for duties
9. Tiffin allowance 4. Academic research &
10. Fixed medical allowance preformed
11. Servant allowance 5. Conveyance Allowance
Granted to meet the
12. Non-practicing Allowance
expenditure on conveyance in
13. Transport allowance
performance of duties of a
office.
Exempted up to Specific limit as
per sec.10(14)
1. Children education allowance
2. Hostel expenditure allowance
3. Tribal area allowance
4. Transportation allowance (Only
for handicapped employee)

Partly Exempt under the optional tax regime

A. House Rent allowance sec 10 (13A):

(i) Actual amount of H.R.A.
(ii) 40% of salary (50% of salary in Delhi, Mumbai, Kolkata, Chennai) Which ever is lower
(iii) Rent paid - 10% of salary.

Salary :- Basic salary + DA [which is forming part of retirement Benefit] + Commission on turnover
Example : 1
Mr. Ram is entitle to a basic salary of 1,00,000 p.m. and dearness allowance 20,000 p.m. 40% of
which form part of retirement benefit. He is also entitled to H.R.A. of Rs. 20,000 p.m. He actually
pay Rs. 20,000 p.m. of rent for a house in Delhi compute taxable amount of H.R.A. Mr. Ram
exercises the option of shifting out of the default tax regime provided under section
115BAC(1A).
Ans : 1,29,600
 Salaries (Unit - i) | 3.13

B. Entertainment Allowance U/s 16 (ii) Only for Govt.Employee

1. Actual Amount of entertainment.
2. Maximum Rs. 5,000 Which ever is lower
3. 1/5 of Basic Salary

Example : 2
Mr. B an employee, he gets 10,000 p.m. as basic salary and entitled to Rs. 750 p.m. as
entertainment allowance. Compute amount of deduction under section 16(ii) and taxable
amount of salary if Mr. B exercises the option of shifting out of the default tax regime provided
under section 115BAC(1A).
If Employee is
(i) Government (ii) Other
Ans. : (i) Rs 5,000 & 74,000 (ii) Nil & Rs. 79,000

C. Specified allowance Sec 10(14):-

Following allowances are exempted to the extent of
(i) Actual amount of Allowance.
(ii) Amount spent whichever is lower
1. Traveling Allowance:-
Any allowance granted to meet the cost of travel and tour or on transfer of duty.
2. Daily Allowance :-
This allowance on tour or on transfer to meet the ordinary daily charges.
3. Conveyance allowances:-
This allowance meet to expenditure on conveyance for official duties.
4. Helper allowance:-
This allowance provided to meet the expenditure on helper for official duties.

D. Following allowance are exempted to the extent of

(i) Actual amount of Allowance
(ii) specified limit u/s 10(14) whichever is less.

1. Children education allowance:- Rs. 100 per month per child [Max. 2 children]
2. Hostel Exp. Allowance :- Rs. 300 p.m. per child [Max. 2 children]
3. Tribal Area allowance :- Rs. 200p.m.
4. Transportation Allowance : Rs. 3,200 p.m (in case of handicapped
employee)
5. Allowance allowed to transport employees : 70% of such allowance
Rs. 10,000 p.m. which ever is less.

Underground allowance :- Rs. 800p.m.

Granted to employees working in uncongenial [unsuited], unnatural climate in
underground coal mines shall be exempted up to 800 p.m.
6. Remote area allowance:- Varying from 300 to 7000 p.m.
Hill/Boarder
 Salaries (Unit - i) | 3.14

RETIREMENT BENEFITS
Gratuity - Sec 10(10)
Gratuity is a payment made by employer to an employee in appreciation of the past service
rendered by the employee.
(A) At the time of employment Taxable (All employee)
(B) At the time of Retirement
(i) Govt. Employeeu/s 10(10)(i): Exempt
(Central, State & local authorities)
(ii) Payment of gratuity Act 1972 u/s 10(10)(ii)
Gratuity shall be payable to an employee on termination of his employment after he has
rendered continues service for not less than five year.
However, 5 year shall not be necessary were the termination of the employment of any
employee is due to death or disablement.

Actual Amount of Gratuity

Which ever is less Maxi. 20,00,000
15/26 x last month of salary x No. of years of Services
*(more than 6 month counted next year)
Salary :- Last month of Basic salary + D.A.

*Example:- *(more than 6 month counted next year)

case 1. 36years, and 6months 36 years

Case 2. 36 years,6 months and 1day 37 years
** The payment of Gratuity Act,1972 is applicable in the case of every shop/
establishment (employing 10 or more person and every factory, mine, oilfield,
plantation, port etc.

(iii) Payment of gratuity Act 1972 is not apply. u/s 10(10) (iii)
Actual Amount of Gratuity
Which ever is less Maxi. 20,00,000
1/2 x Average of Salary x No. of Completed year of service

Average Salary :
Mean of Salary = Basic salary + D.A. (*If) + Commission in turnover (%)
* If which is part of retirement benefit

Example 3
Vikash an employee of ABC & Co., receives Rs. 1,00,000 as gratuity. He is covered by the payment of
gratuity Act 1972. He retires on Dec. 28, 2023 after rendering service of 38 year and 9 months. At the
time of Retirement his monthly basic salary and dearness allowance was Rs. 3000 and 1000
respectively. How much amount of gratuity exempt.
Ans. Rs. 90,000/-
 Salaries (Unit - i) | 3.15

Example 4
Ankit, who is not covered by the payment of Gratuity Act 1972, retires on Nov. 10, 2023 from POR
Ltd. and receives Rs. 3,72,000 as gratuity of the service of 38 year and 11 months. His salary is Rs.
16,000 p.m. up to July 31, 2023 and 18,000 p.m. from Aug. 1, 2023. Beside he gets Rs. 1000 per
month as dearness allowance (60% of which is part of salary for computing retirement benefit).
what amount of gratuity will be exempt from tax?
Ans. Rs. 3,26,800/-

Pension - Sec. 10(10A)

Pension is payment made by the employer after the retirement / death of the employee as a
reward past service.
(A) Uncommuted Pension Taxable
(monthly pension) (All employee)

(B) Commuted Pension

(a) Govt employee Exempt
*(Govt., Local Authorities, statutory corporation)

(b) Other Exempted amount

(1) With gratuity = 1/3 of total Pension
(2) Without gratuity = ½ of total pension

Example 5
Q.1 Ram received Rs. 2000 P.m. as pension from state Government during the previous year 2023-24.
Ans. Rs. 24,000
Q.2. Ram received Rs. 4,000 p.m. as pension from the Government of M.P. during the previous year
2023-24.
Ans. Rs. 48,000
Q.3. Mohan received Rs. 800 p.m. as pension from PQR Ltd. a public limited co. in the private sector,
during previous year.
Ans. Rs. 9,600

Q.4. A retires from the central Government service on may 31, 2023. He gets pension of Rs. 1,800
p.m. upto Nov. 30, 2023, with from Dec. 1, 2023 he get 1/3 of his pension commuted for Rs.
92,000/-
Ans. Rs. 15,600

Q.5. P retires from ABC Co. on June 30, 2023. He gets pension of Rs. 6,000 p.m. up to Jan 31, 2024,
with effect from feb. 1, 2024 he get 60% of pension commuted for Rs. 1,22,400. Does it make any
difference of he also gets gratuity of Rs. 120,000 at the time of retirement ?
Ans. (i) Rs. 67,200 (ii) Rs. 1,01,200
 Salaries (Unit - i) | 3.16

Leave Salary - Sec 10(10AA)

(A) At the time of employment Taxable (Allemployee)
(B) At the time of Retirement
(a) Govt. Employee Exempt
(Central & State Govt. employee)
(b) Others
(i) Actual Amount of leave salary
(ii) Maxi Rs. 25 lakh
(iii) 10 x Average Salary Which ever is less
(iv) Encashment of leave month x Average Salary
Cash equivalent of unavailed leave salary @ 30 days for every completed year of service.

Step 1.
(i) Leave Actually Allowed
(ii) Max. 30 days per year as per income tax act Which ever is less
Step 2.
Step 1 — Leave actually taken = Encashment of leave

Average Salary :

Salary = Basic Salary + D.A. (If) + Commission on turnover (%)

Note : If leave salary received from previous employer was exempted, exempted amount shall be
deducted from Rs. 25,00,000.

Example 6
Mr. Hari prasad an employee of ABC Pvt. Ltd. retired from the company on 30-11-2023. At the time of his
retirement he received Rs. 2,88,000 as leave salary from his employer the following information is
provided by the employee.
(I) Salary of the time of retirement (per month) 18,000
(II) Period of Service 20 years 2 month
(III) Leave encashment 2,88,000
(IV) Leave availed while in service 14 month
(V) Balance unavailed leave at the time of retirement 16 month
(VI) Average salary for the month of Feb. 2023 to Nov. 23 17,600
(VII) Leave entitlement 1½ month for every year
Ans. Rs.1,05,600/-

Retrenchment Compensation [10(10B)]

Actual Amount of Compensation
Which ever is less Maxi. 5,00,000
15/26 x Average Salary x No. of year service worked

Average Salary :

Salary :- Salary include all except bonus & Employer P.F Contribution.
 Salaries (Unit - i) | 3.17

Compensation Received on voluntary retirement [Sec 10(10C)]

Conditions for claiming exemption
(1) It should be received on his voluntary retirement.
(2) It should be received by employees of central/state govt. public sector, undertaking, any
other company, statutory corporation, local authority, university, or notified institute of
management.
(3) It must be received in according with the scheme of voluntary retirement which is framed in
accordance with the prescribed guidelines of the govt.
Prescribed guidelines: [Golden Hands shake scheme]
(1) It applies to an employee, who has completed 10 years of service or completed 40 years of age.
(2) The scheme of voluntary retirement should have been drawn to result in overall reduction
in the existing strength of the employer.
(3) The vacancy caused by the not to be filled up.
(4) The retiring employee of a company shall not be employed in another company belonging to
the same management.

Voluntary retirement compensation xxx

Less: Exempt u/s 10(10C) - Least of the following: xxx
(a) Compensation received/receivable on voluntary xxx
retirement Whichever
is
(b) ` 5,00,000 xxx
(c) 3 months’ salary x completed years of service lower
xxx
(d) Last drawn salary x remaining months of service left xxx

Example 7
Mr. A aged 54 years and who has put in 20 years of service in a public sector undertaking voluntary
resigns the job under a scheme of voluntary separation. He has 7 years and 2 months of service and
his last drawn salary is Rs. 10,000. He is paid Rs. 12 lakh as compensation. Calculate the taxable
amount of compensation.
If the compensation amount Rs 600,000 instant of Rs. 12,00,000/-?
Ans. 12,00,000; 1,00,000
 Salaries (Unit - i) | 3.18

Treatment of Provident Fund For Income-Tax Purpose

Particulars SPF RPF URPF PPF
1. Employer Fully Exemption Exempt upto 12% Not Exempt but Not
Contribution Tax of Salary and in also not taxable application
excess of 12% of every year. For as there is
included in Gross taxability see only
Salary point 4 below assessee
own
contribution
2. Interest on Fully exempt from Exempt u/s 10 upto Not exempted Fully
Provident fund tax 9.5%p.a. Interest but also not Exempt
credited in excess of taxable every
9.5% p.a. is year. For
included in gross taxability see
salary. point 4 below.

3. Employee's Deduction u/s 80C Deduction u/s 80C No Deduction Deduction

assessee's is available from is available from U/s 80C is U/S 80 C is
Contribution gross total income gross total income available available
subject to the limit subject to the limit from gross
specified there in. specified there in. total income
subject to
the limit
specified
there in
4. Repayment of Fully exempt u/s Exempt subject Accumulated Fully
lump sum amont on 10 (11) to certain employee's Exempt u/s
retirement/resignai condition See contribution 10(11)
on/ter mination Note 1 is not taxable
accumulated
employer's
contribution +
interest on
Employer
Contribution till
interest on
employees
contribution till
date is taxable
income from
other sources
Note 1:-
The accumulated balance due and becoming payable to an employee participating in RPF shall be
exempt in the following cases :-
(I) If the employee has rendered continues service with his employer for a period of 5 years or
more or
(II) If, though he has not rendered such continues service of 5 years the service has been
terminated (a) by reason of such employee's ill health or (b) by the contraction or
discontinuance of the employer's business or (c) or other cause beyond the control of the
 Salaries (Unit - i) | 3.19

employee or
(iii) If one of the cessation of his employment the employee obtains employment with any other
employer, to the extent the accumulated balance due and becoming payable to him is transferred to
his individual account in any recognized fund maintained by such other employer.

Exemption of Accumulated balance of RPF, payable to an employee

 Salaries (Unit - i) | 3.20

Example 8
From the following particulars of Shri Ramesh, a manager of a firm compute of his gross salary for the
assessment year 2024-25
(I) Basic salary[p.m.] 5,000
(II) D.A. [included in salary for retirement benefit's]P.M. 400
(III) Employer's contribution towards recognized provident fund 8,000
(IV) Interest on RPF @ 13% per annum 4,680
(V) House rent allowance (Rs. 7,200 rent paid for house to Delhi) 13,800
(VI) Medical allowance[p.m.] 100
Shri Ramesh exercises the option of shifting out of the default tax regime provided
under section 115BAC(1A).
Answer : Rs. 80,564 As Per Solution

PERQUISITES

Perquisites are the benefits or amenities in cash or in kind, or in money worth and also amenities
which are not convertible into money, provided by the employer whether free of cost or at a
concessional rate :
Taxable for all Taxable for specified Tax Free
employee Employee
1. Rent free 1. Free facility of sweeper, 1. Training of Employee
accommodation. Gardener, Watchman or 2. Telephone & mobile exp.
2. Any Sum paid by personal attended. 3. Use of computer & Laptop
employer in 2. Free or concessional use of 4. Newspaper, Journal &
discharging the gas, electricity & water. Periodical
monetary obligation 3. Free or concessional 5. Perquisite provided by Govt.
of the employee. educational facilities. to its employee working
3. Interest free loan. 4. Motor car provide by outside of India. Sec. 10(7)
4. Use of movable assets. employer. 6. Rent free house/conveyance
5. Transfer of assets. 5. Personal & private journey facilities to a Judge of
provided free of cost or Supreme/High Court.
concessional rate to an 7. Residence to officials of
employee or member of parliament
his family. 8. Use of Health club, Sports and
similar facilities provided to
all employee
9. Scholarship is provide to
employee children by
employer.
10. Goods sold to employee by
employer at a concessional
rate which goods is
manufacturing by employer.
 Salaries (Unit - i) | 3.21

1. Rent Free accommodation:- Sec17(2)

(A) Govt. employees :- License fee determined by the central or state govt.
(B) Other Employees:-
(I) Where the accommodation is owned by the employer-
If city population not exceeding 10 lacs -7.5% of salary
if city population exceeding 10 lacs but not -10% ofsalary
exceeding 25 lacs
if city population exceeding 25 lacs -15% ofsalary

(II) Where accommodation is taken on lease or rent by the employer-

(a) actual lease rent paid
(b) 15% ofsalary
[which ever is less is taken]
Salary :- All taxable monetary benefits
Value of furnished accommodation
value of accommodation + value of furniture

(2) Value of Furniture -

(I) 10% of cost of the furniture Or
(II) hire charges
Value offurnished accommodation = 1 +2
Example 9
Mr. A, furnishes the following particulars of his remuneration for the previous year 2023-24.
(I) Basic salary 12,000 p.m.
(II) Dearness allowance [40% of which forms part of salary for retirement benefits] 1,000 p.m.
(III) Lunch Allowance 200 p.m.
(IV) Medical allowance 500 p.m.
(V) City Compensatory allowance 300 p.m.
(VI) Children Education allowance [per child for 2 children] 230 p.m.
He is provided with a rent free accommodation in Delhi. The cost of the furniture provided is
Rs. 1,00,000 and two air conditioners. The hire charges of each air conditioner is Rs. 2000 per annum.
Compute the value of the gross salary if the accommodation is provided by:-
(I) The Govt. and the value of the accommodation as per Govt. rules is Rs. 500 p.m.
(II) Reserves bank of India and the accommodation has been taken on rent by RBI of 5000 p.m.
(III) XYZ Ltd. taken accommodation on rent amount of Rs. 500 p.m.
Mr. A exercises the option of shifting out of the default tax regime provided under section
115BAC(1A).

Ans:- (i) 1,91,120/- (ii) 2,09,708/- (iii) 1,91,120/-

(C) Accommodation provided in hotel by any employer [Govt. or other]

Following :-
(1) 24% of the salary paid or payable or
(2) Actual charges paid or payable to such hotel. [which ever is less is taken]
 Salaries (Unit - i) | 3.22

For the period during which such accommodation is provided however nothing shall be taxable if
accommodation is:
(I) Provided for not more than 15 days and
(II) On transfer of employee from one place to another.
Double house on transfer
In case of transfer from one place to another if employee is provided house at the New place and
also allowed to retain house at the old place.
for first 90 days from the transfer the value of one house which house Lower value will be
taxable After 90 days value of both house will be taxable.
Note :- Rent free accommodation is not taxable as a perquisite if
1. House is located in a remote area i.e. an area 40 K.M. away from city having population
not exceeding 20,000
2. An employee working at a mining site or an on share (on land) oil exploration site or a
project execution site.
2. Value of Interest Free Loan
The value of the benefit resulting from loan made available to the employee or any member
of his house hold during the relevant previous year the employer or any person on his
benefit.
Any type of loan rate charged by state Bank of India as in the 1st day of the relevant previous
year. Interest shall be calculated on the maximum outstanding monthly balance.

However nothing shall be charged if

(a) Loan are not exceeding in the aggregate Rs. 20,000/-
(b) Loan is provided for medical treatment in respect of disease specified in rule
3A. However exemption shall not apply to so much of the loan as has been
reimbursed to the employee under any medical insurance scheme.
Example 10
Mr X taken Housing loan from his employer @ 6% per annum. Amount outstanding as
on 1-4-2023 is Rs. 6,00,000. Loan amount pay Rs. 12,000 p.m. on 5th of each month.
The lending rate of SBI on 1-4-2023 for housing loan may be taken on 10%
Ans. Rs. 20880/-

3. Use of Movable Assets :-

Laptop and Computer Nil (value is taxable)
Other assets 10% per annum at actual cost or Hire charges

4. Transfer of movable Assets :-

The value of the benefit shall be taxable for employee. The actual value of assets is reduced
by following percentage for each completed year during which the assets was put to use by
employer
Computer & electronic items 50% of the W.D.V.
Motor Car 20% on the W.D.V.
any other Assets 10% on the cost (SLM)
Note : Employer use movable assets 10 years or more than 10 years after than transfer to
employee without consideration or concessional rate. It is not perquisite.
 Salaries (Unit - i) | 3.23

Example 11
Find out the taxable value of perquisite in the following cases:
(I) X is give a computer by the company for using office & private purpose ownership is not
transfer the cost of the computer is Rs. 30,000.
(II) On 10 Dec. 2023. The company give its A.C. to y for domestic use ownerships is not
transfer cost to A/c to the employer is Rs. 20,000.
(III) The employer sells the following assets to the employee Jan 1 2024.

Name of Employee X Y Z
Assets sold Car Computer Music System
Cost of the asset to 5,00,000 2,00,000 1,00,000
employer
Date of purchase [put
to use of the same June 20, 2020 June 20, 2020 June 20, 2020
day]
Sale Price 50,000 20,000 4,000

Specified employee Sec 17(2) (III)

(1) Director of the company or
(2) Employee having 20% or more voting power in the employer company or
(3) Employee having salary more then Rs. 50,000 salary means all taxable monetary
payments, after deduction u/s16.
Example 12
Mr. X is employed on part time bases in two companies. A Ltd. & B Ltd. The detail are as
below :
Particulars Company A Company B
(I) Basic Salary 82,000 13,000
(II) Education allowance for one child - 1,800
(III) Reimbursement 2,000 -
(IV) Medical allowance - 2,800
(V) Employer's contribution to recognised P.F. 1,800 1,500
(VI) Value of rent free accommodation
Taken by the employer on rent 3,000 -

Mr. X pay Rs.400/- as professional tax. Mr. X exercises the option of shifting out of the default
tax regime provided under section 115BAC(1A).

Mr. X is neither a Director nor a substantial shareholder of either A Ltd or B Ltd. Is he a specified
employee?
 Salaries (Unit - i) | 3.24

5. Facility of Motor Car :-

(A) Car Owned by employee
Expenditure incurredby employer Taxable All employee
(i) Exclusively for private purpose :- Taxable [Actual Exp] [All Employee]
(ii) Partly official and partly personal :- Total actual exp -Rs1800/2400p.m.
Rs. 900 for Driver (If any)
(B) Car Ownedby employer Taxable Specifiedemployee
Or
Hire the employer
(a) All expenditure bear by employer:-
(i) Exclusively for private purpose : Actual Running / maintaining charges
+ [Hire charges/10% of cost]
(ii) Partly official partly personal :
upto 1.6 ltr. Engine cubic capacity :- Rs. 1800 p.m. (+Rs. 900 for Driver (if any)
If more then 1.6 Ltr. cubic capacity:- Rs. 2400 p.m. (+Rs. 900 for Driver (if any)

(b) Running & Maintain Exp. bear by employee :-

(i) Exclusively for private purpose :- Hire charges or 10% of cost.
(ii) Partly official partly personal :
upto 1.6 ltr. Engine cubic capacity :- Rs.600 p.m. (+Rs.900 for Driver (if any)
If more then 1.6 Ltr. cubic capacity:- Rs.900 p.m. (+Rs.900 for Driver (if any)

(c) Official Purpose :- Tax free ( all time tax free for office use)

Note :-
(1) Company provided free conveyance facility to it employee for journey between office to
home - it is not perquisite - Tax free
(2) Where more than one motor car provided Only one car deemed as a office & private
purpose and remaining car are deemed as a private purpose.

Example 13
X has been provided with the benefit of a car by his employer a sale proprietary concern.
Compute the perquisite value of the car for assessment year 2024-25 in the following
situation if the taxable monetary of X are Rs. 150,000.
(I) The car is owned by X but the running and maintenance expenditure amounting to Rs.
40,000 during the previous year are met by the employer. The car is used.
(a) For personal benefit of X.
(b) Only for official duties
(c) 30% for personal benefit and 70% for official use.
(II) The employer provides a car of 1.5 Ltr. engine cubic capacity costing Rs. 5,00,000
exclusively for the personal benefit of x. The exp incurred onthe car are Rs. 52,000
(III) The employer provides a car (below 1.6 lt.) alongwith a driver to x partly for official and
partly for personal purpose. The Exp. incurred by the company are
(a) Running and maintenance exp 32,000
 Salaries (Unit - i) | 3.25

(b) Driver's salary 36,000

(IV) In case (III) the employer maintains a log book and it is established than 30% of the total
coverage of the car is for personal use of X and 70% for official duties.
(V) The employer provides a car [above 1.6 lt.] to X which is used for official work and is
also used by x for commuting from his residence to office and back.
(VI) X is provided with 2 cars to be used for official and personal work and the following
information is available from the companies record :-

Car 1 Car 2
Exceeding 1.6 Ltr. Below 1.6 ltr.
Cost of the Car 3,00,000 2,00,000
Running & Maintance 30,400 24,000
Salary of Driver 22,000 22,000

6. Leave travel concession :- sec 10(5)

Any concession received by employee for himself or his family for traveling to any place in
India is exempted to the extent. Amount spent subject to the following condition.
Exemption can be claimed for two journey in a block of 4 years i.e. 2006-09, 2010-13 and
so on out of two journeys, exemption for one journey can be claimed in the calender year
succeeding the end of the block.

Note :-
(i) The amount of exemption shall not exceeding the amount actually incurred for such
travel.
(ii) Only two journeys performed in a block of four calendar year.
Block :-
2010-13 ( i.e. 1 Jan.2010 to 31 Dec. 2013)
2014-17 ( i.e. 1 Jan.2014 to 31 Dec. 2017)
2018-21 ( i.e. 1 Jan.2018 to 31 Dec. 2021)
2022-23 (i.e. 1 Jan. 2022 to 31 Dec. 2023)
2024–27 (i.e.1 jan. 2024 to 31 Dec. 2027)
** carry over 'concession :- if an assessee has not availed travel concession or assistance
during any of specified four year block period on one of the permitted occasion
( or both) exemption can be claimed in first calander year of next block( but in respect of
only one Journey).
S.No. Journey performed by Limit
1 Air Amount not exceeding the air economy
fare of the National Carrier by the
shortest route to the place of
destination.
2 Any other mode:
(i) Where rail service is Amount not exceeding the air-
available conditioned first class rail fare by the
 Salaries (Unit - i) | 3.26

shortest route to the place of

destination
(ii) Where rail service is
not available
(a) a recognised amount not exceeding the 1st class or
public transport deluxe class fare, as the case may be, on
system exists such transport by the shortest route to
the place of destination
(b) no recognisedpublic amount equivalent to the air-
transportsystem exists conditioned first class rail fare, for the
distance of the journey by the shortest
route, as if the journey had been
performed by rail

7. Medical perquisite
(A) In side India - See New Acts.
(a) Expenditure incurred or reimbursed on any medical treatment provided to
an employee or any member of his family is fully exempt without limit.
For treatment in any hospital dispensary etc. Fully Tax free.
- Maintained by the Govt.
- Maintained by the employer
- Approved for a specified disease
- Maintained by local authority.
(b) Health insurance premium reimbursed for insurance on the health of employee or
any member of his family is fully exempt. Fully Taxfree
(c) Private Hospital : — Taxable
Reimbursement of expenditure actually incurred on medical treatment:
Any sum paid by the employer in respect of any expenditure actually incurred
by the employee on his medical treatment or treatment of any member of his
family
• in any hospital maintained by the Government/local authority/any other
hospital approved by the Government for the purpose of medical treatment of
its employees;
• in respect of the prescribed disease or ailments in any hospital approved by the
Principal Chief Commissioner or Chief Commissioner having regard to the
prescribed guidelines.
• in respect of any illness relating to COVID-19 subject to conditions notified by
the Central Government
Accordingly, the Central Government has, vide Notification No. 90/2022 dated
5.8.2022, specified that for claiming benefit of such exemption, the employee
has to submit the following documents to the employer, –
(a) the COVID-19 positive report of the employee or family member, or
medical report if clinically determined to be COVID-19 positive through
investigations, in a hospital or an in-patient facility by a treating physician
 Salaries (Unit - i) | 3.27

of a person so admitted;
(b) all necessary documents of medical diagnosis or treatment of the
employee or his family member for COVID-19 or illness related to COVID-
19 suffered within 6 months from the date of being determined as COVID-
19 positive; and
(c) a certification in respect of all expenditure incurred on the treatment of
COVID-19 or illness related to COVID-19 of the employee or of any
member of his family.

(B) Out Side India :-

(a) Medical expenses shall be tax free upto permit by RBI
(b) Expenses on stay abroad of the employee or any member of his family for
medical treatment with one attendant who accompanies the patient in
connection with such treatment, to the extent permitted by RBI.
(c) Travel Expenses of patient [employee or his family] and one attendant and who
accompanies the patient in connection with such treatment if GTI does not exceed
Rs. 2,00,000.

Meaning of Family for Valuation of Medical Facilities & LTC

(i) Spouse and children of the employee whether dependent or not
(ii) Parents, brother and sister of the employee who are mainly depended on employee.

Example 14
Determine the taxable value of the perquisite
(a) The employer reimburse an insurance premium of Rs. 5000 paid by X under a health insurance
scheme on the life of Z and his wife.
(b) The employer maintains a hospital for the employees where they and their family members
are provide free treatment the exp on treatment of Z and his family members during the P/Y
2023-24 were as under
(I) Treatment of Z's major son [dependant upon him] 5,400
(II) Treatment of Z 9,400
(III) Treatment of Z's Uncle 10,250
(IV) Treatment of Mrs. Z 14,000
(V) Treatment of Z's widow sister [dependent upon him] 9,000
(VI) Treatment of Z's handicapped nephew 4,000
(c) The employer reimburses the following medical exp
(I) Treatment of Z by his family physician Rs. 9,200
(II) Treatment of Mrs Z in a private nursing home Rs. 8,500
(III) Treatment of Z's mother [dependent upon him] Rs. 2,600 by a private doctor.
(IV) Treatment of Z's brother [not dependent upon him] Rs. 900
(V) Treatment of Z's grand father [depended upon him] Rs. 2,900
(d) Expenses on cancer treatment of married daughter of Z at Mahaveer hospital (Approved by
income tax), Jaipur paid by the employer Rs. 120,000 and reimbursement of expenses for
medical treatment of himself amounting to Rs. 60,000.
 Salaries (Unit - i) | 3.28

(e) The following expenses on treatment of Z's Major son outside India where paid by the employer.

Actual Expenses
Expenses Permitted by RBI
(1) Actual Medical Exp. 1,60,000 1,30,000
(2) Exp on stay abroad of Z's Son and brother 1,40,000 1,00,000
who accompanied the patient
(3) Travelling Exp. of Z's son and Z's brother 2,50,000 –

Assume that the other income of Z is (a) 1,10,000 (b) Rs. 1,70,000 [including income under
the head salaries excluding the above taxable perquisite]
Valuation of free or concessional educational facilities
 If school fees of children of employee or any member of employee’s house hold is paid
or reimbursed by the employer on employee’s behalf, it will be perquisite in the hands
of all employees.
 But if the education facility is provided in the school maintained by the employer or
in any school by reason of his being employment at free of cost or at concessional rate,
it would be perquisite in the hands of specified employees only.:
Circumstances Value of benefit
If the educational institution cost of such education in a similar
is maintained and owned by the employer institution in or near the locality.
However, there would be no perquisiteif
If free educational facilities are allowed in the cost of such education or the value of
any other educational institution by such benefit per child does not exceed
reason of his being in employment of that ` 1,000 p.m.
employer
Others amount of expenditure incurred by the
employer in that behalf
Where any amount is paid or recovered from the employee on that account, the value of benefit
shall be reduced by the amount so paid or recovered.
Note: The exemption of ` 1,000 p.m is allowed only in case of education facility provided to the
children of the employee and not in case of education facility provided to other household
members.

Example 15
Find the taxable value of the perquisite for the A.Y. 2024-25 in the following cases -
(1) Mr. X is an employee in Accounts department of A Ltd. on November 27, 2023 he
attends a seminar "perquisite valuation" seminar fees of Rs. 2,500 is paid by A Ltd.
(2) Y's son is a student of ninth class of DPS Noida Rs. 17,800 being tuition fee of Y's son
reimbursed by A Ltd. where Y is employed there is no arrangement between A Ltd. and
DPS Noida.
(3) Blue bell school, Jaipur is tie up with VSI Ltd. books of accounts are maintained
separately. Z is an employee of VSI Ltd. The following family members of Z are student
in Blue bells school.
 Salaries (Unit - i) | 3.29

Cost of Education in a Amount Charged

Similar institute from Z
A. Daughter of Z Rs. 5,500 P.M Rs. 800 P.M.
B. Depended brother of Z Rs. 6,000 P.M. Rs. 1,600 P.M.

8. Gas, Electricity or Water

Gas, Electricity or Water - Taxable
If provided from own sources -
Manufa
cturing cost per unit
In other case amount paid to another agency
shall be taxable value.
Note :- If connection of Gas, electricity or water on the name of employee then it will taxable
for all employees but if connection is on the name of employer then it will taxable only for
specified employee U/s 17(2) (III).
9. Gift Voucher or token
However nothing shall be taxable if value of such gift in aggregate during p/y is up to Rs. 5,000
but as per CBDT clarification that if gift is by way of cash or by way of cheque, then entire
amount shall be taxable otherwise the amount only in excess of Rs. 5,000 shall be taxable.
10. Credit card or Club Exp.
The actual expenditure incurred by the employer shall be taxable for all employees. but if
expenditure is wholly and exclusively for office purpose and satisfied following condition then
it will not taxable perquisite :
(I) Complete details of such expenditure are maintained
(II) And employer certifies that such expenditure was exclusively for official purpose.
* If Exp. on use of health club, sport facilities to all the employees than nothing shall be
taxable and if the employer has obtained corporate membership of the club then the fees
paid for that not be taxable

11. Free Meals:-

Actual exp incurred by employer shall be taxable however nothing shall be taxable in the
following cases:-
(1) If tea or snacks provided during office hours :- The board has clarified that tea includes
soft drink coffee and other non alcoholic beverages.
(2) During office hour if it is provided :- at the office premises or
Through paid vouchers which are not transferable and usable only at eating joint
In both of the above cases value should not exceed Rs. 50 per meal. The amount only in
excess of Rs. 50 shall be taxable.
In remote area or off share installation no limit has been prescribed (fully exempt).
 Salaries (Unit - i) | 3.30

12. Sweat EquityShare

Fair market value of the share on the date on which option is exercised XXXX
Less:- Amount recovered from the employee XXX
Taxable Amount XXX
Example :- Under a stock option scheme, a company allotted 10,000 shares to its employees
at their face value of Rs. 100 each, although the market value of the shares on the date of
allotment as per quotation was Rs. 240 per share. Discuss the tax consideration, if any, of the said
allotment.
Example :- An individual is an employee of a public sector undertaking owned by the
Government of India. The shares are fully held by the President of India and his nominees.
The Government of India in an attempt to broaden the equity base of the company, allots each
of the employees of the undertaking 200 equity shares at Rs. 200 per share whilst for the
members of the public, the allotment price was fixed at Rs. 400 per share. The Assessing
Officer wants to add the difference between Rs. 400 per share and Rs. 200 per share as a
perquisite in the hands of the individual employee.
Profit in Lieu of Salary:- Sec 17(3)
(I) Compensation to assessee from his employer in connection with the termination of his
employment or the modification of the terms and conditions.
(II) Any payment due to or received by an assessee from an employer or a former employer
or from a provident or other fund to the extent to which it doesn't consist of
contribution by the assessee or interest on such contributions.
(III) Any sum received under a Key man insurance policy including bonus on such policy.
(IV) Any amount due to or received, whether in lump sum or otherwise, by any assessee.
Before his joining any employment with that person or
After cessation of his employment with that person.
Deductions (Sec 16)
1. Standard deduction Sec 16 (ia)— Standard deduction is available as follows—
From the assessment year 2023-24. Standard deduction is available is Rs. 50,000 or
the amount of salary, whichever islower
2. Entertainment allowances Sec 16 (ii)
This deduction is available only for govt. employee. The deduction is least of the
following
(a) Actual amount received during the year
(b) 20% ofsalary
(c) Rs. 5,000

Meaning of salary: Only basic salary

3. Professional tax Sec 16 (iii)

Any amount paid by the employee shall be allowed as deduction in the year of payment.
Note :- If professional tax of employee is paid by employer then first it shall be included
in the gross salary of all employees and then deduction shall be allowed U/s 16
Relief U/s 89(1):-
Relief when salary is paid in arrears or in advance sec 89 (1)
 Salaries (Unit - i) | 3.31

Step 1. :- Calculate tax payable of the p/y in which the arrears/advance salary is
received on :
(a) Total income plus including additional salary
(b) Total income less excluding additional salary
The difference between (a) and (b) is the tax on additional salary included in the total
income.

Step 2. : - Calculate the tax payable of every p/y to which the additional salary
related:
(a) On total income plus including additional salary of that particular p/y
(b) On total income less excluding additional salary.
Calculate the difference between (a) and (b) for every PY to which the additional salary
relates and aggregate the same.
Step 3:- The excess between the tax on additional salary as calculated under step 1
and Step 2 shall be the relief admissible U/s 89(I)
If the tax calculated in Step 1 is less than tax calculated in step 2, then assessee will
not be applicable for relief.
Sr. Particulars Mean of salary
No.
1 Entertainment Allowance Basic salary { Only Basic Salary }
u/s 16(ii)
2 Gratuity Act, 1972 is Basic salary + D.A. ( entire ) [ Last month]
apply. u/s 10(10)(ii)
3 Gratuity Act, 1972 does not Basic Salary + D.A. (if)* + Commission on turnover(%)
apply. u/s 10(10)(iii)
4 Leave salary u/s 10(10AA) Basic Salary + D.A. (if)* + Commission on turnover(%)
5 Retrenchment compensation All taxable monetary benefit except BONUS & PF
u/s 10(10B) contribution
6 Voluntary Retirement u/s Basic Salary + D.A. (if)* + Commission on turnover(%)
10(10C)
7 Recognized provident Fund. Basic Salary + D.A. (if)* + Commission on turnover(%)
8 House Rent Allowance u/s Basic Salary + D.A. (if)* + Commission on turnover(%)
10(13A)
9 Rent free Accommodation All Taxable monetary benefit of salary
u/s 17(2)
Note * (if) :- Which is part of Retirement Benefit.
 Salaries (Unit - i) | 3.32

ILLUSTRATION 1
Mr. Raj Kumar has the following receipts from his employer:

(1) Basic pay ` 40,000 p.m.

(2) Dearness allowance (D.A.) ` 6,000 p.m.
(3) Commission ` 50,000 p.a.
(4) Motor car for personal use (expenses met by the employer) ` 1,500 p.m.
(5) House rent allowance ` 15,000 p.m.
Find out the amount of HRA exempt in the hands of Mr. Raj Kumar assumingthat he paid a
rent of ` 16,000 p.m. for his accommodation at Kanpur. DA forms part of salary for retirement
benefits. Mr. Raj Kumar exercises the option of shifting out of the default tax regime provided
under section 115BAC(1A).

SOLUTION
HRA received ` 1,80,000
Less: Exempt under section 10(13A) [Note] ` 1,36,800
Taxable HRA ` 43,200
Note: Exemption shall be least of the following three limits:
(a) the actual amount received (` 15,000 × 12) = ` 1,80,000
(b) excess of the actual rent paid by the assessee over 10% of his salary
= Rent Paid (-) 10% of salary for the relevant period
= (` 16,000×12) (-) 10% of [(` 40,000+` 6,000) × 12]
= ` 1,92,000 - `55,200 = ` 1,36,800
(c) 40% salary as his accommodation is situated at Kanpur
= 40% of [(` 40,000+ ` 6,000) × 12] = `2,20,800
Note: For the purpose of exemption under section 10(13A), salary includes dearness
allowance only when the terms of employment so provide, but excludes all other
allowances and perquisites.
ILLUSTRATION 2
Mr. Srikant has two sons. He is in receipt of children education allowance of ` 150 p.m. for his
elder son and ` 70 p.m. for his younger son. Both his sons are going to school. He also receives the
following allowances:
Transport allowance : ` 1,800 p.m.

Tribal area allowance : ` 500 p.m.

Compute his taxable allowances

 Salaries (Unit - i) | 3.33

SOLUTION
Taxable allowance in the hands of Mr. Srikant is computed as under -
If Mr. Srikant exercises the option of shifting out of the default tax regime provided
under section 115BAC(1A)
Children Education Allowance:
Elder son [(`150 – `100) p.m. × 12 months] = `600
Younger son [(`70 – `70) p.m. × 12 months] = Nil ` 600

Transport allowance (`1,800 p.m. × 12 months) `21,600

Tribal area allowance [(`500 – `200) p.m. × 12 months] `3,600

Taxable allowances `25,800

If Mr. Srikant pays tax under default tax regime under section 115BAC
Children Education Allowance [(`150 + `70) p.m. × 12 months] `2,640
Transport allowance (`1,800 p.m. × 12 months) `21,600
Tribal area allowance (`500 p.m. × 12 months) `6,000
Taxable allowances ` 30,240

ILLUSTRATION 3
Mr. Sagar who retired on 1.10.2023 is receiving ` 5,000 p.m. as pension. On 1.2.2024, he
commuted 60% of his pension and received ` 3,00,000 as commuted pension. You are required to
compute his taxable pension assuming:
(a) He is a government employee.
(b) He is a private sector employee and received gratuity of ` 5,00,000 at the time of retirement.
(c) He is a private sector employee and did not receive any gratuity at the time of retirement.
SOLUTION
(a) He is a government employee
Uncommuted pension received (October – March) `24,000

[(`5,000 × 4 months) + (40% of `5,000 × 2 months)]

Commuted pension received ` 3,00,000
Less: Exempt u/s 10(10A) ` 3,00,000 NIL
Taxable pension ` 24,000
(b) He is a private sector employee and received gratuity ` 5,00,000 at the time of
retirement
Uncommuted pension received (October – March) ` 24,000
[(` 5,000 × 4 months) + (40% of ` 5,000 × 2 months)]
Commuted pension received ` 3,00,000
 Salaries (Unit - i) | 3.34

Less: Exempt u/s 10(10A)

( ) `1,66,667 `1,33,333

Taxable pension `1,57,333

(c) He is a private sector employee and did not receive any gratuity at the time of
retirement
Uncommuted pension received (October – March) ` 24,000
[(` 5,000 × 4 months) + (40% of ` 5,000 × 2 months)]
Commuted pension received ` 3,00,000
Less: Exempt u/s 10(10A)

( ) `2,50,000 `50,000

Taxable Pension `74,000

ILLUSTRATION 4
Mr. Ravi retired on 15.6.2023 after completion of 26 years 8 months of service and received
gratuity of ` 15,00,000. At the time of retirement, his salary was:

Basic Salary : ` 50,000 p.m.

Dearness Allowance : ` 10,000 p.m. (60% of which is for retirement benefits)

Commission : 1% of turnover (turnover in the last 12 months was ` 1,20,00,000)

Bonus : ` 25,000 p.a.
Compute his taxable gratuity assuming:
a. He is private sector employee and covered by the Payment of Gratuity Act, 1972.
b. He is private sector employee and not covered by Payment of Gratuity Act, 1972.
c. He is a Government employee.
Solution
(a) He is covered by the Payment of Gratuity Act 1972
Gratuity received at the time of retirement ` 15,00,000
Less: Exemption under section 10(10)
Least of the following:
i. Gratuity received ` 15,00,000
ii. Statutory limit ` 20,00,000
iii. 15 days’ salary based on last drawn salary
for each completed year of service or part
thereof in excess of 6 months
last drawn salary × years of service

( ) `9,34,615 `9,34,615

Taxable Gratuity `5,65,385

 Salaries (Unit - i) | 3.35

(b) He is not covered by the Payment of Gratuity Act 1972

Gratuity received at the time of retirement ` 15,00,000
Less: Exemption under section 10(10) (Note) ` 8,58,000
Taxable Gratuity ` 6,42,000
Note: Exemption under section 10(10) is least of the following:

(i) Gratuity received ` 15,00,000

(ii) Statutory limit ` 20,00,000
(iii) Half month’s salary based on average salary of last 10 monthspreceding the month of
retirement for each completed year of service.

i.e. × Average salary × years of service

*( ) ( ) ( )+
×26 = `8,58,000

(c) He is a government employee

Gratuity received at the time of retirement `15,00,000
Less: Exemption under section 10(10) ` 15,00,000
Taxable gratuity Nil

ILLUSTRATION 5
Mr. Gupta retired on 1.12.2023 after 20 years of service and received leave salary of
`5,00,000. Other details of his salary income are:
Basic Salary : ` 5,000 p.m. (` 1,000 was increased w.e.f. 1.4.2023)

Dearness Allowance : ` 3,000 p.m. (60% of which is for retirement benefits)

Commission : ` 500 p.m.

Bonus : ` 1,000 p.m.

Leave availed during service : 480 days

He was entitled to 30 days leave every year.

You are required to compute his taxable leave salary assuming:
(a) He is a government employee.
(b) He is a non-government employee
 Salaries (Unit - i) | 3.36

Solution:
(a) He is a government employee
Leave Salary received at the time of retirement ` 5,00,000

Less: Exemption under section 10(10AA) ` 5,00,000

Taxable Leave salary Nil

(b) He is a non-government employee

Leave Salary received at the time of retirement ` 5,00,000
Less: Exempt under section 10(10AA) [See Note below] ` 26,400

Taxable Leave Salary ` 4,73,600

Note: Exemption under section 10(10AA) is least of the following:
(i) Leave salary received ` 5,00,000
(ii) Statutory limit ` 25,00,000
(iii) 10 months’ salary based on average salary of last 10 months
–
i.e. * +
( ) ( ) ( )
* +` 66,000
(iv) Cash equivalent of leave standing at the credit ofthe employee based on the average
salary of last10 months’ (max. 30 days per year of service) Leave Due = Leave allowed –
Leave taken
= ( 30 days per year × 20 years ) – 480 days= 120 days
( )
i.e. * +

* + `26,400

ILLUSTRATION 6
Mr. A retires from service on December 31, 2023, after 25 years of service. Following are the
particulars of his income/investments for the previous year 2023-24:
Particulars `
Basic pay @ ` 16,000 per month for 9 months 1,44,000
Dearness pay (50% forms part of the retirement benefits) ` 8,000 per 72,000
month for 9 months
Lumpsum payment received from the Unrecognized Provident Fund 6,00,000
Deposits in the PPF account 40,000
 Salaries (Unit - i) | 3.37

Out of the amount received from the unrecognised provident fund, the employer’s contribution
was ` 2,20,000 and the interest thereon ` 50,000. The employee’s contribution was ` 2,50,000
and the interest thereon ` 60,000. What is the taxable portion of the amount received from the
unrecognized provident fund in the hands of Mr. A for the assessment year 2024-25?
SOLUTION
Taxable portion of the amount received from the URPF in the hands of Mr. A for the A.Y. 2024-25
is computed hereunder:
Particulars `
Amount taxable under the head “Salaries”:
Employer’s share in the payment received from the URPF 2,20,000
Interest on the employer’s share 50,000
Total 2,70,000
Amount taxable under the head “Income from Other Sources”:
Interest on the employee’s share 60,000
Total amount taxable from the amount received from the fund 3,30,000

Note: Since the employee is not eligible for deduction under section 80C for contribution to URPF
at the time of such contribution, the employee’s share received from the URPF is not taxable at the
time of withdrawal as this amount has already been taxed as his salary income.
ILLUSTRATION 7
Will your answer be any different if the fund mentioned above was a recognised provident fund?
SOLUTION
Since the fund is a recognised one, and the maturity is taking place after a service of 25 years, the
entire amount received on the maturity of the RPF will be fully exempt from tax.
ILLUSTRATION 8
Mr. B is working in XYZ Ltd. and has given the details of his income for the P.Y. 2023-24. You are
required to compute his gross salary from the details given below:
Basic Salary ` 10,000 p.m.
D.A. (50% is for retirement benefits) ` 8,000 p.m.
Commission as a percentage of turnover 0.1%
Turnover during the year ` 50,00,000
Bonus ` 40,000
Gratuity ` 25,000
His own contribution in the RPF ` 20,000
Employer’s contribution to RPF 20% of his basic salary

Interest accrued in the RPF @ 13% p.a. ` 13,000

 Salaries (Unit - i) | 3.38

SOLUTION
Computation of Gross Salary of Mr. B for the A.Y.2024-25
Particulars ` `
Basic Salary [ `10,000 × 12] 1,20,000
Dearness Allowance [`8,000 × 12] 96,000
Commission on turnover [0.1% × `50,00,000] 5,000
Bonus 40,000
Gratuity [Note 1] 25,000
Employers contribution to RPF [20% of `1,20,000] 24,000
Less: Exempt [Note 2] 20,760 3,240

Interest accrued in the RPF@13% p.a. 13,000

Less: [email protected]% p.a. 9,500 3,500
Gross Salary 2,92,740

Notes:
1. Gratuity received during service is fully taxable.
2. Employers’ contribution in the RPF is exempt up to 12% of the salary i.e., 12% of [Basic
Salary + Dearness Allowance forming part of retirement benefits + Commission based on
turnover] = 12% of [` 1,20,000 + (50% × ` 96,000) + ` 5,000] = 12% of ` 1,73,000 = `
20,760
3. Employee’s contribution to RPF is not taxable. It is eligible for deduction under section
80C, if he exercises the option of shifting out of the default tax regime provided under
section 115BAC(1A).
ILLUSTRATION 9
Mr. Dutta received voluntary retirement compensation of ` 7,00,000 after 30 years 4 months of
service. He still has 6 years of service left. At the time of voluntary retirement, he was drawing
basic salary ` 20,000 p.m.; Dearness allowance (which forms part of pay) ` 5,000 p.m. Compute
his taxable voluntary retirement compensation, assuming that he does not claim any relief under
section 89.
SOLUTION
Voluntary retirement compensation received ` 7,00,000
Less: Exemption under section 10(10C) [See Note below] ` 5,00,000
Taxable voluntary retirement compensation ` 2,00,000
Note: Exemption is to the extent of least of the following:
(i) Compensation actually received = ` 7,00,000
(ii) Statutory limit = `5,00,000
(iii) 3 months’ salary × completed years of service
= (`20,000 + `5,000) × 3 × 30 years = ` 22,50,000
(iv) Last drawn salary × remaining months of service left
 Salaries (Unit - i) | 3.39

= (`20,000 + `5,000) × 6 × 12 months = ` 18,00,000

ILLUSTRATION 10
Mr. X is appointed as a CFO of ABC Ltd. in Mumbai from 1.9.2021. His basic salary is `6,00,000
p.m. He is paid 8% as D.A. He contributes 10% of his pay and D.A. towards his recognized
provident fund and the company contributes the same amount. The accumulated balance in
recognized provident fund as on 1.4.2022, 31.3.2023 and 31.3.2024 is ` 9,81,137, ` 27,43,048
and ` 46,48,555, respectively. Compute the perquisite value chargeable to tax in the hands of Mr.
X u/s 17(2)(vii) and 17(2)(viia) for the A.Y. 2023-24 and A.Y. 2024-25. Prior to 1.9.2021, he was a
consultant, whose professional fees was taxable under the head “Profits and gains of business or
profession”.
SOLUTION
Computation of perquisite value taxable u/s 17(2)(vii) and 17(2)(viia) for A.Y. 2023-24

1. Perquisite value taxable u/s 17(2)(vii) = ` 7,77,600, being employer’s contribution to

recognized provident fund during the P.Y. 2022-23 – ` 7,50,000 = ` 27,600
2. Perquisite value taxable u/s 17(2)(viia) =Annual accretion on perquisite taxable u/s
17(2)(vii) = (PC/2)*R + (PC1 + TP1)*R
= (27,600/2) x 0.111 + 0
= ` 1,532
PC ABC Ltd.’s contribution in excess of ` 7.5 lakh to recognized providentfund during P.Y. 2022-
23 = `27,600
PC1 Nil since employer’s contribution is less than ` 7.5 lakh to recognized provident fund in P.Y.
2021-22 and there is no employer’s contribution in P.Y. 2020-21.
TP1 Nil
R I/Favg = 2,06,711/18,62,093 = 0.111
I RPF balance as on 31.3.2023 – employee’s and employer’s contribution
during the year – RPF balance as on 1.4.2022 = ` 2,06,711 (`27,43,048 – `7,77,600 – `
7,77,600 – ` 9,81,137)
Favg Balance to the credit of recognized provident fund as on 1st April, 2022 + Balance to the
credit of recognized provident fund as on 31st March, 2023)/2 = (` 9,81,137 + ` 27,43,048)/2 =
`18,62,093
Note – Interest on the aggregate of following will also be chargeable to tax during A.Y. 2023-24 –

(i) ` 2,03,600 [Employee’s contribution exceeding ` 2,50,000 during P.Y. 2021-22]

(ii) ` 5,27,600 [Employee’s contribution exceeding ` 2,50,000 during P.Y. 2022-23]
(iii) interest accrued on ` 2,03,600 being excess employee’s contribution of P.Y. 2021-22

Computation of perquisite value taxable u/s 17(2)(vii) and 17(2)(viia) for A.Y. 2024-25
1. Perquisite value taxable u/s 17(2)(vii) = ` 7,77,600, being employer’scontribution to
recognized provident fund during the P.Y. 2023-24 – ` 7,50,000 = ` 27,600
 Salaries (Unit - i) | 3.40

2. Perquisite value taxable u/s 17(2)(viia) = Annual accretion on perquisite taxable u/s
17(2)(vii) = (PC/2)*R + (PC1 + TP1)*R
= (27,600/2) x 0.09479 + (27,600 + 1,532) x 0.09479
= `1,308 + `2,761 = `4,069
PC ABC Ltd.’s contribution in excess of ` 7.5 lakh to recognizedprovident fund
during P.Y. 2023-24 = ` 27,600
PC1 Amount of employer’s contribution in excess of ` 7,50,000 to RPF in P.Y. 2020-21 and
P.Y. 2021-22 = ` 27,600
TP1 Taxable perquisite under section 17(2)(viia) for the P.Y. 2022-23 = ` 1,532
R I/Favg = 3,50,307/36,95,802 = 0.09479
I RPF balance as on 31.3.2024 – employee’s and employer’s contribution during the
year – RPF balance as on 1.4.2023 = ` 3,50,307 (` 46,48,555 – ` 7,77,600 – `
7,77,600 – ` 27,43,048)
Favg Balance to the credit of recognized provident fund as on 1st April, 2023 + Balance to the
credit of recognized provident fund as on 31st March, 2024)/2 = (` 27,43,048 + ` 46,48,555)/2 =
` 36,95,802

Note–Interest on the aggregate of following will also be chargeable to tax duringA.Y. 2024-25–
(i) ` 2,03,600 [Employee’s contribution exceeding ` 2,50,000 during P.Y. 2021-22]
(ii) ` 5,27,600 [Employee’s contribution exceeding ` 2,50,000 during P.Y. 2022-23]
(iii) ` 5,27,600 [Employee’s contribution exceeding ` 2,50,000 during P.Y. 2023-24]
(iv) interest accrued on ` 2,03,600 being excess employee’s contribution of P.Y. 2021-22
(v) interest accrued on ` 5,27,600 being excess employee’s contribution of P.Y. 2022-23
ILLUSTRATION 11
Mr. D went on a holiday on 25.12.2023 to Delhi with his wife and three children (one son – age 5
years; twin daughters – age 3 years). They went by flight (economy class) and the total cost of
tickets reimbursed by his employer was ` 60,000 (` 45,000 for adults and ` 15,000 for the three
minor children). Compute the amount of LTC exempt if Mr. D exercises the option of shifting out of
the default tax regime provided under section 115BAC(1A).
SOLUTION
Since the son’s age is more than the twin daughters, Mr. D can avail exemption for all his three
children. The restriction of two children is not applicable to multiple births after one child. The
holiday being in India and the journey being performed by air (economy class), the entire
reimbursement met by the employer is fully exempt in the hands of Mr. D, since he is exercising
the option of shifting out of the default tax regime provided under section 115BAC(1A).
ILLUSTRATION 12
In the above illustration 11, will there be any difference if among his three children the twins were
5 years old and the son 3 years old? Discuss.
SOLUTION
Since the twins’ age is more than the son, Mr. D cannot avail for exemption for all his three
 Salaries (Unit - i) | 3.41

children. LTC exemption can be availed in respect of only two children. Taxable
LTC = 15,000 × = `5,000.

LTC exempt would be only ` 55,000 (i.e. ` 60,000 – ` 5,000)

ILLUSTRATION 13
Compute the taxable value of the perquisite in respect of medical facilities received by Mr. G from
his employer during the P.Y. 2023-24:
Medical premium paid for insuring health of Mr. G ` 7,000
Treatment of Mr. G by his family doctor ` 5,000
Treatment of Mrs. G in a Government hospital ` 25,000
Treatment of Mr. G’s grandfather in a private clinic ` 12,000
Treatment of Mr. G’s mother (68 years and dependant) by family doctor ` 8,000
Treatment of Mr. G’s sister (dependant) in a nursing home ` 3,000
Treatment of Mr. G’s brother (independent) ` 6,000

Treatment of Mr. G’s father (75 years and dependent) abroad ` 50,000
Expenses of staying abroad of the patient ` 30,000

Limit specified by RBI ` 75,000

SOLUTION
Computation of taxable value of perquisite in the hands of Mr. G
Particulars ` `
Treatment of Mrs. G in a Government hospital -
Treatment of Mr. G’s father (75 years and dependent) abroad 50,000
Expenses of staying abroad of the patient and attendant 30,000

80,000
Less: Exempt up to limit specified by RBI 5,000
75,000
Medical premium paid for insuring health of Mr. G -

Treatment of Mr. G by his family doctor 5,000

Treatment of Mr. G’s mother (dependent) by family doctor 8,000
Treatment of Mr. G’s sister (dependent) in a nursing home 3,000
Treatment of Mr. G’s grandfather in a private clinic 12,000
Treatment of Mr. G’s brother (independent) 6,000
Taxable value of perquisite 39,000
 Salaries (Unit - i) | 3.42

ILLUSTRATION 14
Mr. C is a Finance Manager in ABC Ltd. The company has provided him with rent- free
unfurnished accommodation in Mumbai. He gives you the following particulars:
Basic salary ` 6,000 p.m.
Dearness Allowance ` 2,000 p.m. (30% is for retirement benefits)
Bonus ` 1,500 p.m.
Even though the company allotted the house to him on 1.4.2023, he occupied the same only from
1.11.2023. Calculate the taxable value of the perquisite for A.Y.2024-25.
SOLUTION
Value of the rent free unfurnished accommodation
= 15% of salary for the relevant period
= 15% of [(`6000 × 5) + (`2,000 × 30% × 5) + (`1,500 × 5)] [See Note below]
= 15% of `40,500 = `6,075.
Note: Since, Mr. C occupies the house only from 1.11.2023, we have to include the salary due to
him only in respect of months during which he has occupied the accommodation. Hence salary for
5 months (i.e. from 1.11.2023 to 31.03.2024) will be considered.
ILLUSTRATION 15
Using the data given in the previous illustration 14, compute the value of the perquisite if Mr. C is
required to pay a rent of ` 1,000 p.m. to the company, for the use of this accommodation.
SOLUTION
First of all, we have to see whether the accommodation is provided at a concessional rate. If the
value of accommodation computed in prescribed manner exceeds the rent recoverable, or payable
by, the assessee, the accommodation would be deemed to have been provided at a concessional
rate.
In this case, 15% of salary would be ` 6,075 (i.e. 15% of ` 40,500). The rent paid by the employee
is ` 5,000 (i.e., ` 1,000 x 5). Since 15% of salary exceeds the rent recovered from the employee,
the accommodation would be deemed to have been provided at a concessional rate.
Value of the accommodation = ` 6,075
Less: Rent paid by the employee (` 1,000 × 5) = ` 5,000
Perquisite value of accommodation given at a concessional rent = ` 1,075
ILLUSTRATION 16
Using the data given in illustration 14, compute the value of the perquisite if ABC Ltd. has taken
this accommodation on a lease rent of ` 1,200 p.m. and Mr. C is required to pay a rent of ` 1,000
p.m. to the company, for the use of this accommodation.
SOLUTION
Here again, we have to see whether the accommodation is provided at a concessional rate.
In the case of accommodation taken on lease by the employer, the accommodation would be
deemed to have been provided at a concessional rate if the rent paid by the employer or 15% of
 Salaries (Unit - i) | 3.43

salary, whichever is lower, exceeds rent recoverable from the employee.

In this case, 15% of salary is ` 6,075 (i.e. 15% of ` 40,500). Rent paid by the employer is ` 6,000
(i.e. ` 1,200 x 5). The lower of the two is ` 6,000, which exceeds the rent paid by the employee i.e.,
`5,000 (` 1,000 x 5). Therefore, the accommodation would be deemed to have been provided at a
concessional rate.
Value of the accommodation [Note] = `6,000
Less: Rent paid by the employee (` 1,000 × 5) = `5,000

Value of accommodation given at a concessional rent = `1,000

Note: Value of the accommodation is lower of

(i) Lease rent paid by the company for relevant period = ` 1,200 × 5 = `6,000
15% of salary for the relevant period (computed earlier) = `6,075
ILLUSTRATION 17
Using the data given in illustration 14, compute the value of the perquisite if ABC Ltd. has
provided a television (WDV ` 10,000; Cost ` 25,000) and two air conditioners. The rent paid by
the company for the air conditioners is ` 400 p.m. each. The television was provided on 1.1.2024.
However, Mr. C is required to pay a rent of ` 1,000 p.m. to the company, for the use of this
furnished accommodation.

SOLUTION
Here again, we have to see whether the accommodation is provided at a concessional rate. In the
case of accommodation owned by the employer in a city having a population exceeding 25 lakh,
the accommodation would be deemed to have been provided at a concessional rate, if 15% of
salary exceeds rent recoverable from the employee. In case of furnished accommodation, the
excess of hire charges paid or 10% p.a. of the cost of furniture, as the case may be, over and above
the charges paid or payable by the employee has to be added to the value arrived at above to
determine whether the accommodation is provided at a concessional rate.
In this case, 15% of salary is ` 6,075 (i.e. 15% of ` 40,500). The value of furniture of ` 4,625 (See
Note below) is to be added to 15% of salary. The rent paid by the employee is ` 5,000 (i.e. ` 1,000
x 5). Therefore, the accommodation would be deemed to have been provided at a concessional
rate.
Value of the accommodation (computed earlier) = `6,075

Add: Value of furniture provided by the employer [Note] = `4,625

Value of furnished accommodation = `10,700

Less: Rent paid by the employee (` 1,000 × 5) = ` 5,000
Value of furnished accommodation given at a concessional rent = ` 5,700
Note: Value of the furniture provided = (` 400 p.m. × 2 × 5 months) + (` 25,000 × 10% p.a. for 3
months) = `4,000 + `625 = `4,625
 Salaries (Unit - i) | 3.44

ILLUSTRATION 18
Using the data given in illustration 17 above, compute the value of the perquisite if Mr. C is a
government employee. The licence fees determined by the Government for thisaccommodation was
` 700 p.m.
SOLUTION
In the case of Government employees, the accommodation would be deemed to have been
provided at a concessional rate, if the licence fees determined by the employer as increased by the
value of furniture and fixture exceeds the rent recovered/ recoverable from the employee.
In this case, ` 3,500 (licence fees: ` 700 x 5) + ` 4,625 (Value of furniture) is the value of
furnished accommodation. The rent paid by the employee is ` 5,000 (i.e. ` 1,000 x 5). Therefore,
the accommodation would be deemed to have been provided at a concessional rate.
Value of the accommodation (` 700 × 5) = ` 3,500

Add: Value of furniture provided by the employer (computed earlier) = ` 4,625

Value of furnished accommodation = ` 8,125

Less: Rent paid by the employee (` 1,000 × 5) = ` 5,000
Perquisite value of furnished accommodation given at concessional rent = ` 3,125
ILLUSTRATION 19
Mr. X and Mr. Y are working for M/s. Gama Ltd. As per salary fixation norms, the followingperquisites
were offered:
(i) For Mr. X, who engaged a domestic servant for ` 500 per month, his employer reimbursed
the entire salary paid to the domestic servant i.e. ` 500 per month.
(ii) For Mr. Y, he was provided with a domestic servant @ `500 per month as part of
remuneration package.
You are required to comment on the taxability of the above in the hands of Mr. X and Mr. Y, who are
not specified employees.
SOLUTION
In the case of Mr. X, it becomes an obligation which the employee would have discharged even if
the employer did not reimburse the same. Hence, the perquisite will be covered under section
17(2)(iv) and will be taxable in the hands of Mr. X. This is taxable in the case of all employees.
In the case of Mr. Y, it cannot be considered as an obligation which the employee would meet. The
employee might choose not to have a domestic servant. This is taxable only in the case of specified
employees covered by section 17(2)(iii). Hence, there is no perquisite element in the hands of Mr.
Y.
ILLUSTRATION 20
Mr. X retired from the services of M/s Y Ltd. on 31.01.2024, after completing service of 30 years
and one month. He had joined the company on 1.1.1994 at the age of 30 years and received the
following on his retirement:
 Salaries (Unit - i) | 3.45

(i) Gratuity ` 6,00,000. He was covered under the Payment of Gratuity Act, 1972.
(ii) Leave encashment of ` 3,30,000 for 330 days leave balance in his account. He was credited
30 days leave for each completed year of service.
(iii) As per the scheme of the company, he was offered a car which was purchased on 30.01.2021
by the company for ` 5,00,000. Company has recovered ` 2,00,000 from him for the car.
Company depreciates the vehicles at the rate of 15% on Straight Line Method.
(iv) An amount of ` 3,00,000 as commutation of pension for 2/3 of his pension commutation.
(v) Company presented him a gift voucher worth ` 6,000 on his retirement.
(vi) His colleagues also gifted him a Television (LCD) worth ` 50,000 from their own
contribution.
Following are the other particulars:
(i) He has drawn a basic salary of ` 20,000 and 50% dearness allowance per month for the
period from 01.04.2023 to 31.01.2024.
(ii) Received pension of ` 5,000 per month for the period 01.02.2024 to 31.03.2024 after
commutation of pension.
Compute his gross total income from the above for Assessment Year 2024-25 assuming he exercises
the option of shifting out of the default tax regime provided under section 115BAC(1A).
SOLUTION
Computation of Gross Total Income of Mr. X for A.Y. 2024-25

Particulars `

Basic Salary = `20,000 x 10 2,00,000

Dearness Allowance = 50% of basic salary 1,00,000

Gift Voucher (See Note - 1) 6,000
Transfer of car (See Note - 2) 56,000
Gratuity (See Note - 3) 80,769
Leave encashment (See Note - 4) 1,30,000
Uncommuted pension (` 5000 x 2) 10,000
Commuted pension (See Note - 5) 1,50,000

Gross Salary 7,32,769

Less: Standard deduction u/s 16(ia) 50,000

Taxable Salary /Gross Total Income 6,82,769

Notes:
(1) As per Rule 3(7)(iv), the value of any gift or voucher or token in lieu of gift received by the
employee or by member of his household not exceeding ` 5,000 in aggregate during the
previous year is exempt. In this case, the amount was received on his retirement and the
 Salaries (Unit - i) | 3.46

sum exceeds the limit of ` 5,000.

Therefore, the entire amount of ` 6,000 is liable to tax as perquisite.
Note – An alternate view possible is that only the sum in excess of ` 5,000 is taxable. In
such a case, the value of perquisite would be ` 1,000 and gross total income would be `
7,27,769.
(2) Perquisite value of transfer of car: As per Rule 3(7)(viii), the value of benefit to the
employee, arising from the transfer of an asset, being a motor car, by the employer is the
actual cost of the motor car to the employer as reduced by 20% of WDV of such motor car
for each completed year during which such motor car was put to use by the employer.
Therefore, the value of perquisite on transfer of motor car, in this case, would be:
Particulars `
Purchase price (30.1.2021) 5,00,000
Less: Depreciation @ 20% 1,00,000
WDV on 29.1.2022 4,00,000
Less: Depreciation @ 20% 80,000
WDV on 29.1.2023 3,20,000
Less: Depreciation @ 20% 64,000
WDV on 29.1.2024 2,56,000
Less: Amount recovered 2,00,000
Value of perquisite 56,000

The rate of 15% as well as the straight line method adopted by the company for depreciation of
vehicle is not relevant for calculation of perquisite value of car in the hands of Mr. X.
(3) Taxable gratuity
Particulars `
Gratuity received 6,00,000
Less : Exempt under section 10(10) - Least of the following:
(i) Notified limit = ` 20,00,000
(ii) Actual gratuity = ` 6,00,000
(iii) 15/26 x last drawn salary x no. of completed years
of services or part in excess of 6 months
15/26 × `30,000 × 30 = ` 5,19,231 5,19,231

Taxable Gratuity 80,769

Note: As per the Payment of Gratuity Act, 1972, D.A. is included in the meaning of salary. Since in
this case, Mr. X is covered under payment of Payment of Gratuity Act, 1972, D.A. has to be
included within the meaning of salary for computation of exemption under section 10(10).
 Salaries (Unit - i) | 3.47

(4) Taxable leave encashment

Particulars `
Leave Salary received 3,30,000
Less : Exempt under section 10(10AA) - Least of the following
(i) Notified limit ` 25,00,000
(ii) Actual leave salary ` 3,30,000
(iii) 10 months × ` 20,000 ` 2,00,000
(iv) Cash equivalent of leave to his credit ` 2,20,000

( ) 2,00,000
Taxable Leave encashment 1,30,000
Note – It has been assumed that dearness allowance does not form part of salary for retirement
benefits. In case it is assumed that dearness allowance forms part of pay for retirement benefits,
then, the third limit for exemption under section 10(10AA) in respect of leave encashment would
be ` 3,00,000 (i.e. 10 x ` 30,000) and the fourth limit ` 3,30,000, in which case, the taxable leave
encashment would be ` 30,000 (` 3,30,000-` 3,00,000). In such a case, the gross total income
would be ` 6,32,769.
(5) Commuted Pension
Since Mr. X is a non-government employee in receipt of gratuity, exemption under section
10(10A) would be available to the extent of 1/3rd of the amount of the pension which he
would have received had he commuted the whole of the pension.
Particulars `
Amount received 3,00,000

Less: Exemption under section 10(10A) * + 1,50,000

Taxable amount 1,50,000

(6) The taxability provisions under section 56(2)(x) are not attracted in respect of television
received from colleagues, since television is not included in the definition of property
therein.
ILLUSTRATION 21
Shri Bala employed in ABC Co. Ltd. as Finance Manager gives you the list of perquisites provided
by the company to him for the entire financial year 2023-24:
(i) Domestic servant was provided at the residence of Bala. Salary of domestic servant is `
1,500 per month. The servant was engaged by him and the salary is reimbursed by the
company (employer).
In case the company has employed the domestic servant, what is the value of perquisite?
 Salaries (Unit - i) | 3.48

(ii) Free education was provided to his two children Arthy and Ashok in a school maintained
and owned by the company. The cost of such education for Arthy is computed at ` 900 per
month and for Ashok at ` 1,200 per month. No amount was recovered by the company for
such education facility from Bala.
(iii) The employer has provided movable assets such as television, refrigerator and air-
conditioner at the residence of Bala. The actual cost of such assets provided to the employee
is ` 1,10,000.
(iv) A gift voucher worth ` 10,000 was given on the occasion of his marriage anniversary. It is
given by the company to all employees above certain grade.
(v) Telephone provided at the residence of Shri Bala and the bill aggregating to ` 25,000 paid
by the employer.
(vi) Housing loan @ 6% per annum. Amount outstanding on 1.4.2023 is ` 6,00,000.
Shri Bala pays ` 12,000 per month towards principal, on 5th of each month.
Compute the chargeable perquisite in the hands of Mr. Bala for the A.Y. 2024-25.
The lending rate of State Bank of India as on 1.4.2023 for housing loan may be takenas 10%.
SOLUTION
Taxability of perquisites provided by ABC Co. Ltd. to Shri Bala
(i) Domestic servant was employed by the employee and the salary of such domestic servant
was paid/ reimbursed by the employer. It is taxable as perquisite for all categories of
employees.
Taxable perquisite value = ` 1,500 × 12 = ` 18,000.
If the company had employed the domestic servant and the facility of such servant is given
to the employee, then the perquisite is taxable only in the case of specified employees. The
value of the taxable perquisite in such a case also would be ` 18,000.
(ii) Where the educational institution is owned by the employer, the value of perquisite in
respect of free education facility shall be determined with reference to the reasonable cost
of such education in a similar institution in or near the locality. However, there would be no
perquisite if the cost of such education per child does not exceed ` 1,000 per month.
Therefore, there would be no perquisite in respect of cost of free education provided to his child
Arthy, since the cost does not exceed ` 1,000 per month.
However, the cost of free education provided to his child Ashok would be taxable, since the cost
exceeds ` 1,000 per month. The taxable perquisite value would be ` 14,400 (` 1,200 × 12).
Note – An alternate view possible is that only the sum in excess of ` 1,000 per month is taxable.
In such a case, the value of perquisite would be ` 2,400.

(iii) Where the employer has provided movable assets to the employee or any member of his
household, 10% per annum of the actual cost of such asset owned or the amount of hire
charges incurred by the employer shall be the value of perquisite. However, this will not
apply to laptops and computers. In this case, the movable assets are television, refrigerator
and air conditioner and actual cost of such assets is ` 1,10,000.
 Salaries (Unit - i) | 3.49

The perquisite value would be 10% of the actual cost i.e., ` 11,000, being 10% of `
1,10,000.
(iv) The value of any gift or voucher or token in lieu of gift received by the employee or by
member of his household not exceeding ` 5,000 in aggregate during the previous year is
exempt. In this case, the amount was received on the occasion of marriage anniversary and
the sum exceeds the limit of ` 5,000.
Therefore, the entire amount of ` 10,000 is liable to tax as perquisite.
Note - An alternate view possible is that only the sum in excess of ` 5,000 is taxable. In
such a case, the value of perquisite would be ` 5,000
(v) Telephone provided at the residence of the employee and payment of bill by the employer is
a tax free perquisite.
(vi) The value of the benefit to the assessee resulting from the provision of interest-free or
concessional loan made available to the employee or any member of his household during
the relevant previous year by the employer or any person on his behalf shall be
determined as the sum equal to the interest computed at the rate charged per annum by the
State Bank of India (SBI) as on the 1st day of the relevant previous year in respect of loans
for the same purpose advanced by it. This rate should be applied on the maximum
outstanding monthly balance and the resulting amount should be reduced by the
interest, if any, actually paid by him.
“Maximum outstanding monthly balance” means the aggregate outstanding balance for loan
as on the last day of each month.
The perquisite value for computation is 10% - 6% = 4%
ILLUSTRATION 22
AB Co. Ltd. allotted 1000 sweat equity shares to Sri Chand in June 2023. The shares were
allotted at ` 200 per share as against the fair market value of ` 300 per share on the date of
exercise of option by the allottee viz. Sri Chand. The fair market value was computed in
accordance with the method prescribed under the Act.
(i) What is the perquisite value of sweat equity shares allotted to Sri Chand?
(ii) In the case of subsequent sale of those shares by Sri Chand, what would be the cost of
acquisition of those sweat equity shares?
Solution
(i) As per section 17(2)(vi), the value of sweat equity shares chargeable to tax as perquisite
shall be the fair market value of such shares on the date on which the option is exercised by
the assessee as reduced by the amount actually paid by, or recovered from, the assessee in
respect of such shares.
 Salaries (Unit - i) | 3.50

Particulars `
Fair market value of 1000 sweat equity shares @ ` 300 each 3,00,000
Less: Amount recovered from Sri Chand 1000 shares @ `200 each 2,00,000
Value of perquisite of sweat equity shares allotted to SriChand 1,00,000

(ii) As per section 49(2AA), where capital gain arises from transfer of sweat equity shares, the
cost of acquisition of such shares shall be the fair market value which has been taken into
account for perquisite valuation under section 17(2)(vi). (The provisions of section 49 are
discussed in Unit 4: Capital Gains of this chapter)
Therefore, in case of subsequent sale of sweat equity shares by Sri Chand, the cost of
acquisition would be ` 3,00,000.
ILLUSTRATION 23
X Ltd. provided the following perquisites to its employee Mr. Y for the P.Y. 2023-24 –
(1) Accommodation taken on lease by X Ltd. for ` 15,000 p.m. ` 5,000 p.m. is recovered from
the salary of Mr. Y.
(2) Furniture, for which the hire charges paid by X Ltd. is ` 3,000 p.m. No amount is recovered
from the employee in respect of the same.
(3) A car of 1,200 cc which is owned by X Ltd. and given to Mr. Y to be used both for official and
personal purposes. All running and maintenance expenses are fully met by the employer. He
is also provided with a chauffeur.
(4) A gift voucher of ` 10,000 on his birthday.
Compute the value of perquisites chargeable to tax for the A.Y.2024-25, assuming his salary for
perquisite valuation to be ` 10 lakh.
SOLUTION
Computation of the value of perquisites chargeable to tax in the hands of Mr. Y for the
A.Y.2024-25
Particulars Amount in `
(1) Value of accommodation at
concessional rate
Actual amount of lease rental paid byX Ltd. 1,80,000

15% of salary i.e., 15% of ` 10,00,000 1,50,000

Lower of the above 1,50,000

Less: Rent paid by Mr. Y (` 5,000 × 12) 60,000

90,000
 Salaries (Unit - i) | 3.51

Add: Hire charges paid by X Ltd. for furniture 36,000 1,26,000

provided for the use of Mr.Y (`3,000 × 12)

(2) Perquisite value of Santro car owned by X Ltd. 32,400

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

Value of perquisites chargeable to tax 1,68,400

* An alternate view possible is that only the sum in excess of ` 5,000 is taxable. In such a case, the
value of perquisite would be ` 5,000.

ILLUSTRATION 24
Mr. Goyal receives the following emoluments during the previous year ending 31.03.2024.
Basic pay ` 4,00,000
Dearness Allowance ` 1,50,000
Commission ` 1,00,000
Entertainment allowance ` 40,000
Medical expenses reimbursed ` 25,000

Professional tax paid ` 2,000 (` 1,000 was paid by his employer)

Mr. Goyal contributes ` 5,000 towards recognized provident fund. He has no other income.
Determine the income from salary for A.Y. 2024-25, if Mr. Goyal is a State Government employee.
SOLUTION
Computation of salary of Mr. Goyal for the A.Y.2024-25 under default tax regime under
section 115BAC

Particulars `
Basic Salary 4,00,000
Dearness Allowance 1,50,000
Commission 1,00,000
Entertainment Allowance received 40,000
Employee’s contribution to RPF [Note] -
Medical expenses reimbursed 25,000
Professional tax paid by the employer 1,000
Gross Salary 7,16,000
Less: Deductions under section 16(ia) - Standard deduction of upto
`50,000 50,000
Income from Salary 6,66,000
 Salaries (Unit - i) | 3.52

Note: Employee’s contribution to RPF is not taxable. It is eligible for deduction u/s 80C. However,
such deduction shall not be available under the default tax regime under section 115BAC.
Computation of salary of Mr. Goyal for the A.Y.2024-25 under the optional tax regime
(normal provisions of the Act)
Particulars ` `
Basic Salary 4,00,000
Dearness Allowance 1,50,000
Commission 1,00,000
Entertainment Allowance received 40,000
Employee’s contribution to RPF [Note] -
Medical expenses reimbursed 25,000
Professional tax paid by the employer 1,000
Gross Salary 7,16,000
Less: Deductions under section 16
under section 16(ia) - Standard deduction of upto 50,000
`50,000
under section 16(ii) - Entertainment allowance being
lowest of :
(a) Allowance received 40,000
(b) One fifth of basic salary [1/5 × `4,00,000] 80,000
(c) Statutory amount 5,000 5,000
under section 16(iii) - Professional tax paid 2,000
Income from Salary 6,59,000

Note: Employee’s contribution to RPF is not taxable. It is eligible for deduction u/s 80C.
ILLUSTRATION 25
In the case of Mr. Hari, who turned 71 years on 28.3.2024, you are informed that the salary
(computed) for the previous year 2023-24 is ` 10,20,000 and arrears of salary received is `
3,45,000. Further, you are given the following details relating to the earlier years to which the
arrears of salary received is attributable to:
Previous year Taxable Salary (`) Arrears now received (`)
2010 – 2011 7,10,000 1,03,000
2011 – 2012 8,25,000 1,17,000
2012 – 2013 9,50,000 1,25,000
Compute the relief available under section 89 and the tax payable for the A.Y. 2024-25. Assume
that Mr. Hari exercises the option of shifting out of the default tax regime provided under section
115BAC(1A).
 Salaries (Unit - i) | 3.53

Note: Rates of Taxes:

Assessment Slab rates of income-
Year tax
For resident individuals of the For other resident
ageof 60 years or more at any individuals
time during the previous year
Slabs Rate Slabs Rate
2011–12 Upto ` 2,40,000 Nil Upto ` 1,60,000 Nil
` 2,40,001 - ` 5,00,000 10% ` 1,60,001 - ` 5,00,000 10%
` 5,00,001 - ` 8,00,000 20% ` 5,00,001 - ` 8,00,000 20%
Above ` 8,00,000 30% Above ` 8,00,000 30%
2012–13 Upto ` 2,50,000 Nil Upto ` 1,80,000 Nil
` 2,50,001 - ` 5,00,000 10% ` 1,80,001 - ` 5,00,000 10%
` 5,00,001 - ` 8,00,000 20% ` 5,00,001 - ` 8,00,000 20%
Above ` 8,00,000 30% Above ` 8,00,000 30%
2013–14 Upto ` 2,50,000 Nil Upto ` 2,00,000 Nil
` 2,50,001 - ` 5,00,000 10% ` 2,00,001 - ` 5,00,000 10%
` 5,00,001 - ` 10,00,000 20% ` 5,00,001 - ` 20%
10,00,000
Above ` 10,00,000 30% Above ` 10,00,000 30%
Note – Education cess@2% and secondary and higher education cess@1% was attracted on the
income-tax for all above preceding years.

SOLUTION
Computation of tax payable by Mr. Hari for the A.Y.2024-25
Particulars Incl. arrears of Excl.
salary arrearsof
` salary
`
Current year salary (computed) 10,20,000 10,20,000
Add: Arrears of salary 3,45,000 -
Taxable Salary 13,65,000 10,20,000
Income-tax thereon 2,19,500 1,16,000
Add: Health and education cess @4% 8,780 4,640
Total payable 2,28,280 1,20,640
 Salaries (Unit - i) | 3.54

Computation of tax payable on arrears of salary if charged to tax in therespective AYs

A.Y. 2011-12 A.Y. 2012-13 A.Y. 2013-14
Particulars Incl. Excl. Incl. Excl. Incl. Excl.
arrears arrears arrears arrears arrears arrears
(`) (`) (`) (`) (`) (`)

Taxable salary 7,10,000 7,10,000 8,25,000 8,25,000 9,50,000 9,50,000

Add: Arrears of 1,03,000 - 1,17,000 - 1,25,000 -
salary
Taxable salary 8,13,000 7,10,000 9,42,000 8,25,000 10,75,000 9,50,000
Tax on the above 97,900 76,000 1,34,600 99,500 1,47,500 1,15,000
Add: Cess@3% 2,937 2,280 4,038 2,985 4,425 3,450
Tax payable 1,00,837 78,280 1,38,638 1,02,485 1,51,925 1,18,450

Computation of relief under section 89

Particulars ` `
i Tax payable in A.Y.2024-25 on arrears:Tax
on income including arrears 2,28,280
Less : Tax on income excluding arrears 1,20,640 1,07,640
ii Tax payable in respective years on arrears :
Tax on income including arrears (` 1,00,837 + ` 1,38,638 3,91,400
+ `1,51,925)
Less: Tax on income excluding arrears (` 78,280 + 2,99,215 92,185
` 1,02,485 + ` 1,18,450)
Relief under section 89 - difference between tax on
15,455
arrears in A.Y. 2024-25 and tax on arrears in the
respective years

Tax payable for A.Y.2024-25 after relief under section 89

Particulars `
Income-tax payable on total income including arrears of salary 2,28,280
Less : Relief under section 89 as computed above 15,455
Tax payable after claiming relief 2,12,825
 Salaries (Unit - i) | 3.55

LET US RECAPITULATE
Basis of Charge [Section 15]
(i) Salary is chargeable to tax either on ‘due’ basis or on ‘receipt’ basis, whicheveris
earlier.
(ii) However, where any salary, paid in advance, is assessed in the year of payment,
it cannot be subsequently brought to tax in the year in which it becomes due.

(iii) If the salary paid in arrears has already been assessed on due basis, the same
cannot be taxed again when it is paid.
If an employee works with more than one employer, salaries received from all theemployers
would be clubbed and brought to charge for the relevant previous year.

Taxability/Exemption of certain Allowances

Section Allowance Exemption
10(13A) House Rent Least of the following is exempt:
Allowance
(a) HRA actually received
(b) Rent paid less 10% of salary
(c) 50% of salary, if accommodation is located
in Mumbai, Kolkata, Delhi or Chennai
40% of salary, if the accommodation is
located in any other city.
Note - Exemption would be available to an assessee
only if he exercises the option of shifting out of the
default tax regime provided under section
115BAC(1A).

10(14)(ii) Children education ` 100 per month per child upto maximum of two
allowance children
Note - Exemption would be available to an assessee
only if he exercises the option of shifting out of the
default tax regime provided under section
115BAC(1A).

Transport ` 3,200 per month for an employee who is blind

allowance for or deaf and dumb or orthopedically handicapped
commuting Note - Exemption in respect of transport
between the placeof allowance would be available to an assessee
residence andthe irrespective of the regime under which he pays tax.
place of duty
 Salaries (Unit - i) | 3.56

Commuted pension Employees of Fully exempt under section 10(10A)(i)

Central
Government/
local
authorities/
Statutory
corporation/
members of
Civil
services/All-
India
services/
Defence
Services

Other If the employee is in receipt of

Employees gratuity
1/3 x (commuted pension received ÷
commutation %) x 100
If the employee is not in receipt of
gratuity
1/2 x (commuted pension received ÷
commutation %) x 100
10(10AA) Leave Salary
Received during service Government Fully taxable
& Non-
Government

Received at the time of Government Fully exempt u/s 10(10AA)(i)

retirement, (whether on
Non- Least of the following is exempt :
superannuation or
Government (i) ` 25,00,000
otherwise)
(ii) Leave salary actually received
(iii) Cash equivalent of leave standing at
the credit of the employee [based
on average salary of last 10months]
(maximum 30 days for every year
of service)
(iv) 10 months’ salary (based on
average salary of last 10 months
preceding retirement)
 Salaries (Unit - i) | 3.57

10(10B) Retrenchment Least of the following is exempt :

Compensation
(i) Compensation actually
received
(ii) ` 5,00,000
(iii) 15 days average pay × Completed
years of service and part thereof
in excess of 6months

10(10C) Voluntary Retirement Central and Least of the following is exempt :

Compensation State (i) Compensation actually
Government, received
Public sector
company, any (ii) ` 5,00,000
other (iii) 3 months’ salary x completed
company, years of service
local
authority, co- (iv) Last drawn salary x remaining
operative months of services left
society, IIT etc.

Section 10(5) [Leave Travel Concession]

Exemption is available for 2 trips in a block of 4 calendar years. Exemption would be available
to an assessee only if he exercises the option of shifting out of the default tax regime provided
under section 115BAC(1A).

S. No. Journey performed by Exemption

1 Air Amount not exceeding air economy fare bythe
shortest route.
2 Any other mode :
(i) Where rail service Amount not exceeding air-conditioned first-
isavailable class rail fare by the shortest route to the place
of destination
(ii) Where rail service is not
available
a) and public transport
does not exist Amount equivalent to air conditioned first class
rail fares by the shortest route, as if the journey
had been performed by rail
b) but public transport
exists. Amount not exceeding the first class or deluxe
class fare by the shortest route to the place of
destination.
 Salaries (Unit - i) | 3.58

Provident Funds - Exemption & Taxability provisions

Particulars Recognized PF Unrecognized Statutory PF Public PF
PF
Employer’s Contribution in Not taxable at Fully exempt N.A.(asthere
excess of 12% of the time of is only
Contribution salary is taxable as contribution assessee’s
“salary” u/s 17(1) own
contribution)

Employee’s Eligible for Not eligible for Eligible for Eligible for
Contribution deduction u/s 80C, deduction deduction u/s deduction
where an employee 80C, where an u/s 80C,
exercises the employee where an
option of shifting exercises the employee
out of the default option of exercises the
tax regime shifting out of option of
provided under the default shifting out
section 115BAC(1A) tax regime of the
provided default tax
under section regime
115BAC(1A) provided
under
section
115BAC(1A)
Interest Credited Amount in excessof Not taxable at Fully exempt N.A.
on Employer’s 9.5% p.a. is the time of
Contribution taxable as “salary” credit of
u/s 17(1) interest
Interest Credited Amount in excess Not taxable at Exempt upto Fully exempt
on Employee’s of 9.5% p.a. is the time of certain limit
Contribution taxable as “salary” credit of of
u/s 17(1) [See Note interest contribution
below] [See Note
below]
Amount withdrawn Exempt from tax if Employer’s Fully exempt Fully exempt
on (i) employee served a contribution u/s 10(11) u/s 10(11)
retirement/ continuous period and interest
termination of 5 years or thereon is
more; or taxable as
salary.
(ii) retires before
Employee’s
rendering 5
contribution is
years of service
not taxable.
because of ill
Interest on
health,
employee’s
contraction or
contribution is
discontinuance of
taxable under
employer’s
income from
business or
other source.
reason beyond
 Salaries (Unit - i) | 3.59

the control of
the employee; or
(iii) on cessation
of employment,
the employee
obtains
employment with
any other
employer, to the
extent the
accumulated
balance in RPF is
transferred to his
RPF account
maintained by
the new
employer.
(iv) The entire
balance standing
to the credit of
the employee is
transferred to his
NPS account
referred to in
section 80CCDand
notified by the
Central
Government
In other cases, it
will be taxable.

As per section 10(11), any payment from a Provident Fund (PF) to which Provident Fund Act,
1925, applies or from Public Provident Fund would be exempt.

Accumulated balance due and becoming payable to an employee participating in a Recognized

Provident Fund (RPF) would be exempt under section 10(12).

However, the exemption under section 10(11) or 10(12) would not be available in respect of
income by way of interest accrued during the previous year to the extent it relates to the
amount or the aggregate of amounts of contribution made by that person/employee
exceeding ` 2,50,000 in any previous year in that fund, on or after 1st April, 2021.
If the contribution by such person/employee is in a fund in which there is no employer’s
contribution, then, a higher limit of ` 5,00,000 would be applicable for such contribution, and
interest accrued in any previous year in that fund, on or after 1st April, 2021 would be
exempt upto that limit.
It may be noted that interest accrued on contribution to such funds upto 31st March,2021
would be exempt without any limit, even if the accrual of income is after that date.
 Salaries (Unit - i) | 3.60

Valuation of Perquisites [Section 17(2) read with Rule 3]

(I) Rent-free residential accommodation/ Accommodation provided to anemployee
at concessional rate
S. No.(A) Category of Unfurnished accommodation(C) Furnished
Employee accommodation
(B)
(D)

1 Government License fee determined as per Value determined

employee Government rules as reduced by the under column (C)
rent actually paid by the employee.
Add: 10% p.a. of the
furniture cost.
However, if the
furniture is hired,
then hire charges
payable/paid should
be added to the value
determined under
column (C),
as reduced by
charges recovered
from employee.
2 Non- Where accommodation is owned Value determined
government by employer under column (C) Add:
employee 10% p.a. of the
furniture cost.

However, if the
furniture is hired,
then hire charges
payable/paid should be
added to the value

In cities having a 10% of salary determined under

population > 10 column (C),
lacs ≤ 25 lacs as as reduced by
per 2001 census charges recovered
from employee.
In other areas 7.5% of salary
The perquisite value should be
arrived at by reducing the rent, if any,
actually paid by the employee, from
the above value.
 Salaries (Unit - i) | 3.61

Where the accommodation is taken Value determined

on lease or rent by employer under column (C)
Lower of the following is taxable: Add: 10% p.a. of
(a) actual amount of lease rent paid thefurniture cost.
or payable by employer or However, if the
furniture is hired, then
(b) 15% of salary
hire
The lower of the above should be charge
reduced by the rent, actually paid by s payable/paid should
the employee, to arrive at the be added to the value
perquisite value. determined under
column (C),
as reduced by
charges recovered
from employee.

(II) Interest free or concessional loan

In respect of any loan given by employer to employee or any member of his household
(excluding for medical treatment for specified ailments or where loans amount in
aggregate does not exceed ` 20,000), the interest at the rate charged by SBI as on
the first day of the relevant previous year at maximum outstanding monthly balance
(aggregate outstanding balance for each loan as on the last day of each month) as
reduced by the interest, if any, actually paid by him or any member of his
household.
(III) Use of movable assets by employee/ any member of his household
Asset given Value of benefit
(a) Use of laptops and Nil
computers

(b) Movable assets, other 10% p.a. of the actual cost of such asset, or the
than - amount of rent or charge paid, or payable by the
(i) laptops and employer, as the case may be
computers; and (-)
(ii) assets already Amount paid by/ recovered from an
specified employee

(IV) Transfer of movable assets

Actual cost of asset to employer (-) cost of normal wear and tear (-) amount paid or
recovered from employee
Assets transferred Value of perquisite
Computers and electronic items @50% on WDV for each completed year of usage
Motor cars @20% on WDV for each completed year of usage
Any other asset @10% of actual cost of such asset to employer for
each completed year of usage [on SLM basis]
 Salaries (Unit - i) | 3.62

(V) Motor car

S. No. Car Expenses Wholly Partly personal use (c)
owned/ met by official use
hired by

1 Employer Employer Not a

perquisite*

If chauffeur is also provided, ` 900 p.m.

should be added to the above value.

2 Employee Employer Not a Actual amount of expenditure incurred

perquisite* by the employer as reduced by the
perquisite value arrived at in
(1) above.

3 Employer Employee -
cc of engine Perquisite value
upto 1.6 litres ` 600 p.m.
above 1.6 litres ` 900 p.m.
If chauffeur is also provided, ` 900
p.m. should be added to the above
value.
* Provided employer maintains the complete details of such journey and expenditure thereon and
gives a certificate that such expenditure are incurred wholly for official use.
Note: Where car is owned by employer and expenses are also met by the employer, the
taxable perquisites in case such car is used wholly for personal purposes of the employee
would be equal to the actual expenditure incurred by the employer on running and
maintenance expenses and normal wear and tear (calculated @10% p.a. of actual cost of
motor car) less amount charged from the employee for such use.

Meaning of Salary:
S. No. Calculation of exemption of Meaning of salary
Allowance/Terminal
benefit/Valuationof perquisite
1 Gratuity Basic salary and
(in case of non-Government employees dearnessallowance.
covered by the Payment of Gratuity Act,
1972)
 Salaries (Unit - i) | 3.63

2 a) Gratuity (in case of non- Basic salary and dearness

Government employee not covered allowance, if provided in
by Payment of Gratuity Act, 1972) terms of employment, and
b) Leave Salary commission calculated as a
fixed percentage of turnover.
c) House Rent Allowance
d) Recognized Provident Fund
e) Voluntary Retirement
Compensation
3 Rent free accommodation and All pay, allowance, bonus or
Accommodation provided to an commission or any monetary
employee at a concessional rate payment by whatever name
called but excludes-
(1) Dearness allowance not
forming part of
computation of
superannuation
o
rretirement benefit
(2) employer’s contribution
to the provident fund
account of the employee;
(3) allowances which are
exempted from the
payment of tax;
(4) value of the perquisites
specified in section
17(2);
(5) any payment or
expenditure specifically
excluded under the
proviso to section 17(2)
i.e., payment of medical
insurance
premium specified
therein.

(6) lump-sum payments

received at the time of
termination of service or
superannuation or
voluntary retirement, like
gratuity, leave
encashment, voluntary
retirement benefits,
commutation of pension and
similar payments.
 Salaries (Unit - i) | 3.64

Deductions from gross salary [Section 16]

(1) Standard deduction [Section 16(ia)]
Standard deduction of upto ` 50,000.
Note - Deduction would be available to an assessee irrespective of the regime
under which he pays tax.

(2) Entertainment allowance (allowable only in the case of government

employees) [Section 16(ii)]
Least of the following is allowed as deduction:
(1) ` 5,000
(2) 1/5th of basic salary
(3) Actual entertainment allowance received
Note - Deduction would be available to an assessee only if he exercises the option
of shifting out of the default tax regime provided under section 115BAC(1A).

(3) Professional tax [Section 16(iii)]

Any sum paid by the assessee on account of tax on employment is allowable as
deduction.
In case professional tax is paid by employer on behalf of employee, the amount
paid shall be included in gross salary as a perquisite and then deduction can be
claimed.
Note - Deduction would be available to an assessee only if he exercises the
option of shifting out of the default tax regime provided under section
115BAC(1A).

Relief when salary is paid in arrears or in advance [Section 89]

Step 1 Calculate tax payable of the previous year in which the arrears/advance salaryis
received by considering:
(a) Total Income inclusive of additional salary
(b) Total Income exclusive of additional salary
Step 2 Compute the difference the tax calculated in Step 1 and Step 2 [i.e., (a) – (b)]

Step 3 Calculate the tax payable of every previous year to which the additional salary
relates:
(a) On total income including additional salary of that particular previous
year
(b) On total income excluding additional salary.
Step 4 Calculate the difference between (a) and (b) in Step 3 for every previous yearto
which the additional salary relates and aggregate the same.
Step 5 Relief under section 89(1) = Amount calculated in Step 2 – Amount calculatedin
Step 4
 Salaries (Unit - i) | 3.65

PAST QUESTION

Problem 1

X, who is not covered by the Payment of Gratuity Act, 1972, retires on November 20, 2023 from Ltd.
and receives Rs. 1,86,000 as gratuity after service of 38 years and 10 months. His salary is Rs. 8,000
per month up to July 31, 2023 and Rs. 9.000 per month from August 1, 2023. Besides. he gets Rs. 500
per month as dearness allowance (69 percent of which is part of salary for computing retirement
benefits).What amount of gratuity will be exempt from tax?

Solution : Least of the following hall be exempt:

(i) Rs. 1,86,000 (amount received)
(ii) Rs. 20,00,000
(iii) x salary x no. of years [Note 1]

= x 8.645 x 38 = 1,64,255

Amount received Rs. 1,86,000

(-) Exempt Rs. 1,64,255
Taxable amount Rs. 21,745

Working Notes :
(1) No. of years = 38 years

(2) Basic salary from January 1,2023 to October 31, 2023

(i.e., Rs. 8,000 x 7 + Rs. 9,000 x 3) 83,000 Rs.
(+) D.A.(69% of Rs. 500 x 10) 3,450 Rs.
Total 86,450 Rs.
Average monthly salary (86,450/10) 8,645 Rs.
Problem 2
Mr. Vinod, who was in part-time employment with A Ltd. and B Ltd. furnishes the following
information:
A. Ltd. B. Ltd.
(1) Basic Salary p.m. (last drawn) 10,000 6,000
(2) Dearness Allowance 30% 30%
(Forming part of (40% forming part of
salary for retirement salary for retirement
benefits) benefit)
(3) Date of Retirement 1-12-2023 15-1-2024
(4) Period of Service 22 years 11 months 20 years 4 months
(5) Amount of Gratuity received 1,43,000 1,20,000
(6) Date of last increment in Basic salary 1-4-2023 1-8-2023
(7) Amount of last increment 1,000 p.m. 500 p.m.
Compute the Gross salary income chargeable to tax in the hands of Mr. Vinod for the
 Salaries (Unit - i) | 3.66

A.Y. 2024-25 assuming he exercises the option of shifting out of the default tax regime
provided under section 115BAC(1A).

Solution :
Computation of Gross Salary of Mr Vinod
(For the assessment year 2024-25)
A. Ltd. B. Ltd.

Salary (A Ltd. 10,000 x 8) 80,000 55,000

(B Ltd. 6,000 x 5.5 + 5,500 x 4)
Dearness Allowance @ 30% 24,000 16,500
Gratuity received
From A Ltd. 1,43,000
Less: Exempt (See working note) 1,40,140 2,860
From B Ltd. 1,20,000
Less: Exempt (See working note) 64,400 55,600

Therefore, Total Gross Salary = Rs. 2,33,960

Note : - Gratuity shall be exempt to the extent of minimum of the following:
Rs. Rs.
(i) Actual amount received 1,43,000 1,20,000
(ii) Half month average salary for every completed
year of service
12,740/2 x 22 1,40,140
6,440/2 x 20 64,400
(iii) Specified Amount 10,00,000 10,00,000

Computation of Average Salary

A. Ltd. B. Ltd.
Basic salary of last 10 months Basic Salary for last 10 months
[8 x 10,000 + 2 x 9,000] 98,000 [5 x 6,000 + 5 x 5,500] 57,500
DA @ 30% 29,400 DA [57,500 x 30/100 x 40/100] 6,900
1,27,400 64,400
Average Salary 12,740 Average Salary 6,440
 Salaries (Unit - i) | 3.67

Problem 3.
Mr. Rajesh was employed since 1-1-1992 in a commercial establishment. His salary was
fixed at Rs. 14,800, in the grade of Rs. 14,000 - 400 - 22,000 with effect from 1-7-2021. He got
15% of his salary as dearness allowance which is treated as salary for computation of
retirement benefits. He retired from service on 1-2-2024. He received Rs. 3,40,000 as
gratuity from his employer.

Compute the Gross salary income chargeable to tax in the hands of Mr. Rajesh for the A.Y.
2024-25 assuming he exercises the option of shifting out of the default tax regime
provided under section 115BAC(1A). if
(i) Payment of Gratuity Act, 1972 applies.
(ii) Payment of Gratuity Act, 1972 does not apply.
Solution:

Computation of Gross Salary of Mr Rajesh

(For the assessment year 2024-25)

Salary from April, 2023 to January, 2024

April, 2023 to June, 2023 [15,200 x 3] 45,600

July, 2023 to January, 2024 [15,600 x 7] 1,09,200
1,54,800
D. A. @ 15% 23,220

(a) Gratuity Act Applies

(i) [(15,600 + 2,340)/26] x 15 x 32 = Rs. 3,31,200
(ii) Rs. 20,00,000
(iii) Rs. 3,40,000
Hence, Taxable Amount = 3,40,000 - 3,31,200 = Rs. 8,800
Gross Salary = 1,78,020 + 8,800 = Rs. 1,86,820

(b) Gratuity Act does not apply

(i) [17,802*/2 x 32] = Rs. 2,84,832

(ii) Rs. 20,00,000

(iii) Rs. 3,40,000
Taxable Amount = 3,40,000 - 2,84,832 = Rs. 55,168
Gross Salary = 1,78,020 + 55,168 = Rs. 2,33,188
* Average salary on the basis of preceding 10 months 1,78,020/10 = Rs. 17,802.
 Salaries (Unit - i) | 3.68

Problem 4.
Mr Sahil was appointed as sales manager of a company at Ghaziabad (Population is less than
25,00,000) on 1-1-2020 in the scale of Rs. 18,000-400-22,000 at Rs. 18,000 p.m. His other
emoluments are:

Dearness Allowance 40% of salary

Conveyance Allowance (upto 30-9-2023 and his actual expenses on conveyance for Rs.1,200
p.m. employment purposes were Rs. 800 p.m.)
House Rent Allowance u to 31-7-2023 (Rent paid was Rs. 3,000 .m.) Rs.2,500 p.m.
Fixed Medical Allowance Rs. 600 p.m.
Rent free house from 1-8-2023 onwards FRV Rs. 45,000 p.a. and cost of furnishing amounts
to Rs. 90,000. Employer also paid Rs. 20,000 towards maintenance of house and Rs. 1,000
p.m. as electricity bill from 1-8-2023 to 31-3-2024. He and his employer both contributed
15% of salary each towards RPF.
Interest credited on RPF balance @ 15% amounts to Rs. 7.500.
Club bill of the employee reimbursed by the employer during the year were Rs. 6,000.
Compute the salary income chargeable to tax in the hands of Mr. Sahil for the
A.Y. 2024-25 assuming he exercises the option of shifting out of the default tax regime provided
under section 115BAC(1A).

Solution:
Computation of Taxable income of Mr. Sahil
Rs. Rs.
1. Salary (Note1) 2,31,600
2. D.A. @ 40% of salary 92,640
3. Conveyance allowance (1,200 x 6) 7,200
Less- Actual expenses (800 x 6) 4,800 2,400
4. Fixed medicalallowance 7,200
5. Club bill paid by employer 6,000
6. Electricity bill paid by employer 8,000
7. Employers contribution to RPF 15% 34,740
Less- Exempted @ 12% 27,792 6,948
8. Interest on RPF Balance @ 15% 7,500
Less- Exempted @ 9.5% 4,750 2,750
9. House rent allowance for 4 months (refer working note 5,680
3)
10. Value of rent free house (Note 2) 22,040
Gross Salary 3,85,258
Less: Deduction under section 16(ia) – Standard 50,000
deduction
Salary income chargeable to tax 3,35,258
Notes - Rs.
1. Pay fixation: Scale 18,000 - 400 - 22,000 18,000
Pay on 1-1-2020
 Salaries (Unit - i) | 3.69

1-1-2021 18,400
1-1-2022 18,800
1-1-2023 19,200
1-1-2024 19,600
Salary from 1-4-2023 to 31-12-2023 (19.200 × 9) 1,72,800
Salary from1-1-2024 to 31-3-2024 (19,600 × 3) 58,800
Salary 2,31,600
2. Value of rent free house at Ghaziabad for 8 months
salary 10% of [1,54,800 + 800;+ 4,800] = 10%
(1,60,400)
[8 months Basic + C.A. (for 2 months) + M.A. for 8 16,040
months]
Add: 10% of cost of furnishing (90,000 x 10 x 8) / 6,000
(100x 12)
Value of rent free furnished house 22,040
3. House Rent Allowance
Exempted upto least of following:
(i) Actual received 10,000
(ii) Rent paid-l0% of salary
[(12,000 - 1,920 x 4)] 4,320
(iii) 40% of (19,200 x 4) 30,720 4,320 5,680

Problem 5.

Mr. X retires on June 30, 2023. He submits the following information -

Basic salary (since January 2023) : Rs. 20,000 p.m., D.A.: Rs. 6,000 p.m. (1/3 of which is
part of salary for retirement benefits), employer's contribution towards provident fund:
Rs. 3,000 p.m. (X makes a matching contribution); interest credited at the rate of 15 % on
April 30, 2023 : Rs. 7,500; pension after retirement: Rs. 10,000 p.m.; and payment of
provident fund at the time of retirement: Rs. 7,60,000 (out of which employer's
contribution: Rs. 3,30,000 interest thereon: Rs. 44,000, X's contributions: Rs. 3,40,000,
interest thereon: Rs. 46,000). Salary and pension become due on the last day of each month. X
has deposited the entire provident fund payment with a company (rate of interest: Rs. 9 %
p.a.)
Compute Gross total income of Mr. X for the A.Y. 2024-25 assuming he exercises the option
of shifting out of the default tax regime provided under section 115BAC(1A).
If provident fund is:
(a) Statutory providentfund
(b) Recognized provident fund, or
(c) Unrecognized providentfund.
 Salaries (Unit - i) | 3.70

Ans.

SPF RPF URPF

Basic salary (Rs. 20,000 x 3)
60,000 60,000 60,000
Dearness allowance (Rs. 6,000 x 3) 18,000 18,000 18,000
PF by employer [Rs. 3,000 x 3 - 12% of (Rs. 60,000+
1/3 of Rs. 18,000)] ---- 1,080 ---
Interest credited in PF account in excess of 9.5%
[Rs. 7,500 x 5.5 / 15] ---- 2,750 ----
Pension (Rs. 10,000 x 9) 90,000 90,000 90,000
Payment for provident fund account
- Employer: s contribution ---- ---- 3,30,000
- Interest thereon ---- ---- 44,000
Gross salary 1,68,000 1,71,830 5,42,000
Less Deduction u/s 16
Standard Deduction 16 (ia) 50,000 50,000 50,000
Income from salary 1,18,000 1,21,830 4,92,000
Income from other sources
---- ---- 46,000
- Interest on X's contribution to provident fund'
- Interest on company deposits (i.e., 9% per annum
on Rs. 7,60,000 from July 1, 2023 to March 31, 2024) 51,300 51,300 51,300
Gross total income 1,69,300 1,73,130 5,89,300
Notes :
1. In the case of recognized provident fund, it is assumed that X has retired after rendering
service of 5 years.
Problem 6.
Mrs. Zed is employed with PQR Ltd. on a monthly salary of Rs.15,000. She has been provided with the
following perquisite:
(1) Rent free accommodation at Delhi with rent paid by the company Rs. 60,000.
(2) A mobile phone and a fixed line telephone facility provided at her residence during the
previous year amounting to Rs. 25,000.
(3) On the evening of Silver Jubilee Celebrations of the company, she got a gift worth
Rs. 12,000 from the company.
(4) She was allowed to use the Video Camera and Laptop belonging to the company. The
company has purchased these assets for Rs.75,000 and Rs.I,50,000 respectively on
01-04-2022. and the employee has used it throughout the year.
(5) She was given a chauffeur driven car (1.6 liters) for private and official use.
All expense of running and maintenance including driver's salary were paid by the
company. She also drew the following allowances.
 Salaries (Unit - i) | 3.71

(a) Dearness allowance

(50% forms the part of basic pay) Rs. 5,600p.m.
(b) Education allowance for 2 children Rs. 300 p.m. per child
(c) Transport Allowance Rs. 3,400 p.m. (Mrs Zed is Handicapped employee)
(d) Medical Facility Rs. 20,000
Compute the salary income chargeable to tax in the hands of Mrs. Zed for the A.Y. 2024-25
assuming he exercises the option of shifting out of the default tax regime provided under
section 115BAC(1A).

Solution

Computation of Salary of Mrs. Zed

(For the assessment year 2024-25)
Rs.
1. Basic salary (Rs. 15,000 x 12) 1,80,000
2. Dearness allowance (Rs. 5,600 x 12) 67,200
3. Education allowance (Rs. 300 x 2 x 12) 7,200
Less:- Exemption (Rs. 100 x 2 x 12) 2,400 4,800
(4) Transport allowance (Rs. 3,400 x 12) 40,800
Less Exemption (Rs. 3,200x12) 38,400 2,400
(5) RFA 33,120
[Refer Note 1,2]
(6) Mobile Phone and Fixed line Telephone Nil
(7) Gift 12,000
(8) Use of Video Camera(75,000 x 10%) 7,500
(9) Motor Car [(1800 + 900) X 12] 32,400
(10) Reimbursement of Medical Treatment 20,000
Gross salary 3,59,420
Less:- Deduction u/s 16 (ia) 50,000
Income from salary 3,09,420
Working Notes :
(1) Salary for RFA:
(i) Basic 1,80,000
(ii) D.A. (50% x 67,200) 33,600
(iii) Education Allowance 4,800
(iv) Transport Allowance 2,400
2,20,800
(2) Value ofRFA:
Least of the following is taxable: 33,120
(i) 15% (2,20,800) = 33,120 Rs.or
(ii) 60,000 Rs.
 Salaries (Unit - i) | 3.72

Problem 7.
John is employed in a public company and is paid a sum of Rs. 6,00,000 on Voluntary Retirement
from Service. The normal age of retirement in the company is 60 and John, who was 45 at the time of
retirement had completed 20 years of service. His monthly salary at the time of retirement was as
follows:
Basic Pay Rs.10,000
Dearness Allowance (50 percent includible for pension) Rs. 6,000
H.R.A. Rs. 3,000
Conveyance Allowance Rs. 800
What is the amount of compensation taxable under the Act?
Solution
(i) Actual received 6,00,000
(ii) 3 month salary for each completed year of services Rs. 13,000 x 3 x 20 (See note)7,80,000
(iii) Salary at the time of retirement by the balance months of service left before
the date of his retirement a superannuation (Rs. 13,000 x 12 x 15) (See note)23,40,000
(iv) Maximum Limit Rs. 5,00,000
Therefore Rs. 5,00,000 is exempt from tax and Rs. 1,00,000 is chargeable to tax.
Note : Salary for this purpose means basic salary and includes dearness allowances if the
terms of employment so provides i.e. 10,000 + 50% (6,000) = Rs. 13,000
Problem 8
Mr. Ajay, who retired from the services of Hotel Samode Ltd., on 31.1.2024 after putting on service
for 5 years, received the following amounts from the employer for the year ending on 31.3.2024 :
 Salary @ Rs. 16,000 p.m. comprising of basic salary of Rs. 10,000, Dearness allowance of
Rs. 3,000, City compensatory allowance of Rs. 2,000 and Night duty allowance of Rs. 1,000.
 Pension @ 30% of basic salary from 1.2.2024
 Leave salary of Rs. 75,000 for 225 days of leave accumulated during 5 years @ 45 days leave
in each year.
 Gratuity of Rs. 50,000.
Compute the Gross salary income chargeable to tax in the hands of Mr Ajay for the A.Y. 2024-25
assuming he exercises the default tax regime provided under section 115BAC(1A).
Solution
 Salaries (Unit - i) | 3.73

Computation of total income of Mr. Ajay for the assessment year 2024-25.
Income from Salary :
Basic 10,000 x 10 1,00,000
DA 3000 x10 30,000
CCA 2000 x 10 20,000
Night duty Allowance 1000 x 10 10,000
Pension (30% 10,000 x 2) 6,000

Leave Salary :
Received 75,000
(- ) Exemption 50,000 25,000
150 Leave
Gratuity :
Received 50,000
(- ) Exemption 25,000 25,000
Gross salary 2,16,000

Problem 9
Explain the term “Profit in lieu of salary”.
Solution
(I) Compensation to assessee from his employer in connection with the termination of
his employment or the modification of the terms and conditions.
(II) Any payment due to or received by an assessee from an employer or a former
employer or from a provident or other fund to the extent to which it doesn't consist of
contribution by the assessee or interest on suchcontributions.
(III) Any sum received under a Key man insurance policy including bonus on such policy.
(IV) Any amount due to or received, whether in lump sum or otherwise, by any assessee.
Before his joining any employment with that person or
After cessation of his employment with that person.

Problem 10.
Distinguish between foregoing of salary and surrender of salary.

Ans. Foregoing of salary : Waiver by an employee of his salary is foregoing of salary. Once salary
accrues, subsequent waiver does not absolve him from liability to income-tax.
Surrender of salary If any employee surrenders his salary to the Central Government
under the Voluntary Surrender of Salaries (Exemption from Taxation) Act, 1961, the
surrendered salary would not be included in computing his taxable income, whether he is a
private sector/public sector or Government employee.
Problem 11.
Mr. A and Mr. B are working for M/s. Sun Ltd. As per salary fixation norms, the following
perquisites were offered:

i. For Mr. A, who engaged a domestic servant for Rs. 600 per month, his employer
reimbursed the entire salary paid to the domestic servant i.e. Rs. 600 per month.
 Salaries (Unit - i) | 3.74

ii. For Mr. B, he was provided with a domestic servant @ Rs. 600 per month as part of
remuneration package. You are required to comment on the taxability of the above in
the hands of Mr. A and Mr. B, who are not specified employees.
Solution
In the case of Mr. A, it becomes an obligation which the employee would have discharged even if the
employer did not reimburse the same. Hence, the perquisite will be covered under section
17(2)(iv) and will be taxable in the hands of Mr. A. this is taxable in the case of all employees.
In the case of Mr. B, it cannot be considered as an obligation which the employed would meet. The
employee might choose not to have a domestic servant. This is taxable only in the case of specified
covered by section 17(2)(iii). Hence, there is no perquisite element in the hands of Mr. B.
Problem 12
How is advance salary taxed in the hands of an employee? Is the tax treatment same for loan
or advance against salary?

Solution
Advance Salary
Advance salary is taxable when it is received by the employee, irrespective of the fact
whether it is due or not.
It may so happen that when advance salary is included and charged in a particular previous
year, the rate of tax at which the employee is assessed may be higher than the normal rate of
tax to which he would have been assessed. Section 89(1) provides for relief in these types of
cases.
Loan or Advance against salary
Loan is different from salary. When an employee takes a loan from his employer, which is
repayable in certain specified installments, the loan amount cannot be brought to tax as
salary of the employee.
Similarly, advance against salary is different from advance salary. It is an advance taken by the
employee from his employer. This advance is generally adjusted against his salary over a
specified time period. It cannot be taxed as salary.

Problem 13
Rajan is an employee of a private limited company and gets the following emoluments
during the previous year ended on31-3-2024.

Salary Rs. 96,000

Salary in lieu of leave Rs. 6,000
and, entertained allowance 10,000
Commission Rs. 8,000
Medical Reimbursement Rs. 40,000
Rajan's son studies in a school which is owned and maintained by the company. The
cost of education in a similar school in the locality is 22,000 per year but the company
charges Rs. 4,000. From Rajan salary of a domestic servant provided to Rajan by the
company is Rs. 6,000 and the same is paid by the company. The company purchases
a computer on 1-4-2023 for Rs. 50,000 which is given to Rajan For office and private
use. The company purchase a refrigerator for Rs. 20,000 on 30-6-2023. For personal
use of Rajan. Rajan and the company both contribute Rs. 12,000 towards recognised
 Salaries (Unit - i) | 3.75

provident fund, Rajan deposits Rs. 40,000 towards public provident fund. Rajan
earns Rs. 5,00,000 by way of rent from a vacant plot of land. Compute the taxable
income and tax liability of Rajan for the assessment year 2024-25. Assume that the
Mr. Rajan has not exercised option under section 115BAC.

Solution

A) Income from Salary

Salary 96000
Salary in lieu of leave 6000
Entertainment Allowance 10000
Commission 8000
Medical Reimbursement 40000
Education Facilities 22000
Less: Annual Received from Employee 4000 18000

Value of Domestic Servant 6000

Use of Computer Exempt
Use of Refrigerator 1500
Employee Contribution in RPF 12000
Less: Exempt up to 12% 11520 480

Gross Salary
185980
Less: Deduction u/s 16

1) Standard Deduction u/s 16(ia) 50000

Taxable Salary 135980

B) Income from Other Sources

Rent from vacant land 500000

Gross Total Income 635980

Less: Deduction under chapter VIA

Section 80C PPF 40000

Section 80 RPF 12000 52000

Total Income 583980

Tax on above 29296

Add: 4% H.E.C 1172
30468
 Salaries (Unit - i) | 3.76

Problem 14
Mr. Satish is a state govt. employee and other received by him during the previous year
2023-24 are as under Basic salary : Rs. 10,000 Pm.

Dearness allowance : 40% of Basic salary

Entertainment allowance Rs. 8,000
Medical exp. reimbursed Rs.25,000
Transportation allowance Rs. 2,500 P.M.
Professional tax paid Rs. 5,000 of which Rs. 4,000 paid by employer
Free facility of car 1.4 engine capacity provided by the employer for which exp
incurred by employer is Rs. 42,000 which he uses for official purpose and commuting
from residence to office and back to residence.
Mr. Satish Contribution in Public provident fund Rs. 12,000
He has no other income
Compute the Taxable income of Mr. Satish for the A.Y. 2024-25 assuming he
exercises the option of shifting out of the default tax regime provided under section
115BAC(1A).
Solution
Computation of Taxable Income of Mr. Satish for the A. Y. 2024-25

Basic Salary 1000X12 120000

D. A. 48000
Entertainment Allowance 8000
Medical Expenditure Reimbursement 25000
Transportation Allowance (2500X12) 30000
Profession Tax paid 4000
Value of Motor car facility Nil

Gross salary 235000

Less: Deduction u/s 16

1) Standard Deduction/s 16(ia) 50000

2) Entertainment Allowance/s 16(ii) 5000
3) Professional Tax 5000

Taxable Salary 175000

Less: Deduction under chapter VIA

Section 80C PPF 12000

Taxable Salary 163000

 Salaries (Unit - i) | 3.77

Problem 15
Mr. Arun, a resident of Meerut, receive Rs. 38,000 P.A. as basic salary, In addition he gets
Rs. 12,000 P.A. as dearness allowance which does not form part of basic salary, 5%
commission on turnover achieved by him [turnover achieved by him during the relevant
previous year 2023-24 is Rs. 6,00,000] and Rs. 7,000 per annum as house rent allowance. He
however pays Rs. 8,000 per annum as house rent. Determine the quantum of house rent
allowance exempt from tax. Mr. Arun exercises the option of shifting out of the default tax
regime provided under section 115BAC(1A).
Solution

House Rent Allowance u/s10 (13A)

1) Actual amount of H.R.A. 7000
2) 40% of Salary 27200 Whichever is lower
3) Rent paid – 10% of salary
8000 – 6800 = 1200 1200

Salary = Basic Salary + D.A.* + Commission on turnover (%)

68000 = 38000 + 0 + 30000

D.A. : which is part of Retirement benefits.

Problem 16

Mr. Raj has been working with XYZ Ltd. in a tribal area since 1-10-2010. He was entitled to the
following emoluments.
(i) Basic salary w.e.f. 1-1-2022 Rs. 6,000 p.m.
(ii) D.A. 40% of Basic salary (50% of which forms part of salary for retirement benefits)
(iii) Medical allowance Rs. 500 P.M. (Entire amount is spent on his own medical treatment)
(iv) Entertainment allowance Rs. 400 P.m.
(v) Children education allowance Rs. 40 P.m. per child for three children.
(vi) Hostel exp allowance Rs. 100 p.m. per child for three children.
(vii) Tribal area allowance Rs. 300 P.m.
(viii) Uniform allowance Rs. 250 P.M. (He spends Rs. 1500 on the purchase and maintenance of
uniform)
(ix) House rent allowance Rs. 750 P.m. He pays Rs. 1000 per month as rent.
(x) He contributes Rs. 200 P.m. to a RPF to which his employer contributes an equal amount.

He retired from his job on 1-1-2024 and shifted to Mumbai. He was entitled to the following
benefits at the time of his retirement:-
(a) Gratuity Rs. 1,15,000
(b) Pension from 1-1-2024 Rs. 2,000
(c) Payment fromrecognized P.F. Rs. 3,00,000
(d) Encashment of earned leave for 150 days Rs. 36,000

He was entitled to 40 days leave for every completed year of service. He get 50% of his
pension commuted in during such lump sum 1-3-2024 and received Rs. 120,000 as
commuted pension.
 Salaries (Unit - i) | 3.78

He joined ABC Ltd. at Mumbai w.e.f. 1-2-2024 and was entitled to the following emoluments:
(I) Basic salary Rs. 5,000 p.m.
(II) Dearness allowance [forming port of salary] 20% of basic salary.
(III) Rent-free unfurnished accommodation in Mumbai which is owned by the employer
and whose fair rental value is Rs. 48,000 p.a.
He was also given the following facilities by the employs:
A. Motor car [1.4 Ltr Engine Capacity] with driver which he uses partly for official and
partly for personal purpose.
B. The monthly expenses incurred by Mr. Raj on gas and electricity were 500 which were
reimbursed by the employer.
C. Education facility provided in employer school for his 2 children which amounted to
Rs. 350 p.m.
D. Medical facility reimbursement provided Rs. 17,500.
E. A watchman, a sweeper, a cook, a gardener have been provided to whom the company
pays a salary of Rs. 400 p.m.each.

F. Loan of Rs. 1,00,000 @ 8% for construction of his house was given by the company. SBI
rate of interest is 7% p.a.
He made the following payments during p/y :
(1) professional tax Rs. 500.

Compute the salary income chargeable to tax in the hands of 16. Mr. Raj for the A.Y. 2024-
25 assuming he exercises the option of shifting out of the default tax regime provided under
section 115BAC(1A).
Solution

Computation of Total Income of Raj

XYZ Ltd. [1 April 2023 to 31 Dec. 2023]
i. Basic Salary [6000 P.M. × 9 M] = 54,000

ii. D.A. [54,000 ×40%] = 21,600

iii. Medical Allowance [500 PM ×9] = 4,500

iv. Entertainment Allowance 400 P.M ×9 = 3,600

v. Children Education all. (40 P.M. ×3×9)

Less: Exempt U/s 10(14) (100 P. M ×2×9 ) = 360

vi. Hostel Exp. Allowance (100 P. M. ×3×9)

Less: Exempt u/s 10(14) (100P.M. ×2×9) = 900

vii. Tribal Area Allowance (300PM ×9)= 2700 = 2,700

Less: Exemption u/s 10(14) = 1800 900

viii. Uniform Allowance (250P.M ×9) = 2250

 Salaries (Unit - i) | 3.79

Less: Exemption U/s 10(14) (Actual spent) = 1500 750

ix. House Rent Allowance (750×9) = 6750

Less: Exempt u/s 10(14) W.Note = 2520 4230

x. Amount contribution in R.P.F. 200P.M×9

Less: Exempt 12% of Salary (64,800×12%) Nil

After Retirement Benefit

(a) Gratuity 1,15,000

Less: Exempt u/s 10(10) (iii) (W. Note-2) 46,800 68,200

(b) Pension

Un. Computed Pension [Jan 21 to Feb. 21] (2000 4000

P.M × 2)
1 March 21 to 31st March 21 [2000P.m. ×50% ×1 m] 1,000 5,000

(c) Amount Received from R.P.F at the time of Exempt

Retirement}
(d) Encashment of Earn leave 36,000

Less: Exempt u/s 10(10) AA W.Note 3 4800 31,200

(e) Pension Commuted Pension 1,20,000

Less: Exempt u/s 10(10)A With Gratuity 80,000 40,000

 1 1, 20, 000 
 3  50% 100% 
Gross Salary XYZ 2,35,240

ABC Ltd.

[1st Feb. 2024 to 31 March 2024]

(i) Basic Salary (5,000P.M. ×2 M) 10,000

(ii) D.A. (20% ×10,000) 2,000

(iii) Value of Rent free Accommodation (W. Note 5) 2250

Facilities

A Value of Motor Car [1800 + 900]×2 5400

B Value of Gas & Electricity (500×2) 1000

C Education Facilities up to Rs. 1000 P. m Exempt

D Medical Facilities Reimbursement 17,500

 Salaries (Unit - i) | 3.80

E Watch man, Sweeper, Cook & Gardener Provided by 3200

employer (400 P.m ×4×2)
F Value of Loan Facilities Not Taxable

Gross Salary ABC Ltd. 41,350

Gross Salary (XYZ + ABC Ltd.) 2,76,590

Less: Deduction u/s 16

1. Standard deduction 50,000

2. Entertainment Allowance u/s 16(ii) –

3. Professional Tax u/s 16(iii) 500

Taxable Salary 2,26,090

Less: Deduction under chapter VIA

Sec. 80C[R.P.F] 200 ×9m 1800

Employee contribution in R.P.F)

Taxable Salary 2,24,290

Working Note:—1

House Rent Allowance u/s 10(13A)

(i) Actual Amount of H.R.A. 6,750 Which ever is

(ii) 40% of Salary 25,920 lower
(iii) Rent Paid – 10% of Salary 2520 2520
[1000×9]– [10% ×64,800]
Salary : Basic Salary + D.A. (If)* + Commission on turnover (%)

54,000 + 10,800 = 64,800

D.A. (IF)* : Which is part of Retirement Benefit 21,600 ×50% = 10,800

Working Note: 2

Gratuity Act 1972 Does not apply – u/s 10(10) (iii)

(1) Actual Amount of Gratuity 1,15,000

(2) Max. Rs. 20,00,000
(3) 15
 Average Salary ×No. of Completed Year
30
15 46,800
 7200 ×13 year
30
 Salaries (Unit - i) | 3.81

72,000 – 6,000 + 1200

Salary : Basis Salary + D.A(IF)* + Commission on turnover (v)

(IF)* 1200 = 6,000 × 40% ×50% : Which is part of Retirement Benefit

W. Note – 3
Leave Salary

(1) Actual Amount of leave salary 36,000

(2) Max. Rs. 25,00,000

(3) 10 × Average Salary (10×7,200)

(4) Encashment of Earn leave month for completed year × Average Salary

20 48
 7200
30

Step 1 Encashment of Earn leave Month for Computed year

(1) Actual Leave Allowed by Employer (40 Days × 13 = 520 Days Which ever is
year) lower = 390
(2) Max. 30 Days P.A. Allowed By I.T. Act =(30 Year 390 Days
×13 year )

Step 2 Step 1 – Actual Leave taken (W.Note - 4)

390 – 370 Days = 20 Days

W. Note – 4

Actual Leave taken

Total leave allowed by employer (40 Days × 13 Year) 520 Days

Less: Encash leave (Amount received) 150 Days
Leave Taken 370 Days

Working Note — 5
Value of Rent free Accommodation
Accommodation own by Employer
• Mumbai (Popular Exceed 25 lakhs)
15% of Salary 15% ×15000 = 2250
Salary: All Taxable Monthly Benefit
 Salaries (Unit - i) | 3.82

Basic Salary 10,000

D.A. 2,000
Pension (XYZ Ltd.)
Feb. 2021 2,000
March 2021 1,000 3,000
15,000

Problem 17
Q, a marketing specialist of Bombay, is working with two companies, viz, A Co. and B Co. He
retires from A Co. on November 30, 2013 (salary at the time of retirement: Rs.2,600) and
receives Rs. 22,000 as gratuity out of which Rs. 20,000 is exempt under Section 10(10)(iii).
He also retires from B Co. on December 10, 2023 after 38 years and 8 months of service and
receives Rs. 3,90,000 as death cum-retirement gratuity.

His average basic salary drawn from B Co. for the preceding 10 month ending on
November 30, 2023 is Rs. 18,200 per month. Besides. he has received Rs. 1,000 per month as
dearness allowance. 80 percent of which forms part of salary for the purpose of
computation of retirement benefits and 6 percent commission on turnover achieved by
him. Total turnover achieved by him during 10 months ending on November 30, 2023 is Rs.
2,00,000. Determine the amount of gratuity exempt under section 10(10)(iii) for the AIY
2024-25.
Solution
Gratuity Act 1972 does not Apply — u/s 10(10) (iii)

1. Actual Amount 3,90,000

2. Max. 20,00,000 Which
(20,00,000 –20,000) = 19,80,000 ever is
3. 15 lower
 Average Salary × No. of Complete year of Service Rs.
30
3,83,800
15 3,83,800
 20,200 × 38 year
30

Salary : Basic Salary + D.A. (If)* + Commission on

Turnover (%)
Average Basic Salary 18,200
Average D.A. (1,000×80%) 800
 2,00,000×6%  1,200 20,200
Commission  
 10 

Problem 18
 Salaries (Unit - i) | 3.83

R, who was employed with P Company Ltd. retired 21-10-2023 received Rs. 1,20.000 as
gratuity. He served the company for 26 years and 8 months. At the time of retirement, his
salary was Rs. 5,000 p.m. However, the average salary for 10 months preceding the month
of retirement is Rs. 4,800 p.m. He is not covered under the Payment of Gratuity Act, 1972.
Compute the taxable gratuity.
Solution
Gratuity Act 1972 Do not Apply u/s 10(10) (iii)

1. Actual Amount 1,20,000

2. Max. 20,00,000 Which
ever is
lower
3. 15 Rs.
 Average Salary × No. of Complete year of Service 62,400
30
15 62,400
 4,800 × 26 year
30

Salary : Basic Salary + D.A. (If)* + Commission on Turnover

(%)
Average Basic Salary 4800

Gratuity 1,20,000

Less: Exemption u/s 10(10) (iii) 62,400

Taxable 57,600

Problem 19
Mr P joined a service in the grade of Rs. 10,400 - 400 - 16,000 - 500 - 20,000 on 1-7-2006
and resigned from the service on 15-9-2023. He was also entitled to dearness allowance @
50%, which forms part of salary for retirement benefits. On retirement, he received a
gratuity of Rs. 2,40,000. He was entitled to a pension of Rs. 8,000 per month w.e.f. 16-9-
2023. He got 75% of his pension commuted w.e.f. 1-1-2024 and received a sum of Rs.
6,00,000 as commuted pension.

Compute the Gross salary chargeable to tax in the hands of Mr P for the A.Y. 2024-25 assuming he
exercises the default tax regime provided under section 115BAC(1A).
Solution

10,400 – 400 –16,000 – 500 – 20,000

1. 1st July 2006 to 30 June 2007 10,400

2. 1st July 2007 to 30 June 2008 10,800

 Salaries (Unit - i) | 3.84

3. 1st July 2008 to 30 June 2009 11,200

4. 1st July 2009 to 30 June 2010 11,600

5. 1st July 2010 to 30 June 2011 12,000

6. 1st July 2011 to 30 June 2012 12,400

7. 1st July 2012 to 30 June 2013 12,800

8. 1st July 2013 to 30 June 2014 13,200

9. 1st July 2014 to 30 June 2015 13,600

10. 1st July 2015 to 30 June 2016 14,000

11. 1st July 2016 to 30 June 2017 14,400

12. 1st July 2017 to 30 June 2018 14,800

13. 1st July 2018 to 30 June 2019 15,200

14. 1st July 2019 to 30 June 2020 15,600

15. 1st July 2020to 30 June 2021 16,000

16. 1st July 2021 to 30 June 2022 16,500

17. 1st July 2022 to 30 June 2023 17,000

18. 1st July 2023 to 30 June 2024 17,500

1st April 23 to 30 June 23

17,000 ×3 month = 51,000

1st July 23 to 15 Sept. 23

17,500 ×2.5 month 43,750

94,750
 Salaries (Unit - i) | 3.85

Computation of Gross Taxable Salary

Basic Salary (W.N. 1) 94,750

D.A. (50%×94,750) 47,375
Gratuity (W. Note ) 21,975
Pension
16th Sep. 22 to 31st 23
8,000 ×3.5 = 28,000
1st Jan. 24 to 31st March 2024 6,000 34,000
Commuted Pension 6,00,000
 1 6, 00, 000  3,33,333
Less: Exempt with Gratuity   100 2,66,667
3 75 
Gross Salary 5,31,433

W. Note -2
Gratuity Act 1972 Does not apply u/s 10(10)(iii)
1 Actual Amount 2,40,000 Which
ever is
2. Max. 20,00,000
Lower
3. 15 2,18,025 2,18,025
×25,650×17 Year
30

Problem 20
Mr. R is employed by A Ltd. up to November 30, 2023 on the following monthly salary (place
of posting: Delhi)

Up to From
May 31, 2023 June 1,2023
Rs. Rs.
(1) Basic salary 4,000 5,000
(2) D.A. @ 30% of basic salary
(60% of D.A.is part of salary for
computing retirement benefits) 1,200 1,500
(3) Dearness pay (not part of salary
for computing retirement benefits) 600 600
(4) Commission 1,000 1,000
(5) House rent allowance 2,000 2,000
With effect from December 1, 2023, he joins B Ltd. on monthly salary of Rs. 10,000 (place of
posting : Amritsar). Besides, he gets dearness allowance @ Rs. 4,000 per month (10 percent
of which is considered for provident fund contribution) and house rent allowance @ Rs. 6,000
p.m..
Rent paid per month Mr. R is as follows:
 Salaries (Unit - i) | 3.86

Delhi Amritsar
(i) From January 1, 2022 to July 31, 2023 500 --
(ii) August 1, 2023 to December 31,2023 2,900 --
(iii) January 2024 --- 1,000
(iv) February 1, 2024 to June 30, 2024 --- 6,000

Find out the taxable amount of house rent allowance. Mr. R exercises the option of shifting
out of the default tax regime provided under section 115BAC(1A).
Solution

Delhi 50% Amritsar 40%

House rent April to June to Aug. to Dec. Jan. Feb. &
allowance May July A Ltd. Nov. March
u/s 10 (13A)
A Ltd. B Ltd.
1. Actual 2,000 2,000 2,000 6,000 6,000 6,000
amount of
H.R.A.
2. 50% of = 2360 2950 2,950 5,200 4160 4160
Salary Or [4720×50 [5,900×50 [10400 × [10,400 × [10400
40% of %] %] 50%] 40%] × 40%]
Salary
3.Rent Paid – 500 – 472 500–590 = 2900– 2900– 1000 – 6000–
10% of Salary = 28 0 590 = 1040 1040 = 0 1040 =
2310 =1860 4960
Which ever is 28 0 2000 1860 0 4160
lower
Number of 2 2 4 1 1 2
month in block
56 0 8000 1860 0 8320
Total 8056 10180
Basic Salary + 4000+720 5000+900 5900 10000 + 10,400 10,400
D.A. (If)* + = 4720 =5900 400 =
commission on 10,400
mover (%)
D.A. (If): which 1200 × 1500 5,900 10,000 + 10400 10400
is part of 60% = 720 ×60% = 400 =
Retirement 900 10,400
benefit
A Ltd.
(2,000 ×8 m) 16,000
Less: Exempt u/s 10(13 A) 8056 7,944
B Ltd. (6,000 × 4 M) 24,000
Less: Exempt u/s 10(13A) 10,180 13,820
21,764
 Salaries (Unit - i) | 3.87

Problem 21

From the following information submitted by Mr. Z in respect of monthly salary and allowances, find
out the house rent allowance chargeable to tax for the A/Y 2024-25

(a) Name of employer A Ltd. B Ltd.

(b) Period of employment Up to From
Aug 31, 23 Oct 1,23
Agra Mumbai
(From Jan 1, 24
Goa)
Rs. Rs.
Basic Salary *(increased to Rs. 18,000 from February 1,2024) 6,000 11,000*
House Rent Allowance 3,000 5,600
Rent Paid at Agra (from April 1, 2023 to September 30, 2023) 2,600 --
Rent paid at Bombay (from October 1, 2023 to
February 28, 2024 -- 7,000
Rent paid at Goa (from March 1, 2024) -- 1,560
Find out the taxable amount of house rent allowance. Mr. Z exercises the option of shifting
out of the default tax regime provided under section 115BAC(1A).
Solution

AGRA BOMBAY GOA

House Rent April to Aug. Sep. Oct. to Jan. Feb. March
Allowance
A Ltd. N. B Ltd.
1. Actual 3000 5,600 5,600 5,600
Amount of A.
H.R.A.
2. 40% of Salary = 2400 =5500 =9,000 7,200
Or [6,000×40%] [11,000×50%] [18,000×50%] 18000×40%
50% of salary
3. Rent paid – 2,600–600 = 7,000–1100 = 7,000 –1800 = 1560 –1800
10% of salary 2000 5,900 5,200 =0
Which ever is 2000 5000 5200 0
lower
Number of month 5m 1 4 1 1
is Block
Total 10000 22000 5200 0
10000 27200
Salary : Basic 6000 11000 18000 18000
salary + D.A. (if)* +
Commission
turnover (%)
 Salaries (Unit - i) | 3.88

House Rent Allowance

A Ltd.

House Rent Allowance Taxable

A Ltd. (3,000 P.M. ×5 M) 15,000

Less: Exempt u/s 10(13A) 10,000 5,000

B Ltd. 5,600 P.M. = 33,600

Less: Exempt u/s 10(13A) 27,200 6,400

Total H.R.A. 11,400

Problem 22.
Mr X Retired from the service of the ABC Ltd. on 28-2-2024. Determine the amount of exemption
under sec. 10(10)AA for the assessment year 2024-25.

(i) Salary at the time of retirement Rs. 22100P.M.

(ii) Average salary received during the 10 months ending on 28-2-2024 Rs. 2 2,100 P.M.
(iii) Duration the service 24 Years & 6 Month
(iv) Leave entitlement for every year of service 1½ Month
(v) Leave at the credit of the employee of the time of retirement 17 Month
(vi) Leave salary paid at the time of retirement @ Rs. 22100 P.M. Rs. 3,75,700
Solution

Encashment of Leave Salary U/s 10(10) AA

1 Actual Amount 3,75,700

2. Max 25,00,000
3 10 × Average Salary
10 × 22,100 2,21,000
4. Encashment of earn leave month of leave Salary × Average 1,10,500
Salary
5 Months × Rs. 22,100 = 1,10,500
Problem 23.

Mr. B joined a company on 1-6-2023 and was paid the following emoluments and allowed perquisites
as under:
Emoluments :
Basic Pay Rs. 25,000 per month
D.A. Rs. 10,000 per month Bonus Rs. 50,000
 Salaries (Unit - i) | 3.89

Perquisites
(i) Furnished accommodation in Delhi owned by the employer and provided free of cost.
(ii) Value of furniture therein Rs. 3,00,000.
(iii) Motor-car owned by the company (with engine c.c. less than 1.6 litres) along with
chauffeur for official and personal use.
(iv) Sweeper salary paid by company Rs. 1,500 per month.
(v) Watchman salary paid by company Rs. 1,500 per month.
(vi) Educational facility for 2 children provided free of cost. The school is owned and
maintained by the company.
(vii) Interest free loan of Rs. 6,25,000 given on 1-10-2021 for purchase of a house. No
repayment was made during the year. Assume SBI rate to be 8% p.a.
(viii) Interest free loan for purchase of computer Rs. 50,000 given on 1-1-2022. No repayment
was made during the year. Assume SBI rate to be 10% p.a.
(ix) Corporate membership of club. The initial fee of Rs. 1,00,000 was paid by the company. B
paid the bills for his use of Club facilities.
(x) Medical facility reimbursement Rs. 40,000
Compute the salary income chargeable to tax in the hands of Mr. B for the A.Y. 2024-25
assuming he exercises the option of shifting out of the default tax regime provided under
section 115BAC(1A).
Solution

Computation of Income from Salaries of Mr. B for assessment year 2024-25

Particulars Rs.

Basic pay Rs.25,000 × 10 2,50,000

D.A. Rs.10,000×10 1,00,000

Bonus Rs. 50,000 50,000 400,000

Value of Perquisites

(a) Rent free accommodation (assumed to be in a city having population

exceeding 25 lakhs) 15% of salary (2,50,000 + 50,000) 45,000
(b) Value of furniture × 25,000

(c) Motor car 1,800 + 900 = 2,700 × 10 27,000

(d) Sweeper (1,500 ×10) 15,000
(e) Watchman (1,500 ×10) 15,000
(f) Educational facility for 2 children
(assuming fee does not exceed Rs. 1,000p.m.) Nil
 Salaries (Unit - i) | 3.90

(g) Interest free loan for purchase of house 25,000

(h) Interest free loan for purchase of computer 1250
(i) Club membership exempt.
(j) Medical Reimbursement 40,000
Gross salary 5,93,250

Less : Deduction U/S 16

Standard deduction U/S 16(ia) 50,000

Income from salary 5,43,250

Problem 24
Mr. Kumar, an employee furnished the following particulars for previous year ending 31.3.2024:
(a) Salary income as computed (after all deductions) for the year 4,52,000
(b) During the year arrears of salary were received 70,000

(not included in the above) relate to Financial Year 2018-19

(c) Assessed income of Financial Year 2018-19 2,50,000

Rebate in the F.Y. 2018–19 Amount of Rs. 2500 (Max.)

Rebate in the F.Y. 2023–24 Amount of Rs. 12,500 (Max.)
You are requested to compute relief u/s 89 in terms of tax payable. (Modified) assuming he
exercises the option of shifting out of the default tax regime provided under section 115BAC(1A).

Solution
Mr. Kumar has not exercised option under section 115BAC

PY – 2023 - 24 PY – 2018 - 19

with arrear Without arrear with arrear Without

arrear
Taxable Salary 4,52,000 4,52,000 2,50,000 2,50,000
Arrear of Salary + 70,000 – + 70,000 –
Total Income 5,22,000 4,52,000 +3,20,000 2,50,000
Tax on above 16,900 10,100 3,500 0
Less: Rebate – 10,100 2,500 0
u/s 87 A
Tax 16,900 0 1,000 0
Add: 4% H.E.C. 676 0 40 0
17,576 0 1040 0
17576 1040
16,536
 Salaries (Unit - i) | 3.91

QUESTIONS & ANSWER

Question 1
Mr. Mohit is employed with XY Ltd. on a basic salary of ` 10,000 p.m. He is also entitled to
dearness allowance @100% of basic salary, 50% of which is included in salary as per terms of
employment. The company gives him house rentallowance of ` 6,000 p.m. which was increased to
` 7,000 p.m. with effect from 01.01.2024. He also got an increment of ` 1,000 p.m. in his basic
salary with effect from 01.02.2024. Rent paid by him during the P.Y.2023-24 is as under:
April and May, 2023- Nil, as he stayed with his parents
June to October, 2023 - ` 6,000 p.m. for an accommodation in Ghaziabad
November, 2023 to March, 2024 - ` 8,000 p.m. for an
accommodation inDelhi
Compute his gross salary for A.Y.2024-25, assuming he exercises the option of shifting out of
the default tax regime provided under section 115BAC(1A).
Answer
Computation of gross salary of Mr. Mohit for A.Y. 2024-25
Particulars `
Basic salary [(` 10,000 × 10) + (` 11,000 × 2)] 1,22,000
Dearness Allowance (100% of basic salary) 1,22,000
House Rent Allowance (See Note below) 21,300
Gross Salary 2,65,300

Note: Computation of Taxable House Rent Allowance (HRA)

Particulars April-May June-Oct Nov-Dec Jan Feb-March

(`)
(`) (`) (`) (`)
Basic salary per month 10,000 10,000 10,000 10,000 11,000
Dearness allowance
(included in salary as
per terms of
5,000 5,000 5,000 5,000 5,500
employment) (50% of
basic salary)

Salary per month for

the purpose of
computation of house 15,000 15,000 15,000 15,000 16,500
rent allowance

Relevant period (in 2 5 2 1 2

months
Salary for the relevant 30,000 75,000 30,000 15,000 33,000
period (Salary per
month × relevant
 Salaries (Unit - i) | 3.92

period)

Rent paid for the Nil 30,000 16,000 8,000 16,000

relevant period (` 6,000×5) (` 8,000×2) (` (` 8,000×2)
8,000×1)

House rent allowance 12,000 30,000 12,000 7,000 14,000

(HRA) received during (`6,000×2) (`6,000×5) (`6,000×2) (`7,000×1) (`7,000×2)
the relevant period (A)
Least of the following N.A.
is exempt [u/s
10(13A)]

1. Actual HRA – 30,000 12,000 7,000 14,000

received
2. Rent paid (–) 10% – 30,000 15,000 7,500 16,500
of salary

3. 40% of salary – 30,000 15,000 7,500 16,500

(Residence at (40% × (50% × (50% × (50% ×
Ghaziabad – June to ` 75,000) ` 30,000) ` 15,000) ` 33,000)
Oct, 2023)
50% of salary
(Residence at
Delhi– Nov, 23 -
March, 24)
Exempt HRA (B) Nil 22,500 12,000 6,500 12,700

Taxable HRA [Actual 12,000 7,500 Nil 500 1,300

HRA (–) Exempt HRA]
(A-B)

Taxable HRA (total) = ` 12,000 + ` 7,500 + ` 500 + ` 1,300 = ` 21,300

Question 2
Ms. Rakhi is an employee in a private company. She receives the followingmedical benefits
from the company during the previous year 2023-24:
Particulars `
1 Reimbursement of following medical expenses incurred
by Ms. Rakhi
(A) On treatment of her self-employed daughter in a 4,000
private clinic
(B) On treatment of herself by family doctor 8,000
(C) On treatment of her mother-in-law dependent on 5,000
her, in a nursing home
 Salaries (Unit - i) | 3.93

2 Payment of premium on Mediclaim Policy taken on her 7,500

health

3 Medical Allowance 2,000 p.m.

4 Medical expenses reimbursed on her son's treatment in 5,000

a government hospital
5 Expenses incurred by company on the treatment of her 1,05,000
minor son abroad including stay expenses
6 Expenses in relation to foreign travel of Rakhi and her 1,20,000
son for medical treatment
Note - Limit prescribed by RBI for expenditure on
medical treatment and stay abroad is USD 2,50,000 per
financial year under liberalized remittance scheme.

Examine the taxability of the above benefits and allowances in the hands of Rakhi.

Answer

Tax treatment of medical benefits, allowances and mediclaim premium in the hands of Ms.
Rakhi for A.Y. 2024-25
Particulars
1. Reimbursement of medical expenses incurred by Ms. Rakhi
(A) The amount of ` 4,000 reimbursed by her employer for treatment
of her self-employed daughter in a private clinic is taxable
perquisite.
(B) The amount of ` 8,000 reimbursed by the employer for treatment
of Ms. Rakhi by family doctor is taxable perquisite.
(C) The amount of ` 5,000 reimbursed by her employer for treatment
of her dependant mother-in-law in a nursing home is taxable
perquisite.
The aggregate sum of ` 17,000, specified in (A), (B) and (C) above,
reimbursed by the employer is taxable perquisite

2. Medical insurance premium of ` 7,500 paid by the employer for insuring

health of Ms. Rakhi is a tax free perquisite as per clause (iii) of the first
proviso to section 17(2).

3. Medical allowance of ` 2,000 per month i.e., ` 24,000 p.a. is a fully

taxable allowance.
4. As per clause (ii)(a) of the first proviso to section 17(2),
reimbursement of medical expenses of ` 5,000 on her son’s treatment
in a hospital maintained by the Government is a tax-free perquisite.
 Salaries (Unit - i) | 3.94

5. As per clause (vi) of the first proviso to section 17(2), the following
& expenditure incurred by the employer would be excluded from
6. perquisite subject to certain conditions –
(i) Expenditure on medical treatment of the employee, or any member
of the family of such employee, outside India including stay
expenses [`1,05,000, in this case];
(ii) Expenditure on travel of the employee or any member of the family
of such employee for medical treatment and one attendant who
accompanies the patient in connection with such treatment [`
1,20,000, in this case].

The conditions subject to which the above expenditure would beexempt

are as follows –

(i) The expenditure on medical treatment and stay abroad would be

excluded from perquisite to the extent permitted by Reserve Bank of
India;
(ii) The expenditure on travel would be excluded from perquisite only
in the case of an employee whose gross total income, as computed
before including the said expenditure, does not exceed `2 lakh.
Since the expenditure on medical treatment and stay abroad doesnot
exceed the limit permitted by RBI, they would be fully exempt. However,
the foreign travel expenditure of Ms. Rakhi and her minor son borne by
the employer would be excluded from perquisite onlyif the gross total
income of Ms. Rakhi, as computed before including the said expenditure,
does not exceed ` 2 lakh.

Question 3
Mr. X is employed with AB Ltd. on a monthly salary of ` 25,000 per month and an entertainment
allowance and commission of ` 1,000 p.m. each. The company provides him with the following
benefits:

(i) A company owned accommodation is provided to him in Delhi. Furniture costing ` 2,40,000
was provided on 1.8.2023.
(ii) A personal loan of ` 5,00,000 on 1.7.2023 on which it charges interest @ 6.75% p.a. The
entire loan is still outstanding (Assume SBI rate of interest on 1.4.2023 was 12.75% p.a.)
(iii) His son is allowed to use a motor cycle belonging to the company. The company had
purchased this motor cycle for ` 60,000 on 1.5.2020. The motor cycle was finally sold to
him on 1.8.2023 for ` 30,000.
(iv) Professional tax paid by Mr. X is ` 2,000.
Compute the income from salary of Mr. X for the A.Y. 2024-25 assuming Mr. X exercises the option
of shifting out of the default tax regime provided under section 115BAC(1A).
 Salaries (Unit - i) | 3.95

Answer

1. Computation of Income from Salary of Mr. X for the A.Y. 2024-25

Particulars ` `
Basic salary [` 25,000 × 12] 3,00,000
Commission [` 1,000 × 12] 12,000
Entertainment allowance [` 1,000 × 12] 12,000
Rent free accommodation [Note 1] 48,600
Add : Value of furniture [` 2,40,000 × 10% p.a. for 8 16,000 64,600
months]
Interest on personal loan [Note 2] 22,500
Use of motor cycle [` 60,000 × 10% p.a. for 4 months] 2,000
Transfer of motor cycle [Note 3] 12,000
Gross Salary 4,25,100
Less : Deduction under section 16
Under section 16(ia) – Standard deduction 50,000
Under section 16(iii) - Professional tax paid 2,000 52,000
Income from Salary 3,73,100
Notes:
1. Value of rent-free unfurnished accommodation
= 15% of salary for the relevant period
= 15% of (` 3,00,000 + `12,000 + ` 12,000) = `48,600
2. Value of perquisite for interest on personal loan
= [` 5,00,000 × (12.75% - 6.75%) for 9 months] = ` 22,500
3. Depreciated value of the motor cycle
= Original cost – Depreciation @ 10% p.a. for 3 completed years.
= `60,000 – (`60,000 × 10% p.a. × 3 years) = `42,000.
Perquisite = ` 42,000 – ` 30,000 = ` 12,000.
Question 4
Mr. Balaji, employed as Production Manager in Beta Ltd., furnishes you the following information
for the year ended 31.03.2024:
(i) Basic salary upto 31.10.2023 ` 50,000 p.m. Basic salary from 01.11.2023 ` 60,000 p.m.
Note - Salary is due and paid on the last day of every month.
(ii) Dearness allowance @ 40% of basic salary.
(iii) Bonus equal to one month salary. Paid in October 2023 on basic salary plus dearness
allowance applicable for that month.
(iv) Contribution of employer to recognized provident fund account of the employee@16% of
basic salary.
 Salaries (Unit - i) | 3.96

(v) Professional tax paid ` 2,500 of which ` 2,000 was paid by the employer.
(vi) Facility of laptop and computer was provided to Balaji for both official and personal use.
Cost of laptop ` 45,000 and computer ` 35,000 were acquired by the company on
01.12.2023.
(vii) Motor car owned by the employer (cubic capacity of engine exceeds 1.60 litres) provided to
the employee from 01.11.2023 meant for both official and personal use. Repair and running
expenses of ` 45,000 from 01.11.2023 to 31.03.2024, were fully met by the employer. The
motor car was self-driven by the employee.
(viii) Leave travel concession given to employee, his wife and three children (one daughter aged 7
and twin sons aged 3). Cost of air tickets (economy class) reimbursed by the employer `
30,000 for adults and ` 45,000 for three children. Balaji is eligible for availing exemption
this year to the extent it is permissible in law.
Compute the salary income chargeable to tax in the hands of Mr. Balaji for the
A.Y. 2024-25 assuming he exercises the option of shifting out of the default tax regime provided
under section 115BAC(1A).

Answer

Computation of Taxable Salary of Mr. Balaji for A.Y. 2024-25

Particulars `
Basic salary [(` 50,000 × 7) + (` 60,000 × 5)] 6,50,000
Dearness Allowance (40% of basic salary) 2,60,000
Bonus (` 50,000 + 40% of ` 50,000) (See Note 1) 70,000
Employers contribution to recognised provident fund in
excess of 12% of salary = 4% of ` 6,50,000 (See Note 2) 26,000
Professional tax paid by employer 2,000
Perquisite of Motor Car (` 2,400 for 5 months) (See Note 4) 12,000
Gross Salary 10,20,000
Less: Deduction under section 16
Standard deduction u/s 16(ia) ` 50,000
Professional tax u/s 16(iii) (See Note 6) ` 2,500 52,500
Taxable Salary 9,67,500
Notes:
1. Since bonus was paid in the month of October, the basic salary of ` 50,000 for the
month of October is considered for its calculation.
2. It is assumed that dearness allowance does not form part of salary for computing
retirement benefits.
3. As per Rule 3(7)(vii), facility of use of laptop and computer is a tax free perquisite, whether
used for official or personal purpose or both.
4. As per the provisions of Rule 3(2), in case a motor car (engine cubic capacity exceeding
1.60 liters) owned by the employer is provided to the employee without chauffeur for
 Salaries (Unit - i) | 3.97

personal as well as office use, the value of perquisite shall be ` 2,400 per month. The car
was provided to the employee from 01.11.2023, therefore the perquisite value has been
calculated for 5 months.
5. Mr. Balaji can avail exemption under section 10(5) on the entire amount of ` 75,000
reimbursed by the employer towards Leave Travel Concession since the same was availed
for himself, his wife and three children and the journey was undertaken by economy class
airfare. The restriction imposed for two children is not applicable in case of multiple births
which take place after the first child.
6. It is assumed that the Leave Travel Concession was availed for journey within India.
7. He is eligible to claim benefit of exemption u/s 10(5) since he has exercised the option of
shifting out of the default tax regime provided under section 115BAC(1A).
8. As per section 17(2)(iv), a “perquisite” includes any sum paid by the employer in respect of
any obligation which, but for such payment, would have been payable by the assessee.
Therefore, professional tax of ` 2,000 paid by the employer is taxable as a perquisite in the
hands of Mr. Balaji. As per section 16(iii), a deduction from the salary is provided on
account of tax on employment i.e. professional tax paid during the year.
9. Therefore, in the present case, the professional tax paid by the employer on behalf of the
employee ` 2,000 is first included in the salary and deduction of the entire professional tax
of ` 2,500 is provided from salary.
Question 5
From the following details, find out the salary chargeable to tax for the A.Y.2024-25 assuming he
exercises the option of shifting out of the default tax regime provided under section 115BAC(1A) -
Mr. X is a regular employee of Rama & Co., in Gurgaon. He was appointed on 1.1.2023 in the scale
of ` 20,000 - ` 1,000 - ` 30,000. He is paid 10% D.A. & Bonus equivalent to one month pay based
on salary of March every year. He contributes 15% of his pay and D.A. towards his recognized
provident fund and the company contributes the same amount. DA forms part of pay for
retirement benefits.
He is provided free housing facility which has been taken on rent by the company at ` 10,000 per
month. He is also provided with following facilities:
(i) Facility of laptop costing ` 50,000.
(ii) Company reimbursed the medical treatment bill of his brother of `25,000, who is
dependent on him.
(iii) The monthly salary of ` 1,000 of a house keeper is reimbursed by the company.
(iv) A gift voucher of ` 10,000 on the occasion of his marriage anniversary.

(v) Conveyance allowance of ` 1,000 per month is given by the company towards actual
reimbursement of conveyance spent on official duty.

(vi) He is provided personal accident policy for which premium of ` 5,000 is paid by the
company.

(vii) He is getting telephone allowance @` 500 per month.

 Salaries (Unit - i) | 3.98

Answer

Computation of taxable salary of Mr. X for A.Y. 2024-25

Particulars `
Basic pay [(` 20,000×9) + (` 21,000×3)] = ` 1,80,000 + 2,43,000
` 63,000
Dearness allowance [10% of basic pay] 24,300
Bonus 21,000
Employer’s contribution to Recognized Provident Fund in
excess of 12% (15%-12% =3% of ` 2,67,300) [See Note 1below] 8,019

Taxable allowances
Telephone allowance 6,000
Taxable perquisites
Rent-free accommodation [See Note 1 & 2 below] 44,145
Medical reimbursement 25,000
Reimbursement of salary of housekeeper 12,000
Gift voucher [See Note 5 below] 10,000
Gross Salary 3,93,464
Less: Deduction under section 16(ia) – Standard deduction 50,000
Salary income chargeable to tax 3,43,464
Notes:

1. Since dearness allowance forms part of salary for retirement benefits, the perquisite value
of rent-free accommodation and employer’s contribution to recognized provident fund have
been accordingly worked out.

2. Where the accommodation is taken on lease or rent by the employer, the value of rent-free
accommodation provided to employee would be actual amount of lease rental paid or
payable by the employer or 15% of salary, whichever is lower.

For the purposes of valuation of rent free house, salary includes:

(i) Basic salary i.e., ` 2,43,000

(ii) Dearness allowance i.e. ` 24,300

(iii) Bonus i.e., ` 21,000

(iv) Telephone allowance i.e., ` 6,000 Therefore, salary works out to ` 2,43,000 + ` 24,300 + `
21,000 + ` 6,000 = ` 2,94,300.

15% of salary = ` 2,94,300 × 15/100 = ` 44,145

 Salaries (Unit - i) | 3.99

Value of rent-free house = Lower of rent paid by the employer (i.e. ` 1,20,000) or 15% of
salary (i.e., ` 44,145). Therefore, the perquisite value is ` 44,145.

3. Facility of use of laptop is not a taxable perquisite.

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

Question 6
You are required to compute the income from salary of Mr. Raja under default tax regime from the
following particulars for the year ended 31-03-2024:

(i) He retired on 31-12-2023 at the age of 60, after putting in 25 years and 9 months of service,
from a private company at Delhi.

(ii) He was paid a salary of ` 25,000 p.m. and house rent allowance of ` 6,000 p.m. He paid rent
of ` 6,500 p.m., during his tenure of service.

(iii) On retirement, he was paid a gratuity of ` 3,50,000. He was covered by the payment of
Gratuity Act, 1972. He had not received any other gratuity at any point of time earlier, other
than this gratuity.

(iv) He had accumulated leave of 15 days per annum during the period of his service; this was
encashed by him at the time of his retirement. A sum of ` 3,15,000 was received by him in
this regard. Employer allowed 30 days leave per annum.

(v) He is receiving ` 5,000 as pension. On 1.2.2024, he commuted 60% of his pension and
received ` 3,00,000 as commuted pension.

(vi)The company presented him with a gift voucher of ` 5,000 on his retirement. His colleagues
also gifted him a mobile phone worth ` 50,000 from their own contribution.
Answer
 Salaries (Unit - i) | 3.100

Computation of income under the head “Salaries”

of Mr. Raja for the A.Y.2024-25 under default tax regime.
Particulars ` `
Basic Salary = ` 25,000 x 9 months 2,25,000
House Rent Allowance = ` 6,000 x 9 months 54,000
[Fully taxable under default tax regime]

Gratuity 3,50,000
Less: Least of the following exempt undersection
10(10)(ii) 3,50,000 Nil
(i) Actual Gratuity received ` 3,50,000
(ii) 15 days salary for every year of completed
service [15/26 x ` 25,000 x 26] =` 3,75,000

(iii) Notified limit = ` 20,00,000

Leave encashment 3,15,000
Less: Least of the following exempt undersection
10(10AA) 2,50,000 65,000
(i) ` 25,00,000

(ii) Leave salary actually received ` 3,15,000

(iii) ` 2,50,000, being 10 months’ salary x
` 25,000
(iv) Cash equivalent of leave standing at thecredit
of the employee based on theaverage salary
of last 10 months’ (max. 30days per year of
service) for every year of actual service
rendered for the employer from whose
service he has retired
375/30 x ` 25,000 = `3,12,500
[Leave Due = Leave allowed – Leave taken]
= 750 (30 days per year × 25 years) – 375
days (15 days x 25)
= 375 days]
Uncommuted Pension received [` 5,000 x 1) + 9,000
(` 5,000 x 2 x 40%)
Commuted Pension received 3,00,000
Less: Exempt under section 10(10A)
1/3 x ` 3,00,000/60% x 100%) 1,66,667 1,33,333
 Salaries (Unit - i) | 3.101

Gift Voucher [As per Rule 3(7)(iv), the value of Nil

any gift or voucher or token in lieu of gift
received by the employee or by member of his
household not exceeding ` 5,000 in aggregate
during the previous year is exempt]
Mobile Phone received as gift from colleagues Nil
(Neither taxable under the head “Salaries” nor
“Income from other sources”, since taxability
provisions under section 56(2)(x) are not
attracted in respect of mobile phone received
from colleagues, as mobile phone is not
included in the definition of “property”
thereunder)
Gross Salary 4,86,333
Less: Standard deduction u/s 16 [Actual salary 50,000
or ` 50,000, whichever is less] [Allowable under
default tax regime]

Net Salary

4,36,333

Question 7
Ms. Akansha, a salaried employee, furnishes the following details for the financial year 2023-24:

Particulars `
Basic salary 6,20,000
Dearness allowance 4,20,000
Commission 75,000
Entertainment allowance 9,000
Medical expenses reimbursed by the employer 18,000
Profession tax (of this, 50% paid by employer) 4,000
Health insurance premium paid by employer 8,000
Gift voucher given by employer on her birthday 10,000
Life insurance premium of Akansha paid by employer 26,000
Laptop provided for use at home. Actual cost of Laptop to
employer 45,000
Children of the assessee are also using the Laptop at home]
Employer company owns a Maruti Suzuki Swift car, which was
provided to the assessee, both for official and personal use.
 Salaries (Unit - i) | 3.102

Driver was also provided. (Engine cubic capacity more than 1.6
litres). All expenses are met by the employer
Annual credit card fees paid by employer [Credit card is not
exclusively used for official purposes; details of usage are not 7,000
available]

You are required to compute the income chargeable under the head Salaries for the assessment
year 2024-25 if she pays tax under default tax regime.
Answer
Computation of income chargeable under the head “Salaries” of Ms. Akansha for A.Y.2024-
25 under default tax regime
Particulars `
Basic Salary 6,20,000
Dearness allowance 4,20,000
Commission 75,000
Entertainment allowance 9,000
Medical expenses reimbursed by the employer is fully 18,000
taxable
Professional tax paid by the employer is a taxable 2,000
perquisite as per section 17(2)(iv), since it is an obligation
of the employee which is paid by the employer
Health insurance premium of ` 8,000 paid by the Nil
employer is an exempt perquisite [Clause (iii) of proviso to
section 17(2)]
Gift voucher given by employer on Ms. Akansha birthday 10,000
(entire amount is taxable since the perquisite value
exceeds ` 5,000) as per Rule 3(7)(iv)
Life insurance premium of Ms. Akansha paid by employer 26,000
is a taxable perquisite as per section 17(2)(v)
Laptop provided for use at home is an exempt perquisite Nil
as per Rule 3(7)(vii)
Provision of motor car with driver (engine cubic capacity
more than 1.6 litres) owned by employer to employee, the 39,600
perquisite value would be ` 39,600 [` (2,400+ 900)
×12]as per Rule 3(2)
Annual credit card fees paid by employer is a taxable
perquisite as per Rule 3(7)(v) since the credit card is not
exclusively used for official purposes and details of usage 7,000
are not available
Gross Salary 12,26,600
 Salaries (Unit - i) | 3.103

Less: Deductions under section 16

- Standard Deduction as per section 16(ia) 50,000
Income chargeable under the head “Salaries” 11,76,600

Note: As per Rule 3(7)(iv), the value of any gift or voucher received by the employee or by
member of his household on ceremonial occasions or otherwise from the employer shall be
determined as the sum equal to the amount of such gift. However, the value of any gift or
voucher received by the employee or by member of his household below ` 5,000 in aggregate
during the previous year would be exempt as per the proviso to Rule 3(7)(iv). In this case, the
gift voucher of ` 10,000 was received by Ms. Akansha from her employer on the
occasion of her birthday.
Since the value of the gift voucher exceeds the limit of ` 5,000, the entire amount of ` 10,000 is
liable to tax as perquisite. The above solution has been worked out accordingly.
An alternate view possible is that only the sum in excess of ` 5,000 is taxable in view of the
language of Circular No.15/2001 dated 12.12.2001, which states that such gifts upto ` 5,000 in
the aggregate per annum would be exempt, beyond which it would be taxed as a perquisite. As
per this view, the value of perquisite would be ` 5,000. Accordingly, the gross salary and net
salary would be ` 12,21,600 and ` 11,71,600, respectively.

**************
 INCOME FROM HOUSE PROPERTY Unit (ii) | 3.1

CHAPTER – 3 (Unit – II) INCOME FROM HOUSE PROPERTY

CHAPTER – 3
Unit - II
HOUSE PROPERTY
CHARGEABILITY [SECTION 22]
(1) Property should consist of any building or land appurtenant thereto.
(i) Buildings include not only residential buildings, but also factory buildings, offices,
shops, godowns and other commercial premises.
(ii) Land appurtenant means land connected with the building like garden, garage etc.
It may be noted that Income from letting out of vacant land is, however, taxable
under the head “Income from other sources” or “Profits and gains from business
or profession”, as the case may be.

(2) Assessee must be the owner of the property

(i) Owner is the person who is entitled to receive income from the property in his
own right.
(ii) The requirement of registration of the sale deed is not warranted.
(iii) Ownership includes both free-hold and lease-hold rights.
(iv) Ownership includes deemed ownership
(v) The person who owns the building need not also be the owner of the land upon
which it stands.
(vi) The assessee must be the owner of the house property during the previous year.
It is not material whether he is the owner in the assessment year.
(2) Use of property
The property may be used for any purpose, but it should not be used by the owner for the
purpose of any business or profession carried on by him, the profit of which is chargeable
to tax.
The income earned by an assessee engaged in the business of letting out of properties on
rent would also be taxable as business income and not as income from house property

(3) Property held as stock-in-trade etc.

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

(1) Meaning of composite rent: The owner of a property may sometimes receive rent in
respect of building as well as –
(i) other assets like say, furniture, plant and machinery.
(ii) for different services provided in the building, for e.g. –
(a) Lifts;
(b) Security;
(c) Power backup;
The amount so received is known as “composite rent”.
 INCOME FROM HOUSE PROPERTY Unit (ii) | 3.2
(2) Tax treatment of composite rent
Where composite rent includes rent of building and charges for different services (lifts,
security etc.), the composite rent is has to be split up in the following manner -
(i) the sum attributable to use of property is to be assessed under section 22 as
income from house property;
(ii) the sum attributable to use of services is to be charged to tax under the head
“Profits and gains of business or profession” or under the head “Income from other
sources”, as the case may be.
(3) Manner of splitting up
If let out building and other assets are inseparable

Where composite rent is received from letting out of building and other assets (like
furniture) and the two lettings are not separable i.e. the other party does not accept letting
out of buildings without other assets, then the rent is taxable either as business income or
income from other sources, the case may be.
This is applicable even if sum receivable for the two lettings is fixed separately.
If let out building and other assets are separable
Where composite rent is received from letting out of buildings and other assets and the
two lettings are separable i.e. letting out of one is acceptable to the other party without
letting out of the other, then
(a) income from letting out of building is taxable under “Income from house
property”;
(b) Income from letting out of other assets is taxable under the head “Profits and gains
from business or profession” or “Income from other sources”, as the case may be.
This is applicable even if a composite rent is received by the assessee from his tenant for
the two lettings.

INCOME FROM HOUSE PROPERTY SITUATED OUTSIDE INDIA

(1) In case of a resident in India (resident and ordinarily resident in case of individuals and
HUF), income from property situated outside India is taxable, whether such income is
brought into India or not.
(2) In case of a non-resident or resident but not ordinarily resident in India, income from a
property situated outside India is taxable only if it is received in India.

5. DETERMINATION OF ANNUAL VALUE [SECTION 23]

Determination Municipal tax Net Annual

of Gross paid by the Value (NAV)
Annual Value owner during
(GAV) the previous
year

Determination of annual value for different types of house properties

 INCOME FROM HOUSE PROPERTY Unit (ii) | 3.3
(i) Where the property is let out throughout the previous year [Section
23(1)(a)/(b)]
Where the property is let out for the whole year, then the GAV would be the higher of –
(a) Expected Rent (ER) and
(b) Actual rent received or receivable during the year
 The Expected Rent (ER) is the higher of fair rent (FR) and municipal value
(MV), but restricted to standard rent (SR).
 For example, let us say the higher of FR and MV is X. Then ER = SR, if X>SR.
However, if X<SR, ER = X.
 Expected Rent (ER) as per section 23(1)(a) cannot exceed standard rent (SR)
but it can be lower than standard rent, in a case where standard rent is more
than the higher of MV and FR.
 Municipal value is the value determined by the municipal authorities for
levying municipal taxes on house property.
 Fair rent means rent which similar property in the same locality would
fetch. The standard rent (SR) is fixed by the Rent Control Act.
From the GAV computed above, municipal taxes paid by the owner during the previous year is to
be deducted to arrive at the NAV.

ILLUSTRATION 1
Jayashree owns five houses in India, all of which are let-out. Compute the GAV of each house from
the information given below –
Particulars House House House House House
I II III IV V
(`) (`) (`) (`) (`)

Municipal Value 80,000 55,000 65,000 24,000 80,000

Fair Rent 90,000 60,000 65,000 25,000 75,000
Standard Rent N.A. 75,000 58,000 N.A. 78,000
Actual rent received/ 72,000 72,000 60,000 30,000 72,000
receivable

SOLUTION
As per section 23(1), Gross Annual Value (GAV) is the higher of Expected rent and actual rent
received. Expected rent is higher of municipal value and fair rent but restricted to standard rent.
Computation of GAV of each house owned by Jayashree
Particulars House House House House House
I II III IV V
(`) (`) (`) (`) (`)
(i) Municipal value 80,000 55,000 65,000 24,000 80,000
(ii) Fair rent 90,000 60,000 65,000 25,000 75,000
(iii) Higher of (i) & (ii) 90,000 60,000 65,000 25,000 80,000
(iv) Standard rent N.A. 75,000 58,000 N.A. 78,000
(v) Expected rent 90,000 60,000 58,000 25,000 78,000
[Lower of (iii) & (iv)]
(vi) Actual rent 72,000 72,000 60,000 30,000 72,000
received/receivable
GAV [Higher of (v) & 90,000 72,000 60,000 30,000 78,000
(vi)]
 INCOME FROM HOUSE PROPERTY Unit (ii) | 3.4

(ii) Where let out property is vacant for part of the year [Section 23(1)(c)]
Where let out property is vacant for part of the year and owing to vacancy, the actual rent is
lower than the ER, then the actual rent received or receivable will be the GAV of the property.
(iii) In case of self-occupied property or unoccupied property [Section 23(2)]
(a) Where the property is self-occupied for own residence or unoccupied throughout
the previous year, its Annual Value will be Nil, provided no other benefit is derived by
the owner from such property.

The expression “Unoccupied property” refers to a property which cannot be

occupied by the owner by reason of his employment, business or profession at a
different place and he resides at such other place in a building not belonging to him.
(b) The benefit of “Nil” Annual Value is available only for upto two self-occupied or
unoccupied house properties i.e. for either one house property or two house
properties owned by the assessee.
(c) The benefit of “Nil” Annual Value in respect of up to two self-occupied house properties
is available only to an individual/ HUF.
(d) No deduction for municipal taxes is allowed in respect of such property.
(iv) Where a house property is let-out for part of the year and self-occupied for
part of the year [Section 23(3)]
(a) If a single unit of a property is self-occupied for part of the year and let-out for the
remaining part of the year, then the ER for the whole year shall be taken into account
for determining the GAV.
(b) The ER for the whole year shall be compared with the actual rent for the let out
period and whichever is higher shall be adopted as the GAV.
(c) However, municipal tax for the whole year is allowed as deduction provided it is paid
by the owner during the previous year.

(v) In case of deemed to be let out property [Section 23(4)]

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

(vi) In case of a house property held as stock-in-trade [Section 23(5)]

(a) In some cases, property consisting of any building or land appurtenant thereto may
be held as stock-in-trade, and the whole or any part of the property may not be let
out during the whole or any part of the previous year.
(b) In such cases, the annual value of such property or part of the property shall be NIL.
(c) This benefit would be available for the period upto two years from the end of the
 INCOME FROM HOUSE PROPERTY Unit (ii) | 3.5
financial year in which certificate of completion of construction of the property is
obtained from the competent authority.
(vii) In case of a house property, a portion let out and a portion self-
occupied
(a) Income from any portion or part of a property which is let out shall be computed
separately under the “let out property” category and the other portion or part
which is self-occupied shall be computed under the “self-occupied property”
category.
(b) There is no need to treat the whole property as a single unit for computation of
income from house property.
(c) Municipal valuation/ fair rent/ standard rent, if not given separately, shall be
apportioned between the let-out portion and self-occupied portion either on plinth
area or built-up floor space or on such other reasonable basis.
(d) Property taxes, if given on a consolidated basis can be bifurcated as attributable to
each portion or floor or on a reasonable basis.
Treatment of unrealised rent [Explanation to section 23(1)]
(i) The Actual rent received/receivable should not include any amount of rent which is not
capable of being realised.
(ii) However the conditions prescribed in Rule 4 should be satisfied. They are –
(a) the tenancy is bona fide;
(b) the defaulting tenant has vacated, or steps have been taken to compel him to
vacate the property;
(c) the defaulting tenant is not in occupation of any other property of the assessee;
(d) the assessee has taken all reasonable steps to institute legal proceedings for the
recovery of the unpaid rent or satisfies the Assessing Officer that legal proceedings
would be useless.
Property taxes (Municipal taxes)
(i) Property taxes are allowable as deduction from the GAV subject to the following two
conditions:
(a) It should be borne by the assessee (owner); and
(b) It should be actually paid during the previous year.
(ii) If property taxes levied by a local authority for a particular previous year is not paid
during that year, no deduction shall be allowed in the computation of income from
house property for that year.
(iii) However, if in any subsequent year, the arrears are paid, then, the amount so paid is
allowed as deduction in computation of income from house property for that year.
(iv) Thus, we find that irrespective of the previous year in which the liability to pay such
taxes arise according to the method of accounting regularly employed by the owner, the
deduction in respect of such taxes will be allowed only in the year of actual payment.
(v) In case of property situated outside India, taxes levied by local authority of the country in
which the property is situated is deductible [CIT v. R. Venugopala Reddiar (1965) 58 ITR
439 (Mad)].
(vi) In respect of self-occupied/unoccupied house property/properties for which “Nil”
Annual Value is claimed, deduction of municipal taxes paid is not allowable.
 INCOME FROM HOUSE PROPERTY Unit (ii) | 3.6
Illustration 2

Rajesh, a British national, is a resident and ordinarily resident in India during the P.Y.2023-24.
He owns a house in London, which he has let out at £ 10,000 p.m. The municipal taxes paid to
the Municipal Corporation of London is £ 8,000 during the P.Y.2023-24. The value of one £ in
Indian rupee to be taken at ` 95. Compute Rajesh’s Net Annual Value of the property for the A.Y.
2024-25.
Solution
For the P.Y.2023-24, Mr. Rajesh, a British national, is resident and ordinarily resident in India.
Therefore, income received by him by way of rent of the house property located in London is
to be included in the total income in India. Municipal taxes paid in London is be to allowed as
deduction from the gross annual value.
Computation of Net Annual Value of the property of Mr. Rajesh for A.Y.2024-25
Particulars `

Gross Annual Value (£ 10,000 × 12 × 95) 1,14,00,000

Less: Municipal taxes paid (£ 8,000 × 95) 7,60,000

Net Annual Value (NAV) 1,06,40,000

6. DEDUCTIONS FROM ANNUAL VALUE [SECTION 24]

(1) There are two deductions from annual value. They are –
(i) 30% of NAV; and
(ii) Interest on borrowed capital
(i) 30% of NAV is allowed as deduction under section 24(a)
(a) This is a flat deduction and is allowed irrespective of the actual expenditure
incurred.
(b) The assessee will not be entitled to deduction of 30%, in the following cases,
as the annual value itself is Nil.
(i) In case of self-occupied property; or
(ii) In case of property held as stock-in-trade and the whole or any part of
the property is not let out during the whole or any part of the
previous year upto 2 years from the end of the financial year in which
certificate of completion of construction of the property is obtained
from the competent authority.
(ii) Interest on borrowed capital is allowed as deduction under section 24(b)
Interest payable on loans borrowed for the purpose of acquisition, construction,
repairs, renewal or reconstruction can be claimed as deduction.
Interest payable on a fresh loan taken to repay the original loan raised earlier for
the aforesaid purposes is also admissible as a deduction.
Interest for pre-construction period:

Pre-construction period is the period prior to the previous year in which property
is acquired or construction is completed.
 INCOME FROM HOUSE PROPERTY Unit (ii) | 3.7
Interest payable on borrowed capital for the period prior to the previous year in
which the property has been acquired or constructed (Pre-construction interest),
can be claimed as deduction over a period of 5 years in equal annual installments
commencing from the year of acquisition or completion of construction.
Interest for the year in which construction is completed/ property is acquired:

Interest relating to the year of completion of construction/ acquisition of

property can be fully claimed in that year irrespective of the date of
completion/ acquisition.
Example 1
Arvind had taken a loan of ` 5,00,000 for construction of property on 1.10.2022. Interest
was payable @10% p.a. The construction was completed on 30.6.2023. No principal
repayment has been made up to 31.3.2024. Compute the interest allowable as deduction
under section 24 for the A.Y.2024-25.
Solution
Interest for the year (1.4.2023 to 31.3.2024) = 10% of ` 5,00,000 = ` 50,000
Pre-construction interest =10% of ` 5,00,000 for 6 months (from 1.10.2022 to 31.3.2023) =
` 25,000.
Pre-construction interest to be allowed in 5 equal annual installments of ` 5,000 from the
year of completion of construction i.e. in this case, P.Y. 2022-23.
Therefore, total interest deduction under section 24 = ` 50,000 + ` 5000 = ` 55,000.
(2) Deduction in respect of self-occupied property where annual value is nil
(i) In this case, the assessee will be allowed a deduction on account of interest
(including 1/5 th of the accumulated interest of pre-construction period) as
under –
S.No. Conditions Amount of Deduction
(a) Loan borrowed before 1.4.99:
Actual interest payable in
Where the property has been acquired,
aggregate for one or two self-
constructed, repaired, renewed or
occupied properties, subject to
reconstructed with borrowed capital
maximum of ` 30,000.
before 1.4.99.

(b) Loan borrowed on or after 1.4.99:

(i) Where the property is acquired or Actual interest payable in
constructed with capital borrowed aggregate for one or two self-
on or after 1.4.99 and such occupied properties, subject to
acquisition or construction is maximum of ` 2,00,000, if
completed within 5 years from the certificate mentioned in (2) below
end of the financial year in which is obtained.
the capital was borrowed
(ii) Where the property is repaired, Actual interest payable in
renewed or reconstructed with aggregate for one or two self-
capital borrowed on or after occupied properties, subject to a
1.4.99. maximum of ` 30,000.
However, the total interest deduction under (a) and (b) cannot exceed
` 2,00,000.
 INCOME FROM HOUSE PROPERTY Unit (ii) | 3.8
Illustration 3
Mr. Manas owns two house properties one at Bombay, wherein his family resides and the other at
Delhi, which is unoccupied. He lives in Chandigarh for his employment purposes in a rented
house. For acquisition of house property at Bombay, he has taken a loan of ` 30 lakh@10% p.a.
on 1.4.2022. He has not repaid any amount so far. In respect of house property at Delhi, he has
taken a loan of ` 5 lakh@11% p.a. on 1.10.2022 towards repairs. Compute the deduction
which would be available to him under section 24(b) for A.Y.2024-25 in respect of interest
payable on such loan if he exercises the option of shifting out of the default tax regime provided
under section 115BAC(1A).
Solution

Mr. Manas can claim benefit of Nil Annual Value in respect of his house property at Bombay and
Delhi, since no benefit is derived by him from such properties, and he cannot occupy such
properties due to reason of his employment at Chandigarh, where he lives in a rented house.
He is eligible for deduction under section 24(b) since he has exercised the option of shifting out of
the default tax regime provided under section 115BAC(1A).
Computation of deduction u/s 24(b) for A.Y.2024-25
Particulars `
I Interest on loan taken for acquisition of
residential house property at Bombay
30,00,000 x 10% = ` 3,00,000
Restricted to ` 2,00,000 2,00,000
II Interest on loan taken for repair of residential
house property at Delhi
` 5,00,000 x 11% = ` 55,000
Restricted to ` 30,000 30,000
Total interest 2,30,000
Deduction under section 24(b) in respect of (I) and (II) 2,00,000
above to be restricted to

Important points:
(a) The ceiling limit would not apply to let-out/ deemed let-out property: The ceiling
prescribed for self-occupied property as above in respect of interest on loan borrowed
does not apply to a let out/deemed let-out property.
(b) Interest allowable on accrual basis: Deduction under section 24(b) for interest is
available on accrual basis. Therefore, interest accrued but not paid during the year can
also be claimed as deduction.
(c) Unpaid purchase price would be considered as capital borrowed: Where a buyer
enters into an arrangement with a seller to pay the sale price in installments along with
interest due thereon, the seller becomes the lender in relation to the unpaid purchase
price and the buyer becomes the borrower. In such a case, unpaid purchase price can be
treated as capital borrowed for acquiring property and interest paid thereon can be
allowed as deduction under section 24.
(d) Interest on unpaid interest is not deductible.
 INCOME FROM HOUSE PROPERTY Unit (ii) | 3.9

Deductions from Net Annual Value: At a Glan

Deductions allowed from NAV

Self occupied property /

Let out/ deemed properties
let out property

Interest on borrowed capital u/s 24(b)

Interest on
Standard borrowed
deduction capital u/s where loan is taken where loan is taken for
u/s 24(a) 24(b) for repair, renewal acquisition or
or reconstruction of construction of house
house property

Fully
30% of If loan is taken If loan is taken on
Allowed Maximum
NAV before 1.4.99 or after 1.4.99

` 30,000 in
toto for one or Acquisition or construction
two self completed within 5 years from the
occupied end of the FY in which the capital
properties was borrowed +

Certificate from lender specifying

interest payable

No Yes
Maximum Maximum `
2,00,000 in
` 30,000 in toto for toto for one or
one or two self two self
occupied properties occupied
properties

Example 2
P, an individual, borrowed ` 20,00,000 for repair of his self-occupied house property and paid
interest of ` 1,60,000 thereon during the financial year 2023-24. What is the amount of interest
allowable as deduction under section 24 for the assessment year 2024-25?

Solution

Section 24(b) provides that where the self-occupied house property has been acquired,
constructed, repaired, renewed or reconstructed with borrowed capital, deduction towards
interest payable thereon shall not exceed ` 30,000. Therefore, only ` 30,000 would be allowed as
deduction on account of interest on loan borrowed for repair and reconstruction of self-
occupied house property.
The higher limit of ` 2,00,000 in respect of interest on loan borrowed on or after 1.4.1999 would
be available only where such loan is borrowed for acquisition or construction of self-occupied
property and not for repair of such property.
 INCOME FROM HOUSE PROPERTY Unit (ii) | 3.10
COMPUTATION OF “INCOME FROM HOUSE PROPERTY” FOR DIFFERENT
CATEGORIES OF PROPERTY
Particulars Amount
Computation of GAV
Step 1 Compute ER
ER = Higher of MV and FR, but restricted to SR
Step 2 Compute Actual rent received/ receivable
Actual rent received/ receivable less unrealized rent as per
Rule 4
Step 3 Compare ER and Actual rent received/ receivable
Step 4 GAV is the higher of ER and Actual rent received/
receivable
Gross Annual Value (GAV) A
Less: Municipal taxes (paid by the owner during the previous B
year)
Net Annual Value (NAV) = (A-B) C
Less: Deductions u/s 24
(a) 30% of NAV D
(b) Interest on borrowed capital (actual without any E F
ceiling limit)
Income from house property (C-F) G

Illustration 4
Anirudh has a property whose municipal valuation is ` 1,30,000 p.a. The fair rent is ` 1,10,000
p.a. and the standard rent fixed by the Rent Control Act is ` 1,20,000 p.a. The property was let out
for a rent of ` 11,000 p.m. throughout the previous year. Unrealised rent was ` 11,000 and all
conditions prescribed by Rule 4 are satisfied. He paid municipal taxes @10% of municipal valuation.
Interest on borrowed capital was ` 40,000 for the year. Compute his income from house property for
A.Y.2024-25.

Answer
Computation of Income from house property of Mr. Anirudh for A.Y.2024-25
Particulars Amount in `
Computation of GAV
Step 1 Compute ER
ER = Higher of MV of ` 1,30,000 p.a. and FR of 1,20,000
` 1,10,000 p.a., but restricted to SR of
` 1,20,000 p.a.
Step 2 Compute actual rent received/receivable
Actual rent received/receivable less unrealized 1,21,000
rent as per Rule 4 = ` 1,32,000 - ` 11,000
Step 3 Compare ER of ` 1,20,000 and Actual rent
received/receivable of ` 1,21,000

Step 4 GAV is the higher of ER and Actual rent 1,21,000

received/receivable
 INCOME FROM HOUSE PROPERTY Unit (ii) | 3.11

Gross Annual Value (GAV) 1,21,000

Less: Municipal taxes (paid by the owner during the
previous year) = 10% of ` 1,30,000 13,000
Net Annual Value (NAV) 1,08,000
Less: Deductions under section 24
(a) 30% of NAV 32,400
(b) Interest on borrowed capital (actual
without any ceiling limit) 40,000 72,400
Income from house property 35,600

Note – Alternatively, if as per income-tax returns, unrealized rent is deducted from GAV, then
GAV would be ` 1,32,000, being higher of expected rent of ` 1,20,000 and actual rent of
` 1,32,000. Thereafter, unrealized rent of ` 11,000 and municipal taxes of ` 13,000 would
be deducted from GAV of ` 1,32,000 to arrive at the NAV of ` 1,08,000.

(I) LET OUT PROPERTY VACANT FOR PART OF THE YEAR

Particulars Amount
Computation of GAV
Step 1 Compute ER
ER = Higher of MV and FR, but restricted to SR
Step 2 Compute Actual rent received/receivable
Actual rent received/receivable for let out period less
unrealized rent as per Rule 4 [See Note below for alternate
view]
Step 3 Compare ER and Actual rent received/receivable computed for
the let-out period
Step 4 If Actual rent is lower than ER owing to vacancy, then Actual
rent is the GAV.
If Actual rent is lower than ER due to other reasons, then
ER is the GAV.
However, in spite of vacancy, if the actual rent is higher than
the ER, then Actual rent is the GAV.
Gross Annual Value (GAV)
Less: Municipal taxes (paid by the owner during the previous year)
Net Annual Value (NAV) = (A-B) A
Less: Deductions under section 24 B
(a) 30% of NAV D C
(b) Interest on borrowed capital (actual without
any ceiling limit) E

F
Income from house property (C-F) G

Note - The income-tax returns, however, permit deduction of unrealized rent from gross
annual value. If this view is taken, the unrealized rent should be deducted only after
computing gross annual value.
 INCOME FROM HOUSE PROPERTY Unit (ii) | 3.12
Illustration 5
Ganesh has a property whose municipal valuation is ` 2,50,000 p.a. The fair rent is ` 2,00,000 p.a.
and the standard rent fixed by the Rent Control Act is ` 2,10,000 p.a. The property was let out for a
rent of ` 20,000 p.m. However, the tenant vacated the property on 31.1.2024. Unrealised rent was
` 20,000 and all conditions prescribed by Rule 4 are satisfied. He paid municipal taxes @8% of
municipal valuation. Interest on borrowed capital was ` 65,000 for the year. Compute the income
from house property of Ganesh for A.Y.2024-25.
Answer
Computation of income from house property of Ganesh for A.Y.2024-25
Particulars Amount in `
Computation of GAV
Step 1 Compute ER
Higher of MV of ` 2,50,000 p.a. & FR of ` 2,00,000 2,10,000
p.a., but restricted to SR of ` 2,10,000 p.a.
Step 2 Compute Actual rent received/receivable
Actual rent received/receivable for let out 1,80,000
period less unrealized rent as per Rule 4 =
` 2,00,000 – ` 20,000
Step 3 Compare ER & Actual rent received/receivable
Step 4 In this case the actual rent of ` 1,80,000 is 1,80,000
lower than ER of ` 2,10,000 owing to vacancy,
since, had the property not been vacant the
actual rent would have been ` 2,20,000
(` 1,80,000 + ` 40,000, being notional rent for
February and March 2023). Therefore, actual
rent is the GAV.
Gross Annual Value (GAV) 1,80,000
Less: Municipal taxes (paid by the owner during the
previous year) = 8% of ` 2,50,000 20,000
Net Annual Value (NAV) 1,60,000
Less: Deductions under section 24
(a) 30% of NAV = 30% of ` 1,60,000 48,000
(b) Interest on borrowed capital (actual
without any ceiling limit) 65,000 1,13,000
Income from house property 47,000

Note – Alternatively, if as per income-tax returns, unrealized rent is deducted from GAV, then
GAV would be ` 2,00,000, being the actual rent, since the actual rent is lower than the
expected rent of ` 2,10,000 owing to vacancy. Thereafter, unrealized rent of ` 20,000 and
municipal taxes of ` 20,000 would be deducted from GAV of ` 2,00,000 to arrive at the
NAV of ` 1,60,000.
 INCOME FROM HOUSE PROPERTY Unit (ii) | 3.13

(III) SELF-OCCUPIED PROPERTIES OR UNOCCUPIED PROPERTIES

Particulars Amount

Annual value under section 23(2) Nil

Less: Deduction under section 24
Interest on borrowed capital [Allowable only in case the E
assessee exercises the option of shifting out of the
default tax regime provided under section 115BAC(1A)]
(i) Interest on loan taken for acquisition or construction of
house on or after 1.4.99 and same was completed
within 5 years from the end of the financial year in
which capital was borrowed, interest paid or payable in
toto for one or two self-occupied properties subject to
a maximum of ` 2,00,000 (including apportioned pre-
construction interest).
(ii) Interest on loan taken for repair, renovation or
reconstruction on or after 1.4.99, interest paid or
payable in toto for one or two self-occupied properties
subject to a maximum of ` 30,000.
Income from house property -E
However, aggregate interest on borrowed capital allowable under
(i) and (ii) cannot exceed ` 2,00,000

Illustration 6
Poorna has one house property at Indira Nagar in Bangalore. She stays with her family in
the house. The rent of similar property in the neighbourhood is ` 25,000 p.m. The
municipal valuation is ` 2,80,000 p.a.. Municipal taxes paid is ` 8,000. The house construction
began in April 2017 with a loan of ` 20,00,000 taken from SBI Housing Finance Ltd. @9% p.a.
on 1.4.2017. The construction was completed on 30.11.2019. The accumulated interest up to
31.3.2019 is ` 3,60,000. On 31.3.2024, Poorna paid ` 2,40,000 which included ` 1,80,000
as interest. There was no principal repayment prior to this date. Compute Poorna’s income
from house property for A.Y. 2024-25 assuming that she has exercised the option of shifting
out of the default tax regime provided under section 115BAC(1A).
Answer

Computation of income from house property of Smt.

Poorna for A.Y.2024-25

Particulars Amount `
Annual Value of house used for self-occupation under section 23(2) Nil

Less: Deduction under section 24

Interest on borrowed capital
 INCOME FROM HOUSE PROPERTY Unit (ii) | 3.14

Interest on loan was taken for construction of house on or after 1.4.99 and
same was completed within the prescribed time - interest paid or
payable subject to a maximum of
` 2,00,000 (including apportioned pre-construction interest) will be
allowed as deduction.

In this case the total interest is ` 1,80,000 + ` 72,000 (Being 1/5th

of ` 3,60,000) = ` 2,52,000. However, the interest deduction is
restricted to ` 2,00,000. 2,00,000

Loss from house property (2,00,000)

Illustration 7
R is a Cost Accountant in HIFI. Ltd., Mumbai, and he gets Rs 18,000 per month as salary. He owns
two houses, one of which has been let out to the employer company which in turn was provided to
him as rent-free accommodation. Determine the taxable income of R for the A/Y 2024-25 after
taking into account the following information relating property income :
House 1 (Rs.) House 2 (Rs.)
Fair rent (Rent. Control Act is not applicable) 60,000 1,82,000
Actual Rent 63,000 1,84,000
Municipal Valuation - Annual Value 61,000 1,85,000
Municipal Taxes paid 14,000 40,000
Repairs 3.500 7,700
Insurance premium on building 3,000 33,000
Land revenue 7,500 24,000
Ground Rent 4.000 7,800
Interest on borrowed capital by mortgaging House I -
(funds are used for construction of House 2) 18,000
Nature of occupation Let out to HIFI Ltd. Let out to G for
business
Date of completion of construction March, 2002 April, 2005

Answer

Computation of Taxable income of R

(For the assessment year 2024-25)

Rs. Rs.

Salary income

Basic salary (Rs. 18,000 x12) 2,16,000

Rent free accommodation (Refer note 1) 32,400

2,48,400

Less : Standard Deduction u/s 16 50,000

Standard Deduction u/s 16 (ia) 1,98,400

 INCOME FROM HOUSE PROPERTY Unit (ii) | 3.15
Income from House

Property House-l (Let out for Residence):

Gross annual value

(a) maximum of fair rent and municipal value Rs. 61,000

(b) Actual rent received or receivable Rs. 63,000 63,000

Less : Municipal Taxes 14,000

Net annual value 49,000

Less: Deductions under section 24

Statutory deduction @ 30% 14,700

Interest on capital borrowed

(As the funds are utilized for house 2,

it is not deductible from house 1) Nil 14,700 34,300

House 2 (Let out for business)

Gross Annual value
(a) maximum of fair Rent and municipal value Rs. 1,85,000
(b) Actual rent received or receivable Rs. 1,84,000 1,85,000
Less- municipal taxes 40,000
Net annual value 1,45,000
Less- Deductions under section 24
(a) Statutory deduction @ 30% 43,500
(b) Interest on funds borrowed:

as the amount is borrowed for construction of House 2, it is 18,000 61,500

deductible even if House 1 is mortgaged)

83,500

Income under the head house property 1,17,800

Taxable income 3,16,200

Note : Free accommodation: R has let out House 1 to his employer company HIFl Ltd, which provides
the same to him as rent free accommodation. Rental income received by R as owner will be taxable
as "income from house property." As he uses the House only as an employee of the tenant, value of
perquisite for rent free house is taxable under the head "Salaries". He is not entitled to the benefits
permissible under section 23(2), as he occupies the house not as owner as a sub-tenant of the
employer company. Value of perquisites in respect of rent free house: 15% Salary of Rs. 2,16,000 i.e.
Rs. 32,400 or actual rent i.e. 63,000 whichever is lower.
 INCOME FROM HOUSE PROPERTY Unit (ii) | 3.16
Illustration 8
Ganesh has three houses, all of which are self-occupied. The particulars of the houses for the
P.Y.2023-24 are as under:
Particulars House I House II House III
Municipal valuation p.a. ` 3,00,000 ` 3,60,000 ` 3,30,000
Fair rent p.a. ` 3,75,000 ` 2,75,000 ` 3,80,000
Standard rent p.a. ` 3,50,000 ` 3,70,000 ` 3,75,000
Date of completion/purchase 31.3.2000 31.3.2002 01.4.2016
Municipal taxes paid during the year 12% 8% 6%
Interest on money borrowed for repair of - ` 55,000
property during the current year
Interest for current year on money ` 1,75,000
borrowed in April, 2016 for purchase of
property

Compute Ganesh’s income from house property for A.Y.2024-25 and suggest which houses
should be opted by Ganesh to be assessed as self-occupied so that his tax liability is minimum.
Answer
Let us first calculate the income from each house property assuming that they are deemed to
be let out.
Computation of income from house property of Ganesh for the A.Y. 2024-25
Particulars Amount in `
House I House II House III
Gross Annual Value (GAV)
ER is the GAV of house property
ER = Higher of MV and FR, but 3,50,000 3,60,000 3,75,000
restricted to SR

Less: Municipal taxes (paid by the 36,000 28,800 19,800

owner during the previous year)

Net Annual Value (NAV) 3,14,000 3,31,200 3,55,200

Less: Deductions under section 24
(a) 30% of NAV 94,200 99,360 1,06,560
(b) Interest on borrowed capital - 55,000 1,75,000
Income from house property 2,19,800 1,76,840 73,640

Ganesh can opt to treat any two of the above house properties as self-occupied.

Under default tax regime under section 115BAC

OPTION 1 (House I and II– self-occupied and House III – deemed to be let out)

If House I and II are opted to be self-occupied, the income from house property shall be –
 INCOME FROM HOUSE PROPERTY Unit (ii) | 3.17

Particulars Amount in `
House I (Self-occupied) Nil
House II (Self-occupied) (No interest deduction) House Nil
III (Deemed to be let-out) 73,640
Income from house property
73,640

OPTION 2 (House I and III – self-occupied and House II – deemed to be let out)

If House I and III are opted to be self-occupied, the income from house property shall be –
Particulars Amount in `
House I (Self-occupied) Nil
House II (Deemed to be let-out) 1,76,840
House III (Self-occupied) (No interest deduction) Nil
Income from house property 1,76,840

OPTION 3 (House II and III –self-occupied and House I – deemed to be let out)

If House II and III are opted to be self-occupied, the income from house property shall be –
Particulars Amount in `
House I (Deemed to be let-out) 2,19,800
House II (Self-occupied) (No interest deduction) -
House III (Self-occupied) (No interest deduction) -
Income from house property 2,19,800

Since Option 1 is most beneficial, Ganesh should opt to treat House I and II as self-
occupied and House III as deemed to be let out. His income from house property would be
`73,640 for the A.Y. 2024-25 under default tax regime under section 115BAC.
If Mr. Ganesh has exercised the option of shifting out of the default tax regime provided
under section 115BAC(1A)
OPTION 1 (House I and II– self-occupied and House III – deemed to be let out)
If House I and II are opted to be self-occupied, the income from house property shall be –
Particulars Amount in `
House I (Self-occupied) Nil
House II (Self-occupied) (Interest deduction restricted to ` 30,000) (30,000)
House III (Deemed to be let-out) 73,640
Income from house property 43,640

OPTION 2 (House I and III – self-occupied and House II – deemed to be let out)
If House I and III are opted to be self-occupied, the income from house property shall be –
Particulars Amount in `
House I (Self-occupied) Nil
House II (Deemed to be let-out) 1,76,840
House III (Self-occupied) (1,75,000)
Income from house property 1,840
 INCOME FROM HOUSE PROPERTY Unit (ii) | 3.18
OPTION 3 (House II and III –self-occupied and House I – deemed to be let out)

If House II and III are opted to be self-occupied, the income from house property shall be –
Particulars Amount in `
House I (Deemed to be let-out) 2,19,800
House II (Self-occupied) (Interest deduction (30,000)
restricted to ` 30,000)
House III (Self-occupied) (No interest deduction) (1,75,000)
(Total interest deduction restricted to ` 2,00,000) (2,00,000)
Income from house property 19,800

Since Option 2 is most beneficial in this case, Ganesh should opt to treat House I and III as
self-occupied and House II as deemed to be let out. His income from house property would
be ` 1,840 for the A.Y. 2024-25 under the optional tax regime i.e., the normal provisions
of the Act.
ILLUSTRATION 9

Prem owns a house in Madras. During the previous year 2023-24, 2/3rd portion of the house
was self-occupied and 1/3rd portion was let out for residential purposes at a rent of ` 8,000
p.m. Municipal value of the property is ` 3,00,000 p.a., fair rent is ` 2,70,000 p.a. and
standard rent is ` 3,30,000 p.a. He paid municipal taxes @10% of municipal value during the
year. A loan of ` 25,00,000 was taken by him during the year 2019 for acquiring the property.
Interest on loan paid during the previous year 2023-24 was ` 1,20,000. Compute Prem’s
income from house property for the A.Y.2024-25 assuming that he has exercised the option of
shifting out of the default tax regime provided under section 115BAC(1A).
What would be Prem’s income from house property under the default tax regime?
Answer
There are two units of the house. Unit I with 2/3rd area is used by Prem for self- occupation
throughout the year and no other benefit is derived from that unit, hence it will be treated as
self-occupied and its annual value will be Nil. Unit 2 with 1/3rd area is let-out throughout the
previous year and its annual value has to be determined as per section 23(1).
Computation of income from house property of Mr. Prem for A.Y.2024-25 under the
optional tax regime (i.e., the normal provisions of the Act)
Particulars Amount in `
Unit I (2/3 area – self-occupied)
rd

Annual Value Nil

Less: Deduction under section 24(b)
2/3rd of ` 1,20,000 80,000
Income from Unit I (self-occupied) (80,000)
Unit II (1/3 area – let out)
rd

Computation of GAV
Step I Compute ER
ER = Higher of MV and FR, restricted to SR 1,00,000
However, in this case, SR of ` 1,10,000 (1/3rd of
` 3,30,000) is more than the higher of MV of
 INCOME FROM HOUSE PROPERTY Unit (ii) | 3.19

` 1,00,000 (1/3rd of ` 3,00,000) and FR of

` 90,000 (1/3rd of ` 2,70,000). Hence the higher
of MV and FR is the ER. In this case, it is the MV.
96,000
Step 2 Compute actual rent received/ receivable
` 8,00012 = ` 96,000
Step 3 Compare ER and Actual rent received/receivable
1,00,000
Step 4 GAV is the higher of ER and actual rent
received/receivable i.e. higher of ` 1,00,000 and
` 96,000
1,00,000
Gross Annual Value(GAV)
Less: Municipal taxes paid by the owner during the
previous year relating to let-out portion
10,000
1/3rd of (10% of ` 3,00,000) = ` 30,000/3 = ` 10,000
90,000
Net Annual Value(NAV)
Less: Deductions under section 24
27,000
(a) 30% of NAV = 30% of ` 90,000
(b) Interest paid on borrowed capital (relating
40,000 67,000
to let out portion) 1/3rdof ` 1,20,000
23,000
Income from Unit II (let-out)
Loss under the head “Income from house property” = (` 80,000) +
` 23,000 = (` 57,000)
Under the default tax regime, Prem would not be entitled to interest deduction of ` 80,000
under section 24(b) in respect of self-occupied portion (Unit 1). Hence, income from house
property would be ` 23,000, being income from Unit II, which is let out.

HOUSE PROPERTY, A PORTION LET OUT AND A PORTION SELF-OCCUPIED

8 INADMISSIBLE DEDUCTIONS [SECTION 25]

Interest chargeable under this Act which is payable outside India shall not be deducted if
(a) tax has not been paid or deducted from such interest and
(b) there is no person in India who may be treated as an agent under section 163.
9 PROVISION FOR ARREARS OF RENT AND UNREALIZED RENT RECEIVED
SUBSEQUENTLY [SECTION 25A]

(1) As per section 25A(1), the amount of rent received in arrears from a tenant or the
amount of unrealised rent realised subsequently from a tenant by an assessee shall be
deemed to be income from house property in the financial year in which such rent is
received or realised, and shall be included in the total income of the assessee under the
head “Income from house property”, whether the assessee is the owner of the property
or not in that financial year.
(2) Section 25A(2) provides a deduction of 30% of arrears of rent or unrealised rent
realised subsequently by the assessee.
(3) Summary:
 INCOME FROM HOUSE PROPERTY Unit (ii) | 3.20

Section 25A
Arrears of Rent / Unrealised Rent
(i) Taxable in the year of receipt/realisation
(ii) Deduction@30% of rent received/realised
(iii) Taxable even if assessee is not the owner of the property in the financial
year of receipt/realisation.

Illustration 10

Mr. Anand sold his residential house property in March, 2023.

In June, 2023, he recovered rent of ` 10,000 from Mr. Gaurav, to whom he had let out his
house for two years from April 2017 to March 2019. He could not realise two months rent of `
20,000 from him and to that extent his actual rent was reduced while computing income
from house property for A.Y.2019-20.

Further, he had let out his property from April, 2019 to February, 2023 to Mr. Satish. In April,
2021, he had increased the rent from ` 12,000 to ` 15,000 per month and the same was a
subject matter of dispute. In September, 2023, the matter was finally settled and Mr. Anand
received ` 69,000 as arrears of rent for the period April 2021 to February, 2023.

Would the recovery of unrealised rent and arrears of rent be taxable in the hands of Mr. Anand,
and if so in which year?

Solution
Since the unrealised rent was recovered in the P.Y.2023-24, the same would be taxable in the
A.Y.2024-25 under section 25A, irrespective of the fact that Mr. Anand was not the owner of the
house in that year. Further, the arrears of rent was also received in the P.Y.2023-24, and hence the
same would be taxable in the A.Y.2024-25 under section 25A, even though Mr. Anand was not the
owner of the house in that year. A deduction of 30% of unrealised rent recovered and arrears of
rent would be allowed while computing income from house property of Mr. Anand for A.Y.2024-
25.
Computation of income from house property of Mr. Anand for A.Y.2024-25

Particulars `
(i) Unrealised rent recovered 10,000
(ii) Arrears of rent received 69,000
79,000
Less: Deduction@30% 23,700
Income from house property 55,300
 INCOME FROM HOUSE PROPERTY Unit (ii) | 3.21
10 TREATMENT OF INCOME FROM CO-OWNED PROPERTY [SECTION 26]
(1)
Co-owned property [Section 26]
Self-occupied property Let-out property
The annual value of the property of each co- The income from such property shall be
owner will be Nil and each co-owner shall be computed as if the property is owned by
entitled to a deduction of ` 30,000/ one owner and thereafter the income so
` 2,00,000, as the case may be, on account of computed shall be apportioned amongst
interest on borrowed capital. each co-owner as per their specific share.
However, if the co-owner owns another
self- occupied/ unoccupied property, the
aggregate interest from the co-owned
property and the other self-occupied
property cannot exceed ` 30,000/
` 2,00,000, as the case may be.

11 DEEMED OWNERSHIP [SECTION 27]

As per section 27, the following persons, though not legal owners of a property, are
deemed to be the owners for the purposes of section 22 to 26.
(1) Transfer to a spouse [Section 27(i)] – In case of transfer of house property by an
individual to his or her spouse otherwise than for adequate consideration, the
transferor is deemed to be the owner of the transferred property.
Exception– In case of transfer to spouse in connection with an agreement to live apart,
the transferor will not be deemed to be the owner. The transferee will be the owner of the
house property.

(2) Transfer to a minor child [Section 27(i)] – In case of transfer of house property by an
individual to his or her minor child otherwise than for adequate consideration, the
transferor would be deemed to be owner of the house property transferred.
Exception– In case of transfer to a minor married daughter, the transferor is not
deemed to be the owner.

Note - Where cash is transferred to spouse/minor child and the transferee acquires property
out of such cash, then the transferor shall not be treated as deemed owner of the house
property. However, clubbing provisions will be attracted.
(3) Holder of an impartible estate [Section 27(ii)] – The impartible estate is a property
which is not legally divisible. The holder of an impartible estate shall be deemed to be
the individual owner of all properties comprised in the estate.
After enactment of the Hindu Succession Act, 1956, all the properties comprised in an
impartible estate by custom is to be assessed in the status of a HUF. However, section
27(ii) will continue to be applicable in relation to impartible estates by grant or covenant.

(4) Member of a co-operative society etc. [Section 27(iii)] – A member of a co-operative

society, company or other association of persons to whom a building or part thereof is
allotted or leased under a House Building Scheme of a society/ company/ association,
shall be deemed to be owner of that building or part thereof allotted to him although the
co-operative society/company/ association is the legal owner of that building.
(5) Person in possession of a property [Section 27(iiia)] – A person who is allowed to
take or retain the possession of any building or part thereof in part performance of a
 INCOME FROM HOUSE PROPERTY Unit (ii) | 3.22
contract of the nature referred to in section 53A of the Transfer of Property Act shall be
the deemed owner of that house property. This would include cases where the –
(i) possession of property has been handed over to the buyer
(ii) sale consideration has been paid or promised to be paid to the seller by the
buyer
(iii) sale deed has not been executed in favour of the buyer, although certain other
documents like power of attorney/ agreement to sell/ will etc. have been
executed.
In all the above cases, the buyer would be deemed to be the owner of the property
although it is not registered in his name.
(6) Person having right in a property for a period not less than 12 years [Section
27(iiib)]
– A person who acquires any rights in or with respect to any building or part thereof, by
virtue of any transaction as is referred to in section 269UA(f) i.e. transfer by way of
lease for not less than 12 years, shall be deemed to be the owner of that building or
part thereof.
Exception – In case the person acquiring any rights by way of lease from month to month or for a
period not exceeding one year, such person will not be deemed to be the owner.

ILLUSTRATION 11
Ms. Aparna co-owns a residential house property in Calcutta along with her sister Ms.
Dimple, where her sister’s family resides. Both of them have equal share in the property and the
same is used by them for self-occupation. Interest is payable in respect of loan of `
50,00,000@10% taken on 1.4.2022 for acquisition of such property. In addition, Ms. Aparna
owns a flat in Pune in which she and her parents reside. She has taken a loan of `
3,00,000@12% on 1.10.2022 for repairs of this flat. Compute the deduction which would be
available to Ms. Aparna and Ms. Dimple under section 24(b) for A.Y.2024-25, if both exercise
the option of shifting out of the default tax regime provided under section 115BAC(1A).
Answer
Computation of deduction u/s 24(b) available to Ms. Aparna for A.Y.2024-25

Particulars `
I Interest on loan taken for acquisition of residential house
property at Calcutta
` 50,00,000 x 10% = ` 5,00,000
Ms. Aparna’s share = 50% of ` 5,00,000 = ` 2,50,000
Restricted to ` 2,00,000 2,00,000
II Interest on loan taken for repair of flat at Pune
` 3,00,000 x 12% = ` 36,000
Restricted to ` 30,000 30,000
Total interest 2,30,000
Deduction under section 24(b) in respect of (I) and (II) above to be 2,00,000
restricted to
 INCOME FROM HOUSE PROPERTY Unit (ii) | 3.23
Computation of deduction u/s 24(b) available to Ms. Dimple for A.Y.2024-25

Particulars `
Interest on loan taken for acquisition of residential house property
at Calcutta
` 50,00,000 x 10% = ` 5,00,000
Ms. Dimple’s share = 50% of ` 5,00,000 = ` 2,50,000
Restricted to ` 2,00,000 2,00,000
Deduction under section 24(b) 2,00,000

LET US RECAPITULATE

Section Contents
22 Basis of Charge
The annual value of any property comprising of buildings or lands
appurtenant thereto, of which the assessee is the owner, is chargeable
to tax under the head “Income from house property”.
(i) Property should consist of any buildings or lands appurtenant
thereto
Income from letting out of vacant land is, however, taxable under
the head “Income from other sources” or “Profits and gains from
business or profession”, as the case may be.
(ii) Assessee must be the owner of the property
(iii) The property may be used for any purpose, but it should not be
used by the owner for the purpose of any business or
profession carried on by him, the profit of which is
chargeable to tax.
Further, the income earned by an assessee engaged in the business
of letting out of properties on rent would be taxable as business
income.
(iv) Property held as stock-in-trade etc.
Annual value of house property will be charged under the head
“Income from house property”, where it is held by the assessee as
stock-in-trade of a business also.
23(1) Annual Value of let-out property
Annual value is the amount arrived after deducting the municipal
taxes actually paid by the owner during the previous year from the
Gross Annual Value (GAV). The GAV of let-out property would be
determined in the following manner:
INCOME FROM HOUSE PROPERTY Unit (ii) | 3.24
 INCOME FROM HOUSE PROPERTY Unit (ii) | 3.25
23(2) Annual Value of self-occupied property
Where the property is self-occupied for own residence or unoccupied
throughout the previous year owing to his employment, business or
profession carried on at any other place and residing at that other place in a
building not belonging to him, its Annual Value will be Nil, provided no other
benefit is derived by the owner from such property.
An assessee can claim benefit of “Nil” Annual Value in respect of one or two
residential house properties self-occupied by him.
23(4) Annual Value of deemed to be let-out property
If more than two properties are so self-occupied/unoccupied, the assessee
may claim benefit of Nil annual value in respect of any two properties at
his option. The other property(s) would be deemed to be let out, in
respect of which Expected Rent would be the GAV.

23(5) Annual value where the property held as stock-in-trade etc. Where
property consisting of any buildings or lands appurtenant thereto is
held as stock-in-trade and the whole or any part of the property is not
let out during the whole or any part of the previous
year, the annual value of such property or part of the property for the
period upto 2 years from the end of the financial year in which certificate
of completion of construction of the property is obtained from the
competent authority shall be taken as “Nil”.

24 Deductions from Annual Value

1. 30% of Annual Value [Section 24(a)]
2. Interest on borrowed capital [Section 24(b)]: Interest payable on
loans borrowed for the purpose of acquisition, construction, repairs,
renewal or reconstruction can be claimed as deduction.
Pre-construction interest: Interest for the period prior to the
previous year in which property is acquired or construction is completed.
Pre-construction interest is allowable as deduction in 5 equal installments
from the previous year of completion of construction or acquisition.
(a) Let out property: Whole of the amount of interest on borrowed
capital payable during the previous year and apportioned pre-
construction interest without any ceiling limit would be allowed
as deduction.
(b) Self-occupied property:
(i) Interest on loan taken for acquisition or construction of
house on or after 1.4.99, where such construction is completed
within 5 years from the end of the financial year in which
capital was borrowed, aggregate interest paid or payable for
one or two self-occupied properties subject to a maximum of
` 2,00,000 (including apportioned pre- construction interest).
(ii) In case of loan taken for repair, renovation or reconstruction
at any point of time, aggregate interest paid
 INCOME FROM HOUSE PROPERTY Unit (ii) | 3.26
or payable for one or two self-occupied properties subject to
a maximum of ` 30,000 (including apportioned pre-
construction interest).
Notes –
(1) Total amount of interest deduction under (i) and (ii) in respect of one
or two self-occupied properties owned by the assessee cannot
exceed ` 2,00,000.
(2) Interest deduction in respect of self occupied property(ies) would
be available only if the assessee exercises the option of shifting out of
the default tax regime provided under section 115BAC(1A). If the
assessee pays tax under default tax regime under section 115BAC,
deduction under section 24(b) in respect of interest on loan for
self occupied property is not allowed.
25 Inadmissible deductions
Interest chargeable under this Act which is payable outside India
shall not be deducted if –
(a) tax has not been paid or deducted from such interest and
(b) in respect of which there is no person in India who may be
treated as an agent

25A Taxability of recovery of unrealised rent & arrears of rent

received
(i) Taxable in the year of receipt/ realisation
(ii) Deduction@30% of rent received/ realised
(iii) Taxable even if assessee is not the owner of the property in the
financial year of receipt/ realization
26 Co-owned property
(i) Self-occupied property: The annual value of the property of each
co-owner will be Nil and each co-owner shall be entitled to a
deduction of ` 30,000/ ` 2,00,000, as the case may be, on account of
interest on borrowed capital if they exercise the option of shifting
out of the default tax regime provided under section 115BAC(1A).
However, aggregate deduction of interest to each co-owner in respect
of co-owned self-occupied property and any other self- occupied
house property, if any, cannot exceed ` 30,000/
` 2,00,000, as the case may be.
No deduction would be allowed in respect of interest on loan taken
for purchase/construction/reconstruction/repairs of self occupied
property where the assessee pays tax under the default tax
regime.
(ii) Let-out property: The income from such property shall be computed
as if the property is owned by one owner and thereafter the
income so computed shall be apportioned amongst each co-owner
as per their specific share.
 INCOME FROM HOUSE PROPERTY Unit (ii) | 3.27
27 Deemed Ownership: The following persons, though not legal owners
of a property, are deemed to be the owners:
(i) Transferor of the property, where the property is transferred to
the spouse or to minor child except minor married daughter, without
adequate consideration
(ii) Holder of an impartible estate
(iii) Member of a co-operative society etc.
(iv) Person in possession of a property
(v) Person having right in a property for a period not less than 12 years
Other important points
(i) The Actual rent received/receivable should not include any amount of
rent which is not capable of being realized i.e., unrealized rent while
determining gross annual value in case let-out property, provided the
conditions specified in Rule 4 are satisfied.
Note - The income-tax returns, however, permit deduction of unrealized
rent from gross annual value. If this view is taken, the unrealized rent should
be deducted only after computing gross annual value.

(ii) If a portion of a property is let-out and a portion is self-occupied,

then, the income will be computed separately for let out and self- occupied
portion.

PAST QUESTIONS
Problem 1
Mr. A and B constructed their houses on a piece of land purchased by them at New Delhi. The built up
area of each house was 1,000 sq. ft. (Ground floor and an equal area in the First floor.) A started
construction on 1-04-2022 and completes on 01-04-2023. B. starts the construction on 01-04-2022
and completes the construction on 30-06-2023. A occupied the entire house on 01-04-2023.
However B occupies the ground floor on 01-07-2023 and let out the First floor for a rent of Rs. 15,000
per month. The tenant vacated the house on 31-12-2023 and B occupies the entire house during the
period 01-01-2024 to 31-03-2024.
Following are the other information:
Rs.
(i) Fair Rental value of each unit
(Ground floor/First floor) (per annum) 1,00,000
(i) Municipal value of each unit
(Ground floor/First floor) (per annum) 72,000
(iii) Municipal taxes paid by A - 8,000
B - 8,000
(iv) Repair and Maintenance charges paid by A - 28,000
B - 30,000
A has availed a housing loan of Rs. 20.00 lakhs @ 12% p.a. on 01-04-2022. B has availed a housing
loan of Rs. 12.00 lakhs @ 10% p.a. on 01-07-2022. No repayment was made by either of them till
31-03-2024. Compute Income from House Property for A and B for the previous year 2023-24.
Compute the income chargeable from house property of Mr. A & B for the A.Y. 2024-25 if Mr. A
and Mr.B has exercised the option of shifting out of the default tax regime provided under
section 115BAC(1A).
 INCOME FROM HOUSE PROPERTY Unit (ii) | 3.28
Solution
Particulars Rs. Rs
Annual value is nil (since house property is self Nil
occupied)
Less deduction u/s 24(b) 2,40,000
Interest paid on borrowed capital RS.
20,00,000@12% 48000
Pre construction interest RS. 240,000/5 2,88,000
As per section proviso ti sec. 24(b) interest
deduction restricted to loss under the head
“income from house property ’’of MR. A 2,00,000
Loss under the head income from house (2,00,000)
property of MR.A

Computation of income from house property of MR. B for A.Y. 2024-2025

Particulars Ground Floor First floor
(self Occupied) Rs.
Gross Annual Value( GAV) Nil 90,000
Less: Municipal taxes for first floor 4,000
Net annual Value (A) Nil 86,000
Less: deduction u/s 24
(a) 30% of net annual value 25,800
(b) Interest on borrowed Capital
Current year interest
Rs. 12,00,000 X 10% = Rs. 1,20,000 60,000 60,000
Pre-construction interest
Rs. 12,00,000 X 10% X 9/12 = Rs. 90,000
Rs. 90,000 allowed in 5 equal installment
Rs. 90,000 / 5 = Rs. 18,000 per annum 9,000 9,000
Total Deduction under section 24 (B) (69,000) (69,000)

Income from house property (A) – (B) 69,000 ( 8,800)

Loss under the head “ Income from house property” of (77,800)

Mr. B ( Both ground floor & first floor)
Note : computation of Gross Annual Value( GAV) of first floor of B’s house – if a single unit
of property (in this case the first floor of B’s house )is let out of some months and self
occupied for the months then the annual letting value of the property shall be taken into
account for determining the annual value . the ALV shall be compared with the actual rent
and whichever is higher shall be adopted as the annual value . in this case the actual rent
shall be the rent for the period which the property was let out during the previous year
Annual letting value = RS. 75000 being higher of Fair rent of 100000*9/12= Rs. 75,000
Municipal value = 72000*9/12=54000
Actual rent = RS. 90,000
(15000 p.m. for 6 months from July2023 to Dec. 2023) Rs. 90,000
(being higher of ALV oF 75000 AND actual rent of 90,000)
 INCOME FROM HOUSE PROPERTY Unit (ii) | 3.29
Problem 2
Sunil is the owner of a house property, its municipal valuation is Rs.80,000. It has been let-out for
Rs.1,20,000 per annum. The local taxes payable by the owner amount to Rs.16,000, but as per
agreement between the tenant and the landlord, the tenant has paid the amount direct to the
municipality. The landlord, however, bears the following expenses on tenant's amenities :
Extension of water connection 3,000
Water charges 1,500
Lift main 1,500
Salary of gardener 1,800
Lighting of stairs 1,200
Maintenance ofswimming pool 750
The landlord claims the following deductions :
Repairs and collection charges 7,500
Land revenue paid 1,500
Compute the taxable income of Sunil from the house property for the assessment year 2024-25.
Compute the income chargeable from house property of Mr. Sunil for the A.Y. 2024-25 if she has
exercised the option of shifting out of the default tax regime provided under section
115BAC(1A).
Solution
G.A.V. (Let out Property)

i. Municipal Value 80,000 Which

ii. Fair Rent ever is 1,13,250
iii. Actual Rent (W. Note) 1,13,250 Higher

Actual Rent
Rent Received 1,20,000
Less: Amount Received From Tenant for other
Amenities
(i) Extension of water connection (Capital Exp.)
(ii) Water Charges 1,500
(iii) Lift Main 1,500
(iv) Salary of Grander 1,800
(v) Lighting of Stairs 1,200
(vi) Maintenance of Swimming pool 750
Actual Rent 1,13,250
Gross Amount Value [G.A.V.] 1,13,250
Less: Municipal Tax [Cash Basis] (Actually paid by Paid by Tenants
Owner)
Net Amount value [N.A.V.] 1,13,250
Less: Deduction u/s 24
1. Standard Deduction u/s 24(a) 33975
30% of N.A.V.
Income from House Property 79,275
Problem 3
Mr Rajesh owns a residential house, let out for a monthly rent of Rs 15,000. The fair rental value of the
property for the let out period is Rs 1,50,000. The house was self-occupied by him from 1st January,
2024 to 31st March, 2024. He has taken a loan from bank of Rs 20 lacs for the construction of the
property, and has repaid Rs 1,05,000 (including interest Rs 40,000) during the year. Compute
Rajesh’s income from house property for the Assessment Year 2024-25.
 INCOME FROM HOUSE PROPERTY Unit (ii) | 3.30
Compute the income chargeable from house property of Mr. Rajesh for the A.Y. 2024-25 if she
has exercised the option of shifting out of the default tax regime provided under section
115BAC(1A).
Solution
G.A.V. (Let out Property)

(1) Municipal Value Which ever is

(2) 1,50,000  2,00,000 higher
Fair Rent  12  2,00,000
 9 
(3) Actual Rent [15,000×9] = 1,35,000
G.A.V. 2,00,000
Less: Municipal Tax –
N.A.V. 2,00,000
Less: Deduction u/s 24
(1) Standard Deduction u/s 24(A)
(2,00,000×30%) 60,000
(2) Int. on Borrowing u/s 24(B) 40,000
Income From H.P. 1,00,000

Problem 4
Mr. Ramesh owns a house property which is let out. During the previous year ending 3 I .3.2024 he
receives (i) arrears of rent of Rs. 30,000 and (ii) unrealised rent of Rs. 20,000. (a) State, how they
should be dealt with as per the provisions of the Act, and (b) compute the income chargeable under the
head "income from house property"
Solution
Treatment of arrears of rent and unrealised rent:
Rs. Rs.
Arrears of rent (Sec. 25A) 30,000
Collection of unrealised rent (Sec 25 A) 20,000
Income 50,000
Less: Deduction (30% of Rs. 50,000) 15,000 35,000

Problem 5
'X' an American national, is a resident in India during the previous year ended on 31-3-2023. He was
the owner of a building located in New York. The same was on rent @ US$ 12,500 p.m. The Municipal
Corporation of New York was paid taxes on such building of US $ 10,000 on 12-2-2023. Besides the
above property, he purchased a piece of land at Delhi for construction of a house. The said land was
given on rent for running of a dairy @ 3,000 p.m.
w.e.f. 1-10-2023. The value of one US $ in Indian rupee throughout the year remained at Rs. 46.50. 'X'
wants to know his taxable income for assessment year 2024-25.
Solution
For the previous year 2023-2024, an American National, is a resident. Therefore, the income
received by him by way of rent of the house property located in USA is to be included in the total
income in India. Municipal taxes so paid in the country where the property is situated are also to be
allowed.
 INCOME FROM HOUSE PROPERTY Unit (ii) | 3.31
Computation of income from house property
Income from House Property
House property located in New York Rs. Rs.
Gross annual US $ 12,500 × 12 ×46.50 69,75,000
Less: Municipal taxes paid (US $10,000 ×46.50) 4,65,000
Net Annual Value (NAV) 65,10,000
Less: Statutory deduction @ 30% 19,53,000 45,57,000
Income from Other Sources
Rental income from the land 3,000 × 6 18,000
Total Income 45,75,000
As per rule 115, income from house property received in foreign exchange has to be converted into
Indian currency by applying TT buying rate as on the last day of the relevant previous year. As in
the given question the rate for the whole year remains the same, it will be Rs. 46.50 even as on the
last day of the previous year.

Problem 6
R, an owner of a house property, is allowed a deduction of Rs. 12,000 by way of unrealized rent for
assessment year 2020-21. He sells the house on April 15, 2020 and ceases to be the owner thereof.
A decree for the unrealized rent was given in his favor on 1-12-2023 and he receives the full
amount on 1-2-2024. Examine the tax Implication of this transaction.
Solution
Where a deduction has been made in respect of unrealised rent for any year and subsequently the
assessee realises the amount, the amount so realised shall be chargeable under the head 'Income
from house property' by virtue of section 25 A. It shall be taxable as the income of previous year in
which it is received, whether the assessee is the owner of the property in that year or not. After
allowing deduction @30% of realised.
Hence, unrealized rent of Rs. 8,400 will be chargeable to tax in the assessment year 2024-25.
Problem 7
The following questions are raised by different companies. As a practicing chartered Accountant,
tender suitable advice in each case:
An assessee used to file his return of income showing income from rent on receipt basis and was
assessed accordingly up to the assessment year 2024-25. During the financial year 2023-24, he
received a sum of Rs. 50,000 by way of enhancement for the last six years as the Government
department (tenant) enhanced the rate of rent with retrospective effect. Will the sum of Rs. 50,000
be taxable in the assessment year 2024-25? Can it be spread over the last six years? Is there any
provision of tax relief in such cases, like section 89 of the Income-tax, 1961? What are the provisions of
the Act governing such cases?
Solution
As per new section 25A the arrears of rent shall be taxable in the previous year in which such
arrears are received. However, the assessee shall be allowed statutory deduction @ 30% of such
amount received. Further, it is not necessary that the assessee should be owner of such house
property in the previous year in which such arrears are received.
Thus, Rs. 35,000 (Rs. 50,000- 30% of 50,000 i.e. 15,000) shall be chargeable to income-tax under
the head income from house property in the assessment year 2024-25.
 INCOME FROM HOUSE PROPERTY Unit (ii) | 3.32
Problem 8
Mr. Jai furnishes the following particulars relating to his house properties and other incomes and
expenditure for the year2023-24:
(i) First House: This house is taken by him on lease for 10 years which is let to a tenant, for his
residence, at a monthly rent of Rs. 2,400.
He has incurred the following expenses during this year:
Lease rent Rs. 1,000 per month
Salary of Durban Rs. 200 per month
Interest on loan taken to pay for
the acquisition of the lease Rs 200 per month
(ii) Second House: This house was constructed by him in 1991 but was transferred to his wife in
1995 out of love and affection. He, however, continues to stay in this house with his wife till
date. He has taken a loan for the construction of this house for which interest of Rs. 6,000
becomes due for the year, but had not been paid by him. He has paid repair expenses of Rs.
1,000 during the year.

Compute house property income of Mr. Jai for the assessment year 2024-25.

Ans. Rs. 12,000/-, Rs. () 6,000/-

Problem 9
Mrs. X a resident individual, own a house in USA. She receives rent at the rate of $2,000 per month. She
paid municipal taxes of $1,500 during the financial year 2023-24. She also owns a two storied house in
Mumbai, ground floor is used for her residence and first floor is let out at a monthly rent of Rs.10,000.
Standard rent for each floor is Rs.11,000 per month. Municipal taxes paid for the house amounts to
Rs.7,500. Mrs. X had constructed the house by taking a loan from a nationalized bank on June 20, 2023
She repaid the loan of Rs.54,000 including interest of Rs.24,000. The value of one dollar is to be taken a
Rs.45.
Compute total income from house property of Mrs. X.
Ans. Rs. 7,66,125/-

Problem 10
The assessee, who was deriving income from "House property", realized a sum of Rs.62,000 on
account of display of advertisement hoarding of various concerns on the roof of the building. He
claims that this amount should be considered under the head "House property" and not under
"Other sources"
Answer
Where hoarding on roof was let out for advertisement of various companies, it will be income from
other sources as hoardings cannot be treated as part of the building. On the other hand, if the roof
is let out for hoardings cannot be treated from house property. Mukherjee Estate (P) Ltd. v CIT
(2000) 244 ITR1.
 INCOME FROM HOUSE PROPERTY Unit (ii) | 3.33

QUESTIONS AND ANSWERS

Question 1
Mr. Raman is a co-owner of a house property along with his brother holding equal share in the
property.
Particulars `
Municipal value of the property 1,60,000
Fair rent 1,50,000
Standard rent under the Rent Control Act 1,70,000
Rent received 15,000 p.m.

The loan for the construction of this property is jointly taken and the interest charged by the
bank is ` 25,000, out of which ` 21,000 has been paid. Interest on the unpaid interest is `
450. To repay this loan, Raman and his brother have taken a fresh loan and interest
charged on this loan is ` 5,000.
The municipal taxes of ` 5,100 have been paid by the tenant.
Compute the income from this property chargeable in the hands of Mr. Raman for the
A.Y. 2024-25.

Answer

Computation of income from house property of Mr. Raman for A.Y. 2024-25
Particulars ` `
Gross Annual Value (See Note 1 below) 1,80,000
Less: Municipal taxes – paid by the tenant, hence not Nil
deductible
Net Annual Value (NAV) 1,80,000
Less: Deductions under section 24
54,000
(i) 30% of NAV
(ii) Interest on housing loan (See Note 2 below)
25,000
- Interest on loan taken from bank
- Interest on fresh loan to repay old loan for this 5,000 84,000
property
Income from house property 96,000
50% share taxable in the hands of Mr. Raman
(See Note 3 below) 48,000
Notes:
1. Computation of Gross Annual Value (GAV)
GAV is the higher of Expected rent and actual rent received. Expected rent is the
higher of municipal value and fair rent, but restricted to standard rent.
Particulars ` ` ` `
(a) Municipal value 1,60,000
(b) Fair rent 1,50,000
(c) Higher of (a) and (b) 1,60,000
(d) Standard rent 1,70,000
 INCOME FROM HOUSE PROPERTY Unit (ii) | 3.34

(e) Expected rent [lower of 1,60,000

(c) and (d)]
(f) Actual rent [` 15,000 x 12] 1,80,000
(g) Gross Annual Value 1,80,000
[higher of (e) and (f)]

2. Interest on housing loan is allowable as a deduction under section 24 on accrual basis.

Further, interest on fresh loan taken to repay old loan is also allowable as deduction.
However, interest on unpaid interest is not allowable as deduction under section 24.
3. Section 26 provides that where a house property is owned by two or more persons whose
shares are definite and ascertainable, the share of each such person in the income of house
property, as computed in accordance with sections 22 to 25, shall be included in his
respective total income. Therefore, 50% of the total income from the house property is
taxable in the hands of Mr. Raman since he is an equal owner of the property.

Question 2

Mr. X owns one residential house in Mumbai. The house is having two identical units. First unit
of the house is self-occupied by Mr. X and another unit is rented for ` 8,000 p.m. The rented unit
was vacant for 2 months during the year. The particulars of the house for the previous year
2023-24 are as under:
Standard rent ` 1,62,000 p.a.
Municipal valuation ` 1,90,000 p.a.
Fair rent ` 1,85,000 p. a
Municipal tax (Paid by Mr. X) 5% of municipal valuation
Light and water charges ` 500 p.m.
Interest on borrowed capital ` 1,500 p.m.
Lease money ` 1,200 p.a.
Insurance charges ` 3,000 p.a.
Repairs ` 12,000 p.a.
Compute income from house property of Mr. X for the A.Y. 2024-25 if he exercises the option of
shifting out of the default tax regime provided under section 115BAC(1A).
Answer

Computation of Income from house property for A.Y. 2024-25

Particulars ` `
(A) Rented unit (50% of total area – See Note
below)
Step I - Computation of Expected Rent
Municipal valuation (` 1,90,000 x ½) Fair 95,000
rent (` 1,85,000 x ½) 92,500
Standard rent (` 1,62,000 x ½) 81,000
Expected Rent is higher of municipal valuation and 81,000
fair rent, but restricted to standard rent
 INCOME FROM HOUSE PROPERTY Unit (ii) | 3.35

Step II - Actual Rent

Rent received/receivable for the let out period (` 80,000
8,000 x 10)
Step III – Computation of Gross Annual Value
The actual rent of ` 80,000 is lower than ER of 80,000
` 81,000 owing to vacancy, since, had the
property not been vacant the actual rent would have
been ` 96,000 (` 80,000 + ` 16,000, being notional
rent for two months. Therefore, actual rent is the
GAV.
Gross Annual Value 80,000

Less: Municipal taxes (5% of ` 95,000) 4,750

Net Annual value 75,250

Less : Deductions under section 24 -
(i) 30% of net annual value 22,575
(ii) Interest on borrowed capital (` 750 x 12) 9,000 31,575

Taxable income from let out portion 43,675

(B) Self occupied unit (50% of total area – See Note below)
Annual value Nil
Less : Deduction under section 24 - Interest on
borrowed capital (` 750 x 12)
9,000 9,000
Loss from self occupied portion
(9,000)
Income from house property
34,675

Note: No deduction will be allowed separately for light and water charges, lease money paid,
insurance charges and repairs.

Question 3
Mr. Vikas owns a house property whose Municipal Value, Fair Rent and Standard Rent are `
96,000, ` 1,26,000 and ` 1,08,000 (per annum), respectively. During the F.Y. 2023-24, one-
third of the portion of the house was let out for residential purpose at a monthly rent of ` 5,000.
The remaining two-third portion was self-occupied by him. Municipal tax @11% of municipal
value was paid during the year.
The construction of the house began in June, 2016 and was completed on 31-5-2019. Vikas took
a loan of ` 1,00,000 on 1-7-2016 for the construction of building. He paid interest on loan @
12% per annum and every month such interest was paid.

Compute income from house property of Mr. Vikas for the A.Y. 2024-25 if he has exercised the
option of shifting out of the default tax regime provided under section 115BAC(1A).

Answer
 INCOME FROM HOUSE PROPERTY Unit (ii) | 3.36
Computation of income from house property of Mr. Vikas for the A.Y. 2024-25
Particulars ` `
Income from house property
I. Self-occupied portion (Two third)
Net Annual value Nil
Less: Deduction under section 24(b)
Interest on loan (See Note below) (` 18,600 x 2/3)
[Allowable since he has exercised the option of shifting out
of the default tax regime provided under section 12,400
115BAC(1A)]
Loss from self occupied property
II. Let-out portion (One third) (12,400)
Gross Annual Value
(a) Actual rent received (` 5,000 x 12) ` 60,000
(b) Expected rent ` 36,000
[higher of municipal valuation (i.e.,
` 96,000) and fair rent (i.e., ` 1,26,000)
but restricted to standard rent (i.e.,
` 1,08,000)] = ` 1,08,000 x 1/3
Higher of (a) or (b) 60,000
Less: Municipal taxes 3,520
(` 96,000 x 11% x
1/3)
56,480
Net Annual Value
Less: Deductions under section 24
16,944
(a) 30% of NAV
(b) Interest on loan (See Note
6,200 33,336
below) (` 18,600 x 1/3)
Income from house property 20,936
Question 4
Mrs. Rohini Ravi, a citizen of the U.S.A., is a resident and ordinarily resident in India during the
financial year 2023-24. She owns a house property at Los Angeles, U.S.A., which is used as her
residence. The annual value of the house is $20,000. The value of one USD ($) may be taken
as ` 75.
She took ownership and possession of a flat in Chennai on 1.7.2023, which is used for self-
occupation, while she is in India. The flat was used by her for 7 months only during the year
ended 31.3.2024. The municipal valuation is ` 3,84,000 p.a. and the fair rent is ` 4,20,000
p.a. She paid the following to Corporation of Chennai:
Property Tax ` 16,200
Sewerage Tax ` 1,800
She had taken a loan from Standard Chartered Bank in June, 2021 for purchasing this flat. Interest
on loan was as under:
Particulars `
Period prior to 1.4.2023 49,200
1.4.2023 to 30.6.2023 50,800
1.7.2023 to 31.3.2024 1,31,300
 INCOME FROM HOUSE PROPERTY Unit (ii) | 3.37
She had a house property in Bangalore, which was sold in March, 2020. In respect of this house,
she received arrears of rent of ` 60,000 in March, 2024. This amount has not been charged to
tax earlier.
Compute the income chargeable from house property of Mrs. Rohini Ravi for the A.Y. 2024-25 if
she has exercised the option of shifting out of the default tax regime provided under section
115BAC(1A).
Would your answer change if she pays tax under the default tax regime under section 115BAC?

Answer
(i) Since the assessee is a resident and ordinarily resident in India, her global income
would form part of her total income i.e., income earned in India as well as outside India will
form part of her total income.
She possesses a self-occupied house at Los Angeles as well as at Chennai. She can take the
benefit of “Nil” Annual Value in respect of both the house properties.
As regards the Bangalore house, arrears of rent will be chargeable to tax as income from
house property in the year of receipt under section 25A. It is not essential that the assessee
should continue to be the owner. 30% of the arrears of rent shall be allowed as deduction.
Accordingly, the income from house property of Mrs. Rohini Ravi for A.Y.2024-25 will be
calculated as under:
Particulars ` `
1. Self-occupied house at Los Angeles
Annual value Nil

Less: Deduction under section 24 Nil

Chargeable income from this house Nil
property
2. Self-occupied house property at
Chennai
Annual value Nil

Less: Deduction under section 24

1,91,940
Interest on borrowed capital
(See Note below)
(1,91,940)

3. Arrears in respect of Bangalore

property (Section 25A) 60,000
Arrears of rent received
Less: Deduction @ 30% u/s 25A(2) 18,000 42,000
Loss under the head "Income from house (1,49,940)
property”

Note: Interest on borrowed capital

Particulars `
Interest for the current year (` 50,800 + ` 1,31,300) 1,82,100
Add: 1/5th of pre-construction interest (` 49,200 x 1/5) 9,840
Interest deduction allowable under section 24 1,91,940
 INCOME FROM HOUSE PROPERTY Unit (ii) | 3.38
Interest deduction under section 24(b) is allowable since she has exercised the
option of shifting out of the default tax regime provided under section
115BAC(1A).
(ii) Yes, the answer would change if she pays tax under the default tax regime
under section 115BAC. Under the default tax regime, deduction under section
24(b) for interest is not available. Hence, she cannot claim deduction of `
1,91,940 in respect of the Chennai house. Accordingly, income from house
property would be ` 42,000.
Question 5
Two brothers Arun and Bimal are co-owners of a house property with equal share. The property
was constructed during the financial year 2015-2016. The property consists of eight identical
units and is situated at Cochin.
During the financial year 2023-24, each co-owner occupied one unit for residence and the
balance of six units were let out at a rent of ` 12,000 per month per unit. The municipal value of
the house property is ` 9,00,000 and the municipal taxes are 20% of municipal value, which
were paid during the year. The other expenses were as follows:

`
(i) Repairs 40,000
(ii) Insurance premium (paid) 15,000

(iii) Interest payable on loan taken for construction of house 3,00,000

One of the let out units remained vacant for four months during the year.
Arun could not occupy his unit for six months as he was transferred to Chennai. He does
not own any other house.
The other income of Mr. Arun and Mr. Bimal are ` 2,90,000 and ` 1,80,000, respectively, for
the financial year 2023-24.
Compute the income under the head ‘Income from House Property’ and the total income of
two brothers for the A.Y. 2024-25 if they pay tax under the default tax regime under section
115BAC.
Also, show the computation of income under this head, if they both exercised the option of
shifting out of the default tax regime provided under section 115BAC(1A).
Answer
Particulars Arun (`) Bimal(`)
Income from house property
I. Self-occupied portion (25%)
Annual value Nil Nil
Less: Deduction under section 24(b) Nil Nil
Loss from self occupied property Nil Nil
II. Let-out portion (75%) – See Working Note
below 1,25,850 1,25,850
Income from house property 1,25,850 1,25,850
Other Income 2,90,000 1,80,000
Total Income 4,15,850 3,05,850
 INCOME FROM HOUSE PROPERTY Unit (ii) | 3.39
Working Note – Computation of Income from Let-Out Portion of House Property
Particulars ` `
Let-out portion (75%)
Gross Annual Value
(a) Municipal value (75% of ` 9 lakh) 6,75,000
(b) Actual rent [(` 12000 x 6 x 12) – (` 12,000 x 1 x 4)] 8,16,000
= ` 8,64,000 - ` 48,000
- whichever is higher 8,16,000
Less: Municipal taxes 75% of ` 1,80,000 (20% of ` 9 1,35,000
lakh)
Net Annual Value (NAV) 6,81,000
Less: Deduction under section 24
(a) 30% of NAV 2,04,300
(b) Interest on loan taken for the house [75% of ` 3
lakh] 2,25,000 4,29,300
Income from let-out portion of house property 2,51,700
Share of each co-owner (50%) 1,25,850
(ii) If Arun and Bimal have exercised the option of shifting out of the default tax
regime provided under section 115BAC(1A)
Computation of total income for the A.Y. 2024-25

Particulars Arun (`) Bimal(`)

Income from house property
I. Self-occupied portion (25%)
Annual value Nil Nil

Less: Deduction under section 24(b)

Interest on loan taken for construction
` 37,500 (being 25% of ` 1.5 lakh)
[Allowable since they have exercised the
option of shifting out of the default tax 37,500 37,500
regime provided under section
115BAC(1A)]
(37,500) (37,500)
Loss from self occupied property

II. Let-out portion (75%) – See Working 1,25,850 1,25,850

Note above

Income from house property 88,350 88,350

Other Income 2,90,000 1,80,000

Total Income 3,78,350 2,68,350

******************
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.1

CHAPTER – 3 (Unit – III) PGBP

CHAPTER – 3
Unit-III
PROFIT & GAIN BUSINESS OR PROFESSION
Proforma for computation of income under the head “Profits and gains of
business or profession" under default tax regime under section 115BAC
Particulars Amount Amount
(`) (`)

Net profit as per statement of profit and loss A

Add: Expenses debited to statement of profit and loss but

not allowable

 Depreciation as per books of account xxx

 Income-tax [disallowed u/s 40(a)(ii)] xxx

 30% of sum payable to residents on which tax is not xxx

deducted at source or has not been remitted on or before
the due date u/s 139(1), after deduction, disallowed
under section 40(a)(ia) [The same is allowable in the
year in which the tax is deducted and remitted]
 Any expenditure incurred, in respect of which payment xxx
is made for goods, services or facilities to a related
person, to the extent the same is excessive or
unreasonable, in the opinion of the A.O, having regard
to its FMV [disallowed u/s 40A(2)]
 Any expenditure incurred in respect of which payment or xxx
aggregate of payments to a person exceeding ` 10,000
in a single day is made otherwise than by way of A/c
payee cheque/bank draft/ use of ECS through bank A/c
or through such other prescribed electronic mode (debit
card, credit card, Net banking, RTGS, NEFT, IMPS, BHIM
Aadhar Pay) [disallowed u/s 40A(3)]

 Certain sums payable by the assessee which have not xxx

been paid during the relevant P.Y. in which the liability
was incurred on or before the due date for filing return
u/s 139(1) in respect of that P.Y. [disallowed u/s 43B]

 Sum payable by the assessee to a micro or small xxx

enterprise beyond the time limit specified in section
15 of MSME Development Act, 2006
[disallowed u/s 43B]

 Personal expenses [not allowable as per section 37] xxx

 Capital expenditure [not allowable as per section 37] xxx

 Repairs of capital nature [not allowable as perSections xxx

30 & 31]
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.2

 Amortization of preliminary expenditure u/s 35D/ xxx

expenditure incurred under voluntary retirement
scheme u/s 35DDA [4/5th of such expenditure to be
added back]

 Family planning expenses not allowable in the caseof xxx

a person other than a company
 Fine or penalty paid for infringement or breach of law xxx
[However, penalty in the nature of damages for delay in
completion of a contract, being compensatory in
nature, is allowable]

 All expenses related to income which is not taxable under xxx

this head e.g. municipal taxes in respect of residential
house property

 Any sum paid by the assessee as an employer by way of

contribution to pension scheme u/s 80CCD exceeding
10% of the salary of the employee xxx B
(A + B) C
Less: Expenditure allowable as deduction but not debitedto
statement of profit and loss

 Depreciation computed as per Rule 5 of Income-taxRules, xxx

1962
 30% of expenditure disallowed in an earlier P.Y. due to xxx
non-deduction of tax at source/ non-remittance before
due date u/s 139(1) of that year, allowed this year on
remittance (This item of adjustment is generally given
under “Additional information” in the question)
 Amount disallowed in an earlier P.Y. as per section 43B,
due to non-payment on or before due date u/s 139(1),
allowed as deduction in this year on actual payment
(This item of adjustment is generally given under xxx
“Additional information” in the question) D
(C - D) E
Less: Income credited in statement of profit and lossbut
not taxable/taxable under any other head

 Dividend income xxx

 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.3

 Agricultural income exempt under section 10(1) xxx

 Interest on securities/savings bank account/FD xxx

taxable under the head “Income from other sources”
 Profit on sale of capital asset taxable under the head xxx
“Capital Gains”
 Rent from house property taxable under the head xxx
“Income from house property”
 Winnings from lotteries, horse races, games etc. xxx
taxable under the head “Income from other sources”
 Gifts exempt or taxable under the head “Income xxx
from other sources”
 Income-tax refund not taxable xxx

 Interest on income-tax refund taxable under the

head “Income from other sources” xxx F

(E - F) G

Add: Income chargeable under this head/Deemed Income

[If the same is given as additional information and has
not already been credited to Statement of Profit &
Loss]
 Salary, remuneration, interest received by a partner xxx
from the firm, to the extent the same is deductible in
the hands of the firm as per section 40(b)
 Bad debt allowed as deduction u/s 36(1)(vii) in an xxx
earlier P.Y., now recovered [deemed as income u/s
41(4)]
 Remission or cessation of a trading liability [deemed
as income u/s 41(1)] xxx H

Profits and gains from business or profession (G + H) I

 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.4

Proforma for computation of income under the head “Profits and gains of business or
profession” under optional tax regime taking business income computed under default
tax regime under section 115BAC as the starting point
Particulars Amount Amount
(`) (`)

Profits and gains from business or profession as per section A

115BAC
Less: Expenditure allowable as deduction

 Additional depreciation@20% of actual cost of new P& xxx

M acquired by an assessee engaged in the business of
manufacture or production of any article or thing or
generation, transmission or distribution of power (10%
of actual cost, if put to use for less than 180 days in the
year of acquisition) [Balance additional depreciation can
be claimed in the next year i.e., P.Y.2024-25]

 Balance additional depreciation @10% of actual cost of

P & M acquired and installed during the P.Y. 2022- 23
and put to use for less than 180 days in that year xxx
B
Profits and gains from business or profession as per normal C
provisions of the Act (A – B)
Note - An assessee carrying on specified business and exercising the option to shift out of the
default tax regime provided under section 115BAC(1A), is eligiblefor deduction u/s 35AD in respect of
capital expenditure (other than land, goodwill and financial instruments) incurred for such business,
subject to fulfillment of specified conditions. However, if he pays tax under default tax regime under
section 115BAC, he would not be eligible for deduction u/s 35AD.
The table in the next page depicts the allowability of deduction for expenditure incurred for in-house
scientific research related to the business of the assessee and contribution to outsiders for scientific
research/social science/statistical research under the default tax regime and optional tax regime.
 Section 28: Charging Section
Following income shall be taxable under the head PGBP.
1. Any profit or gain of any Business / profession
2. Profit on sale of import entitlement licence.
3. Cash compensatory support or duty drawback
4. Compensation amount received for contravention of contract.
5. Any amount received under Key–Man insurance policy.
6. Any Gift/benefit/ perquisite arising due to business or profession.
7. Any interest, salary, bonus, commission received by partner from partnership firm [to the extent
allowed u/s 40 (b) to firm]
8. Non-compete Fees [not carrying out any activity in relation to any business or profession or not
sharing any know-how, patent, copyright, trade-mark etc].
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.5

9. Fair market value of inventory on its conversion as capital asset: Fair market value of
inventory on the date of its conversion or treatment as capital asset, determined in the
prescribed manner, would be chargeable to tax as business income.
Sec 145 (1) : Method of Accounting

For PGBP and IFOS – Cash or Mercantile.

For Salary, House Property, Capital Gain – No method. These income taxable as per specific rules
application to them.
Sec 145 (2) : Income computation & disclosure Standard (ICDS)
CG has been empowered to notify ICDS CG has recently notified 10 ICDS effective from A.Y.
2017–18, For computing income under the head PGBP & IFOS, who are following mercantile
system of Accounting. It is applied to all Assessee (except individual/HUF not regd to get A/cs
audited u/s 44 AB)
ICDS I. Disclosure of accounting policy
II. Valuation of inventories
III. Construction Contracts
IV. Revenue Recognition
V. Tangible Fixed Assets
VI. The effect of change in Foreign Exchange
VII. Govt. Grants
VIII. Securities
IX. Borrowing Cost
X. Provisions, Contingent Liabilities & Contingent assets.

 Section : 30 Rent, Rates, Repairs & Insurance of building.

Owner Tenant
Rent Not allowed Allowed
Rate & Taxes Allowed Allowed
Insurance Allowed Allowed
Revenue Repair Allowed Allowed
Capital Repair Not allowed Not allowed
Added to cost of Asset Sec. 43(I)
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.6

Section 31 Insurance & Repair of plant & Machinery & Furniture

Owner Tenant
Rent Not allowed Allowed (As per sec. 37)
Insurance Allowed Allowed
Revenue Repair Allowed Allowed
Capital Repair Not allowed Not allowed
Added to cost of Asset Sec. 43(I)
Note:
1. Expenses u/s 30 & 31 allowed only if asset used for business or profession.
2. Capital repair by tenant is treated as Deemed Building & depreciation is allowed to
Tenant.
 Section 32 : Depreciation
Condition to claim depreciation
I. Asset should be used for business / Profession purpose (active or passive)
II. Assessee should be Owner of such asset (wholly or partly)
Note:
1. Depreciation is allowed if assessee is beneficial owner.
Smt. A. Sivakami and Another (2010) (Mad.)
2. In case of LEASE, depreciation is always claimed by lessor whether it is Financial
lease or Operating lease [CBDT circular]
3. In case of Hire Purchase, assessee gets the ownership only after payment of last
installment but he can claim depreciation from beginning, assuming assessee is
the owner from beginning.
4. Depreciation on asset partially owned by the assessed shall be allow to him to
the extent of his share in asset.
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.7

PART – A
Rates of Depreciation
Assets RATE (%)
1. Building
i. Residential 5
ii. General 10
iii. Temporary Structure 1 Wooden 40
2. Furniture & Fittings 10
3. Plant & Machinery 15%
i. Motor Vehicles
 Used in a business of running them on HIRE 30
 Other motor vehicles 15
ii. Ships 20
iii. Aircraft 40
iv. Computer/ Laptop 40
v. Books
 Normally 40
 Annual Publication 40
 Libraries Business 40
vi. Windmills & its equipments.
 Installed before 01/04/2014 15
 Installed on or after 01/04/2014 40
vii. Pollution control equipments 40
viii. Other plant & Machinery 15
ix. Oil Wells 15
Motor cars other than those used in a business of running them on hire,
[acquired during the period from 23.8.2019 to 31.3.2020 and 30
put to use on or before 31.3.2020]
Motor buses, motor lorries and motor taxis used in a business of running them on hire,
acquired during the period from 23.8.2019 to 31.3.2020 and put to use on or before
31.3.2020 45%
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.8

PART – B
Intangible assets 25
System of depreciation / method of depreciation

WDV Method SLM Method

Block of Asset System Individual Asset system shall
shall apply Apply (Power units)
 Block of asset means "Group of assets
(I) Nature of Assets
(II) Rate of Depreciation
Bother are equal than create book
BLOCK OF ASSET = SAME RATE + SAME CLASS
 Individual assets system : Dep calculated on individual asset — Same as Accounts
 Calculation of depreciation [Block of asset/ WDV method]

Opening WDV of Black XXXX

Add: Actual cost of asset acquired during PY
Put to use 180 days or more XXXX
put to use less than 180 days XXXX
XXXX
Less: Money payable [selling price of asset] (XXXX)
** WDV of block for depreciation XXXXX
Less: Dep actually allowed (XXX)
Closing WDV of block XXXX
**WDV of Block for Depreciation
Put to use
Less than 180 days 180 Days or more

Half rate depreciation Full rate Depreciation

 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.9

Note:
If asset acquired during current PY & not put to use then Depreciation shall not be allowed for
such asset but that asset should be added to Block of Asset.
Sec 32(1)
Depreciation restricted to 50% if asset put to use of less than 180 days in the year of acquisition.
Restriction applies only in the year of acquisition.
Year of acquisition Year of put to use less Dep. Allowed Rate
than 180 days
P.Y. 2022–23 PY 2022–23 PY 2022–23 Half Rate
P.Y. 2022–23 PY 2023 –24 PY 2023–24 Full Rate

Example 1
From the following data, calculate the depreciation admissible to an individual earning on business, for
assessment year, 2024-25.
Factory building (W.D.V.) Rs. 5,00,000
Plant & Machinery (W.D.V.) Rs. 8,00,000
Additions
30-6-2023 Rs. 1,00,000
31-12-2023 Rs. 1,00,000
Sales
1-12-2023 Rs. 6,00,000
Computer
Addition 1-1-2024 Rs. 6,00,000
Furniture and Fixtures (WDV) Rs. 60,000
Motor car (WDV) Rs. 60,000

Additional Depreciation
1. Sec.32(1) (iia) Additional Depreciation
 Assessee – engaged in the business of manufacture or generation or transmission or distribution of
power.
 Additional depreciation @ 20% Actual cost of on plant & machinery
Excluding Followings:
i. Second hand P & M
ii. Any P & M installed in office premises or residential accommodation.
iii. Ships, aircraft & transports vehicles
iv. P & M on which 100% deduction allowed
 Additional depreciation is allowed ONLY in the first year in which it is put to use. If put to
use for less than 180 days then 10% depn shall be allowed [20% × 50%]
1. If additional depreciation allowed at HALF RATE [asset used than 180 days] then balance half
rate depreciation shall be allowed in NEXT year.
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.10

Eligibility for grant of additional depreciation under section 32(1)(iia) in the case of an assessee
engaged in printing or printing and publishing [Circular No. 15/2016, dated 19-5-2016]
An assessee, engaged in the business of manufacture or production of an article or thing, is eligible to
claim additional depreciation under section 32(1)(iia) in addition to the normal depreciation under section
32(1).
The CBDT has, vide this Circular, clarified that the business of printing or printing and publishing
amounts to manufacture or production of an article or thing and is, therefore, eligible for additional
depreciation under section 32(1)(iia).

Additional depreciation would be allowed to an assessee only if he exercises the option of shifting out of
the default tax regime provided under section 115BAC(1A). It is not allowable when the assessee pays
concessional rates of tax under the default tax regime u/s 115BAC.

Example : 2
BSL Industries furnishes you the following information as on 1-04-2023
Block -1 Plant and machinery (consisting of 10 looms) WDV 5,00,000
Rate of depreciation 15%

Block if Building (consisting of 3 building) on 01-04-2023

Rate of depreciation on 10% WDV on 1-4-2023 Rs. 12,50,000

Acquired on 05-07-2023 5 looms for Rs. 4,00,000

sold on 7-12-2023 - 15 looms Rs. 10,00,000
Acquired on 10-01-2024 - 2 looms for Rs. 3,00,000
Compute depreciation claim for the assessment year 2024-25.
We are assuming that looms are use in manufacturing and production activities.
Ans. WDV as on 31-03-2024
P&M Rs.1,55,000 & Building Rs. 11,25,000
Proviso to Sec 32(1) : Depreciation in case of Amalgamation / Demerger/ Succession.
In this cases depreciation is calculated normally & after that it shall bed distributed between
amalgamating co. / Demerged Co./ Predecessor AND Amalgamated Co. / Resulting Co./ Successor in the
Ratio of the number of days for which assets were put to use by them.
Succession means :
(i) Firm / Proprietorship company Sec 47 (xiii) (xiv)
(ii) Company LLP Sec 47 (xiiib)

Example 4:
M/s XYZ & Co. proprietary concern was converted into a company on 1-9-2023. Before the conversion
the sole proprietary concern had a block of plant and machinery [rate of dep. 15%] whose WDV as on 1-4-
2023 was Rs. 3,00,000. On 1st April, new plant of the same block was purchased for Rs. 1,20,000 after the
conversion the company has purchased the same type of plant on 1-1-2024 for Rs. 1,60,000 . Compute the
depreciation that would be allocated between the sole proprietary concern and the successor company.
Ans- Sole pro. Rs 26336 Co. 48,664
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.11

Example 5
Sai Ltd. has a block of assets carrying 15% rate of depreciation, whose written down value on 01.04.2023
was ` 40 lacs. It purchased another asset (second-hand plant and machinery) of the same block on
01.11.2023 for ` 14.40 lacs and put to use on the same day. Sai Ltd. was amalgamated with Shirdi Ltd.
with effect from 01.01.2024.
You are required to compute the depreciation allowable to Sai Ltd. & Shirdi Ltd. for the previous year
ended on 31.03.2024 assuming that the assets were transferred to Shirdi Ltd. at ` 60 lacs. Also assume
that the plant and machinery were purchased by way of account payee cheque.
Answer—
Statement showing computation of depreciation allowable to Sai Ltd. & Shirdi
Ltd. for A.Y. 2024-25
Particulars `
Written down value (WDV) as on 1.4.2023 40,00,000
Addition during the year (used for less than 180 days) 14,40,000
Total 54,40,000
Depreciation on ` 40,00,000 @ 15% 6,00,000
Depreciation on ` 14,40,000 @ 7.5% 1,08,000
Total depreciation for the year 7,08,000
Apportionment between two companies:
(a) Amalgamating company, Sai Ltd.
` 6,00,000 × 275/366 4,50,820
` 1,08,000 × 61/152 43,342
4,94,162
(b) Amalgamated company, Shirdi Ltd.
` 6,00,000 × 91/366 1,49,180
` 1,08,000 × 91/152 64,658

2,13,838

(i) The aggregate deduction, in respect of depreciation allowable to the amalgamating company and
amalgamated company in the case of amalgamation shall not exceed in any case, the deduction
calculated at the prescribed rates as if the amalgamation had not taken place. Such deduction shall be
apportioned between the amalgamating company and the amalgamated company in the ratio of the
number of days for which the assets were used by them.
(ii) The price at which the assets were transferred, i.e., ` 60 lacs, has no implication in computing
eligible depreciation.
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.12

Example 6
Mr. Gopi carrying on business as proprietor converted the same into a limited company by name
Gopi Pipes (P) Ltd. from 01-07-2023. The details of the assets are given below:
`
Block - I WDV of plant & machinery (rate of depreciation @ 15%) on 12,00,000
01.04.2023
Block - II WDV of building (rate of depreciation @ 10%) on 01.04.2023 25,00,000

The company Gopi Pipes (P) Ltd. acquired plant and machinery in December 2023 for
`10,00,000. It has been doing the business from 01-07-2023.
Compute the quantum of depreciation to be claimed by Mr. Gopi and successor Gopi Pipes (P)
Ltd. for the assessment year 2024-25. Assume that plant and machinery were purchased by way of
account payee cheque.
Note: Ignore additional depreciation.
Answer—
Computation of depreciation allowable to Mr. Gopi for A.Y. 2024-25
Particulars ` `
Block 1 Plant and Machinery (15% rate)
WDV as on 1.4.2023 12,00,000
Depreciation@15% 1,80,000
Block 2 Building (10% rate)
WDV as on 1.4.2023 25,00,000
Depreciation@10% 2,50,000
Total depreciation for the year 4,30,000
Proportionate depreciation allowable to Mr. Gopi for 91
days (i.e., from 1.4.2023 to 30.6.2023) [i.e., 91/366 × 1,06,913
` 4,30,000)
Computation of depreciation allowable to Gopi Pipes (P) Ltd. for A.Y.2024-25
Particulars `
(i) Depreciation on building and plant and machinery 3,23,087
Proportionately for 275 days (i.e. from 1.7.2023 to 31.3.2024)
(275/366 × ` 4,30,000)
(ii) Depreciation@ 50% of 15% on ` 10 lakh, being the value of
plant and machinery purchased after conversion, which was put
to use for less than 180 days during the P.Y. 2023-24 75,000
Depreciation allowable to Gopi Pipes (P) Ltd. 3,98,087
Note: In the case of conversion of sole proprietary concern into a company, the depreciation
should be first calculated for the whole year as if no succession had taken place. Thereafter, the
depreciation should be apportioned between the sole proprietary concern and the company in the
ratio of the number of days for which the assets were used by them. It is assumed that in this case,
the conditions specified in section 47(xiv) are satisfied.
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.13

Example 7
Lights and Power Ltd. engaged in the business of generation of power, furnishes the
following particulars pertaining to P.Y.2023-24. Compute the depreciation allowable under
section 32 for A.Y.2024-2025, while computing its income under the head “Profits and
gains of business or profession”. The company has opted for the depreciation allowance on
the basis of written down value.
Particulars `
1. Opening Written down value of Plant and Machinery (15% block) as on 5,78,000
01.04.2023 (Purchase value ` 8,00,000)

2. Purchase of second hand machinery (15% block) on 29.12.2023 for 2,00,000

business purpose

3. Machinery Y (15% block) purchased and installed on 12.07.2023 for the 8,00,000
purpose of power generation

4. Acquired and installed for use a new air pollution control equipment 2,50,000
on 31.7.2023
5. New air conditioner purchased and installed in office premises on 3,00,000
8.9.2023
6. New machinery Z (15% block) acquired and installed on 23.11.2023 for 3,25,000
the purpose of generation of power

7. Sale value of an old machinery X, sold during the year (Purchase value 3,10,000
` 4,80,000, WDV as on 01.04.2023 ` 3,46,800)
Solution:
Computation of depreciation allowance under section 32 for the A.Y. 2024-25
Plant and Plant and
` Machinery Machinery
Particulars
(15%) (40%)
(`) (`)
Opening WDV as on 01.04.2023 5,78,000 –
Add: Plant and Machinery acquired during the year
– Second hand machinery 2,00,000
– Machinery Y 8,00,000
– Air conditioner for office 3,00,000
– Machinery Z 3,25,000 16,25,000
– Air pollution control equipment – 2,50,000
22,03,000 2,50,000
Less: Asset sold during the year 3,10,000 Nil
Written down value before charging depreciation 18,93,000 2,50,000
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.14

Normal depreciation
40% on air pollution control equipment – 100,000
Depreciation on plant and machinery put to use for
less than 180 days@ 7.5% (i.e., 50% of 15%)
– Second hand machinery (` 2,00,000 × 7.5%) 15,000
– Machinery Z (` 3,25,000 × 7.5%) 24,375 39,375
15% on the balance WDV being put to use for more
than 180 days (` 13,68,000 × 15%) 2,05,200
Additional depreciation
- Machinery Y (` 8,00,000 × 20%) 1,60,000
- Machinery Z (` 3,25,000 × 10%) air pollution 32,500 1,92,500 50,000
Total depreciation 4,37,075 1,50,000

Notes:
• Power generation equipment’s qualify for claiming additional depreciation in respect of
new plant and machinery.
• Additional depreciation is not allowed in respect of second hand machinery.
• No additional depreciation is allowed in respect of office appliances. Hence, no depreciation
is allowed in respect of air conditioner installed in office premises.
ILLUSTRATION 1
Mr. X, a proprietor engaged in manufacturing business, furnishes the following
particulars:
Particulars `
(1) Opening balance of plant and machinery as on 1.4.2023 (i.e., 30,00,000
WDVas on 31.3.2023 after reducing depreciation for P.Y.
2022-23)
(2) New plant and machinery purchased and put to use on 20,00,000
8.06.2023
(3) New plant and machinery acquired and put to use on 8,00,000
15.12.2023
(4) Computer acquired and installed in the office premises on 3,00,000
2.1.2024

Compute the amount of depreciation and additional depreciation for the A.Y. 2024- 25, if
Mr. X has exercised the option of shifting out of the default tax regime provided under
section 115BAC(1A). Assume that all the assets were purchased by way of account payee
cheque.
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.15

SOLUTION
Computation of depreciation and additional depreciation for A.Y. 2024-25
Plant & Computer
Particulars Machiner (40%)
y(15%)
Normal depreciation
@15% on ` 50,00,000 [See Working Notes 1 & 2] 7,50,000 -
@7.5% (50% of 15%, since put to use for less
than
180 days) on ` 8,00,000 60,000 -
@20% (50% of 40%, since put to use for less
than
180 days) on ` 3,00,000 - 60,000

Additional Depreciation
@20% on ` 20,00,000 (new plant and 4,00,000 -
machinery
put to use for more than 180 days)
@10% (50% of 20%, since put to use for less
than
180 days) on ` 8,00,000 80,000 -
Total depreciation 12,90,000 60,000

Working Notes:
 Computation of written down value of Plant & Machinery
Particulars Plant & Computer
Machinery
(`) (`)
Opening balance as on 1.4.2023 30,00,000 -
Add: Plant & Machinery purchased on 08.6.2023 20,00,000 -
Add: Plant & Machinery acquired on 15.12.2023 8,00,000 -
Computer acquired and installed in the office - 3,00,000
premises
Written down value as on 31.03.2024 58,00,000 3,00,000
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.16

 Composition of plant and machinery included in the WDV

Plant & Computer

Particulars Machinery
(`) (`)
Plant and machinery put to use for 180 days 50,00,000
or
more [` 30,00,000 (WDV) + `
20,00,000
(purchased on 8.6.2023)]
Plant and machinery put to use for < 180 days 8,00,000 -
Computers put to use for < 180 days - 3,00,000
58,00,000 3,00,000
Notes:
 Where an asset acquired during the previous year is put to use for less than
180 days in that previous year, the amount of deduction allowable as normal
depreciation and additional depreciation would be restricted to 50% of amount
computed in accordance with the prescribed percentage.

Therefore, normal depreciation on plant and machinery acquired and put to use on
15.12.2023 and computer acquired and installed on 02.01.2024, is restricted to
50% of 15% and 40%, respectively. The additional depreciation on the said plant
and machinery is restricted to ` 80,000, being 10% (i.e., 50% of 20%) of ` 8 lakh.
Mr. X is eligible for additional depreciation since he has exercised the option of
shifting out of the default tax regime provided under section 115BAC(1A).
 As per third proviso to section 32(1)(ii), the balance additional depreciation of `
80,000 being 50% of ` 1,60,000 (20% of ` 8,00,000) would be allowed as
deduction in the A.Y.2025-26.
 As per section 32(1)(iia), additional depreciation is allowable in the case of any
new machinery or plant acquired and installed after 31.3.2005 by an assessee
engaged, inter alia, in the business of manufacture or production of any article or
thing, @20% of the actual cost of such machinery or plant.
However, additional depreciation shall not be allowed in respect of, inter alia, any
machinery or plant installed in office premises, residential accommodation or in any
guest house.
Accordingly, additional depreciation is not allowable on computer installed in the
office premises.
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.17

ILLUSTRATION 2
A car purchased by Dr. Soman on 10.08.2020 for ` 5,25,000 for personal use is brought into
professional use on 1.07.2023 by him, when its market value was ` 2,50,000.
Compute the actual cost of the car and the amount of depreciation for the A.Y. 2024-25
assuming the rate of depreciation to be 15%.
SOLUTION
As per section 43(1), the expression “actual cost” would mean the actual cost of asset to the
assessee.
The purchase price of ` 5,25,000 is, therefore, the actual cost of the car to Dr. Soman.
Market value (i.e. ` 2,50,000) on the date when the asset is brought into professional use is
not relevant.
Therefore, amount of depreciation on car as per section 32 for the A.Y.2024-25 would be
`78,750, being ` 5,25,000 × 15%.
Note: Explanation 5 to section 43(1) providing for reduction of notional depreciation from
the date of acquisition of asset for personal use to determine actual cost of the asset is
applicable only in case of building which is initially acquired for personal use and later
brought into professional use. It is not applicable in respect of other assets.
ILLUSTRATION 3
A newly qualified Chartered Accountant Mr. Dhaval, commenced practice and has acquired
the following assets in his office during F.Y. 2023-24 at the cost shown against each item.
Calculate the amount of depreciation that can be claimed from his professional income for
A.Y.2024-25. Assume that all the assets were purchased by way of account payee cheque.
Description Date of Date when Amount
Sl. acquisition put to use `
No.
1. Computer including computer software 27 Sept., 1 Oct., 23 35,000
23
2. Computer UPS 2 Oct., 23 8 Oct., 23 8,500
3. Computer printer 1 Oct., 23 1 Oct., 23 12,500
4. Books (other than annual 1 Apr., 23 1 Apr., 23 13,000
publications are of `
12,000)
5. Office furniture 1 Apr., 23 1 Apr., 23 3,00,000
(Acquired from a practicing C.A.)
6. Laptop 26 Sep., 23 8 Oct., 23 43,000
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.18

SOLUTION
Computation of depreciation allowable for A.Y.2024-25
Asset Rate Depreciation
(`)
Block 1 Furniture [See working note below] 10% 30,000
Block 2 Plant (Computer including computer software,
Computer UPS, Laptop, Printers and Books) [See
working note below] 40% 34,500
Total depreciation allowable 64,500

Working Note:
Computation of depreciation
Block of Assets `
Block 1: Furniture – [Rate of depreciation - 10%]
Put to use for more than 180 days [` 3,00,000@10%] 30,000
Block 2: Plant [Rate of depreciation- 40%]
(a) Computer including computer software (put to use for more 14,000
than180 days) [` 35,000 @ 40%]
(b) Computer UPS (put to use for less than 180 days) [` 8,500 1,700
@20%] [See note below]
(c) Computer Printer (put to use for more than 180 days) [`12,500 5,000
@40%]
(d) Laptop (put to use for less than 180 days) [` 43,000 @20%] 8,600
[Seenote below]
(e) Books (being annual publications or other than annual
publications)
(Put to use for more than 180 days) [`13,000 @40%] 5,200
34,500
Note - Where an asset is acquired by the assessee during the previous year and is put
to use for the purposes of business or profession for a period of less than 180 days, the
deduction on account of depreciation would be restricted to 50% of the prescribed
rate. In this case, since Mr. Dhaval commenced his practice in the P.Y. 2023-24 and
acquired the assets during the same year, the restriction of depreciation to 50% of the
prescribed rate would apply to those assets which have been put to use for less than
180 days in that year, namely, laptop and computer UPS.
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.19

Sec 43 (1) : Actual cost

Actual cost of asset means
Cost of asset (Purchase price) Rs.
(+) Installation charges XXX
Trial run/test run expenses XXX
Taxes & duties (if ITC not available) XXX
Int. on loan taken for acquisition of asset XXX
(upto the date of asset put to use) XXX
XXXXX
(–) Amount received on sale of trial run product (XXXX)
(–) Subsidy/Govt. Grants received for acquisition of Assets (XXXX)
XXX
Adjustment of foreign exchange Rate u/s 43A & ICDS VI (+)/(-) XX
Actual Cost XXXX
ICDS VI: The Effects of changes in foreign exchange rates
(i) This ICDS requires exchange differences arising on settlement of monetary items or
conversion thereof at last day of the previous year to be recognized as income or as
expense in that previous year.
(ii) At the last day of each previous year, foreign currency monetary items shall be converted
into reporting currency by applying the closing rate
(iii) The ICDS contains provisions for initial recognition, conversion at the last date of the
previous year and recognition of exchange differences. These provisions shall be subject
to the provisions of section 43A of the Income-tax Act, 1961 and Rule 115 of the Income-
tax Rules, 1962 ( CIT V Maruti Udyog )

Example: 8
An assessee purchased a machinery from Germany for US $ 50,000 on3-11-2022 and took a
loan of US$ 50,000.the rate of exchange on 3-11-2022 was Rs.45 per US $.the assessee took a
forward exchange rate on 5-11-2023 and the rate specified in the contract was Rs. 46 perUS $.
Compute depreciation for assessment year 2023-24 and 2024-25 assuming the rate of
depreciation to be 15%.
Answer. WDV AY 2023-24 2081252 & AY 2024-25 18,11,564/-
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.20

Treatment of interest on loan taken for acquiring asset

New Company & New Existing business / Extension /

Business is Being set not case of extension
up

Upto the date After the date

asset is first put asset is first put
Upto the date of After the date the asset to use to use
commercial Production is first put to use

Added to actual Allowed as

cost revenue expenses
Added to actual cost Allowed as revenue
expense

Interest upto the date of asset first put to use: add to actual cost.
interest after the date of asset first put to use : allowed as revenue exp.
k. Depreciation for Power Generating undertakings / Sale of Assets / SLM method / individual
asset system.
If power units follows SLM method then they are subject to individual asset system profit &
Loss is calculated on every sale.
For better understanding lets take an example:
Section 38 (2): Asset party use for other purpose
If asset is not exclusively used for the purpose of Business / profession then deduction u/s
30,31,32 shall be restricted to a proportionate part as determined by A.O.
Example
Opening WDV of car (01/04/23) = 10,00,000
Suppose, CAR 60% used for business purpose & 40% used for personal purpose

(iii) Dep @ 15% = `1,50,000 Block of Asset

Opening WDV = `10,00,000
60% 40% (–) Depn Actually
`90,000 `60,000 allowed =
Closing WDV `9,10,000
Allowed Disallowed
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.21

Order for set off losses.

(i) Current year depreciation / Current year capital expenditure on scientific research
and current year expenditure on family planning, to the extent allowed
(ii) B/F losses from Business or profession u/s 72(1)
(iii) Unabsorbed depreciation u/s 32(2)
(iv) Unabsorbed capital expenditure on scientific research [Section 35(4)].
(v) Unabsorbed expenditure on family planning [Section 36(1)(ix)]
Current depreciation to be deducted first - The Supreme Court, in CIT v. Mother India
Refrigeration (P.) Ltd.
Example 9
Mr. Rajesh A business of Delhi, furnishes the following information relevant for the assessment
year 2024-25
Rs.
Income from house property (Computed) 2,60,000
Business profits (before claiming the following deductions) 2,34,000
Current depreciation allowance 1,08,000
Unabsorbed depreciation allowance of the previous year :

 2017-18 13,000
 2007-2008 3,500
Unabsorbed business loss of the previous years :
 2020-21 9,000
(i) 2006-2007 4,000
Current scientific research expenditure 1,06,000
Determine the net income of Mr. Rajesh for the assessment year 2024-25
Mr. Rajesh has exercised the option of shifting out of the default tax regime
provided under section 115BAC(1A).
Answer: 2,54,500/-
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.22

Expenditure on Scientific Research [Section 35]

This section allows a deduction in respect of any expenditure on scientific research
(activities for extension of knowledge in the fields of natural or applied science, including
agriculture, animal husbandry or fisheries) incurred in relation to the business of the
assessee or contribution by the assessee for scientific research or social science or statistical
research. However, it does include expenditure incurred in acquisition of rights in or arising
out of scientific research.
The deduction allowable under this section is depicted in the diagram below –
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.23

ILLUSTRATION 4
Mr. Gamma, a proprietor started a business of manufacture of tyres and tubes for motor
vehicles on 1.1.2023. The manufacturing unit was set up on 1.5.2023. He commenced his
manufacturing operations on 1.6.2023. The total cost of the plant and machinery installed
in the unit is ` 120 crore. The said plant and machinery included second hand plant and
machinery bought for ` 20 crore and new plant and machinery for scientific research
relating to the business of the assessee acquired at a cost of ` 15 crore.
Compute the amount of depreciation allowable under section 32 of the Income-tax Act, 1961
in respect of the assessment year 2024-25. Assume that all the assets were purchased by way
of account payee cheque and Mr. Gamma has exercised the option of shifting out of the
default tax regime provided under section 115BAC(1A).
SOLUTION

Computation of depreciation allowable for the A.Y. 2024-25

in the hands of Mr. Gamma

Notes:
As per section 35(2)(iv), no depreciation shall be allowed in respect of plant and
machinery purchased for scientific research relating to assessee’s business, since
deduction is allowable under section 35 in respect of such capital expenditure.
Mr. Gamma is entitled to additional depreciation since he has exercised the option of shifting
out of the default tax regime provided under section 115BAC(1A). As per section 32(1)(iia),
additional depreciation is allowable in the case of any new machinery or plant acquired and
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.24

installed after 31.3.2005 by an assessee engaged in, inter alia, the business of manufacture or
production of any article or thing, at the rate of 20% of the actual cost of such machinery or
plant.
However, additional depreciation shall not be allowed in respect of, inter alia, –
(i) any machinery or plant which, before its installation by the assessee, was used either
within or outside India by any other person;
(ii) any machinery or plant, the whole of the actual cost of which is allowed as a deduction
(whether by way of depreciation or otherwise) in computing the income chargeable
under the head “Profit and gains of business or profession” of any one previous year.
In view of the above provisions, additional depreciation cannot be claimed in respect of -
(i) Second hand plant and machinery;
(ii) New plant and machinery purchased for scientific research relating to assessee’s
business in respect of which the whole of the capital expenditure can be claimed as
deduction under section 35(1)(iv) read with section 35(2)(ia) & (iv).
ILLUSTRATION 5
Mr. A, furnishes the following particulars for the P.Y.2023-24. Compute the deduction
allowable under section 35 for A.Y.2024-25, while computing his income under the head
“Profits and gains of business or profession”, if.
(a) he is paying tax under default tax regime under section 115BAC
(b) he has exercised the option of shifting out of the default tax regime provided under
section 115BAC(1A)
Particulars `
1. Amount paid to notified approved Indian Institute of Science, 1,00,000
Bangalore, for scientific research
2. Amount paid to IIT, Delhi for an approved scientific research 2,50,000
programme
3. Amount paid to X Ltd., a company registered in India which 4,00,000
hasas its main object scientific research and development, as is
approved by the prescribed authority
4. Expenditure incurred on in-house scientific research and
development facility as approved by the prescribed authority
related to his business
(a) Revenue expenditure on scientific research 3,00,000
(b) Capital expenditure (including cost of acquisition of 7,50,000
land ` 5,00,000) on scientific research

SOLUTION
If Mr. A is paying tax under default tax regime under section 115BAC
Computation of deduction under section 35 for the A.Y.2024-25
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.25

(a) If Mr. A has exercised the option of shifting out of the default tax regime
provided under section 115BAC(1A)
Computation of deduction under section 35 for the A.Y.2024-25
Particulars ` Section % of Amount of
deduction deduction (`)
Payment for scientific
research
Indian Institute of Science 1,00,000 35(1)(ii) 100% 1,00,000
IIT, Delhi 2,50,000 35(2AA) 100% 2,50,000
X Ltd. 4,00,000 35(1)(iia) 100% 4,00,000
Expenditure incurred
on
in-house research and
development facility
Revenue expenditure 3,00,000 35(1)(i) 100% 3,00,000
Capital expenditure 2,50,000 35(1)(iv) 100% 2,50,000
(excluding cost of read with
acquisition of land 35(2)(ia)
` 5,00,000)
Deduction allowable under section 35 13,00,000
**************
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.26

Notes : 1.
1. The deduction u/s 35 (1) (ii) /(iii) / (2AA) shall not be denied if approval of such
institution has been withdrawn after making contribution by assessee.
2. No depreciation allowed an assets if deduction u/s 35 claimed.
3. If L&B
Purchased through a composite agreement then the cost of L&B shall be bifurcated
on the basis of FMV because cost of land is not allowed as deduction.
4. Un-absorbed research capital expenditure can be set off & carried forward same as
un-absorbed depreciation.
Example 10 :-
Mr. Kumar has furnished the following particulars relating to payments made towards
scientific research for the year ended 31.3.2024:
Sl. No. Particulars ` (in lacs)

(i) Payments made to K Research Ltd. 20

(ii) Payment made to LMN College 15
(iii) Payment made to OPQ College 10
(iv) Payment made to National Laboratory 8
(v) Machinery purchased for in-house scientific research 25
(vi) Salaries to research staff engaged in in-house scientific 12
Note: K research
Research Ltd. and LMN College are approved research institutions and
these payments are to be used for the purposes of scientific research. Mr. Kumar has
exercised the option of shifting out of the default tax regime provided under section
115BAC(1A).
Compute the amount of deduction available under section 35 of the Income-tax Act,
1961 while arriving at the business income of the assessee.
Answer
Computation of deduction allowable under section 35
Amount % of Amount
Particulars Section weighted of
(` in lacs)
deduction deductio
Payment for scientific n ( in
Research
K Research Ltd. [See Note 3] 20 35(1)(ii) 100% 20.00
LMN College 15 35(1)(ii) 100% 15.00
OPQ College [See Note 1] 10 – Nil Nil
National Laboratory [See Note 8 35(2AA) 100% 08.00
4]
In-house research [See Note
2]
Capital expenditure 25 35(1)(iv) r.w. 35(2) 100% 25.00
Revenue expenditure 12 35(1)(i) 100% 12.00
Deduction allowable under section 35 80.00
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.27

Notes:-
1. Payment to OPQ College: Since the note in the question below item (vi) clearly
mentions that only K Research Ltd. and LMN College (mentioned in item (i)
and (ii), respectively) are approved research institutions, it is a logical conclusion
that OPQ College mentioned in item (iii) is not an approved research institution.
Therefore, payment to OPQ College would not qualify for deduction under section
35.
2. Deduction for in-house research and development: Only company assessees
are entitled to weighted deduction@100% under section 35(2AB) in respect of in-
house research and development expenditure incurred. However, in this case, the
assessee is an individual. Therefore, he would be entitled to deduction@100% of
the revenue expenditure incurred under section 35(1)(i) and 100% of the capital
expenditure incurred under section 35(1)(iv) read with section 35(2), assuming
that such expenditure is laid out or expended on scientific research related to his
business.
3. Payment to K Research Ltd.: Any sum paid to a company registered in India
which has as its main object scientific research, as is approved by the prescribed
authority, qualifies for a deduction of 100% under section 35(1)(iia). Therefore, it
is also possible to take a view that payment of ` 20 lakhs to K Research Ltd.
qualifies for a weighted deduction of 100% under section 35(1)(iia) since K
Research Ltd. is a company. The weighted deduction under section 35(1)(iia)
would be ` 20 lacs (i.e., 100% of ` 20 lacs).
4. Payment to National Laboratory: The percentage of weighted deduction under
section 35(2AA) in respect of amount paid to National Laboratory is 100%.
Example 11
Vivitha Bio-medicals Ltd. is engaged in the business of manufacture of bio-medical
items. The following expenses were incurred in respect of activities connected with
scientific research
Year ended Item Amount (`)
31.03.2021 Land 10,00,000
(Incurred after Building 25,00,000
1.9.2018)
31.03.2022 Plant and machinery 5,00,000
31.03.2023 Raw materials 2,20,000
31.03.2024 Raw materials and 1,80,000
salaries
The business was commenced on 01-09-2023.
In view of availability of better model of plant and machinery, the existing plant and
machinery were sold for ` 8,00,000 on 1.03.2024.
Discuss the implications of the above for the assessment year 2024-25 along with brief
computation of deduction permissible under section 35 assuming that necessary
conditions have been fulfilled. You are informed that the assessee’s line of business is
eligible for claiming deduction under section 35 at 100% on eligible items.
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.28

Answer
As per section 35(2AB), where a company engaged in, inter alia, the business of
biotechnology incurs any expenditure on scientific research during the current year, it
is eligible for claiming weighted deduction of a sum equal to 100% of the eligible
expenditure.
Note : The benefit of deduction under this section would be available for
st
expenditure incurred upto 31 March 2023 on in-house research and development facility.
The eligible expenditure and quantum of deduction will be:
Current year capital expenditure (except expenditure in the nature of cost of any
land or building) or revenue expenditure incurred for scientific research (deduction @
100%) under section 35(2AB).
Any expenditure incurred during earlier 3 years immediately preceding the date of
commencement of business on payment of salary or purchase of materials, or capital
expenditure incurred other than expenditure on acquisition of land [actual
expenditure qualifies for deduction under section 35(1)].
The deduction available under section 35 for scientific research will, therefore, be:
Particulars `

(a) Land Nil

(b) Building 25,00,000

(c) Revenue expenses of last 3 years 2,20,000

(d) Capital expenditure of last 3 years: Plant and 5,00,000

machinery
Expenditure allowable under section 35(1) 32,20,000

Current year revenue expenditure ` 1,80,000 [100% of ` 1,80,000 1,80,000

is
allowable under section 35(2AB)]

Total deduction under section 35 34,00,000

1. Section 41(3) provides that where a capital asset used for scientific research
is sold, without having been used for other purposes, the lower of sale
proceeds or the total amount of deduction earlier allowed under section 35 will
be considered as income from business of the previous year in which the sale
took place.
Therefore, the income chargeable to tax under section 41(3) would be lower of the
following:
Sale proceeds i.e.,` 8,00,000
Total amount of deduction earlier allowed under section 35 i.e., ` 5,00,000
`5,00,000 will be deemed to be the income chargeable to tax under section 41(3).
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.29

2. The difference between sale proceeds and business income under section 41(3)
will be treated as short-term capital gain.
`

Sale proceeds of plant and machinery

8,00,000
Less: Business Income as per section 41(3) 5,00,000
Short-term capital gain 3,00,000_
Example 12:
X purchased an asset for scientific research for Rs. 30,00,000 in the previous year 2010-
11. During the previous year 2023-24 the said assets ceased to be used for scientific
research the following information also submitted to you.

Profit from business before depreciation 10,00,000

Written down value of block of assets 15% as on 1-4-2023 20,00,000
The scientific research asset if used for business shall be eligible for depreciation 15%.
Compute the total income if the scientific research asset is sold for Rs. 50,00,000 assuming
(I) It is sold without using for business.
(II) It is sold after using for business
(iii) CII 2010–11 167 and 2023–24 = 348
Answer
(i) Rs.37Lacs (ii) Rs.70Lacs.
Unabsorbed capital exp on scientific research for claiming deduction on account of capital
exp on scientific research it may be set up and carry forward like depreciation adjustment.
Note :- Unabsorbed capital expenditure on scientific research shall be carried
forward as unabsorbed depreciation
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.30

“Investment-linked tax incentives” for specified businesses [Section 35AD]

List of specified businesses:
Specified Business U/S 35AD
No. Business Commencement % of
on or after deduction
1 Setting up & operating a cold chain facility 01.04.2009 100
2 Setting up & operating a warehousing facility for 01.04.2009 100
agricultural produce
3 Laying & operation cross country pipeline for 01.04.2009 100
distribution of petroleum oil, natural gas.
4 Building & operating a Hotel of 2 Star or above 01.04.2010 100
5 Building & operating a Hospital with minimum 100 01.04.2010 100
patient beds.
6 Developing & building a Housing project under 01.04.2010 100
slum development scheme.
7 Developing & building a housing project under 01.04.2011 100
affordable housing scheme
8 Production of fertilizers in India. 01.04.2011 100
9 Setting up & operating inland container depot or 01.04.2012 100
container freight station as per custom Act, 1962.
10 Bee keeping and production for honey & Bee wax. 01.04.2012 100
11 Setting up & operating a warehousing facility for 01.04.2012 100
sugar.
12 Laying & operating a slurry pipeline for 01.04.2014 100
transportation of iron are.
13 Setting up & operating a Semi-Conductor wafer 01.04.2014 100
fabrication manufacturing unit.
14 Developing or maintaining and operating or 01.04.2017 100
developing, maintaining and operating a new
Infrastructure facility (Note)

Note :
Infrastructure facility means:
(i) A road including toll road a bridge or a rail system.
(ii) A highway project including housing or other activities being an integral
part of the highway project.
(iii) Water supply project water treatment system. Irrigation project and
sewerage system or solid waste management system.
(iv) A port, airport, inland water way, inland port or navigational channel in
the sea.
In case of an individual/HUF/AoP/BoI carrying on specified business, deduction u/s 35AD would
be available only if they exercise the option of shifting out of the default tax regime provided under
section 115BAC(1A). If such assessee is paying concessional rates of tax under the default tax
regime u/s 115BAC, deduction u/s 35AD would not be available.
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.31

A company would not be eligible for deduction under section 35AD, if it opts for the special
provisions of section 115BAA/115BAB.

Conditions/ Notes
1. Not formed by splitting or reconstruction of existing business means business
should be NEW.
2. P& M Should be NEW
Exception : (1) Imported old P&M (PM on which dep. Not claimed under IT Act.
(2) 20% of total P&M can be old (Second Hand)
3. Deduction allowed on all Capital expenses except (a) Land (b) Goodwill (c) Financial
instruments.
Further , any expenditure in respect of which payment or aggregate of payment made to
a person of an amount exceeding ` 10,000 in a day otherwise than by a/c payee cheque
or an a/c D D or use electronic clearing system through a bank account would not
eligible for deduction (Added by FA 2017)
4. Depreciation not allowed if deduction claimed u/s 35 AD.
5. If deduction u/s 35 AD claimed, then deduction u/s 80IA to 80RRB & 10AA deduction shall
not be allowed.
6. Loss of specified business can be set off only against specified business income
7. Loss of specified business can be carried forward Unlimited Year. assessee has to file ROI
upto due date of ROI for c/f of losses.

ILLUSTRATION 6
Mr. A commenced operations of the businesses of setting up a warehousing facility for
storage of food grains, sugar and edible oil on 1.4.2023. He incurred capital expenditure of
` 80 lakh, ` 60 lakh and ` 50 lakh, respectively, on purchase of land and building during
the period January, 2023 to March, 2023 exclusively for the above businesses, and
capitalized the same in its books of account as on 1st April, 2023. The cost of land
included in the above figures is ` 50 lakh, ` 40 lakh and ` 30 lakh, respectively. During the
P.Y. 2023-24, he incurred capital expenditure of ` 20 lakh, ` 15 lakh & ` 10 lakh,
respectively, for extension/reconstruction of the building purchased and used
exclusively for the above businesses.
Compute the income under the head “Profits and gains of business or profession” for
the A.Y.2024-25 and the loss to be carried forward, assuming that Mr. A is exercising the
option of shifting out of the default tax regime provided under section 115BAC(1A) and
has fulfilled all the conditions specified under section 35AD and wants to claim deduction
under section 35AD and has not claimed any deduction under Chapter VI-A under the
heading “C – Deductions in respect of certain incomes”.
The profits from the business of setting up a warehousing facility for storage of food grains,
sugar and edible oil (before claiming deduction under section 35AD and section 32) for
the A.Y. 2024-25 is ` 16 lakhs, ` 14 lakhs and ` 31 lakhs, respectively. Also, assume in
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.32

respect of expenditure incurred, the payments are made by account payee cheque or
use of ECS through bank account.
SOLUTION
Computation of profits and gains of business or profession for A.Y.2024-25
Particulars ` (in lakhs)
Profit from business of setting up of warehouse for storage ofedible 31
oil (before providing for depreciation under section 32)
Less: Depreciation under section 32
10% of ` 30 lakh, being (` 50 lakh – ` 30 lakh + ` 10 lakh) 3
Income chargeable under “Profits and gains from business or 28
profession”

Computation of income/loss from specified business under section 35AD

Notes:
Deduction of 100% of the capital expenditure is available under section 35AD for
A.Y.2024-25 in respect of specified business of setting up and operating a warehousing
facility for storage of sugar and setting up and operating a warehousing facility for
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.33

storage of agricultural produce where operations are commenced on or after 1.4.2012

or on or after 1.4.2009, respectively.
However, since setting up and operating a warehousing facility for storage of edible oils
is not a specified business, Mr. A is not eligible for deduction under section 35AD in
respect of capital expenditure incurred in respect of such business.
Mr. A can, however, claim depreciation@10% under section 32 in respect of the
capital expenditure incurred on buildings. It is presumed that the buildings were put
to use for more than 180 days during the P.Y.2023-24.
Loss from a specified business can be set-off only against profits from another specified
business. Therefore, the loss of ` 55 lakh from the specified businesses of setting up and
operating a warehousing facility for storage of food grains and sugar cannot be set-off
against the profits of ` 28 lakh from the business of setting and operating a
warehousing facility for storage of edible oils, since the same is not a specified
business. Such loss can, however, be carried forward indefinitely for set-off against
profitsof the same or any other specified business.
ILLUSTRATION 7
Mr. Suraj, a proprietor, commenced operations of the business of a new three-star hotel in
Madurai, Tamil Nadu on 1.4.2023. He incurred capital expenditure of ` 50 lakh during the
period January, 2023 to March, 2023 exclusively for the above business, and capitalized the
same in his books of account as on 1st April, 2023. Further, during the P.Y. 2023-24, he
incurred capital expenditure of ` 2 crore (out of which ` 1.50 crore was for acquisition of
land) exclusively for the above business.
Compute the income under the head “Profits and gains of business or profession” for the
A.Y.2024-25, assuming that he has fulfilled all the conditions specified under section 35AD
and opted for claiming deduction under section 35AD; and he has not claimed any
deduction under Chapter VI-A under the heading “C – Deductions in respect of certain
incomes”. He has exercised the option of shifting out of the default tax regime provided
under section 115BAC(1A).
The profits from the business of running this hotel (before claiming deduction under
section 35AD) for the A.Y.2024-25 is ` 25 lakhs. Assume that he also has another existing
business of running a four-star hotel in Coimbatore, which commenced operations fifteen
years back, the profits from which are ` 120 lakhs for the A.Y.2024- 25. Also, assume that
payments for capital expenditure were made by net banking.
SOLUTION
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.34

Computation of profits and gains of business or profession for A.Y. 2024-25

Particulars `
Profits from the specified business of new hotel in Madurai(before 25 lakh
providing deduction under section 35AD)
Less: Deduction under section 35AD
Capital expenditure incurred during the P.Y.2023-24(excluding
the expenditure incurred on acquisition of
land) = ` 200 lakh – ` 150 lakh 50 lakh
Capital expenditure incurred prior to 1.4.2023 (i.e.,
prior to commencement of business) and capitalized in
the books of account as on 1.4.2023 50 lakh
100 lakh
Total deduction under section 35AD for A.Y.2024-25
Loss from the specified business of new hotel in Madurai (75 lakh)
Profit from the existing business of running a hotel in Coimbatore 120 lakh
Net profit from business after set-off of loss of specified business 45 lakh
against profits of another specified business under section 73A

ILLUSTRATION 8
Mr. Arnav is a proprietor having two units – Unit A carries on specified business of
setting up and operating a warehousing facility for storage of sugar; Unit B carries on
non-specified business of operating a warehousing facility for storage of edible oil.
Unit A commenced operations on 1.4.2022 and it claimed deduction of ` 100 lacs
incurred on purchase of two buildings for ` 50 lacs each (for operating a warehousing
facility for storage of sugar) under section 35AD for A.Y.2023-24. However, in February,
2024, Unit A transferred one of its buildings to Unit B.
Examine the tax implications of such transfer in the hands of Mr. Arnav.
SOLUTION
Since the capital asset, in respect of which deduction of ` 50 lacs was claimed u/s 35AD,
has been transferred by Unit A carrying on specified business to Unit B carrying on non-
specified business in the P.Y.2023-24, the deeming provision u/s 35AD(7B) is attracted
during the A.Y.2024-25.
Particulars `
Deduction allowed u/s 35AD for A.Y.2023-24 50,00,000
Less: Depreciation allowable u/s 32 for A.Y.2023-24 [10% of `50 lacs] 5,00,000
Deemed income under section 35AD(7B) 45,00,000

Mr. Arnav, however, by virtue of proviso to Explanation 13 to section 43(1), can claim
depreciation u/s 32 on the building in Unit B for A.Y.2024-25. For the purpose of
claiming depreciation on building in Unit B, the actual cost of the building would be:
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.35

Particulars `
Actual cost to the assessee 50,00,000
Less: Depreciation allowable u/s 32 for A.Y.2023-24 [10% of `50 5,00,000
lacs]
Actual cost in the hands of Mr. Arnav in respect of building in 45,00,000
itsUnit B

 Section 35 D : Preliminary expenses

1. Meaning : (a) preparation of feasibility study/ project report
(b) Market survey
(c) Engineering services
(d) Drafting & printing of MOA/AOA.
(e) Legal fees
(f) Expenses related to Public issue of shares & debenture
(g) Other expenses may be notified by CBDT
2. Deduction allowed to resident assessee incurs preliminary exps before
Commencement of business or after commencement for extension or for setting up
a new unit.
Amount of deduction

Indian Co. Other Resident

(i) Actual Preliminary Exps (i) Actual Preliminary Exps
(ii) 5% of COP/ CE** (ii) 5% of COP
Whichever is lower Whichever is lower
**COP or CE, whichever is Higher
NOTES :
1. Above deduction is allowed in S equal installments
2. COP = Cost of project [Amount invested in fixed asset of new project]
3. CE= Capital employed [share capital + debentures + long term barrowings for new
project]
Example 13
Compute the deduction u/s 35 D for SUN Ltd. with the following information.
Cost of project Rs. 8,00,000
Capital employed (i) 7,00,000 (ii) 10,00,000
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.36

Actual preliminary exp Rs. 60,000

What will be your answer if the assessee is an individual?
Example 14:-
Sangam Ltd. is an existing Indian Company, which sets up a new industrial unit. It incurs
the following expenditure in connection with the new unit:
Preparation of project report - Rs. 4,00,000
Market Survey Rs. 5,00,000
Legal and other charges for issue of additional
capital required for the new unit Rs. 2,00,000
Total Rs. 11,00,000
The following further data is given:
Cost of project Rs. 30,00,000
Capital employed in the new unit Rs. 40,00,000
What is the deduction admissible to the company under Sec. 35D for Assessment. Year
2024-25?
Ans. Rs.40,000/–
 Sec 35 DD : Expenses on Amalgamation & Demerger
Assessee : Only Indian Co.
Deduction u/s 35DD
Amortization in 5 equal Installments in the 5 year.
= 1/5 of Expenditure on Amalgamation & Demerger
Note : Deduction allowed to the assessee who has incurred such expenditure

 SEC 35 DDA : Expenditure on Voluntary Retirement Scheme

Assessee : All Assessees
Deduction u/s 35DDA
Amortization in 5 equal Installments in the 5 year.
= 1/5 of Expenditure on Voluntary Retirement
Note : 35 D, 35DD & 35 DDA
If there is Amalgamation/Demerger, then remaining Deduction shall be Allowed to
Amalgamated Co/Resulting Co.
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.37

Certain deduction u/s 36

 Section 36 (1)(i) : premium for insurance of stock-in-trade
It is allowed as deduction.
 Section 36 (1)(ib) : Health insurance premium for employee
It is allowed as deduction if premium paid in any mode other than cash.
 Section 36(1)(ii) : Bonus or commission to employee
It is allowed as deduction subject to Sec 43 B.

Example : 15
Good bad Pvt Ltd. Has two shareholders Good and bad who are equal shareholders. Good is an
employee of the company also. The company paid dividend of Rs. 26,000 to Good and 30,000
to Bad. But to compensate the co. paid Rs. 4,000 bonus to Good. Decide that whether the co.
can claim deduction of bonus of Rs. 4,000 or not?
Section 36(1) (iii) : Interest on Loan:

Loan taken for Business/profession purpose Personal Purpose

Not Allowed

Loan From PF / or scheduled banks Loan from others

Allowed Also Allowed

[Subject to SEC 43 B]
 Section 36 (1) (iiia) : Discount on Zero Coupon Bonds (ZCB)
pro-rata amount to discount shall be amortized over the life (calendar months) of
ZCB.
Example:
SUN Ltd. issued, 1,00,000 ZCB on 06/12/23 @ ` 80. Face value of bond is ` 100. ZCB
redeemable after 10 months. Compute deduction allowed for P.Y. 2023-24.
Solution : Total Discount = 1,00,000×20 = ` 20,00,000
20,00,000
Monthly Discount   ` 2,00,000 P.M.
10months
Discount for P.Y. 2023-2024 = 200000 × 4 months = ` 8,00,000 (Dec – 23 to Mar-24)
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.38

Note : If any calendar month part is 15 days or more, it shall be increased to one calendar
month & if such part is less than 15 days it shall be IGNORED.
Section 36 (1) (iv) Employer's contribution for the benefit of the Employee.

Statutory provident fund (SPF) Unrecognized Provident Fund

Recognized provident fund (RPF) (URPF)
Approved Super annuation fund (ASF) Unapproved Super annuation fund
Approved Gratuity Fund (AGF) (UASF)
Unapproved Gratuity Fund (UAGF)
Any Other Fund

Allowed as deduction
(Subject to sec 43 B) Not Allowed

 Sec 36 (1) (iva) : Employer contribution towards pension scheme referred us 80

CCD
Deduction allowed to employer
(i) Actual contribution
(ii) 10% of salary [Basic+DA(Terms)]
Whichever is lower

 Sec 36 (1) (va) : Employees contribution towards welfare fund.

Any sum received by employer from Employee as contribution to PF, super
annuation fund, ESI etc. is deemed to be as PGBP if such sum is not deposited in
respective fund up to the due date to such fund.
It is allowed even if it is deposited up to due date of return filing as per sec 139 (1).

Illustration 9
X Ltd. contributes 20% of basic salary to the account of each employee under a
pension scheme referred to in section 80CCD. Dearness Allowance is 40% of basic salary
and it forms part of pay of the employees. Compute the amount of deduction
allowable under section 36(1)(iva), if the basic salary of the employees aggregate to `
10 lakh. Would disallowance under section 40A(9) be attracted, and if so, to what
extent?
Solution
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.39

Computation of deduction under section 36(1)(iva) and disallowance under section 40A(9)
Particulars `
Basic Salary 10,00,000
Dearness Allowance@40% of basic salary [DA forms part of pay] 4,00,000
Salary for the purpose of section 36(1)(iva) (Basic Salary + DA) 14,00,000
Actual contribution (20% of basic salary i.e., 20% of ` 10 lakh)
2,00,000
Less: Permissible deduction under section 36(1)(iva) (10% of 1,40,000
basic
salary plus dearness pay = 10% of ` 14,00,000 = ` 1,40,000)
Excess contribution disallowed under section 40A(9) _ 60,000
 Sec 36 (1)(vi) : Animals used in Business (other than SIT)
Deduction is allowed in the year in which such animal become permanently useless.
Deduction = Cost of animal – scrap value
Note : Depreciation u/s 32 not allowed on animals
 Sec 36 (1) (vii)
Bad Debts

Actual Bad Debts Prov. for Bad Debts

Related to Sales/
Turnover/ Receipt Related to loan Not Allowed
Allowed Not Allowed [Exception—Banks u/s 36(1)
(viia)]
[Exception – money
lending Business]
Notes : 1. Bad debts should be written off in the books of A/c of Assessee in the P.Y. in
which deduction is claimed.
2. The debt should have been taken into account for computing income for PY or earlier
PY.
3. No need to prove that the debts have become bad.
 Sec 41(4) : Bad-debts Recovery
Where deduction has been allowed in respect of bad debts, recovery shall be taxable as PGBP in
the year of recovery. This shall apply even if the business or profession is not in existence in the
previous year in which recovery.
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.40

Example:
Goods sold on credit for the PY 22-23 Rs. 17,000. Not paid by debtor Rs. 17,000. Deduction
allowed Rs. 11,000. Determine the amount taxable u/s 41(4) if he recovered the following
amount during 23-24
1. Rs. 6,000 in 23-24 and 11,000 in 24-25
2. Rs. 9,000
3. Rs. 17,000
 Section 36 (1)(viia) : Provision for bad debts of banks.

Indian Bank  Foreign Banks

8.5% of GTI (before this deduction )  Public Financial Institutions (PFI)
+  State Financial Corporation (SFC)

10% of Aggregate Avg. Advance made  State Industrial Investment

Corporation
by Rural branches
 Non-banking financial co (NBFC)
5% of GTI (before this deduction)

Note : 1. No deduction is allowed for actual bad debts us 36 (1)(vii)

2. Actual Bad debts should be debited to Prov. For Bad debts A/c
3. If Prov for bad debts less than actual bad debts then remaining bad debts allowed us 36
(1)(vii)
4. Assessee should maintain only one account in respect of provision for bad and doubtful
debts and such account shall relate to all types of advances including advances made by
rural and urban branches.
Example
The following are the particulars in respect of a scheduled bank incorporated in India –
Particulars ` in lakh
(i) Provision for bad and doubtful debts under section 36(1)(viia) upto 100
A.Y.2023-24
(ii) Gross Total Income of A.Y.2024-25 [before deduction under section 800
36(1)(viia)]
(iii) Aggregate average advances made by rural branches of the bank 300
(iv) Bad debts written off (for the first time) in the books of account (in 210
respect of urban advances only) during the previous year 2023-24.

Compute the deduction allowable under section 36(1)(vii) for the A.Y.2024-25.
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.41

Solution
Particulars ` in lakh
Bad debts written off (for the first time) in the books of account 210
Less: Credit balance in the ―Provision for bad and doubtful debts ‖ under section
36(1)(viia) as on 31.3.2023
(i) Provision for bad and doubtful debts u/s 36(1)(viia) upto A.Y.2023-24 100
(ii) Current year provision for bad and doubtful debts u/s 36(1)(viia)
[7.5% of ` 800 lakhs + 10% of ` 300 lakhs] 98 198

Deduction under section 36(1)(vii) in respect of bad debts written off for 12
A.Y.2024-25

 Sec 36 (1)(ix) : Expenses on Promotion of Family planning of employees.

Assessee : Only Company

Revenue Expenses Capital Expenses

100% Dedn allowed Allowed in 5 equal installment

 Sec 36 (1)(xv)/(xvi) : Securities Transaction Tax (STT) Commodities Transaction Tax (CTT)
It is allowed as deduction if assessee held shares/Units/Commodities as stock-in-trade.

 Sec 36 (1)(xvii) : Purchase of Sugar cane.

Expenditure incurred by cooperative society engaged in business of manufacturing of sugar
for purchase of sugarcane at a price which is equal to or less than the price fixed by Govt.
allowed as deduction.
 Sec 37 : General Deduction
Any expenditure [other than covered u/s 30 to 36] shall be allowed as deduction if
following conditions are satisfied:
1. Expenses should be incurred wholly or exclusively for the purpose of Business or
profession.
2. Expenses should be Revenue in nature.
3. Expenses should not be Legal [It should be illegal like Hafta, Bribes, secret commission,
etc.]
 Corporate social Responsibility (CSR) expenses.
It is not treated as Business expense, so not allowed.
 Allow expenses—
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.42

(a) Gift to employee & Customer

(b) Customary expenses (puja at the time of new year, Diwali)
(c) Expenses incurred by CA’s for attending CPE seminars
(d) Tax audit fees or litigation exp in relation income tax cases
(e) Premium paid by the firm on the keyman insurance policy of a partner
 Disallowed Expenses—
(a) Advt. in brochure, souvenir, newspaper, pamphlet published by political party not
allowed
(b) Dividend
(c) Freebies (gifts, cash, travel facility) Provided by Pharmaceutical company to doctors
– its illegal expenses
(d) Interest on loan taken for payment of income tax
(e) Penalty – Breach of law
(f) Freebies (gifts, cash, travel facility) Provided by Pharmaceutical company to
doctors – its illegal expenses – Not allowed
Taxes, interest & penalties
Tax Interest Penalty
Direct taxes Not allowed Not allowed Not allowed
(Income tax, etc.)
Indirect taxes Allowed Allowed Not allowed
(GST etc.)

[Subject to sec. 43 B]
Example
Shanti Bhushan, who is 48 years of age, is a business in Delhi on the basis of the following profit
and Compute his taxable income.

Opening stock 20,700 Sales 15,00,000

Purchases 10,00,000 Closing stock 25,200
House hold expenses 10,000
Income tax for the financial
year
2022-23 30,000
Interest on capital 8,400
Depreciation on furniture 12,000
Reserve for baddebts 1,200
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.43

Salaries and wages 60,000

Rent and rates 25,000
Net Profit 3,57,900
15,25,200 15,25,200

Other relevant particulars are as follows :

(1) Opening stock and closing stock have consistently have been at 10% below cost price.
(2) House hold expenses include a contribution of Rs. 1,500 towards public provident fund.
(3) Amount of depreciation on furniture as per income tax provision as Rs. 10,000.
Answer
Rs.4,08,500/-

*********************
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.44

Income under the Head “PGBP”

Inadmissible Deductions [Section 40]
Sec 40 : Amount specifically NOT deductible
 Sec 40(a)(i) : Payment mode to Non-Resident
Amount paid or credited to Non-resident or foreign co. & if:
a. TDS has not been deducted in PY, or.
b. TDS deducted but not paid to Govt up to due date of return filing then such sum (100%)
shall not be allowed as deduction in current P.Y.
 Sec 40(a) (ia) : Payment made to Resident.
Any amount paid or credited to Resident & if:—
a) TDS has not been deducted in PY, or
b) TDS deducted but not paid to Govt upto due date of returning file.
then 30% of such sum shall not be allowed as deduction in current PY.
Note :
1. If TDS deducted in subsequent year or deducted in PY but paid to govt after due date of
return filing then such sum (100% NR) / (30% Resident) shall be allowed as deduction in the
PY in which such TDS has been paid to Govt.
2. Exception to Sec 40(a) (ia)
If any amt paid / Credited to Resident payee without deduction of TDS but such payee
— Furnish his ROI
— Taken into account such amount in total income.
— Paid the tax due on such income
— Payer furnish a certificate from CA to this effect then it shall be deemed that the payer has
deducted TDS & paid to Govt on date of furnishing or return by payee & deduction of
such expenditure shall be allowed accordingly.
However payer has to pay interest us 201(IA) @ 1% p.m. or part of the month on the amt of TDS
not deducted from date on which the TDS was so deductible till the date on which payee furnish
his ROI.
Example
XYZ Ltd. made the following payments in the month of March 2024 to residents without
deduction of tax at source. What would be the tax consequence for A.Y.2024-25, assuming that
the resident payees in all the cases mentioned below, have not paid the tax, if any, which was
required to be deducted by XYZ Ltd.?

Particulars Amount in `

(1) Salary to its employees 15,00,000

(2) Non-compete fees to Mr. X 70,000

(3) Directors’ remuneration 25,000

 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.45

Would your answer change if XYZ Ltd. has deducted tax on the above in April, 2024 from
subsequent payments made to these persons and remitted the same in July, 2024?
Answer
Non-deduction of tax at source on any payment on which tax is deductible as per the provisions of
Chapter XVII-B would attract disallowance under section 40(a)(ia). Therefore, non-deduction of
tax at source on salary payment on which tax is deductible under section 192 and non-compete
fees and directors’ remuneration on which tax is deductible under section 194J, would attract
disallowance@30% of sum paid under section 40(a)(ia). Therefore, the amount to be disallowed
under section 40(a)(ia) while computing business income for A.Y.2024-25 is as follows –
Particulars Amount Disallowance u/s
40(a)(ia) @ 30% of
paid in `
sum paid

(1) Salary 15,00,000 4,50,000

[tax is deductible under section 192]

(2) Non-compete fees to Mr. X 70,000 21,000

[tax is deductible under section 194J]

(3) Directors’ remuneration 25,000 7,500

[tax is deductible under section 194J without
any threshold limit]

Disallowance under section 40(a)(ia) 4,78,500

If the tax is deducted and paid in the next year i.e., P.Y.2024-25, the amount of ` 4,78,500 would
be allowed as deduction while computing the business income of A.Y.2025-26.
Illustration 10
Delta Ltd. credited the following amounts to the account of resident payees in the
month of March, 2024 without deduction of tax at source. What would be the
consequence of non- deduction of tax at source by Delta Ltd. on these amounts during
the financial year 2023-24, assuming that the resident payees in all the cases
mentioned below, have not paid the tax, if any, which was required to be deducted by
Delta Ltd.?
Particulars Amount in (`)

(1) Salary to its employees (credited and paid in March, 2024) 12,00,000
(2) Directors‘ remuneration (credited in March, 2024 and paid 28,000
in April, 2024)
Would your answer change if Delta Ltd. has deducted tax on directors‘ remuneration in
April,2024 at the time of payment and remitted the same in July, 2024?
Solution
With effect from A.Y.2024-25, non-deduction of tax at source on any sum payable to a
resident on which tax is deductible at source as per the provisions of Chapter XVII -B would
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.46

attract disallowance under section 40(a)(ia). Therefore, non-deduction of tax at source on any
sum paid by way of salary on which tax is deductible under section 192 would attract
disallowance @30% under section 40(a)(ia). Whereas in case of salary, tax has to be
deducted under section 192 at the time of payment, in case of directors‘ remuneration, tax has
to be deducted at the time of credit of such sum to the account of the payee or at the time of
payment, whichever is earlier. Therefore, in both the cases i.e., salary and directors‘
remuneration, tax is deductible in the P.Y.2023-24, since salary was paid in that year and
directors‘ remuneration was credited in that year. Therefore, the amount to be disallowed
under section 40(a)(ia) while computing business income for A.Y.2024-25 is as follows
Particulars Amount paid Disallowance
in ` u/s 40(a)(ia) @
30%
(1) Salary 12,00,000 3,60,000
[tax is deductible under section 192]
(2) Directors‘ remuneration 28,000 8,400
[tax is deductible under section 194J without
any
threshold limit]
Disallowance under section 40(a)(ia) 3,68,400
If the tax is deducted on directors‘ remuneration in the next year i.e., P.Y.2024-25 at
the time of payment and remitted to the Government, the amount of ` 8,400 would
be allowed as deduction while computing the business income of A.Y.2025-26.
 Sec 40A(2): Payments to Specified Persons (Relatives)
If payment of expenditure made to relative then A.O. can disallow excessive or unreasonable
amount.
Note: If payment as per Arm's Length Price (Sec 92 BA) then Sec 40 A(2) NOT
APPLICABE.
 Specified Person (Relative) for sec 40A(2)
Assessee Relative
1. Individual Spouse, Mother, Father, Brother, Sister,
lineal ascendant or descendant of that
individual.
2. HUF Member & their relatives
3. Firm/ LLP Partner & their relatives
4. Company Director & their relatives
5. AOP/BOI Member & their relatives
A person shall be deemed to have a substantial interest in a business or profession if -
- in a case where the business or profession is carried on by a company, such
person is, at any time during the previous year, the beneficial owner of equity
shares carrying not less than 20% of the voting power and
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.47

Cash payments in excess of ` 10,000

 Sec 40A(3) Cash Payment > 10,000 to single person in a Single Day
If assessee makes payment for any expenditure to any person otherwise than A/c payee
cheque or Demand Draft or use of electronic clearing system though a bank account is more
than `10,000 in a single day then such expenditure shall be disallowed.
Note :
1. If payment mode to transporter then limit is `35,000.
2. If the expenditure is claimed as deduction in earlier year (on due basis) & if such
expenses is subsequently paid in cash or bearer cheque then deduction allowed
earlier shall be withdrawn & taxable as PGBP.
 Exception of Sec 40A (3) [Rule 6 DD]
1. Payment made to RBI / LIC/ Banks/ Govt.
2. Payment made through NEFT/ RTGS/ Debit card/ ECS/ credit card.
3. Payments by book entry (adjustment).
4. Payment of producers of agriculture product, forest product, poultry product,
fish product, live-stock etc.
5. Payment required to be made on a day when banks are closed.
6. Payment of Retirement benefits, provided such payment is up to `50,000.
7. Payment of salary to an employee who is posted to any other place other than his
normal place of duty.
8. Payment made where Banking facility not available.
9. Payment made in cottage industry there are No use of electricity in manufacture
& production activities.

Cases where disallowances would not be attracted:

(a) Loan transactions: advancing of loans or repayments of the principal amount of
loan does not constitute an expenditure deductible in computing the taxable
income.
(b) Payment made by commission agents: This requirement does not apply to
payment made by commission agents for goods received by them for sale on
commission or consignment basis because such a payment is not an expenditure
deductible in computing the taxable income of the commission agent.

Example:
If, in respect of an expenditure of ` 32,000 incurred by X Ltd., 4 cash payments of `
8,000 are made on a particular day to one Mr. Y – one in the morning at 10 a.m., one at
12 noon, one at 3 p.m. and one at 6 p.m., the entire expenditure of ` 32,000 would
be disallowed under section 40A(3), since the aggregate of cash payments made
during a day to Mr. Y exceeds `10,000
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.48

Example–
Will the provision of section 40A(3) be attracted in the following cases.
(a) R purchased goods worth Rs. 7,000 and Rs. 5,000 against two bills from G and makes the
payment of Rs. 12,000 in cash at one time.
(b) R purchases goods worth Rs. 15,000 from G against one bill but makes cash payment of Rs.
8,000 & Rs. 7,000 at different times on the same date.
(c) R makes a payment of Rs. 40,000 as donation in cash to National defense fund.
(d) R makes a purchase of goods of Rs. 53,000 and makes payment of Rs. 45,000 by account
payee cheque and Rs. 8,000 in cash.
(e) R makes a purchase of goods of Rs. 45,000 on 14-2-2024 and makes the payment as under
(I) Rs. 30,000 by account payee cheque on 15-2-2024
(II) Rs. 8,000 in cash on 15-2-2024
(III) Rs. 7,000 in cash on 16-2-2024
(f) R purchase a building for Rs. 10,00,000 and makes the payment in cash.
(g) R, a dealer in real estate purchases building for Rs. 10,00,0000 and makes the payment by
crossed cheque.
(h) R, purchased goods in cash from his sister for Rs. 11,000/- whose market value is Rs.
9,000/-
 Sec 40A (7) : Provision of Gratuity – Not allowed
Only payment to Approved Gratuity fund or provision for gratuity actually become payable
during the PY (due basis) is allowed as Deduction.
 Sec 43B : Expenses allowed on Payment Basis
Following expenses are allowed only if they are PAID up to the due date of return filling as
per sec 139 (1).
a) Any tax, Duty, cess
b) Employer's contribution towards SPF, RPF, Approved Gratuity Fund, Approved super
Annuation Fund, New pension scheme.
c) Bonus or commission to Employees
d) Interest on loan to any PFI, State Financial Corp, state Industrial Investment Corp.
scheduled Banks.
e) Leave en- cashment (Leave salary) to employees
f) Any sum payable to Indian railways for use of railway assets.
Note: If payment made after due date of return filing then such expenses shall be allowed in the
year of actual payment.
Example:-An analysis of the profit and loss account and the balance of X as at 31-3-2024 reveals
the following expenses which were due, were though debited to the profit and loss account but
have been paid after 31-3-2024.
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.49

(1) SGST 30,000 10,000 paid on 14-7-2024

20,000 paid on 1-11-2024
(2) CGST 1,20,000 40,000 paid on 14-7-2024
80,000 paid on 1-11-2024
(3) Bonus to Staff 30,000 29,000 paid on 10-7-2024
1,000 paid on 15-12-2024
(4) Employer's Contribution to P.F. 55,000 Rs. 25,000 paid on 15-7-24
Rs. 10,000 paid on 31-10-24
Rs. 20,000 paid on 15-1-25
The due date of filing of return is 31-10-2024 as per section 139(1). In which previous year can
the above payments be claimed as deduction
Illustration 14
Hari, an individual, carried on the business of purchase and sale of agricultural
commodities like paddy, wheat, etc. He borrowed loans from Andhra Pradesh State
Financial Corporation (APSFC) and Indian Bank and has not paid interest as detailed
hereunder:
`
(i) Andhra Pradesh State Financial Corporation (P.Y. 2022-23 15,00,000
& 2023-24)

(ii) Indian Bank (P.Y. 2023-24) 30,00,000

45,00,000
Both APSFC and Indian Bank, while restructuring the loan facilities of Hari during the
year 2023-24, converted the above interest payable by Hari to them as a loan
repayable in 60 equal installments. During the year ended 31.3.2024, Hari paid 5
installments to APSFC and 3 installments to Indian Bank.
Hari claimed the entire interest of ` 45,00,000 as an expenditure while computing the
income from business of purchase and sale of agricultural commodities. Discuss
whether his claim is valid and if not what is the amount of interest, if any, allowable.
Solution
According to section 43B, any interest payable on the term loans to specified
financial institutions and any interest payable on any loans and advances to, inter alia,
scheduled banks shall be allowed only in the year of payment of such interest
irrespective of the method of accounting followed by the assessee. Where there is
default in the payment of interest by the assessee, such unpaid interest may be
converted into loan. Such conversion of unpaid interest into loan shall not be construed
as payment of interest for the purpose of section 43B. The amount of unpaid interest
so converted as loan shall be allowed as deduction only in the year in which the
converted loan is actually paid.
In the given case of Hari, the unpaid interest of ` 15,00,000 due to APSFC and of `
30,00,000 due to Indian Bank was converted into loan. Such conversion would not
amount to payment of interest and would not, therefore, be eligible for deduction in the
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.50

year of such conversion. Hence, claim of Hari that the entire interest of ` 45,00,000
is to be allowed as deduction in the year of conversion is not tenable. The deduction
shall be allowed only to the extent of repayment made during the financial year.
Accordingly, the amount of interest eligible for deduction for the A.Y.2024-25 shall be
calculated as follows:

Interest Number of Amount Instalments Interest

outstanding Instalments per paid allowable
instalment (`)

APSFC 15 lakh 60 25,000 5 1,25,000

Indian 30 lakh 60 50,000 3 1,50,000
Bank
Total amount eligible for deduction 2,75,000
Any sum payable by the assessee to a micro or small enterprise beyond the time- limit specified in
section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 would be allowed
as deduction only in that previousyear in which such sum is actually paid.
Example: Mr. A has purchased goods of ` 10,000 from A & Co., a micro enterprise on 1.3.2024. As
per the written agreement between them, the payment has to be made by 5.4.2024. Mr. A follows
mercantile method of accounting.
(i) If Mr. A paid the sum on 2.4.2024
Since Mr. A paid the sum on or before 5.4.2024, the deduction would be allowed inP.Y. 2023-24.
(ii) If Mr. A paid the sum on 20.4.2024
Since Mr. A paid the sum beyond the time limit, the deduction would be allowed in the year of
actual payment i.e., P.Y. 2024-25.
 Sec 43 A: Asset acquired from foreign.
If any asset acquired from foreign country through a loan in foreign currency or foreign
suppliers credit, any loss/gain arising at the time of payment shall be adjusted with in block
of asset.
Note:
1. Adjustment is made only at the time of actual payment of foreign loan or supplier's credit.
2. If there is gain then reduce from block of asset & if there is loss then added to the block of
asset.
 Sec 41: Deemed PGBP
 Sec 41 (1) Recovery against any deduction already claimed
If Assessee allowed a deduction in a earlier P.Y. by way of expenditure, loss, trading liability
& now during the current P.Y. Assessee has obtained a refund of such liability or there is
remission / cessation of such trading liability, then such refund / remission shall be taxable
under PGBP.
Example a) Sales Tax Refund b) Stock in trade is destroyed by fire & allowed as trading loss
& later on insurance compensation is received by assessee.
Note:
Sec. 41(1) will be attracted in case of waiver of working capital loan (principal).
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.51

 Sec 41(3): Sale of Scientific Research Assets

Sale without use in Business Sale after use in Business

(1) Sale Price Add to block of asset

(2) Deduction already claimed us 35 Actual cost = NIL
Whichever is lower Explain 1 of Sec 43(1)

Taxable as PGBP At the time of sale Sec 50 will arise

[full block / part block sold]
If SP > Cost then Capital gain also arise.
 Sec 41(2): Balancing Charge
Already discussed with the power units depreciation
 Sec 41(4) : Recovery of Bad debts
Recovery amount shall be taxable in the year in which it is recovered.
COMPULSORY MAINTENANCE OF ACCOUNTS [SECTION 44AA]
Part A
I Sec 44AA : Compulsory maintenance of Books of accounts
(A) Individual or HUF
 An Individual or HUF carrying on any business or profession (other than the professions
specified in (1) above) must maintain such books of account and other documents as may
enable the Assessing Officer to compute hid total income in accordance the provisions of the
Income-tax Act, 1961
(a) Existing business or profession: In cases where the income from the existing
business or profession exceeds ` 2,50,000 or the total sales turnover or gross
receipts, as the case may be, in the business or profession exceed ` 25,00,000 in
any one of three years immediately preceding the previous year; or
(b) Newly set up business or profession: In cases where the business or
profession is newly set up in any previous year, if his income from business or
profession is likely to exceed ` 2,50,000 or his total sales turnover or gross
receipts, as the case may be, in the business or profession are likely to exceed
` 25,00,000 during the previous year.
(B) Other than individual or HUF
Every person (other than individual or HUF) carrying on any business or profession
(other than the professions specified in (1) above) must maintain such books of
account and other documents as may enable the Assessing Officer to compute his
total income in accordance the provisions of the Income-tax Act, 1961
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.52

(i) Existing business or profession: In cases where the income from the business
or profession exceeds ` 1,20,000 or the total sales turnover or gross receipts, as
the case may be, in the business or profession exceed ` 10,00,000 in any one of
three years immediately preceding the previous year; or
(ii) Newly set up business or profession: In cases where the business or
profession is newly set up in any previous year, if his income from business or
profession is likely to exceed ` 1,20,000 or his total sales turnover or gross
receipts, as the case may be, in the business or profession are likely to exceed `
10,00,000 during the previous year;
I. Showing lower income as compared to income computed on
presumptive basis under section 44AE or (section 44BB or section
44BBB): Where profits and gains from the business are calculated on a
presumptive basis under section 44AE or section 44BB or section 44BBB
and the assessee has claimed that his income is lower than the profits or
gains so deemed to be the profits and gains of his business.
II. Where the provisions of section 44AD(4) are applicable in his case and
his income exceeds the basic exemption limit in any previous year: In
cases where an assessee becomes ineligible to claim the benefit of the
provisions of section 44AD(1) for five assessment years subsequent to the
assessment year relevant to the previous year in which the profit has not
been declared in accordance with the provisions of 44AD(1) and his income
exceeds the basic exemption limit during the previous year.
Part B: Specified / Notified Profession
In case of specified profession, if gross receipt is more than 1,50,000 in all 3 years preceding
the previous year or likely to exceed if the profession is newly setup then, assessee is
required to maintain such books of accounts as per Rule 6F, otherwise he is required to
maintain such books of accounts or documents from which AO is able to complete the
assessment.
SPECIFIED PROFESSIONS
1. Medical 2. Legal 3. Accountancy
4. Film Artist 5. Engineering 6. Technical Consultancy
7. Architectural 8. Interior Decorator 9. Company Secretary
10. Any other profession
which may be notified
by CBDT.
Specified books as per RULE 6F
1. Cash book 2. Journal 3. Ledgers
4. Carbon copies of bill 5. Original bill for
exceeding `25/- expenditure exceeding
`50/–
In case of Medical Practitioner (Profession) additional books i.e.
– daily case register in Form 3C &
– Drugs , Medical inventory register has to be maintained.
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.53

Note : As per Sec 271 A, if the assessee fails to maintain books of accounts as per sec
44AA then penalty of `25,000 may be attract.
Illustration 15
Vinod is a person carrying on profession as film artist. His gross receipts from
profession are as under:
(`)
Financial year 2020-21 1,15,000
Financial year 2021-22 1,80,000
Financial year 2022-23 2,10,000
What is his obligation regarding maintenance of books of accounts for
Assessment Year 2024-25 under section 44AA of Income-tax Act, 1961?
Answer
Section 44AA(1) requires every person carrying on any profession, notified by the
Board in the Official Gazette (in addition to the professions already specified therein),
to maintain such books of account and other documents as may enable the Assessing
Officer to compute his total income in accordance with the provisions of the Income-
tax Act, 1961.
As per Rule 6F, a person carrying on a notified profession shall be required to maintain
specified books of accounts:
(i) if his gross receipts in all the three years immediately preceding the relevant previous
year has exceeded ` 1,50,000; or
(ii) if it is a new profession which is setup in the relevant previous year, it is likely to
exceed ` 1,50,000 in that previous year.
In the present case, Vinod is a person carrying on profession as film artist, which is a
notified profession. Since his gross receipts have not exceeded ` 1,50,000 in
financial year 2020-21, the requirement under section 44AA to compulsorily maintain
the prescribed books of account is not applicable to him.
Mr. Vinod, however, required to maintain such books of accounts as would enable
the Assessing Officer to compute his total income.
AUDIT OF ACCOUNTS OF CERTAIN PERSONS CARRYING ON BUSINESS OR
PROFESSION [SECTION 44AB]
(i) Requirement of Tax Audit: It is obligatory for the persons mentioned in column
(2) of the table below, carrying on business or profession, to get his accounts
audited before the “specified date” by a Chartered Accountant, if the conditions
mentioned in the corresponding row of column (3) are satisfied
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.54

Persons When tax audit is required?

(1) (2) (3)
I In case of a personcarrying
on business
(a) In case of a person If his total sales, turnover or gross receipts in
carrying on business business > ` 1 crore in the relevant PY

Note – The requirement of audit u/s 44AB

does not apply to a person who declares profits
and gains for the previous year on
presumptive basis u/s 44AD(1).

If in case of such person If his total sales, turnover or gross receipts in

carrying on business - business > ` 10 crore in the relevant PY
(i) Aggregate cash
receipts in the relevant
PY ≤ 5% of total receipts
(incl. receipts for sales,
turnover, gross
receipts); and

(ii) Aggregate cash

payments in the relevant
PY ≤ 5% of total
payments (incl. amount
incurred for
expenditure)
Note – For this purpose, the payment or receipt, as the case may be, by a
cheque drawn on a bank or by a bank draft, which is not account payee,
would be deemed to be the payment or receipt, asthe case may be, in cash.

(b) In case of an assessee If such assessee claims that the profits

covered u/s 44AE i.e., an and gains from business in the relevant
assessee engaged in the P.Y. are lower than the profits and gains
business of plying, computed on a presumptive basis u/s
hiring or leasing goods 44AE [i.e., ` 1000 per ton of gross
carriages who owns not vehicle weight or unladen weight in
more than 10 goods case of each heavy goods vehicle and
carriages at any time ` 7,500 for each vehicle, other than
during the P.Y. heavy goods vehicle, for every month or
part of the month for which the vehicle
is owned by the assessee].
(c) In case of an eligible If he declares profit for any of the five
assessee carrying on successive PYs (say, P.Y.2023-24) not in
business, whose total accordance with section 44AD (i.e., he
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.55

turnover, sales, gross declares profits lower than 8% or 6% of

receipts ≤ ` 200 lakhs, total turnover, sales or gross receipts, as
and who has opted for the case may be, in that year), then, he
section 44AD in any cannot opt for section 44AD for five
earlier PY (say, P.Y. successive PYs after the year of such
2022-23) default (i.e., from P.Y.2024-25 to
P.Y.2028-29). For the year of default (i.e.,
In case of an eligible assessee P.Y.2023-24) and five successive previous
carrying on business, whose years (i.e., P.Y.2024-25 to P.Y.2028-29), he has
aggregate cash receipts in to maintain books of account u/s 44AA and
the relevant PY ≤ 5% of get them audited u/s 44AB, if his income
total turnover or gross exceeds the basic exemption limit.
receipts and whose total

turnover, sales, gross

receipts ≤ ` 300 lakhs,
and who has opted for
section 44AD in any
earlier PY (say, P.Y.
2022-23)

II In case of persons
carrying on profession
(a) In case of a person If his gross receipts in profession > ` 50 lakh in
carrying on profession the relevant PY.
Note – The requirement of audit u/s 44AB does not
apply to a person who declares profits and gains for
the previous year on presumptive basis u/s 44ADA(1).

(b) In case of an assessee If such resident assessee claims that the

carrying on a notified profits and gains from such profession in
profession under section the relevant PY are lower than the profits
44AA(1) i.e., legal and gains computed on a presumptive
medical, engineering, basis u/s 44ADA (50% of gross receipts)
accountancy, and his income exceeds the basic
architecture, interior exemption limit in that PY.
decoration, technical
consultancy, whose gross
receipts ≤ `50 lakhs
In case of an assessee
carrying on a notified
profession under section
44AA(1) i.e., legal
medical, engineering,
accountancy, architecture,
interior decoration,
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.56

technical consultancy,
whose aggregate cash
receipts in the relevant
PY ≤ 5% of total gross
receipts and whose gross
receipts ≤ ` 75 lakhs
(ii) Audit Report: The persons mentioned above would have to furnish by the
specified date a report of the audit in the prescribed forms. For this purpose, the
Board has prescribed under Rule 6G, Forms 3CA/ 3CB/ 3CD containing forms of
audit report and particulars to be furnished therewith.
(iii) Accounts audited under other statutes are considered: In cases where the
accounts of a person are required to be audited by or under any other law before
the specified date, it will be sufficient if the person gets his accounts audited
under such other law before the specified date and also furnish by the said date
the report of audit in the prescribed form in addition to the report of audit
required under such other law.
Thus, for example, the provision regarding compulsory audit does not imply a
second or separate audit of accounts of companies whose accounts are already
required to be audited under the Companies Act, 2013. The provision only
requires that companies should get their accounts audited under the Companies
Act, 2013 before the specified date and in addition to the report required to be
given by the auditor under the Companies Act, 2013 furnish a report for tax
purposes in the form to be prescribed in this behalf by the CBDT.
(iv) Specified date: The expression “specified date” in relation to the accounts of the
previous year or years relevant to any assessment year means the date one month
prior to the due date for furnishing the return of income under section 139(1).
The due date for filing return of income in case of assessees (other than companies)
who are required to get their accounts audited is 31st October of the relevant
assessment year. Hence, the specified date for tax audit would be 30th September of
the relevant assessment year.
(V) Penal provision: It may be noted that under section 271B10, penal action can be
taken for not getting the accounts audited and for not filing the audit report by
the specified date.
Note:
1. Audit can be done by CA
2. Due date of ROI and Tax Audit date 30 Sep. of A.Y.
3. Penalty u/s 271B if assessee fails to get A/c audited
i) 0.5% of T/o or Gross receipts
ii) `1,50,000
whichever is lower.
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.57

(c) PRESUMPTIVE TAXATION

Sec 44AD: Profit & Gains of Business on Presumptive Bases
a) Eligible Assessee : Resident individual / Resident HUF/ Resident firm (excluding
LLP)
b) This Section is applicable for any Business except
 Sec 44AE Business
 Agency Business
 Commission & Brokerage business
- Applicable for any Business whose Turnover / Gross Receipts is upto `2 crore.
c) Presumptive PGBP income = Turnover / Gross receipt × 8%
However, the presumptive rate of 6% of total turnover or gross receipts
will be applicable in respect of amount which is received
 by an account payee cheque or
 by an account payee bank draft or
 by use of electronic clearing system through a bank account
during the previous year or before the due date of filing of return
under section 139(1) in respect of that previous year.
However, the assessee can declare in his return of income, an amount
higher than the presumptive income so calculated, claimed to have
been actually earned by him

d) The eligible assessee is required to pay Advance tax. However, there will be only one
installment i.e. 15th March of Financial year.
e) If section 44AD applied then deduction of expenditure u/s 30 to 38 shall not be allowed
(assume its deemed to already allowed)
f) Partners Remuneration, salary, interest etc as per sec 40(b) shall not be deductible while
computing income under sec 44AD
g) If assessee declares income as per sec 44AD and whose Gross Turnover / Receipt is up
to `2cr then assessee is not required to maintain books of account & get it audited.
h) If assessee declares income for any F.Y. as per 44AD & he doesn't declare income as per
44AD in any of the five consecutive P.Ys, then he shall not eligible to claim benefit of
sec 44AD for 5 years subsequent to the year in which assessee not declare income as per
sec 44AD.
i)
If point (h) is applicable & NTI of assessee is more than basic exemption then assessee is
required to maintain books of account & get it audited.
Example:
Let us consider the following particulars relating to a resident individual, Mr. A, being
an eligible assessee carrying on retail trade business whose total turnover do not
exceed ` 2 crore in any of the previous year relevant to A.Y.2024-25 to A.Y.2026-27-
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.58

Particulars A.Y.2024- A.Y.2025-26 A.Y.2026-

25 27
Total turnover (`) 1,80,00,000 1,90,00,000 2,00,00,000
Amount received through 1,60,00,000 1,45,00,000 1,80,00,000
prescribed electronic modes on
or before 31st October of the
A.Y.
Income offered for taxation (`) 11,20,000 12,30,000 10,00,000
% of gross receipts 6% on ` 1.60 6% on ` 1.45 5% on ` 2
crore and crore and crore
8%on ` 20 8%on ` 45
lakhs lakhs
Offered income as per Yes Yes No
presumptivetaxation scheme
u/s 44AD
In the above case, Mr. A, an eligible assessee, opts for presumptive taxation under section
44AD for A.Y.2024-25 and A.Y.2025-26 and offers income of ` 11.20 lakh and ` 12.30 lakh
on gross receipts of ` 1.80 crore and ` 1.90 crore, respectively.
However, for A.Y.2026-27, he offers income of only ` 10 lakh on turnover of ` 2 crore,
which amounts to 5% of his gross receipts. He maintains books of account under section
44AA and gets the same audited under section 44AB. Since he has not offered income in
accordance with the provisions of section 44AD(1) for five consecutive assessment years,
after A.Y. 2024-25, he will not be eligible to claim the benefit of section 44AD for next five
assessment years succeeding A.Y.2026-27 i.e., from A.Y.2027-28 to 2031-32.
ILLUSTRATION 16
Mr. Praveen engaged in retail trade, reports a turnover of ` 2,98,50,000 for the financial year
2023-24. Amount received in cash during the P.Y. 2023-24 is ` 14,00,000 and balance
through prescribed electronic modes on or before 31st October 2024. His income from the
said business as per books of account is ` 15,00,000 computed as per the provisions of
Chapter IV-D “Profits and gains from business or Profession” of the Income-tax Act, 1961.
Retail trade is the only source of income for Mr. Praveen. A.Y. 2023-24 was the first year for
which he declared his business income in accordance with the provisions of presumptive
taxation u/s 44AD.
(i) Is Mr. Praveen also eligible for presumptive determination of his income
chargeable to tax for the assessment year 2024-25?
(ii) If so, determine his income from retail trade as per the applicable presumptive
provision.
(iii) In case Mr. Praveen wants to declare profits as per books of account from retail
trade, what are his obligations under the Income-tax Act, 1961?
(iii) What is the due date for filing his return of income under both the options?
SOLUTION
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.59

(i) Yes. Since his cash receipts during the P.Y. does not 5% of the total turnover
(14,00,000/2,98,50,000 x 100) and his total turnover for the F.Y.2023-24 isbelow
` 300 lakhs, he is eligible for presumptive taxation scheme under section 44AD in
respect of his retail trade business.
(ii) His income from retail trade, applying the presumptive tax provisions under
section 44AD, would be ` 18,19,000 (` 1,12,000, being 8% of ` 14,00,000 +
` 17,07,000, being 6% of ` 2,84,50,000).
(iii) Mr. Praveen had declared profit for the previous year 2022-23 in accordance with
the presumptive provisions and if he wants to declare profits as per books of
account which is lower than the presumptive income for any of the five
consecutive assessment years i.e., A.Y. 2024-25 to A.Y. 2028-29, he would not
be eligible to claim the benefit of presumptive taxation for five assessment years
subsequent to the assessment year relevant to the previous year in which the
profit has not been declared in accordance the presumptive provisions i.e. if he
declares profits lower than the presumptive income in say P.Y. 2023-24 relevant to
A.Y.2024-25, then he would not be eligible to claim the benefit of presumptive
taxation for A.Y. 2025-26 toA.Y. 2029-30.
Consequently, Mr. Praveen is required to maintain the books of accountsand get
them audited under section 44AB, since his income exceeds the basic
exemption limit.
(iv) In case he declares presumptive income under section 44AD, the due date would
be 31st July, 2024.
In case he declares profits as per books of account which is lower than the presumptive
income, he is required to get his books of account audited, in which case the due date for
filing of return of income would be 31st October, 2024.
Sec 44ADA: PGBP on presumptive basis for professional
a) eligible Assessee: Resident assessee engaged in profession as referred in Sec
44AA
b) This section applicable if Gross Receipt is upto `50 lakhs.
c) PGBP Income = Gross receipt × 50%
d) Deduction of expenses u/s 30 to 38 shall not be allowed.
e) If assessee declares income as per sec 44 ADA then, he is not required to
maintain books of accounts & get it audited.
f) If assessed declare income lower than 50% & his NTI is more than basis
exemption than he is required to maintain books of A/c s & get it audited.
g) Eligible assessee is now required to pay advance tax by 15th March of the
financial year.
(d) Sec 44AE: Presumptive Taxation for Transporters.
If assessee engaged in the business of plying, hiring, leasing such goods carriage then
PGBP will be–
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.60

Goods Carriage Presumptive Income

Heavy goods vehicle ` 1,000 per ton of gross vehicle during which such vehicle
weight or unladen weight, as is owned by the assessee
the case may be, for every for the previous year.
month or part of a month

Other than heavy `7,500 for every month or

goods vehicle part of a month
Meaning of certain terms
S.No Term Meaning
(1) Heavy any goods carriage, the gross vehicle weight of which
goods exceeds 12,000 kilograms.
vehicle
(2) Gross total weight of the vehicle and load certified and
vehicle registered by the registering authority as permissible
weight for that vehicle.

(3) Unlade the weight of a vehicle or trailer including all

n equipment ordinarily used with the vehicle or trailer
weight when working but excluding the weight of driver or
attendant and where alternative parts or bodies are
used the unladen weight of the vehicle means the
weight of the vehicle with the heaviest such alternative
body or part

Note: This section is applicable if assessee owns Max 10 vehicles. If assessee own more than
10 vehicles at any time during the PY then this section shall not apply.
If section 44AE applied then deduction of expenditure u/s 30 to 38 shall not be allowed
(assume its deemed to already allowed)
If assessee declares income Less than sec 44AE than he required to maintain Books of
Accounts & get it audited by C.A.
Illustration 17
Mr. X commenced the business of operating goods vehicles on 1.4.2023. He purchased
the following vehicles during the P.Y.2023-24. Compute his income under section
44AE for A.Y.2024-25.
Gross Vehicle Weight Number Date of
(in kilograms) purchase
(1) 7,000 2 10.04.2023
(2) 6,500 1 15.03.2024
(3) 10,000 3 16.07.2023
(4) 11,000 1 02.01.2024
(5) 15,000 2 29.08.2023
(6) 15,000 1 23.02.2024
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.61

Would your answer change if the goods vehicles purchased in April, 2023 were put
to use only in July, 2023?
SOLUTION
Since Mr. X does not own more than 10 vehicles at any time during the previous year 2023-
24, he is eligible to opt for presumptive taxation scheme under section 44AE. ` 1,000 per
ton of gross vehicle weight or unladen weight per month or part of the month for each
heavy goods vehicle and ` 7,500 per month or part of month for each goods carriage other
than heavy goods vehicle, owned by him would be deemed as his profits and gains from
such goods carriage.
Heavy goods vehicle means any goods carriage, the gross vehicle weight of which exceeds
12,000 kg.
(1) (2) (3) (4)
Number Date of No. of months No. of months × No. of
of purchase forwhich vehicle vehicles
Vehicles is owned [(1) × (3)]
For Heavy goods vehicle
2 29.08.2023 8 16
1 23.02.2024 2 2
18
For goods vehicle other than heavy goods vehicle
2 10.4.2023 12 24
1 15.3.2024 1 1
3 16.7.2023 9 27
1 02.1.2024 3 3
55

The presumptive income of Mr. X under section 44AE for A.Y.2024-25 would be - `
6,82,500, i.e., 55 × ` 7,500, being for other than heavy goods vehicle + 18 x ` 1,000 x
15 ton being for heavy goods vehicle.
The answer would remain the same even if the two vehicles purchased in April, 2023
were put to use only in July, 2023, since the presumptive income has to be calculated
per month or part of the month for which the vehicle is owned by Mr. X.
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.62

SPECIAL PROVISIONS FOR COMPUTING PROFITS AND GAINS OF BUSINESS ON

PRESUMPTIVE BASIS [SECTIONS 44AD/44ADA/44AE]
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.63

(2) Eligible Any business, other Any profession Business of

business/ than business specified u/s plying, hiring or
profession referred to in section 44AA(1), whose leasing goods
44AE, whose total gross receipts carriages
turnover/gross ≤ ` 50 lakhs in
receipts in the P.Y. ≤ the relevant
` 200 lakhs in the P.Y.
relevant P.Y.
Any business, other Any profession
than business referred specified u/s
to in section 44AE, 44AA(1), whose
whose total gross receipts
turnover/gross ≤ ` 50 lakhs in
receipts in the P.Y. ≤ the relevant
` 300 lakhs in the P.Y., if
relevant P.Y., if aggregate
aggregate cash cash receipts
receipts in the in the relevant
relevant PY ≤ 5% of PY ≤ 5% of
total turnover or total gross
gross receipts. receipts.
In effect, if the turnover In effect, if the
of business is > ` 200 gross receipts
lakhs ≤ ` 300 lakhs, from profession
the benefit of section is > ` 50 lakhs ≤
44AD can be availed ` 75 lakhs, the
only if aggregate cash benefit of section
receipts in relevant P.Y. 44ADA can be
≤ 5% of total turnover availed only if
or gross receipts. aggregate cash
receipts in
relevant P.Y. ≤
5% of total gross
receipts.
Note: For this purpose, the receipt of
amount or aggregate of amounts by a
cheque drawn on a bank or by a bank
draft, which is not account payee, would
be deemed to be the receipt in cash.
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.64

(3) Presumptive 8% of total 50% of gross For each heavy

income turnover/sales/gross receipts of goods vehicle
receipts or a sum such ` 1,000 per ton
higher than the profession or a of gross vehicle
aforesaid sum sum higher weight or
claimed to have been than the unladen weight,
earned by the aforesaid sum as the case may
assessee. claimed to be, for every
have been month or part of
6% of total earned by the a month;
turnover/ gross assessee. For each
receipts in respect of vehicle, other
the amount of total than heavy
turnover/ sales/gross goods vehicle:
receipts received by ` 7,500 per
A/c payee cheque/ month or part
bank draft/ ECS of a month
through a bank during which
account or through such vehicle is
such other prescribed owned by the
electronic modes assessee or an
(credit card, debit amount claimed
card, net banking, to have been
IMPS, UPI, RTGS, actually earned
NEFT, and BHIM from such
Aadhar Pay) during vehicle,
the P.Y. or before whichever is
due date of filing of higher.
return u/s 139(1) in
respect of that P.Y.
(or) such higher sum
claimed to have been
earned by the
assessee.
(4) Non- Deductions allowable under sections 30 to 38 shall be
allowability deemed to have been given full effect to and no further
of deduction shall be allowed
deductions
while Even in case of a firm, Even in case of In case of a firm,
computing salary and interest a firm, salary salary and
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.65

presumptive paid to partners is and interest interest paid to

income not deductible. paid to partners is
partners is not deductible
deductible. subject to the
conditions and
limits specified
in section 40(b)
(5) Written WDV of any asset of an eligible business/profession shall
down value be deemed to have been calculated as if the eligible
of asset assessee had claimed and had been actually allowed
depreciation for each of the relevant assessment years
(6) Requirement If eligible assessee If eligible If eligible
of declares profits and assessee assessee
maintenance gains in accordance declares profits declares profits
of books of with the provisions of and gains in and gains in
account u/s section 44AD, he is accordance with accordance with
44AA and not required to the provisions the provisions
audit u/s maintain books of of section of section 44AE,
44AB account u/s 44AA or 44ADA, he is he is not
get them audited u/s not required to required to
44AB. maintain books maintain books
However, if after of account u/s of account u/s
declaring profits on 44AA or get 44AA or get
presumptive basis u/s them audited them audited
44AD, say, for u/s 44AB. u/s 44AB.
A.Y.2024-25, non- However, if the However, if the
declaration of profits assessee claims assessee claims
on presumptive basis his profits to his profits to
for any of the 5 be lower than be lower than
successive A.Y.s the profits the profits
thereafter (i.e., from computed by computed by
A.Y.2025-26 to applying the applying the
A.Y.2029-30), say, for presumptive presumptive
A.Y. 2026-27, would rate, he has to rate, he has to
disentitle the maintain books maintain
assessee from of account and books of
claiming profits on other account u/s
presumptive basis for documents u/s 44AA(2) and
five successive AYs 44AA(1) and get his
subsequent to the AY get his accounts
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.66

relevant to the PY of such accounts audited audited u/s

non-declaration (i.e., from u/s 44AB.
A.Y.2027-28 to A.Y.2031- 44AB, if his
32). In total income >
such a case, the assessee basic exemption
would have to maintain limit for thatyear.
books of account and
other documents u/s
44AA(2) and get his
accounts audited u/s 44AB,
if his total income
exceeds the basic
exemption limit in those
years.
(7) Advance tax The eligible assessee The eligible The eligible
obligation opting for section 44AD is assessee opting for assessee has to pay
required to pay advance section44ADA is advance tax in four
tax by 15th March of the required to pay installments [See
financial year (F.Y.). advance tax by15th Chapter 7 in
March ofthe F.Y. Module 3 for
details].

Deduction for partnership firm section 40 b

In the case of any firm assessable as such or a limited liability partnership (LLP) the
following amounts shall not be deducted in computing the income from business of
any firm/LLP:
(1) Any salary, bonus, commission, remuneration by whatever name called, to any
partner who is not a working partner. (In the following discussion, the term
‗remuneration‘ is applied to denote payments in the nature of salary, bonus,
commission);
(2) Any remuneration paid to the working partner or interest to any partner
which is not authorised by or which is inconsistent with the terms of the
partnership deed;
It is possible that the current partnership deed may authorise payments of
remuneration to any working partner or interest to any partner for a period
which is prior to the date of the current partnership deed. The approval by the
current partnership deed might have been necessitated due to the fact that such
payment was not authorised by or was inconsistent with the earlierpartnership
deed. Such payments of remuneration or interest will also be disallowed. Any
interest to partner, authorized by partnership deed, is allowed upto 12% p.a.
(2) No salary, bonus, commission is allowed to an non working partner.
(3) Salary etc. to working partner authorized by partnership deed is allowed on following
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.67

Step I
(I) Up to 3,00,000 Book profit (I) 1,50,000
or Loss (II) 90% of such Book profit
Whichever is higher
(II) Book profit 60% of such book profit
Step II

Which ever is less

Example:-Calculate the deduction to the firm and the amount taxable in the hands of
partners, in case of firm carrying on specified profession :-
Book Profit Actual Maximum Actual Taxable for
Salary Deduction Deduction Partners
to firm
1. 3,45,000 2,00,000
2. (-)1,00,000 180,000
3. 1,00,000 4,25,000
4. 4,00,000 3,50,000
5. 9,00,000 6,00,000
Example :From the information given in the following P & L a/c compute the income of the
business firm and partner :-

Rs. Rs.
Reserves & Surplus 85,000 Income of Capital Gain 75,000
Interest to Partners @ 15% p.a. 90,000
Salary to Partner 350,000
Net Profit 1,90,000

Ans :- 2,18,000/-
Example
A firm of company secretaries consisting of 3 partners earned a net surplus of Rs. 208000
during the accounting year ended 31-3-2023 after charging interest on capital amounting to
Rs. 36,000 calculated 18% p.a. on the capitals of partners but before charging remuneration
to partners. You are required to calculate the taxable income of the firm and tax there on
after allowing the maximum allowable remuneration to partners under the provisions of
income tax Act 1961.
Ans. Rs. 6,864/-
Illustration 15
A firm has paid ` 7,50,000 as remuneration to its partners for the P.Y.2023-24, in
accordance with its partnership deed, and it has a book profit of ` 10 lakh. What is the
remuneration allowable as deduction?
Solution
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.68

The allowable remuneration calculated as per the limits specified in section 40(b)(v) would
be –

Particulars `
On first ` 3 lakh of book profit [` 3,00,000 × 90%] 2,70,000
On balance ` 7 lakh of book profit [` 7,00,000 × 60%] 4,20,000
6,90,000
The excess amount of ` 60,000 (i.e., ` 7,50,000 – ` 6,90,000) would be disallowed
as per section 40(b)(v)
Illustration 16
Rao & Jain, a partnership firm consisting of two partners, reports a net
profit of
` 7,00,000 before deduction of the following items:
(1) Salary of ` 20,000 each per month payable to two working partners of the firm (as
authorized by the deed of partnership).
(2) Depreciation on plant and machinery under section 32 (computed) ` 1,50,000.
(3) Interest on capital at 15% per annum (as per the deed of partnership). The amount
of capital eligible for interest ` 5,00,000.
Compute:
(i) Book-profit of the firm under section 40(b) of the Income-tax Act, 1961.
(ii) Allowable working partner salary for the assessment year 2024-25 as per section
40(b).

Solution
(I) As per Explanation 3 to section 40(b), “book profit” shall mean the net profit as per
the profit and loss account for the relevant previous year computed in the manner
laid down in Chapter IV-D as increased by the aggregate amount of the
remuneration paid or payable to the partners of the firm if the same has been
already deducted while computing the net profit.
In the present case, the net profit given is before deduction of depreciation on
plant and machinery, interest on capital of partners and salary to the working
partners. Therefore, the book profit shall be as follows:
Computation of Book Profit of the firm under section 40(b)

Particulars ` `
Net Profit (before deduction of depreciation, salary 7,00,000
and interest)
Less: Depreciation under section 32 1,50,000

Interest @ 12% p.a. [being the maximum allowable

as per section 40(b)] (` 5,00,000 × 12%) 60,000 2,10,000
Book Profit 4,90,000
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.69

(i) Salary actually paid to working partners = ` 20,000 × 2 × 12 = ` 4,80,000.

As per the provisions of section 40(b)(v), the salary paid to the working partners is
allowed subject to the following limits –
On the first ` 3,00,000 of book ` 1,50,000 or 90% of book profit,
profit or in case of loss whichever is more

On the balance of book profit 60% of the balance book profit

Therefore, the maximum allowable working partners’ salary for the A.Y. 2023-24 in
this case would be:
Particulars `

On the first ` 3,00,000 of book profit [(` 1,50,000 2,70,000

or 90% of ` 3,00,000) whichever is more]

On the balance of book profit [60% of (` 4,90,000 - ` 3,00,000)] 1,14,000

Maximum allowable partners’ salary 3,84,000

Hence, allowable working partners’ salary for the A.Y. 2023-24 as per the provisions
of section 40(b)(v) is ` 3,84,000.
The excess amount of ` 60,000 (i.e., ` 7,50,000 – ` 6,90,000) would be disallowed
as per section 40(b)(v).
Example:-
Income and expenditure account of a partnership firm of cost accountants for the year ended
31-3-2024 is as follows

Expenses 88,000 Receipt from client for consultation 60,000

Depreciation 32,000 Audit fee 72,000
Remuneration to partners 75,000 Excess of exp over income 68,000
Interest on capital to partners 5,000
2,00,000 2,00,000
Other information:-
(1) Out of expenses of Rs. 88,000 Rs. 17,250 is not deductible under section.
(2) Depreciation as per sec 32 is Rs. 33,100
(3) Interest on capital to partners not deductible under section 40(b) is Rs. 700.
Compute the remuneration deductible
Ans. Loss of the firm Rs.51,150/-
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.70

COMPUTATION OF BUSINESS INCOME IN CASES WHERE INCOME IS PARTLY

AGRICULTURAL AND PARTLY BUSINESS IN NATURE
Taxability in case of composite income
Rule Nature of composite income Business Agricultural
income Income
(Taxable) (Exempt)
7A Income from the manufacture of rubber 35% 65%
7B Income from the manufacture of coffee
- sale of coffee grown and cured 25% 75%
- sale of coffee grown, cured, 40% 60%
roasted and grounded
8 Income from the manufacture of tea 40% 60%
Illustration
Miss Vivitha, a resident and ordinarily resident in India, has derived the following income
from various operations (relating to plantations and estates owned by her) during the year
ended 31-3-2022.
S. No. Particulars `
(i) Income from sale of centrifuged latex processed 3,00,000
from rubber plants grown in Darjeeling.

(ii) Income from sale of coffee grown and cured in 1,00,000

Yercaud, Tamil Nadu.
(iii) Income from sale of coffee grown, cured, roasted 2,50,000
and grounded, in Colombo. Sale consideration was
received at Chennai.
(iv) Income from sale of tea grown and manufactured in 4,00,000
Shimla.
(v) Income from sapling and seedling grown in a 80,000
nursery at Cochin. Basic operations were not carried
out by her on land.
You are required to compute the business income and agricultural income of Miss
Vivitha for the assessment year 2022-23.
Solution
Computation of business income and agricultural income of Ms. Vivitha for the
A.Y.2024-25
Sr. Source of income Gross (`) B Business Agricultural
No. In % Income ` income `

(i) Sale of centrifuged latex from 3,00,000 35% 1,05,000 1,95,000

rubber plants grown in India.
(ii) Sale of coffee grown and cured 1,00,000 25% 25,000 75,000
in India.
(iii) Sale of coffee grown, cured, 2,50,000 100% 2,50,000 –
roasted and grounded
outside India.
 PROFIT & GAIN BUSINESS OR PROFESSION (Unit - iii) | 3.71

(See Note 1 below)

(iv) Sale of tea grown and 4,00,000 40% 1,60,000 2,40,000

manufactured in India
(v) Saplings and seedlings grown
in nursery in India (See Note 80,000 Nil 80,000
2 below)
Total 5,40,000 5,90,000
Notes:
1. Where income is derived from sale of coffee grown, cured, roasted and grounded by the
seller in India, 40% of such income is taken as business income and the balance as
agricultural income. However, in this question, these operations are done in
Colombo, Sri lanka. Hence, there is no question of such apportionment and the whole
income is taxable as business income. Receipt of sale proceeds in India does not make
this agricultural income. In the case of an assessee, being a resident and ordinarily
resident, the income arising outside India is also chargeable to tax.
2. Explanation 3 to section 2(1A) provides that the income derived from saplings or
seedlings grown in a nursery would be deemed to be agricultural income whether or not
the basic operations were carried out on land.
****************
 PROFIT AND GAIN OF BUSINESS OR PROFESSION (Unit-iii) | 3.72

Question & Answer

Question 1
Mr. Venus., engaged in manufacture of pesticides, furnishes the following particulars
relating to its manufacturing unit at Chennai, for the year ending 31-3-2024:
(` in
lakhs)
WDV of Plant and Machinery on 31.3.2023 30.00
Depreciation including additional depreciation for P.Y. 2022-23 4.75
New machinery purchased on 1-9-2023 10.00
New machinery purchased on 1-12-2023 8.00
Computer purchased on 3-1-2024 4.00

Additional information:
 All assets were purchased by A/c payee cheque.
 All assets were put to use immediately.
 New machinery purchased on 1-12-2023 and computer have been installed in
the office.
 During the year ended 31-3-2023, a new machinery had been purchased on
31-10-2022, for ` 10 lakhs. Additional depreciation, besides normal
depreciation, had been claimed thereon.
 Depreciation rate for machinery may be taken as 15%.
 The assessee has no brought forward business loss or unabsorbed depreciation
as on 1.4.2023.
Compute the depreciation available to the assessee as per the provisions of the
Income-tax Act, 1961 and the WDV of different blocks of assets as on 31- 3-2024 if -
(i) he exercises the option of shifting out of the default tax regime provided under
section 115BAC(1A)
(ii) he pays tax under the default tax regime under section 115BAC.
Answer
 PROFIT AND GAIN OF BUSINESS OR PROFESSION (Unit-iii) | 3.73

Computation of written down value of block of assets of

Venus Ltd. as on 31.3.2024
Particulars Plant & Computer
Machinery
(` in lacs) (` in lacs)

Written down value (as on 31.3.2023) 30.00 Nil

Less: Depreciation including additional 4.75 -
depreciation for P.Y. 2022-23
Opening balance as on 1.4.2023 25.25
Add: Actual cost of new assets acquired
during the year
New machinery purchased on 1.9.2023 10.00 -
New machinery purchased on 1.12.2023 8.00 -
Computer purchased on 3.1.2024 - 4.00
43.25 4.00
Less: Assets sold/discarded/destroyed Nil Nil
during the year
Written Down Value (as on 31.03.2024)
43.25 4.00

(i) If Mr. Venus exercises the option of shifting out of the default tax regime
provided under section 115BAC(1A)
In this case, since his income would be computed under the optional tax regime as
per the normal provisions of the Act, he would be entitled for normal depreciation
and additional depreciation, subject to fulfilment of conditions.
 PROFIT AND GAIN OF BUSINESS OR PROFESSION (Unit-iii) | 3.74

Computation of depreciation for A.Y. 2024-25

Plant & Computer
Particulars Machinery
(` in lacs) (` in lacs)

I. Assets put to use for more than 180

days, eligible for 100% depreciation
calculated applying the eligible rate
of normal depreciation and
additional depreciation
Normal Depreciation
- WDV of plant and machinery 3.79 -
(` 25.25 lacs x 15%)
- New Machinery purchased on 1.50 -
1.9.2023 (` 10 lacs x 15%)
(A) 5.29 -
Additional Depreciation
New Machinery purchased on 2.00 -
1.9.2023 (` 10 lakhs x 20%)
Balance additional depreciation in
respect of new machinery purchased
on 31.10.2022 and put to use for less 1.00
than 180 days in the P.Y. 2022-23
(` 10 lakhs x 20% x 50%)
(B) 3.00
II. Assets put to use for less than 180
days, eligible for 50% depreciation
calculated applying the eligible rate
of normal depreciation and
additional depreciation, if any
Normal Depreciation
New machinery purchased on 0.60 -
1.12.2023 [` 8 lacs x 7.5% (i.e., 50% of
15%)]
Computer purchased on 3.1.2023
[` 4 lacs x 20% (50% of 40%)] - 0.80
 PROFIT AND GAIN OF BUSINESS OR PROFESSION (Unit-iii) | 3.75

(C) 0.60 0.80

Total Depreciation (A+B+C) 8.89 0.80

Notes:
(1) As per section 32(1)(iia), additional depreciation is allowable in the case of any
new machinery or plant acquired and installed after 31.3.2005, by an assessee
engaged, inter alia, in the business of manufacture or production of any article
or thing, at the rate of 20% of the actual cost of such machinery or plant.
However, additional depreciation shall not be allowed in respect of, inter alia,–
(i) any office appliances or road transport vehicles;
(ii) any machinery or plant installed in, inter alia, office premises.
In view of the above provisions, additional depreciation cannot be claimed in respect
of -
(i) Machinery purchased on 1.12.2023, installed in office and
(ii) Computer purchased on 3.1.2024, installed in office.
(2) Balance additional depreciation@10% on new plant or machinery acquired and
put to use for less than 180 days in the year of acquisition which has not been
allowed in that year, shall be allowed in the immediately succeeding previous
year.
Hence, in this case, the balance additional depreciation@10% (i.e., ` 1 lakhs, being
10% of ` 10 lakhs) in respect of new machinery which had been purchased during
the previous year 2022-23 and put to use for less than 180 days in that year can be
claimed in P.Y. 2023-24 being immediately succeeding previous year.
(i) If Mr. Venus pays tax under default tax regime under section 115BAC
In this case, under the default tax regime as per section 115BAC, he
wouldbe entitled only for normal depreciation but not additional
depreciation.
 PROFIT AND GAIN OF BUSINESS OR PROFESSION (Unit-iii) | 3.76

Computation of depreciation for A.Y. 2024-25

Plant & Computer
Particulars Machinery (` in lacs)
(` in lacs)
I. Assets put to use for more than 180
days, eligible for 100% depreciation
calculated applying the eligible rate of
normal depreciation
Normal Depreciation
- WDV of plant and machinery 3.79 -
(` 25.25 lacs x 15%)
- New Machinery purchased on 1.50 -
1.9.2023 (` 10 lacs x 15%)
(A) 5.29 -
II. Assets put to use for less than 180 days,
eligible for 50% depreciation calculated
applying the eligible rate of normal
depreciation
Normal Depreciation
New machinery purchased on 1.12.2023 0.60 -
[` 8 lacs x 7.5% (i.e., 50% of 15%)]
Computer purchased on 3.1.2023 [` 4
lacsx 20% (50% of 40%)] - 0.80
(C) 0.60 0.80
Total Depreciation (A+B+C) 5.89 0.80

Question 2
Mr. Abhimanyu is engaged in the business of generation and distribution of electric
power. He opts to claim depreciation on written down value for income-tax
purposes. From the following details, compute the depreciation allowable as per the
provisions of the Income-tax Act, 1961 for the A.Y. 2024-25, assuming he has
exercised the option of shifting out of the default tax regime provided under section
115BAC(1A):
 PROFIT AND GAIN OF BUSINESS OR PROFESSION (Unit-iii) | 3.77

Particulars (` in lacs)
(i) WDV of block as on 31.3.2023 (15% rate) 50.00
(ii) Depreciation for P.Y. 2022-23 7.50

(iii) New machinery purchased on 12-10-2023 10.00

(iv) Machinery imported from Colombo on 12-4-2023. 9.00
This machine had been used only in Colombo
earlier
and the assessee is the first user in India.
(v) New computer installed in generation wing unit 2.00
on 15-7-2023
All assets were purchased by A/c payee cheque.
Answer
Computation of depreciation under section 32 for A.Y.2024-25
Particulars ` `
Normal Depreciation
Depreciation@15% on ` 51,50,000, being 7,72,500
machinery put to use for more than 180 days
[WDV as on 31.3.2023 of ` 50,00,000 – Depreciation
for P.Y. 2022-23 of ` 7,50,000+ Purchase cost of
imported machinery of ` 9,00,000]
[email protected]% on ` 10,00,000, being new
machinery put to use for less than 180 days 75,000
8,47,500
Depreciation@40% on computers purchased 80,000 9,27,500
` 2,00,000
Additional Depreciation (Refer Note below)
Additional Depreciation@10% of ` 10,00,000 1,00,000
[being actual cost of new machinery purchased on
12-10-2023]
Additional Depreciation@20% on new computer
installed in generation wing of the unit [20% of
` 2,00,000] 40,000 1,40,000
Depreciation on Plant and Machinery 10,67,500
 PROFIT AND GAIN OF BUSINESS OR PROFESSION (Unit-iii) | 3.78

Note:-
Mr. Abhimanyu is eligible for additional depreciation since he has exercised the
option of shifting out of the default tax regime provided under section 115BAC(1A). The
benefit of additional depreciation is available to new plant and machinery acquired
and installed in power sector undertakings. Accordingly, additional depreciation is
allowable in the case of any new machinery or plant acquired and installed by an
assessee engaged, inter alia, in the business of generation, transmission or
distribution of power, atthe rate of 20% of the actual cost of such machinery or plant.
Therefore, new computer installed in generation wing units eligible for additional
depreciation@20%.
Since the new machinery was purchased only on 12.10.2023, it was put to use for
less than 180 days during the previous year, and hence, only 10% (i.e., 50% of
20%) is allowable as additional depreciation in the A.Y.2024-25. The balance additional
depreciation would be allowed in the next year.
However, additional depreciation shall not be allowed in respect of, inter alia, any
machinery or plant which, before its installation by the assessee, was used either within
or outside India by any other person. Therefore, additional depreciation is not allowable
in respect of imported machinery, since it was used in Colombo, before its installation
by the assessee.
Question 3
Examine with reasons, the allowability of the following expenses incurred byMr.
Manav, a wholesale dealer of commodities, under the Income-tax Act, 1961 while
computing profit and gains from business or profession for the A.Y. 2024-25 if he
has exercised the option of shifting out of the default tax regime provided under
section 115BAC(1A) -
(i) Construction of school building in compliance with CSR activities amounting to
` 5,60,000.
(ii) Purchase of building for the purpose of specified business of setting up and
operating a warehousing facility for storage of food grains amounting to `
4,50,000.
(iii) Interest on loan paid to Mr. X (a resident) ` 50,000 on which tax has not been
deducted. The sales for the P.Y. 2022-23 was ` 202 lakhs. Mr. X has not
paid the tax, if any, on such interest.
(iv) Commodities transaction tax paid ` 20,000 on sale of bullion.
 PROFIT AND GAIN OF BUSINESS OR PROFESSION (Unit-iii) | 3.79

Answer
Allowability of the expenses incurred by Mr. Manav, a wholesale dealer in commodities,
while computing profits and gains from business or profession
(i) Construction of school building in compliance with CSR activities
Under section 37(1), only expenditure not being in the nature of capital expenditure or
personal expense and not covered under sections 30 to 36, and incurred wholly and
exclusively for the purposes of the business is allowed as a deduction while computing
business income.
However, any expenditure incurred by an assessee on the activities relating to corporate
social responsibility referred to in section 135 of the Companies Act, 2013 shall not be
deemed to have been incurred for the purpose of business and hence, shall not be allowed as
deduction under section 37.
Accordingly, the amount of ` 5,60,000 incurred by Mr. Manav, towards construction of
school building in compliance with CSR activities shall not be allowed as deduction under
section 37.
(ii) Purchase of building for setting up and operating a warehousing facility for
storage of food grains
Mr. Manav, would be eligible for investment-linked tax deduction under section 35AD,
since he has exercised the option of shifting out of the default tax regime provided under
section 115BAC(1A). The deduction u/s 35AD would be 100% of ` 4,50,000, being the
amount invested in purchase of building for setting up and operating a warehousing
facility for storage of food grains which commences operation on or after 1st April, 2009
(P.Y.2023-24, in this case).

Therefore, the deduction under section 35AD while computing business income of such
specified business would be ` 4,50,000, if Mr. Manav opts for section 35AD.
(iii) Interest on loan paid to Mr. X (a resident) ` 50,000 on which tax has not been
deducted
As per section 194A, Mr. Manav, being an individual is required to deduct tax at source on
the amount of interest on loan paid to Mr. X, since his turnover during the previous year
2022-23 exceeds `100 lakhs.
Therefore, ` 15,000, being 30% of ` 50,000, would be disallowed under section
40(a)(ia) while computing the business income of Mr. Manav for non-deduction of
tax at source under section 194A on interest of ` 50,000 paid by it to Mr. X.
The balance `35,000 would be allowed as deduction under section 36(1)(iii), assuming that
the amount was borrowed for the purposes of business.
 PROFIT AND GAIN OF BUSINESS OR PROFESSION (Unit-iii) | 3.80

(iv) Commodities transaction tax of ` 20,000 paid on sale of bullion

Commodities transaction tax paid in respect of taxable commodities transactions entered
into in the course of business during the previous year is allowable as deduction, provided
the income arising from such taxable commodities transactions is included in the income
computed under the head “Profits and gains of business or profession”.
Taking that income from this commodities transaction is included while computing the
business income of Mr. Manav, the commodity transaction tax of ` 20,000 paid is allowable
as deduction under section 36(1)(xvi).
Question 4
Examine with reasons, for the following sub-divisions, whether the following
statements are true or false having regard to the provisions of the Income-tax Act,
1961:
(i) For a dealer in shares and securities, securities transaction tax paid in a
recognized stock exchange is permissible business expenditure.
(ii) Where a person follows mercantile system of accounting, an expenditure of
`25,000 has been allowed on accrual basis and in alater year, in respect of the
said expenditure, assessee makes the payment of ` 25,000 through a crossed
cheque, `25,000 can be the profits and gains of business under section 40A(3A)
in the year of payment.
(iii) It is mandatory to provide for depreciation under section 32 of the Income-tax
Act, 1961, while computing income under the head “Profits and Gains from
Business and Profession”.
(iv) The mediclaim premium paid to GIC by Mr. Lomesh for his employees, by an
account payee cheque on 27.12.2023 is a deductible expenditure under section
36.
(v) Under section 35DDA, amortization of expenditure incurred under eligible
Voluntary Retirement Scheme at the time of retirement alone,can be done.
(vi) An individual engaged in trading activities and exercising the option of shifting
out of the default tax regime provided under section 115BAC(1A) can claim
additional depreciation under section 32(1)(iia) in respect of new plant
acquired and installed in the trading concern, where the increase in value of
such plant as compared to the approved base year is more than 10%.
Answer
(i) True: Section 36(1)(xv) allows a deduction of the amount of securities transaction tax
paid by the assessee in respect of taxable securities transactions entered into in the
course of business during the previous year as deduction from the business income of a
dealer in shares and securities.
 PROFIT AND GAIN OF BUSINESS OR PROFESSION (Unit-iii) | 3.81

(ii) True: As per section 40A(3A), in the case of an assessee following mercantile system of
accounting, if an expenditure has been allowed as deduction in any previous year on
due basis, and payment exceeding ` 10,000 has been made in the subsequent year
otherwise than by an account payee cheque or an account payee bank draft or use of ECS
through a bank account or through such other prescribed electronic modes such as credit
card, debit card, net banking, IMPS, UPI, RTGS, NEFT, and BHIM Aadhar Pay, then, the
payment so made shall be deemed to be the income of the subsequent year in which such
payment has been made.
(iii) True: According to the Explanation 5 to section 32(1), allowance of depreciation is
mandatory. Therefore, depreciation has to be provided mandatorily while calculating
income from business/ profession whether or not the assessee has claimed the same
while computing his total income.

(iv) True: Section 36(1)(ib) provides deduction in respect of premium paid by an employer to
keep in force an insurance on the health of his employees under a scheme framed in this
behalf by GIC or any other insurer. The medical insurance premium can be paid by any
mode other than cash, to be eligible for deduction under section 36(1)(ib).

(v) False: Expenditure incurred in making payment to the employee in connection with his
voluntary retirement either in the year of retirement or in any subsequent year, will be
entitled to deduction in 5 equal annual installments beginning from the year in which
each payment is made to the employee.

(vi) False: Additional depreciation can be claimed only in respect of eligible plant and
machinery acquired and installed by an assessee engaged in the business of manufacture
or production of any article or thing or in the business of generation or transmission or
distribution of power.
In this case, the individual is engaged in trading activities and the new plant has been acquired
and installed in a trading concern. Hence, he will not be entitled to claim additional depreciation
under section 32(1)(iia), even though he has exercised the option of shifting out of the default
tax regime provided under section 115BAC(1A).

Question5
Examine, with reasons, the allowability of the following expenses under the Income-
tax Act, 1961 while computing income from business or profession for the A.Y.
2024-25:
(i) Provision made on the basis of actuarial valuation for payment of gratuity `
5,00,000. However, no payment on account of gratuity was made before due
date of filing return.
 PROFIT AND GAIN OF BUSINESS OR PROFESSION (Unit-iii) | 3.82

(ii) Purchase of oil seeds of ` 50,000 in cash from a farmer on a bankingday.

(iii) Tax on non-monetary perquisite provided to an employee ` 20,000.
(iv) Payment of ` 50,000 by using credit card for fire insurance.
(v) Salary payment of ` 10,00,000 to Mr. X outside India by a company without
deduction of tax assuming Mr. X has not paid tax on such salary income.
(vi) Payment made in cash ` 30,000 to a transporter in a day for carriage of goods.
Answer
(i) Not allowable as deduction: As per section 40A(7), no deduction is allowed in computing
business income in respect of any provision made by the assessee in his books of
account for the payment of gratuity to his employees except in the following two cases:
(1) where any provision is made for the purpose of payment of sum by way of
contribution towards an approved gratuity fund; or
(2) where any provision is made for the purpose of making any payment on account
of gratuity that has become payable during the previous year.
Therefore, in the present case, the provision made on the basis of actuarial valuation for
payment of gratuity has to be disallowed under section 40A(7), since, no payment has
been actually made on accountof gratuity.
Note: It is assumed that such provision is not for the purpose of contribution towards an
approved gratuity fund.
(ii) Allowable as deduction: As per Rule 6DD, in case the payment is made for purchase
of agricultural produce directly to the cultivator, grower or producer of such agricultural
produce, no disallowance under section 40A(3) is attracted even though the cash
payment forthe expense exceeds `10,000.
Therefore, in the given case, disallowance under section 40A(3) is not attracted since,
cash payment for purchase of oil seeds is made directly to the farmer.
(iii) Not allowable as deduction: Income-tax of ` 20,000 paid by the employer in respect of
non-monetary perquisites provided to its employees is exempt in the hands of the
employee under section 10(10CC).
As per section 40(a)(v), such income-tax paid by the employer is not deductible while
computing business income.
(iv) Allowable as deduction: Payment for fire insurance is allowable as deduction under
section 36(1). Since payment is made by credit card, which is a prescribed electronic
mode, disallowance under section 40A(3) is not attracted in this case.
(v) Not allowable as deduction: Disallowance under section 40(a)(iii) is attracted in
 PROFIT AND GAIN OF BUSINESS OR PROFESSION (Unit-iii) | 3.83

respect of salary payment of ` 10,00,000 outside India by a company without

deduction of tax at source.
(vi) Allowable as deduction: The limit for attracting disallowance under section 40A(3)
for payment otherwise than by way of account payee cheque or account payee bank
draft or use of ECS through a bank account or through such other prescribed
electronic mode is ` 35,000 in case of payment made for plying, hiring or leasing
goods carriage. Therefore, in the present case, disallowance under section 40A(3)
is not attracted for payment of ` 30,000 made in cash to a transporterfor carriage
of goods.
Question 6
Examine with reasons, whether the following statements are true or false, with regard to
the provisions of the Income-tax Act, 1961:
(a) Payment made in respect of a business expenditure incurred on 16th February, 2024
for ` 25,000 through a crossed cheque is hit by the provisions of section 40A(3).
(b) (i) It is a condition precedent to write off in the books of account, the amount due
from debtor to claim deduction for bad debt.
(ii) Failure to deduct tax at source in accordance with the provisions of Chapter
XVII-B, inter alia, from the amounts payable to a non- resident as rent or royalty,
will result in disallowance while computing the business income where the non-
resident payee has not paid the tax due on such income.
Answer
(a) True: In order to escape the disallowance specified in section 40A(3), payment in
respect of the business expenditure ought to have been made through an account
payee cheque. Payment through a crossed cheque will attract disallowance under
section 40A(3).
(b) (i) True: It is mandatory to write off the amount due from a debtor as not
receivable in the books of account, in order to claim the same as bad debt under section
36(1)(vii). However, where the debt has been taken into account in computing the
income ofthe assessee on the basis of ICDSs notified under section 145(2), without recording
the same in the accounts, then, such debt shall be allowed in the previous year in which
such debt becomes irrecoverable and it shall be deemed that such debt or part thereof has
been written off as irrecoverable in the accounts for the said purpose.
(ii) True: Section 40(a)(i) provides that failure to deduct tax at source from, inter
alia, rent or royalty payable to a non-resident, in accordance with the provisions of
Chapter XVII-B, will result in disallowance of such expenditure, where the non-resident
payee has not paid the tax due on such income.
 PROFIT AND GAIN OF BUSINESS OR PROFESSION (Unit-iii) | 3.84

Question 7
Mr. Sivam, a retail trader of Cochin gives the following Trading and Profit and Loss Account
for the year ended 31st March, 2024:
Trading and Profit and Loss Account for the year ended 31.03.2024
Particulars ` Particulars `
To Opening stock 90,000 By Sales 1,12,11,500
To Purchases 1,10,04,000 By Closing stock 1,86,100
To Gross Profit 3,03,600 -
1,13,97,600 1,13,97,600
To Salary 60,000 By Gross profit b/d 3,03,600
To Rent and rates 36,000 By Income from UTI 2,400
To Interest on loan 15,000
To Depreciation 1,05,000
To Printing & stationery 23,200
To Postage & telegram 1,640
To Loss on sale of 8,100
shares (Short-term)
To Other general 7,060
expenses
To Net Profit 50,000
3,06,000 3,06,000

Additional Information:
(i) It was found that some stocks were omitted to be included in both theOpening
and Closing Stock, the values of which were:

Opening stock ` 9,000

Closing stock ` 18,000
(ii) Salary includes ` 10,000 paid to his brother, which is unreasonable to the extent of `
2,000.
(iii) The whole amount of printing and stationery was paid in cash by way of one-time
payment to Mr. Ramesh.
 PROFIT AND GAIN OF BUSINESS OR PROFESSION (Unit-iii) | 3.85

(iv) The depreciation provided in the Profit and Loss Account ` 1,05,000 was based on the
following information:
The opening balance of plant and machinery (i.e., the written down value as on
31.3.2023 minus depreciation for P.Y. 2022-23) is ` 4,20,000. A new plant falling
under the same block of depreciation was bought on 01.7.2023 for ` 70,000. Two old
plants were sold on 1.10.2023 for ` 50,000.
(v) Rent and rates includes GST liability of ` 3,400 paid on 7.4.2024.
(vi) Other general expenses include ` 2,000 paid as donation to a Public Charitable Trust.
You are required to compute the profits and gains of Mr. Sivam under presumptive taxation
u/s 44AD and profits and gains as per the regular provisions of the Act assuming he has
exercised the option of shifting out of the default tax regime provided under section
115BAC(1A). Assume that the whole of the amount of turnover received by account payee
cheque or use of electronic clearing system through bank account during the previous year.
Answer
Computation of business income of Mr. Sivam for the A.Y. 2024-25
Particulars ` `
Net Profit as per profit and loss account 50,000
Add: Inadmissible expenses/ losses
Under valuation of closing stock 18,000
Salary paid to brother – unreasonable 2,000
[Section 40A(2)]
Printing and stationery - whole amount of 23,200
printing & stationery paid in cash would be
disallowed, since such amount exceeds
` 10,000 [Section 40A(3)]
Depreciation (considered separately) 1,05,000
Short term capital loss on shares 8,100
Donation to public charitable trust 2,000 1,58,300
2,08,300
Less: Items to be deducted:
Under valuation of opening stock 9,000

Income from UTI [Chargeable under the 2,400 11,400

head “Income from Other Sources]
Business income before depreciation 1,96,900
Less: Depreciation (See Note 1) 66,000
1,30,900
 PROFIT AND GAIN OF BUSINESS OR PROFESSION (Unit-iii) | 3.86

Computation of business income as per section 44AD:

As per section 44AD, where the amount of turnover is received, inter alia, by way of account
payee cheque or use of electronic clearing system through bank account or through such
other prescribed electronic modes, the presumptive business income would be 6% of
turnover, i.e., ` 1,12,11,500 x6 /100 = `6,72,690
Notes:
1. Calculation of depreciation
Particulars `
Opening balance of plant & machinery as on 1.4.2023(i.e. 4,20,000
WDV as on 31.3.2023 (-) depreciation for P.Y. 2022-23)
Add: Cost of new plant & machinery 70,000
4,90,000
Less: Sale proceeds of assets sold 50,000
WDV of the block of plant & machinery as on 31.3.2024 4,40,000
Depreciation@15% 66,000
No additional depreciation is allowable as the assessee is
not engaged in manufacture or production of any article.

2. Since GST liability has been paid before the due date of filing return of income
under section 139(1), the same is deductible.
Question 8

Mr. Sukhvinder is engaged in the business of plying goods carriages. On 1st April,
2023, he owns 10 trucks (out of which 6 are heavy goods vehicles, the gross vehicle
weight of such goods vehicle is 15,000 kg each). On 2nd May, 2023, he sold one of the heavy
goods vehicles and purchased a light goods vehicle on 6th May, 2023. This new vehicle
could, however, be put to use only on 15th June, 2023.
Compute the total income of Mr. Sukhvinder for the A.Y. 2024-25, taking note of the
following data:
Particulars ` `
Freight charges collected 12,70,000
Less: Operational expenses 6,25,000
Depreciation as per section 32 1,85,000
Other office expenses 15,000 8,25,000
Net Profit 4,45,000
 PROFIT AND GAIN OF BUSINESS OR PROFESSION (Unit-iii) | 3.87

Other business and non-business income 70,000

Answer
Section 44AE would apply in the case of Mr. Sukhvinder since he is engaged in the business
of plying goods carriages and owns not more than ten goods carriages at any time during
the previous year.
Section 44AE provides for computation of business income of such assesseson a presumptive
basis. The income shall be deemed to be ` 1,000 per ton of gross vehicle weight or unladen
weight, as the case may be, per month or part of the month for each heavy goods vehicle and `
7,500 per month or part of month for each goods carriage other than heavy goods vehicle,
owned by the assessee in the previous year or such higher sum as declaredby the assessee
in his return of income.
Mr. Sukhvinder’s business income calculated applying the provisions of section 44AE is
`13,72,500 (See Notes 1 & 2 below) and his total income would be `14,42,500.
However, as per section 44AE(7), Mr. Sukhvinder may claim lower profits and gains if he
keeps and maintains proper books of account as per section 44AA and gets the same audited
and furnishes a report of such audit as required under section 44AB. If he does so, then his
income for tax purposes from goods carriages would be ` 4,45,000 instead of ` 13,72,500
and his total income would be `5,15,000.
Notes:
1. Computation of total income of Mr. Sukhvinder for A.Y. 2024-25
Particulars Presumptive Where books
income are maintained
` `
Income from business of plying
goods carriages [See Note 2 13,72,500 4,45,000
Below]
Other business and non-business 70,000 70,000
income
Total Income 14,42,500 5,15,000
 PROFIT AND GAIN OF BUSINESS OR PROFESSION (Unit-iii) | 3.88

2. Calculation of presumptive income as per section 44AE

Type of carriage No. of Rate per ton Ton Amount
months per month/ `
per month
(1) (2) (3) (4)
Heavy goods
vehicle
1 goods carriage 2 1,000 15 30,000
upto 1st May (15,000/1,000)
5 goods carriage 12 1,000 15 9,00,000
held throughout the (15,000/1,000)
year
Goods vehicle
other than heavy
goods vehicle
1 goods carriage 11 7,500 - 82,500
from 6th May
4 goods carriage 12 7,500 - 3,60,000
held throughout
the year
Total 13,72,500
Question 9
Mr. Raju, a manufacturer at Chennai, gives the following Manufacturing, Trading and Profit
& Loss Account for the year ended 31.03.2024:
Manufacturing, Trading and Profit & Loss Account for the
year ended 31.03.2024
Particulars ` Particulars `
To Opening Stock 71,000 By Sales 2,32,00,000
To Purchase of Raw 2,16,99,000 By Closing stock 2,00,000
Materials
To Manufacturing 5,70,000
Wages & Expenses
To Gross Profit 10,60,000
2,34,00,000 2,34,00,000
Administrative 3,26,000 Gross Profit 10,60,000
 PROFIT AND GAIN OF BUSINESS OR PROFESSION (Unit-iii) | 3.89

To charges By
5,000 15,000
SGST penalty Dividend from
To By domestic companies
1,10,000 1,80,000
GST paid Income from
To By agriculture (net)
54,000
General Expenses
To
To Interest to Bank 60,000
(On machinery
term loan)
To Depreciation 2,00,000
To Net Profit 5,00,000
12,55,000 12,55,000

Following are the further information relating to the financial year 2023-24:
(i) Administrative charges include ` 46,000 paid as commission to brother of the
assessee. The commission amount at the market rate is ` 36,000.
(ii) The assessee paid ` 33,000 in cash to a transport carrier on 29.12.2023. This amount
is included in manufacturing expenses. (Assume that the provisions relating to TDS
are not applicable to this payment)
(iii) A sum of ` 4,000 per month was paid as salary to a staff throughout the year and this
has not been recorded in the books of account.
(iv) Bank term loan interest actually paid upto 31.03.2024 was ` 20,000 and the balance
was paid in November 2024.
(v) Housing loan principal repaid during the year was ` 50,000 and it relates to
residential property acquired by him in P.Y. 2022-23 for self-occupation. Interest on
housing loan was ` 23,000. Housing loan was taken from Canara Bank. These amounts
were not dealt with in the profit and loss account given above.
Depreciation allowable under the Act is to be computed on the basis of following
information:
Plant & Machinery (Depreciation rate@15%) `
WDV as on 31.03.2023 minus Depreciation for P.Y. 2022-23 11,90,000
Additions during the year (used for more than 180 days) 2,00,000
Total additions during the year 4,00,000
Compute the total income of Mr. Raju for the A.Y. 2024-25 assuming he pays tax under
default tax regime.
 PROFIT AND GAIN OF BUSINESS OR PROFESSION (Unit-iii) | 3.90

Note: Ignore application of section 14A for disallowance of expenditures in respect of any
exempt income.
Answer
Computation of total income of Mr. Raju for the A.Y. 2024-25
Particulars ` `
Profits and gains of business or profession
Net profit as per profit and loss account 5,00,000
Add: Excess commission paid to brother disallowed 10,000
under section 40A(2)
Disallowance under section 40A(3) is not Nil
attracted since the limit for one time cash
payment is ` 35,000 in respect of payment to
transport operators. Therefore, amount of
` 33,000 paid in cash to a transport carrier is
allowable as deduction.

Salary paid to staff not recorded in the books 48,000

(Assuming that the expenditure is in the nature
of unexplained expenditure and hence, is
deemed to be income as per section 69C
and would be taxable @ 60% under section
115BBE – no deduction allowable in respect of
such expenditure) [See Note 1 below]
Bank term loan interest paid after the due date 40,000
of filing of return under section 139(1) –
disallowed as per section 43B
State GST penalty paid disallowed [See Note 2 5,000
below]
Depreciation debited to profit and loss account 2,00,000 3,03,000
8,03,000
Less: Dividend from domestic companies 15,000
[Chargeable to tax under the head “Income
from Other Sources”]
Income from agriculture [Exempt under 1,80,000
section 10(1)]
Depreciation under the Income-tax Act, 1961
(As per working note) 2,23,500 4,18,500
 PROFIT AND GAIN OF BUSINESS OR PROFESSION (Unit-iii) | 3.91

3,84,500
Income from house property
Annual value of self-occupied property Nil
Less: Deduction u/s 24(b) – interest on housing loan Nil Nil
[Not allowable, since Mr. Raju is paying tax as
per default tax regime]
Income from Other Sources
Dividend from domestic companies 15,000
Gross Total Income 3,99,500
Less: Deduction u/s 80C [Not allowable, since
Mr. Raju is paying tax as per default tax regime] Nil
Total Income 3,99,500

Working Note:
Computation of depreciation under the Income-tax Act, 1961
Particulars `
Depreciation@15% on ` 13.90 lakhs (WDV as on 31.3.2023 less
depreciation for P.Y. 2022-23 i.e., ` 11.90 lakh plus assets 2,08,500
purchased during the year and used for more than 180 days ` 2
lakh)

Depreciation @7.5% on ` 2 lakh (Assets used for < 180 days) 15,000
2,23,500

Since Mr. Raju is paying tax as per default tax regime, additional depreciation u/s 32(1)(iia)
would not be available to him.
Notes (Alternate views):
1. It is also possible to take a view that the salary not recorded in the books of account was
an erroneous omission and that the assessee has offered satisfactory explanation for the
same. In such a case, the same should not be added back as unexplained expenditure, but
would be allowable as deduction while computing profits and gains of business and
profession.
2. Where the imposition of penalty is not for delay in payment of sales tax or VAT or GST
but for contravention of provisions of the Sales Tax Act or VAT Act or GST Law, the levy is
not compensatory and therefore, not deductible. However, if the levy is compensatory in
nature, it would be fully allowable. Where it is a composite levy, the portion which is
compensatory is allowable and that portion which is penal is to be disallowed.
 PROFIT AND GAIN OF BUSINESS OR PROFESSION (Unit-iii) | 3.92

Since the question only mentions “GST penalty paid” and the reason for levy of penalty is not
given, it has been assumed that the levy is not compensatory and therefore, not deductible. It is,
however, possible to assume that such levy is compensatory in nature and hence, allowable as
deduction. In such a case, the total income would be ` 3,94,500.
Question 10.

Mr. Tenzingh is engaged in composite business of growing and curing (further

processing) coffee in Coorg, Karnataka. The whole of coffee grown in his plantation is
cured. Relevant information pertaining to the year ended 31.3.2024 are given below:
Particulars `
Opening balance of car (only asset in the block) as on 1.4.2023 3,00,000
(i.e. WDV as on 31.3.2023 (-) depreciation for P.Y. 2022-23)
Opening balance of machinery as on 1.4.2023 (i.e., WDV as on 15,00,000
31.3.2023 (-) depreciation for P.Y. 2022-23)
Expenses incurred for growing coffee 3,10,000
Expenditure for curing coffee 3,00,000
Sale value of cured coffee 22,00,000
Besides being used for agricultural operations, the car is also used for personal use;
disallowance for personal use may be taken at 20%. The expenses incurred for car
running and maintenance are ` 50,000. The machines were used in coffee curing
business operations.
Compute the income arising from the above activities for the A.Y. 2024-25.
Answer
Where an assessee is engaged in the composite business of growing and curing of coffee, the
income will be segregated between agricultural income and business income, as per Rule 7B
of the Income-tax Rules, 1962.
As per the above Rule, income derived from sale of coffee grown and cured by the seller in
India shall be computed as if it were income derived from business, and 25% of such income
shall be deemed to be income liable to tax. The balance 75% will be treated as agricultural
income.
 PROFIT AND GAIN OF BUSINESS OR PROFESSION (Unit-iii) | 3.93

Particulars ` `
Sale value of cured coffee 22,00,000
Less: Expenses for growing coffee 3,10,000
Car expenses (80% of ` 50,000) 40,000
Depreciation on car (80% of 15% of
`3,00,000) [See Computation below] 36,000
Total cost of agricultural operations 3,86,000
Expenditure on coffee curing 3,00,000
operations
Add: Depreciation on machinery 2,25,000
(15% of ` 15,00,000)
[See Computation below]
Total cost of the curing operations 5,25,000
Total cost of composite operations 9,11,000
Total profits from composite activities 12,89,000
Business income (25% of above) 3,22,250
Agricultural income (75% of above) 9,66,750

Computation of depreciation for P.Y. 2023-24

Particulars ` `
Car
Opening balance as on 1.4.2023 (i.e., WDV as on 3,00,000
31.3.2023 (-) depreciation for P.Y.2022-23)
Depreciation thereon at 15% 45,000
Less: Disallowance @20% for personal use 9,000
Depreciation actually allowed 36,000
Machinery
Opening balance as on 1.4.2023 (i.e., WDV as on 15,00,000
31.3.2023 (-) depreciation for P.Y.2022-23)
Depreciation @ 15% for P.Y. 2023-24 2,25,000
Explanation 7 to section 43(6) provides that in cases of ‘composite income’,for the purpose of
computing written down value of assets acquired before the previous year, the total amount
of depreciation shall be computed as ifthe entire composite income of the assessee (and not
 PROFIT AND GAIN OF BUSINESS OR PROFESSION (Unit-iii) | 3.94

just 25%) is chargeable under the head “Profits and gains of business or profession”. The
depreciation so computed shall be deemed to have been “actually allowed” to the assessee.
Question 12
X & Ca., a partnership firm as such, furnishes the following Profit and Loss Account for the
previous year ending 31 st March, 2024:
To Cost of Goods 2,80,000 By Sales 2,92,000
To Other Expenses 91,000 By Net Loss 1,72,000
To Interest to Partners 25,000
To Remuneration to. Partners 68,000
4,64,000 4,64,000
The other expenses debited include Rs. 13,600 not allowable under Section 37(i) of the Act.
Interest to partners is in Excess by Rs. 7,100, (not statutorily allowable).
You are required to. compute for the Assessment Year 2024-25 :
(i) Book profits of the firm.
(ii) Permissible remuneration to. partners under Section 40(b)(v).
(iii) The income of the firm.

Answer

Computation of Book Profit of the firm: Rs.

Net profit as per Profit & Lass Account Rs. (172,000)
Add: Expenses other than remuneration not deductible:
Other expenses 13,600
Interest to partner 7,100
(1,51,300)
Add: Remuneration to partners debited to. Profit & Lass account 68,000
Book profit (Loss) (83,300)
Maximum permissible remuneration:-
Computation of Taxable Income of the firm:
(83,300)
Book Profit
Less: Remuneration deductible 40 (b) (68,000)
Loss to. be carried forward by the firm (1,51,300)
 PROFIT AND GAIN OF BUSINESS OR PROFESSION (Unit-iii) | 3.95

Question 13
X (age: 66 years), a resident, furnishes the following particulars relevant for the AIY 2023-24:
Profit and Loss Account of the year ending March 31, 2024
Salary to staff 34,000 Gross profit 1,86,000
General Expenses 48,000 Commission and 2,17,200
discount
Bad debts written off 15,000 Sundry receipts 43,000
Reserve for losses 2,000 Short term profit on 31,000
sale of investment
Fire insurance premium( office 4,200
premises)
Advertisement Rs. 2,400
Add: Outstanding Rs. 1,600 4,000
Interest on X's capital 3,500
Interest on bank loan 14,500
Expenditure. on acquisition of 17,000
patent right acquired & put to use
on June 30, 2023
Lump sum consideration for
acquiring know-how on March 3, 60,000
2024
Depreciation on plant and 28,000
machinery
Provision for CGST and SGST 13 ,000
Net profit 2,34,000
Total 4,77,200 Total 4,77,200
Other information:
(1) Advertisement expenditure includes Rs. 3,400 being cost of 2 dairies (cost of each being
Rs.1,700) presented tocustomers.
(2) Depreciation on plant and machinery according to income-tax provision comes to
Rs. 29,700.
(3) Salary to staff includes Rs. 8,000 paid to a relative which is unreasonable to extent of
Rs. 3,000.
(4) General expenses include (a) expenditure of Rs. 4,800 incurred by X on training of his
employees, (b) commission of Rs. 10,000 for securing a business order, and (c)
compensation of Rs. 6,000 paid to an employee while terminating his service in the
business interest.
(5) Out of outstanding CGST and SGST duty, Rs. 3,000 is paid on July 10, 2024 and Rs. 8,000
is paid on Nov. 3, 2024. The balance is not paid as yet. Due date of filing ROI is Oct. 31, 2024.
Determine the income of business & profession of X for the A/Y 2024-25.
Answer
 PROFIT AND GAIN OF BUSINESS OR PROFESSION (Unit-iii) | 3.96

Rs. Rs.
Profit as per Profit and Loss Account 2,34,000
Add: Inadmissible expenditure:
Salary to staff (salary paid to a relative to the extent it is treated as
excessive or unreasonable) 3,000
Reserve for losses 2,000
Interest on capital 3,500
Dep on patent right (amount deductible is 25% of Rs. 17,000
i.e., Rs. 4,250; therefore, amount inadmissible = Rs. 17,000-Rs. 4,250) 12,750
Dep on know-how (50% of Rs. 25% of Rs. 60,000, as it is put to
use for less than 180 days, is deductible which comes to Rs. 7,500;
amount not deductible is Rs. 52,500) 52,500
O/s sales tax and excise duty Rs. 3,000 paid on or before Oct. 31
2024 is deductible. The balance is not deductible for the previous year
ending March 31, 2024 10,000 83,750
3,17,750
Less: Provision for depreciation on plant and machinery
(i.e., Rs. 29,700-Rs. 28,000) 1,700
3,16,050
Less: Short-term capital gain on sale of investment 31,000
Business income 2,85,050
Notes:

1. Expenditure on training of employees is a deductible expenditure. Likewise, commission

for securing business order is deductible.
2. Advertisement expenditure (being expenditure of revenue nature) is fully deductible u/s
37(1).
3. Compensation payable for terminating service of an employee is deductible.
4. It is assumed that evidence of payment of sales tax on July 10, 2024 is submitted along
with ROI.
Question 14
The following is the profit and loss account for the year ended 31 st March, 2024 of Western Sugar
Mills of which Shri Daga is the owner:
 PROFIT AND GAIN OF BUSINESS OR PROFESSION (Unit-iii) | 3.97

(`) (`)
To Manufacturing expenses 7,01,000 By Sale of sugar and
To Excise duty 92,795 Molasses 11,62,300
To Establishment charges 49,200 By Rent from agricultural land 950
To Fine paid to excise By Revenue from fisheries 4,000
department 2,000 By Sale proceeds from canes 6,05,055
To Salary and wages 1,21,445 By Profit on sales of motor truck 3,230
To General charges 16,750
To Interest on bank loan 21,000
To Daga's remuneration 38,750
To Depreciation 91,000
To Income Tax 25,000
To Cultivation expenses 4,37,500
To Net Profit 1,79,095
17,75,535 17,75,535
Compute the income from business of Shri Daga from the Sugar Mill for the assessment year
2024-25 after taking the following information into consideration:
(i) Sale proceeds of sugar include Rs. 5,32,000 on account of cane produced and consumed in
the factory and debited to manufacturing expenses, the average market price of such cane
being Rs. 6,00,000.
(ii) The motor truck sold during the year for Rs. 7,230 was purchased in the past for Rs.
19.000. Depreciation claimed in respect thereof in past assessments was Rs. 15,000.
(iii) General charges include (a) Rs. 2,000 being the legal expenses incurred in defending a suit
regarding the company's title to certain agricultural lands and (b) Rs. 10,000 paid to Shri
Daga's son who is an employee in the Sugar Mill for a trip to Hawai to study modern methods
of manufacture.
(iv) Depreciation in respect of all assets has been ascertained at Rs. 50.000 as per Income Tax
Rules.
Answer
INCOME OF SHRI DAGA FROM m/s WESTERN SUGAR MILLS.
PARTICULARS (Rs.)
NP (as per P & LA/C) 1,79,095
+ Expenses on Account of cane product 5,32,000
- Average MP. of Cane Product (6,00,000)
+ Fine to excise department 2,000
 PROFIT AND GAIN OF BUSINESS OR PROFESSION (Unit-iii) | 3.98

+ Shri Daga's Remuneration. 38,750

+ Income Tax 25,000
+ Cultivation Expenses 4,37,500
+ Legal Expenses (Ag land) 2,000
+ Excess Depreciations 41,000
+ Rent received from Ag. land (950)
- Sale Proceeds of cane (6,05,055)
- Profit on sale of Trucks (3,230)
- Revenue from Fisheries ( 4,000)
Chargeable Revenue PGBP : From the Sugar Mill 44,110
From Fisheries 4,000
STCG on Trucks 3,230
GTI/Total Income 51,340

Question 15
Following is the Profit and Loss Account of Mr. A for the year ended 31 -3-2024:

Rs. Rs.
To Repairs on Building 1,30,000 By Gross Profit 6,01,000
To Advertisement 51,000 By I.T. Refund 4,500
To Amount paid to Scientific Research By Interest from Company 6,400
Deposits
Association approved u/s 35 1,00,000 By Dividends 3,600
To Interest 1,10,000
To Travailing 1,30,000
To Banking Cash Transaction Tax 550
To Net Profit 93,950
6,1 5,500 6,15,500

Following additional informations are furnished:

(1) Repairs on building includes Rs. 95,000 being cost of raising a compound wall for the own
business premises.
(2) Interest payments include interest payable outside India to a resident Indian on which TDS
has not been deducted of Rs. 12,000 and penalty for contravention of CGST of Rs. 24,000.
Compute the income chargeable under the head 'Profits and Gains of business or profession for
the year ended 31.3.2024 ignoring depreciation.
 PROFIT AND GAIN OF BUSINESS OR PROFESSION (Unit-iii) | 3.99

Answer

Net Profit as per P/LA/c 93,950

Add: Item not admissible or for separate consideration
(i) Amount paid to scientific research association 1,00,000
(ii) Penalty for contravention of CGST 24,000
(iii) Interest on which T.D.S. is not deducted 12,000
(iv) Expenses on raising wall 95,000 2,31,000
3,24,950
Less : Item admissible not debited in P/L Alc or for separate consideration
(i) Donation to scientific research association (100% of Rs. 1 ,00,000) 1,00,000
(ii) I.T. Refund 4,500
Less: Income chargeable under separate head
(i) Interest on company deposit (IFOS) 6,400
(ii) Dividend (IFOS) exempt 3,600 1,64,500
Income from Business & Profession Rs. 2,10,450
Note:- Since income tax is not a allowable expenses so the refund is also not to be included in
profit and loss account.
Question 16
R gives you the following particulars for the year ended 31-3-2024:
Rs.
Net Profit as per P & L account (without allowing the following items) 5,20,000
Capital expenditure on Family planning 70,000
Lump sum consideration for purchase of tech. know-how developed in govt. 1,20,000
laboratory
Entertainment Expenditure 40,000
Expenditure on acquisition of patent right 80,000
Expenditure on advertisement paid in cash 25,000
Provision for excise duty 60,000
(He paid Rs. 30,000 on 27-6-2024, and Rs. 12,000 on 1-11-2024). Due date of
filing or return is 31-10-2024
Amount paid to Delhi University for an approved Research 60,000
Program in the field of social sciences not connected with his business
Compute his business income for the assessment year 2024-25
Answer
 PROFIT AND GAIN OF BUSINESS OR PROFESSION (Unit-iii) | 3.100

Computation of Business Income

(for the assessment year 2024-25)

Net profit as per P & L Nc Rs. Rs.

Less: Allowed expenses: 5,20,000
(a) Capital expenditure on family planning
(allowed only to companies) Nil
(b) Purchase of technical know how: Depreciation @ 25% 30,000
(c) Entertainment expenditureallowed 40,000
(d) Advertisement expenditure in cash fully disallowed ---
(e) Acquisition of patent right: Depreciation @ 25% 20,000
(f) Amount paid to Delhi University for Social Research
(60,000x100%) 60,000
(g) Payment of excise duty before due date of filing of return 30,000 1,80,000
Taxable Business Profit 3,40,000

********************
 CAPITAL GAINS (Unit - iv) | 3.1

CHAPTER – 3.4 CAPITAL GAINS

CAPITAL GAINS
In this chapter on capital gains, definition of
(i) “capital asset” and

(ii) “transfer”
Section 45 provides that any profits or gains arising from the transfer of a capital asset
effected in the previous year will be chargeable to income-tax under the head ‘Capital Gains’.

CAPITAL ASSET
Definition: According to section 2(14), a capital asset means –
(a) property of any kind held by an assessee, whether or not connected with his
business or profession;
(b) any securities held by a Foreign Institutional Investor which has invested in such
securities in accordance with the SEBI regulations.
However, it does not include—
(i) Stock-in trade: Any stock-in-trade [other than securities referred to in (b) above,
consumable stores or raw materials held for the purpose of the business or profession
of the assessee;
(ii) Personal effects: Personal effects, that is to say, movable property (including wearing
apparel and furniture) held for personal use by the assessee or any member of his
family dependent on him.
EXCLUSIONS:

(a) jewellery;
(b) archaeological collections;
(c) drawings;
(d) paintings;
(e) sculptures; or
(f) any work of art.
 CAPITAL GAINS (Unit - iv) | 3.2

(i) Rural agricultural land in India i.e., agricultural land in India which is not situated
inany specified area.
Shortest aerial Population according to the last preceding census of
distance from the local which the relevant figures have been published before
limits of a municipality the first day of the previous year.
or cantonment board
referred to in item (a)
(i) ≤ 2 kilometers > 10,000 ≤ 1,00,000
(ii) ≤ 6 kilometers > 1,00,000 ≤ 10,00,000
(iii) ≤ 8 kilometers > 10,00,000

Example 1
Area Shortest aerial Population Is the land
distance from the according to the last situated in
local limits of a preceding census of this area a
municipality or which the relevant capital asset?
cantonment board figures have been
referred to in item published before the
(a) first day of the
previous year.
(i) A 1 km 9,000 No
(ii) B 1.5 kms 12,000 Yes
(iii) C 2 kms 11,00,000 Yes
(iv) D 3 kms 80,000 No
(v) E 4 kms 3,00,000 Yes
(v) F 5 kms 12,00,000 Yes
(vi) G 6 kms 8,000 No
(vii) H 7 kms 4,00,000 No
(viii) I 8 kms 10,50,000 Yes
(ix) J 9 kms 15,00,000 No
(ii) Specified Gold Bonds: 6½% Gold Bonds, 1977, or 7% Gold Bonds, 1980, or
NationalDefence Gold Bonds, 1980, issued by the Central Government;
(iii) Special Bearer Bonds, 1991 issued by the Central Government;

(iv) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates
issued under the Gold Monetisation Scheme, 2015 notified by the Central Government.
 CAPITAL GAINS (Unit - iv) | 3.3

SHORT TERM AND LONG TERM CAPITAL ASSETS

Period of holding: A summary
STCA, If held for ≤ 12 months • Security (other than unit) listed in a recognized stock
exchange
LTCA , if held for > 12 months • Unit of equity oriented fund/ unit of UTI
• Zero Coupon bond

• Unlisted shares
STCA, if held for ≤ 24 month • Land or building or both

LTCA, if held for > 24 months

• Unit of debt oriented fund

STCA, if held for ≤ 36 month • Unlisted securities other than shares
• Other capital assets
LTCA, if held for > 36 months

TRANSFER: WHAT IT MEANS? [SECTION 2(47)]

The Act contains an inclusive definition of the term ‘transfer’. Accordingly, transfer in
relation to a capital asset includes the following types of transactions:—
(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) the owner of a capital asset may convert the same into the stock-in-trade of a
business carried on by him. Such conversion is treated as transfer; or
(v) the maturity or redemption of a zero coupon bond; or
(vi) possession of an immovable property in consideration of part-performance of a
contract
referred to in section 53A of the Transfer of Property Act, 1882.
(vii) transactions which have the effect of transferring or enabling the enjoyment of an
immovable property.
ASCERTAINMENT OF COST IN SPECIFIED CIRCUMSTANCES [SECTION 49]
A person becomes the owner of a capital asset not only by purchase but also by several other
methods. Section 49 gives guidelines as to how to compute the cost under different
circumstances.
Example 2
Mr. A purchase a land on 10 Nov. 1995 for Rs. 10,00,000 and improvement on such land in
1998 amount 200,000, this land was sold by him on 3 Oct 2023 for Rs. 50,00,000. The Fair
market value of the land as on 1 Apr. 2001 was Rs. 11,00,000 expenses on transfer 2% of
sales price.
Answer : LTCG Rs.
Cost to previous owner deemed as cost of acquisition of asset: In the following cases, the cost
of acquisition of the asset shall be deemed to be cost for which the previous owner of the
 CAPITAL GAINS (Unit - iv) | 3.4
property acquired it. To this cost, the cost of improvement to the asset incurred or borne by the
previous owner or the assessee must be added:
Where the capital asset became the property of the assessee:
(i) on any distribution of assets on the total or partition of a HUF;
(ii) under a gift or will;
(iii) by succession, inheritance
Example 3
Mr. Y acquired the property in the 2001-02 for Rs. 10,00,000 and paid Rs. 3600 as a registration
charges. Mr Y died on 14 Feb. 2006 and the property was transfer to his Son Mr.Z market value of
property as on 14 Feb. 2006 Rs. 30,00,000 Mr. Z sold the property 31Jan 2024 For Rs. 35 lakhs
(1) COI 2001-02 :- 100, 2005-06 :- 117, 2023-24 :- 348,
(2) Answer :LTCL Rs. Or CIT v. Manjula J. Shah LTCL Rs.

Cost of Acquisition of assets: At a Glance

Sl. Nature of asset Cost of acquisition
No.
1 Goodwill of business, trademark, brand
name etc., -
- Self generated Nil
- Acquired from previous owner Purchase price

In case of self-generated assets namely, goodwill of a business or a trademark or brand name

associated with a business or a right to manufacture, produce or process any article or thing, or right
to carry on any business or profession, tenancy rights, stage carriage permits, or loom hours, the cost
of acquisition will be taken to be nil.
However, it is significant to note that the above amendment does not cover self- generated
goodwill of a profession. So, in respect of self-generated goodwill of a profession and other self-
generated assets not specifically covered by the amended provisions of section 55, the decision of
the Supreme Court in B. C. Srinivasa Setty’s casewill still apply

Example 4
On January 31, 2023, Mr. A has transferred self-generated goodwill of his profession for a sale
consideration of ` 70,000 and incurred expenses of ` 5,000 for such transfer. You are required to
compute the capital gains chargeable to tax in the hands of Mr. A for the A.Y. 2023-24.
Solution
The transfer of self-generated goodwill of profession is not chargeable to tax. It is based upon the
Supreme Court’s ruling in CIT vs. B.C. Srinivasa Shetty.
Example 5
Compute the capital gain in the hands of P who has transferred the following assets during
theP/Y2023-24

Name of the Assets Cost of FM on 1-4- Full value of

Acquisition 2001 Consideration
Rs. Rs. Rs.
Goodwill of a business - 40,000 4,00,000
 CAPITAL GAINS (Unit - iv) | 3.5
Tenancy rights of a – 1,00,000 6,00,000
commercial building
Route permit – 50,000 5,00,000
Share acquired in 65,000 50,000 4,00,000
1999

Ans. LTCG

Example 6
Compute the capital gain in the following case :
(1) (a) Prakash commenced a business on 15-8-2001. The said business is sold by Prakash on 18-4-
2023 and he received Rs.4,00,000 towards goodwill.
Ans. LTCG 4,00,000
(b) What will be your answer in the above case, if Prakash had acquired the goodwill for this
business for a consideration of Rs. 1,00,000.(Index Value)
Ans. LTCG 3,00,000
(2) Ramesh has been living in a rented accommodation since June 2004, and he is paying arent
of Rs.250 per month. The landlord got the house vacated from R on 16-7-2023 and paid a
sum of Rs. 2,50,000 for vacating the house.
Ans. LTCG 2,50,000

(3) Prakash is a Chartered Accountant in Jaipur since January 2003. He transfer the practice to
another Chartered Accountant Sunil on8-7-2023 and charges Rs. 3,00,000 towards goodwill.
Ans. The transfer of self-generated goodwill of profession is not chargeable to tax. It is
based upon the Supreme Court’s ruling in CIT vs. B.C. Srinivasa Shetty.
(4) Ramesh purchased tenancy right on 1-4-1996 for Rs. 1,00,000. The same was sold by him on 14-3-
2024 for Rs.10,00,000. Fair market value of tenancy right as on 1-4-2001 as Rs. 1,50,000.
(5) Ans. LTCG 6,52,000.
Coi F.Y. 2001– 2002 = 100
F.Y. 2023–24 = 348

1 Rights Shares:
Original shares (which form the basis of Amount actually paid for
entitlement of rights shares) acquiring the original shares

Rights entitlement (which is renounced Nil

by the assessee in favour of a person)
 CAPITAL GAINS (Unit - iv) | 3.6
Rights shares acquired by the assesse Amount actually paid for
acquiring the rights shares
Rights shares which are purchased by Purchase price paid to the renouncer
the person in whose favour the assessee of rights entitlement as well as the
has renounced the rights entitlement amount paid to the company which
has allotted the rights shares.
2. Equity shares received on Cost of acquisition of such shares
demutualisation or corporatisation of a shall be the cost of acquiring his
recognized stock exchange original membership of the
exchange.

3. Clearing or trading right acquired on NIL

demutualisation or corporatisation of a
recognized stock exchange
4. Long term capital assets being, Cost of acquisition shall bethe
– equity shares in a company on which higher of
STT is paid both at the time of (i) cost of acquisition ofsuch
purchase and transfer or asset; and
- unit of equity oriented fund or unit (ii) lower of
of business trust on which STT is - the fair market value of
paid at the time of transfer, such asset; and
acquired before 1st February, 2018
- the full value of
consideration received or
Accruing as a

result of
the transfer of the capital
asset.
 CAPITAL GAINS (Unit - iv) | 3.7
Scenario 1 – An equity share is acquired on 1st of January, 2017 at ` 100, its fair market value is `
200 on 31st of January, 2018 and it is sold on 1st of April, 2023 at ` 250. As the actual cost of
acquisition is less than the fair market value as on 31st of January, 2018, the fair market value
of ` 200 will be taken as the cost of acquisition and the long-term capital gain will be ` 50 (`
250 – ` 200).
Scenario 2 – An equity share is acquired on 1st of January, 2017 at ` 100, itsfair market value is `
200 on 31st of January, 2018 and it is sold on 1st of April, 2023 at ` 150. In this case, the actual
cost of acquisition is less than the fair market value as on 31st of January, 2018. However, the
sale value is also less than the fair market value as on 31st of January, 2018. Accordingly, the sale
value of ` 150 will be taken as the cost of acquisition and the long- term capital gain will be NIL (`
150 – ` 150).
Scenario 3 – An equity share is acquired on 1st of January, 2017 at ` 100, its fair market value is `
50 on 31st of January, 2018 and it is sold on 1st ofApril, 2023 at ` 150. In this case, the fair
market value as on 31st of January, 2018 is less than the actual cost of acquisition, and therefore, the
actual cost of ` 100 will be taken as actual cost of acquisition and the long-term capital gain will be `
50 (` 150 – ` 100).
Scenario 4 – An equity share is acquired on 1st of January, 2017 at ` 100, its fair market value is ` 200
on 31st of January, 2018 and it is sold on 1st of April, 2023 at ` 50. In this case, the actual cost of
acquisition is less than the fair market value as on 31st January, 2018. The sale value is less than the
fair market value as on 31st of January, 2018 and also the actual cost of acquisition. Therefore, the
actual cost of ` 100 will be taken as the cost of acquisition in this case. Hence, the long-term capital loss
will be ` 50 (` 50 – ` 100) in this case.
Example 7
Mr. Mithun purchased 100 equity shares of M/s Goodmoney Co. Ltd. on 01- 04-2007 at rate of ` 1,000
per share in public issue of the company by paying securities transaction tax. Company allotted
bonus shares in the ratio of 1:1 on 01.12.2022.
He has sold all the shares on 01.10.2023 at the rate of ` 4,000 per share through a recognized stock
exchange and paid brokerage of 1% and securities transaction tax of 0.02%.
Compute his total income and tax liability for A.Y. 2024-25 if Mr. Mithun pays tax under default tax
regime, assuming that he is having no income other than given above. Fair market value of shares
of M/s Goodmoney Co. Ltd. on 31.1.2018 is ` 2,000.
1. Any other capital asset Cost of the asset to the assesse, or
Where such capital asset became the FMV as on 1.4.2001, at the option
property of the assessee before 1.4.2001 ofthe assessee.

Where capital assets became the Cost to the previous owner. Where
property of the assessee by way of such cost cannot be ascertained, FMV
distribution of assets on total or partial on the date on which the capital asset
partition of HUF, under a gift or will, by became the property of the previous
succession, inheritance, distribution of owner.
assets on liquidation of a company, etc.

Where the capital asset became the Cost to the previous owner
property of the previous owner before or FMV as on 1.4.2001, atthe
1.4.2001 option of the assessee.
 CAPITAL GAINS (Unit - iv) | 3.8
49(2AA) Where the capital gain arises from Fair market value which has been
the transfer of specified security or taken into account for perquisite
sweat equity shares referred to in valuation.
section 17(2)(vi)

Where any specified security or Period from the date of allotment or

sweat equity shares is allotted or transfer of such specified security or
transferred, directly or indirectly, by sweat equity shares shall be
the employer free of cost or at reckoned
concessional rate to his employees
(including former employees)

“Sweat equity shares” means equity shares issued by a company to its

employees or directors at a discount or for consideration other than cash
for providing know-how or making available rights in the nature of
intellectual property rights or value additions, by whatever name called.

SCOPE AND YEAR OF CHARGEABILITY [SECTION 45]

(1) General Provision [Section 45(1)]
Any profits or gains arising from the transfer of a capital asset effected in the previous year
(other than exemptions covered under this chapter) shall be chargeable to Income-tax under
this head in the previous year in which the transfer took place.

Year of chargeability- Capital gains are chargeable as the income of the previous year in which
the sale or transfer takes place. In other words, for determining the year of chargeability, the
relevant date of transfer is not the date of the agreement to sell, but the actual date of sale i.e.,
the date on which the effect of transfer of title to the property as contemplated by the parties has
taken place [Alapati Venkatramiah v. CIT [1965] 57 ITR 185 (SC)].

(2) Insurance receipts [Section 45(1A)]

Where any person receives any money or other assets under any insurance from
aninsurer on account of
 damage to or destruction of any capital asset,
 as a result of flood, typhoon, hurricane, cyclone, earthquake or other convulsion
of nature,
 riot or civil disturbance,
 accidental fire or explosion or
 because of action by an enemy or action taken in combating an enemy (whether with
or without declaration of war), then,
any profits or gains arising from receipt of such money or other assets shall be
chargeable to income-tax under the head “Capital gains” and shall be deemed to be the
income of the such person for the previous year in which such money or other asset
was received.
 CAPITAL GAINS (Unit - iv) | 3.9
Full value of consideration: In order to compute capital gains,
– the value of any money or the fair market value of other assets
– on the date of such receipt shall be deemed to be the full value of the consideration
– received or accruing as a result of the transfer of such capital assets.
(3) Conversion or treatment of a capital asset as stock-in-trade [Section 45(2)]
A person who is the owner of a capital asset may convert the same or treat it as stock-in-
trade of the business carried on by him. As noted above, the above transaction is a transfer.
As per section 45(2), the profits or gains arising from the above conversion or treatment will
be chargeable to income-tax as his income of the previous year in which such stock-in-
trade is sold or otherwise transferred by him.

Full value of consideration: the fair market value of the asset on the date of such
conversion or treatment shall be deemed to be the full value of the consideration received as
a result of the transfer of the capital asset.

Note – Both Capital Gains and Business income are chargeable to tax in the year in which
stock-in-trade is sold or otherwise transferred.
Example 8
X converts his capital asset (acquired on June 10, 2003 for ` 60,000) into stock-in-trade on March
10, 2019. The fair market value on the date of the above conversion was ` 5,50,000. He
subsequently sells the stock-in-trade so converted for ` 6,00,000 on June 10, 2023. Examine the
tax implication.
 CAPITAL GAINS (Unit - iv) | 3.10
Cost Inflation Index - F.Y. 2003-04: 109; F.Y. 2018-19: 280; F.Y. 2023-24-348.

Solution

Since the capital asset is converted into stock-in-trade during the previous year relevant
to the A.Y. 2019-20, it will be a transfer under section 2(47) during the P.Y.2018-19.
However, the profits or gains arising from the above conversion will be chargeable to tax
during the A.Y. 2024-25, since the stock-in-trade has been sold only on June 10, 2023. For
this purpose, the fair market value on the date of such conversion (i.e. 10th March, 2019) will
be the full value of consideration.
The capital gains will be computed after deducting the indexed cost of acquisition from the
full value of consideration. The cost inflation index for 2003-04 i.e., the year of acquisition is
109 and the index for the year of transfer i.e., 2018-19 is 280. The indexed cost of acquisition
is 60,000 × 280/109= ` 1,54,128. Hence, ` 3,95,872 (i.e. ` 5,50,000 – ` 1,54,128) will be
treated as long- term capital gains chargeable to tax during the A.Y.2024-25. During the
same assessment year, ` 50,000 (`6,00,000 – `5,50,000) will be chargeable to tax as
businessprofits.
Example 9
Mr. A invest Rs. 2,00,000 on the purchase of gold ornaments on 2 Feb. 2009 he hold the gold
ornaments as a investment on 10-Mar. 2015. He started a business of a jewellery and convert
this holding into stock in trade the market value of the gold ornament as on the date of
conversation was Rs. 8,00,000 and there for the gold ornaments were sold in the previous
year 2023-24 for a sum Rs. 10,00,000.
Answer : 4,49,635/- 200,000

COI 2001-02 :- 100, 2008-09 :- 137,2014-15 :- 240, 2023-24 : 348,

Example 10
P, who own 9 acres of land near Chennai since July, 2003 purchased for Rs.12 lakh, commenced
real estate business from April, 2015 and introduced this land as his capital. Fair market value of
the land on the date of commencement of the business was Rs.65 lakh. However, the value of such
land has been recorded at Rs. 80 lakh in the books of the business. The entire land after
development and conversion into housing plots was sold for Rs.135 lakh between September,
2023 and February, 2024. Expenses incurred for project development were Rs.37 lakh. Advise
him as to the tax ability of income and under what heads and in which assessment years.
Ans. LTCG 37,03,670 B/P 33 Lakhs
COI 2003-04 :- 109, 2015-16 :- 254, 2023-24 :- 348,

(4) Transfer of beneficial interest in securities [Section 45(2A)]

As per section 45(2A), where any person has had at any time during the previous year any
beneficial interest in any securities, then, any profits or gains arising from the transfer
made by the Depository or participant of such beneficial interest in respect of securities
shall be chargeable to tax as the income of the beneficial owner of the previous year
in which such transfer took place and shall not be regarded as income of the
depository who is deemed to be the registered owner of the securities by virtue of
section 10(1) of the Depositories Act, 1996.
Full value of consideration and period of holding:
– the cost of acquisition and
– the period of holding of securities shall be
 CAPITAL GAINS (Unit - iv) | 3.11
– determined on the basis of
– the first-in-first-out (FIFO) method.
Example 11
Mr. Sandeep purchased 200 shares of Abhi Ltd. On 1.6.17 for Rs. 10,000. He purchased
another300 shares of same company on 1.6.18 for Rs. 18,000. He again purchased 400 shares
for Rs. 28,000 on 1.6.23. He sold 800 shares for Rs. 64,000 on31.3.24. Compute the capital gains.
Ans. LTCG Rs STCG Rs 3,000/-

COI 2016-17 :- 264, 2017-18 :- 272, 2023-24 :- 331,

(5) Introduction of capital asset as capital contribution [Section 45(3)]

Where a person transfers a capital asset to

– a firm,
– AOP or BOI
– in which he is already a partner/ member or is to become a partner/ member by way
of capital contribution.
– the profits or gains arising from such transfer will be
– chargeable to tax as income of the previous year in which such transfer takes
place.
Full value of consideration: For this purpose, the value of the consideration will be the
amount recorded in the books of account of the firm, AOP or BOI as the value of the
capital asset.
Example 12
X and Y formed a partnership firm during 2023-24. Soon after its formation. Y brings the following
assets as his capital contribution

Gold (Rs.) Building (Rs.)

FMV on the date of transfer 14,40,000 16,00,000
Amount recorded in books 13,30,000 18,10,000
Actual cost 80,000 2,40,000
Year of acquisition 2002-03 2004-05
Cost inflation index for the year of acquisition 105 113
Compute the taxable capital gain of Y,
Ans . LTCL Rs.

Example 13
B acquire a property by way of gift from his father in the previous year 2013-14. The father
acquire the property in the previous year 2005-06 for Rs. 1,00,000. This property was
introduced as a capital contribution to a partnership firm on 10 August 2023. M.V. of assets
wasRs. 5,00,000 butit was recordedinbooks ofaccounts ofthefirm 4,50,000.
Answer : LTCL Rs. Or CIT v. Manjula J. Shah LTCL Rs.

COI 2005-06 :- 117, 2013-14 :- 220, 2023-24 :- 348

(6) Distribution of capital assets on dissolution of firm/AOP or BOI [Section 45(4)]

 CAPITAL GAINS (Unit - iv) | 3.12
The profits or gains arising from the transfer of capital assets by way of
– distribution of capital assets on the dissolution of a firm or AOP or BOI or
– otherwise shall be chargeable to tax as the income of the firm etc. of the
previousyear in which such transfer takes place.
Full value of consideration: For this purpose, the fair market value of the asset onthe date of
such transfer shall be the full value of consideration.

(7) Compensation on compulsory acquisition [Section 45(5)]

Sometimes, a building or some other capital asset belonging to a person is taken over by
the Central Government by way of compulsory acquisition. In that case, the
consideration for the transfer is determined by the Central Government or RBI. When
the Central Government pays the above compensation, capital gains may arise. Such
capital gains are chargeable as income of the previous year in which such
compensation is received.
Enhanced Compensation-
If the court awards a compensation which is
– higher than the original compensation,
– the difference thereof will be chargeable to capital gains
– in the year in which the same is received from the government.

Cost of acquisition in case of enhanced compensation –

the cost of acquisition and cost of improvement

– shall be taken to be nil.

Compensation received in pursuance of an interim order deemed as income
chargeable to tax in the year of final order

Reduction of enhanced compensation –

compensation is reduced by any court, tribunal or any authority, the assessed capital
gain of that year
– shall be recomputed by taking into consideration the reduced amount.
– This re-computation shall be done by way of rectification under section 155.
Death of the transferor- It is possible that the transferor may die before he receives the
enhanced compensation. In that case, the enhanced compensation or consideration will be
chargeable to tax in the hands of the person who received the same.
Example 14
The house property of Abhi is compulsorily acquired by the government for Rs.10,00,000/- vide
notification issued on 12-3-2014. Abhi had purchased the house in 2007-08 for Rs.2,00,000/-. The
compensation is received on 15-4-2023. The compensation is further enhanced by on order of the
court on 25-4-2023 and sum of Rs.2,00,000/- is received as enhanced compensation on 25-3-2024.
Abhi wants to claim full exemption of the capital gain advice Abhi in this regard. Compute the capital
gains and determine the year in which it is taxable.

COI 2007-08 :- 129, 2013-14 :- 220, 2023-24 :- 348

 CAPITAL GAINS (Unit - iv) | 3.13
Ans. LTCG Rs. 8,58,915
Example: 15
X is in possession of agricultural land situated within urban limits which is used for agricultural
purposes during the preceeding 3 years by his father. On 4.4.2023, this land is compulsorily
acquired by the Government of India ona compensation fixed and paid by it for Rs. 10 lakhs. Advise X
as to the tax treatment, assuming that the entire amount is invested in purchase of shares.

Ans Section 10(37) exempts the capital gains arising to an individual or a Hindu Undivided Family
from transfer of agricultural land by way of compulsory acquisition, or a transfer, the consideration
for which is determined or approved by the RBI or the Central Government.
Such exemption is available where the compensation or the enhanced compensation or
consideration, as the case may be, is received after 1st April, 2004and the land has been used for
agricultural purposes during the preceding two years by such individual or a parent of his or by
such Hindu undivided family.
Since all the above conditions are fulfilled in this case, X is entitled to exemption under section
10(37) of the entire capital gains arising on sale of agricultural land

Example: 16
Interest on enhanced compensation received by Mr. G during the previous year 2023-24 is Rs
5,00,000. Out of this interest, Rs 1,50,000 relates to the previous year 2016-17, Rs 1,65,000
relates to previous year 2017-18 and Rs 1,85,000 relates to previous year 2017-18. Discuss the
tax implication, if any, of such interest in come for A.Y.2024-25.

Answer
The entire interest of 5,00,000 would be taxable in the year of receipt, namely, P.Y. 2023-24.
Particulars `
Interest on enhanced compensation taxable u/s 56(2)(viii) 5,00,000
Less: Deduction under section 57(iv) @50% 2,50,000
Interest chargeable under the head “Income from other sources” 2,50,000

COI 2007-08 :- 129, 2023-24 :- 348

Example 17
Mr. Kumar has an agricultural land costing ` 6 lakh in Lucknow on 1.4.2003 and has been
using it for agricultural purposes till 1.8.2012 when the Government took over compulsory
acquisition of this land. A compensation of `12 lakh was settled. The compensation was
received by Mr. Kumar on 1.7.2023. Compute the amount of capital gains taxable in the
hands of Mr. Kumar.

Cost Inflation Index: 2003-04: 109, 2012-13: 200, 2023-24: 348

Solution
In the given problem, compulsory acquisition of an urban agricultural land has taken place
and the compensation is received after 1.4.2004. This land had also been used for at least 2
years by the assessee himself for agricultural purposes. Thus, as per section 10(37), entire
capital gains arising on such compulsory acquisition will be fully exempt and nothing is
taxable in the hands of Mr. Kumar in the year of receipt of compensation i.e. A.Y.2024-25.
 CAPITAL GAINS (Unit - iv) | 3.14

Example 18
Will your answer be any different if Mr. Kumar had by his own will sold this land to his
friend Mr. Sharma? Examine.
Solution
As per section 10(37), exemption is available if compulsory acquisition of urban agricultural
land takes place. Since the sale is out of own will and desire, the provisions of this section are
not attracted and the capital gains arising on such sale will be taxable in the hands of Mr.
Kumar.
Example 19
Will your answer be different if Mr. Kumar had not used this land for agricultural
activities? Examine and compute the amount of capital gains taxable in the hands of Mr.
Kumar, if any.

Solution
As per section 10(37), exemption is available only when such land has been used for
agricultural purposes during the preceding two years by such individual or a parent of his
orby such HUF. Since the assessee has not used it for agricultural activities, the provisions of
this section are not attracted and the capital gains arising on such compulsory acquisition will
be taxable in the hands of Mr. Kumar in the year of receipt of compensation i.e., A.Y. 2023-24.
Computation of capital gains
Particulars Amount ( ` )
Sales consideration 12,00,000
Less: Cost of acquisition ( 6,00,000 x 200/109) 11,00,917
Long term capital Gains 99,083
Example 20

Will your answer be different if the land belonged to ABC Ltd. and not Mr. Kumar and
compensation on compulsory acquisition was received by the company? Examine.

Solution
Section 10(37) exempts capital gains arising to an individual or a HUF from transfer of
agricultural land by way of compulsory acquisition. If the land belongs to ABC Ltd., a company,
the provisions of this section are not attracted and the capital gains arising on such compulsory
acquisition will be taxable in the hands of ABC Ltd.
CAPITAL GAINS ON DISTRIBUTION OF ASSETS BY COMPANIES IN
LIQUIDATION [SECTION 46]
(1) In the hands of liquidated company: Where the assets of a company are distributed to its
shareholders on its liquidation, such distribution shall not be regarded as a transfer by the
company for the purposes of section 45 [Section 46(1)].
The above section is restricted in its application to the circumstances mentioned therein i.e.,
the assets of the company must be distributed in specie to shareholders on the liquidation
of the company. If, however, the liquidator sells the assets of the company resulting in a
capital gain and distributes the funds so collected, the company will be liable to pay tax
on such gains.
(2) In the hands of shareholders: Shareholders receive money or other assets from the
 CAPITAL GAINS (Unit - iv) | 3.15
company on its liquidation. They will be chargeable to income-tax under the head ‘capital
gains’ in respect of the market value of the assets received on the date of distribution, or
the moneys so received by them. The portion of the distribution which is attributable to
the accumulated profits of the company is to be treated as dividend income under section
2(22)(c), which would be taxable in the hands of shareholders. The same will be
deducted from the amount received/fair market value for the purpose of determining the
consideration for computation of capital gains.

Capital Gains on distribution

of assets by companies in
liquidation [Section 46]

In the hands of In the hands of

the company shareholders
[Section 46(1)] [Section 46(2)]

Distribution is
not a transfer
Distribution attributable to Money received (+)
accumulated profits of the FMV of assets
company distributed (-) deemed
dividend u/s 2(22)(c)
No capital gains
tax liability

Deemed dividend u/s 2(22)(c) Full value of

consideration for the
purpose of section 48

Taxable in the hands of To be considered for

shareholders as “Income computing Capital
from Other Sources” Gains in the hands of
shareholders

Example 21
Miss Hany purchased 10,000 equity shares of M/s Radha Co. Pvt. Ltd. on 28.01.2008 Rs. 60,000. The
company was wound up on 31.7.2023. The following is the summarized financial position of the
company as on 31.7.2023:
Liabilities Rs. Assets Rs.
60,000 Equity Shares 6,00,000 Agriculture lands 42,00,000
General Reserve 40,00,000 Cash at Bank 6,50,000
Provision for taxation 2,50,000

48,50,000 48,50,000
The tax liability (towards income tax) was ascertained at Rs. 3,00,000 after considering refund due to
the company. The remaining assets were distributed to the shareholders in the proportion of their
shareholding. The market value of 6 acres of agricultural land (in an urban area) as on 31.7.2023 is Rs.
 CAPITAL GAINS (Unit - iv) | 3.16
10,00,000 per acre.
The agricultural land received above was sold by Miss. Hany on 28.2.2024 for Rs. 15,00,000.
Discuss the tax consequences in the hands of the company and Miss. Hany.
Ans. LTCG Rs. STCG Rs. 5,00,000/-

Example 22
Mr. R holds 10,000 share (10% of total share holding) of ABC Ltd. which he had purchase on 3 Jan2004
for Rs. 2 lacs in the company when into liquidation 8 July 2023 and paid. Sum of Rs. 80 pershare in cash
and an assets to market valued as on date of distribution 3 Sep. 2023 was Rs. 8,80,000 the accumulated
profit were 10,00,000 compute the income of Mr. R. Compute the capital gain chargeable to tax if the
assets is sold by Mr. R for Rs. 10,00,000.
Ans. LTCG STCG 1,20,000/-

COI 2003-04 :- 109, 2023-24 :– 348

Capital Gains On Buyback of Shares Or Others Securities [Section 46 A]

(1) (2) (3) (4)
Taxability in Buyback of shares Buyback of shares Buyback of
the hands of by domestic by a company, specified securities
companies other than a by any company
domestic
company
Company Subject to additional Not subject to tax in Not subject to tax in
[email protected]%. the hands of the the hands of the
company. company.
Shareholder/ Income arising to Income arising to Income arising to
Holder of shareholders exempt shareholder taxable holder of specified
specified under section 10(34A) as capital gains u/s securities taxable as
securities 46A. capital gains u/s 46A.

Problem
Mr. Flower purchased shares of Garden ltd. (Other then domestic Co.) for Rs. 15 each. Company
offered to buy back the shares for Rs. 17 each while the market value was Rs. 16 each. Mr. Flower
sold the shares to company. Compute the Capital Gain.

TRANSACTIONS NOT REGARDED ASTRANSFER [SECTION 47]

Section 47 specifies certain transactions which will not be regarded as transfer for the purpose of
capital gains tax:
(1) Total or partial partition of a HUF: Any distribution of capital assets on the total or
partial partition of a HUF [Section 47(i)].
(2) A gift or will or an irrevocable trust: Any transfer of a capital asset undera gift or will
or an irrevocable trust.
However, this clause shall not include transfer under a gift or an irrevocable trust of a capital
asset being shares, debentures or warrants allotted by a company directly or indirectly to its
employees under the Employees' Stock Option Plan or Scheme offered to its employees in
accordance with the guidelines issued in this behalf by the Central Government [Section
47(iii)].
 CAPITAL GAINS (Unit - iv) | 3.17
(3) Transfer of capital asset by holding company to its wholly owned Indian
subsidiary company: Any transfer of capital asset by a company to its subsidiary
company [Section 47(iv)].
Conditions:
(i) The parent company or its nominee must hold the whole of the sharesof the
subsidiary company; and
(ii) The subsidiary company must be an Indian company.
(4) Transfer of capital asset by a subsidiary company to its 100% holding company, being
an Indian company: Any transfer of capital asset by a subsidiary company to the holding
company [Section 47(v)].
Conditions:
(i) The whole of shares of the subsidiary company must be held by theholding
company; and

(ii) The holding company must be an Indian company.

Exception - The exemption mentioned in 3 or 4 above will not apply if a capital asset is
transferred as stock-in-trade.
(5) Transfer of capital asset by amalgamating company to amalgamated Indian company,
in a scheme of amalgamation: 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)].
(6) Transfer of capital asset by the demerged company to the resulting Indian company,
in a scheme of demerger: 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)].
(7) Transfer or issue of shares by a resulting company, in a scheme of demerger: 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 is made in consideration of the
demerger of the undertaking [Section 47(vid)].
(8) Transfer of shares by a shareholder in a scheme of amalgamation: Any transfer by a
shareholder, in a scheme of amalgamation, of shares held by him in the amalgamating
company [Section 47(vii)].
Conditions:
(i) The transfer is made in consideration of the allotment to him of any share/s in the
amalgamated company, except where the shareholder itself is the amalgamated
company;
(ii) The amalgamated company is an Indian company.

Example: 23
Let us take a case where A Ltd., an Indian company, holds 60% of shares in B Ltd. B Ltd. amalgamates
with A Ltd. Since A Ltd. itself is the shareholder of B Ltd., A Ltd., being the amalgamated company,
cannot issue shares to itself. However, A Ltd. has to issue shares to the other shareholders of B Ltd.
 CAPITAL GAINS (Unit - iv) | 3.18
ILLUSTRATION 1
M held 2000 shares in a company ABC Ltd., an Indian company. This company amalgamated with
another Indian company XYZ Ltd. during the previous year ending 31-3-2024. Under the scheme of
amalgamation, M was allotted 1000 shares in the new company. The market value of shares allotted is
higher by `50,000 than the value of holding in ABC Ltd. The Assessing Officer proposes to treat the
transaction as an exchange and to tax ` 50,000 as capital gain. Is he justified?

SOLUTION
In the above example, the transaction is squarely covered by the exemption explained above and the
proposal of the Assessing Officer to treat the transaction as a transfer is not justified.
(1) Transfer of Government Security outside India by a non-resident to another non-resident: Any
transfer of a capital asset, being a Government Security carrying a periodic payment of interest,
made outside India through an intermediary dealing in settlement of securities, by a non- resident
to another non-resident [Section 47(viib)]
(2) Redemption of sovereign gold bonds by an Individual: Redemption by an individual of sovereign
gold bonds issued by RBI under the Sovereign Gold Bond Scheme, 2015 [Section 47(viic)]
(3) Conversion of gold into Electronic Gold Receipt or vice a versa: Any transfer of a capital asset,
being conversion of gold into Electronic Gold Receipt issued by a Vault Manager, or conversion of
Electronic Gold Receipt into gold [Section 47(viid)]
(4) Transfer of specified capital asset to the Government or university etc.: Any transfer of any of the
following capital asset to the Government or to the University or the National Museum, National
Art Gallery, National Archives or any other public museum or institution notified by the Central
Government to be of national importance or to be of renown throughout any State
(i) work of art
(ii) archaeological, scientific or art collection
(iii) book
(iv) manuscript
(v) drawing
(vi) painting
(vii) photograph or
(viii) print [Section 47(ix)].
(5) Transfer on conversion of bonds or debentures etc. into shares or debentures: Any transfer by way
of conversion of bonds or debentures, debenture stock or deposit certificates in any form, of a
company into shares or debentures of that company [Section 47(x)].
(6) Conversion of preference shares into equity shares: Any transfer by way of conversion of
preference shares of a company into equity shares of that company [Section 47(xb)].
(7) Transfer of capital asset under Reverse Mortgage: Any transfer of a capital asset in a transaction of
reverse mortgage under a scheme made and notified by the Central Government [Section 47(xvi)].

The Reverse Mortgage scheme is for the benefit of senior citizens, who own a residential house
property. In order to supplement their existing income, they can mortgage their house property
with a scheduled bank or housing finance company, in return for a lump-sum amount or for a
regular monthly/quarterly/annual income. The senior citizens can continue to live in the house
and receive regular income, without the botheration of having to pay back the loan.
The loan will be given up to, say, 60% of the value of residential house property mortgaged. Also,
the bank/housing finance company would undertake a revaluation of the property once every 5
years. The borrower can use the loan amount for renovation and extension of residential property,
family’s medical and emergency expenditure etc., amongst others However, he cannot use the
amount for speculative or trading purposes.
The Reverse Mortgage Scheme, 2008, now includes within its scope, disbursement of loan by an
approved lending institution, in part or in full, to the annuity sourcing institution, for the purposes of
periodic payments by way of annuity to the reverse mortgagor. This would be an additional mode of
disbursement i.e., in addition to direct disbursements by the approved lending institution to the
Reverse Mortgagor by way of periodic paymentsor lump sum payment in one or more tranches.
An annuity sourcing institution has been defined to mean Life Insurance Corporation of India or any
 CAPITAL GAINS (Unit - iv) | 3.19
other insurer registered with the Insurance Regulatory and Development Authority.
Maximum Period of Reverse Mortgage Loan:
Mode of disbursement Maximum period of loan
(a) Where the loan is disbursed directlyto 20 years from the date of signing the
the Reverse Mortgagor agreement by the reverse mortgagor
and the approved lending
institution.

(b) Where the loan is disbursed, in part The residual life time of theborrower.
or in full, to the annuity sourcing
institution for the purposes of periodic
payments by way of annuity to the
Reverse mortgagor

The bank will recover the loan along with the accumulated interest by selling the house after the
death of the borrower. The excess amount will be given to the legal heirs However, before resorting
to sale of the house, preference will be given to the legal heirs to repay the loan and interest and get
the mortgaged property released.
Therefore, section 47(xvi) clarifies that any transfer of a capital asset in a transaction of reverse mortgage
under a scheme made and notified by the Central Government would not amount to transfer for the purpose
of capital gains.

Exemption of income received in a transaction of reverse mortgage [Section 10(43)]: Section 10(43),
further, provides that the amount received by the senior citizen as a loan, either in lump sum or in
installments, in a transaction of reverse mortgage would be exempt from income-tax.

ILLUSTRATION 2
In which of the following situations capital gains tax liability does not arise?
(i) Mr. A purchased gold in 1970 for ` 25,000. In the P.Y. 2023-24, he gifted it to his son at
the time of marriage. Fair market value (FMV) of the gold on the day the gift was made
was ` 1,00,000.
(ii) A house property is purchased by a Hindu undivided family in 1945 for ` 20,000. It is given
to one of the family members in the P.Y. 2023-24 at the time of partition of the family. FMV
on the date of partition was ` 12,00,000.
(iii) Mr. B purchased 50 convertible debentures for ` 40,000 in 1995 which are converted into 500
shares worth ` 85,000 in November 2023 by the company.
(iv) A house property is purchased by a Hindu undivided family in 1945 for
(v) ` 20,000. It is given to one of the family members in the P.Y. 2023-24 at the time of partition of
the family. FMV on the date of partition was ` 12,00,000.
(vi) Mr. B purchased 50 convertible debentures for ` 40,000 in 1995 which are converted into 500
shares worth ` 85,000 in November 2023 by the company.
Solution
We know that capital gains arises only when we transfer a capital asset. The liability of capital
gains tax in the situations given above is discussed as follows:
(i) As per the provisions of section 47(iii), gift of a capital asset is not regarded as transfer
for the purpose of capital gains. Therefore, capital gains tax liability does not arise in the
given situation.
 CAPITAL GAINS (Unit - iv) | 3.20
(ii) As per the provisions of section 47(i), distribution of a capital asset (being in kind) on the
total or partial partition of Hindu undivided family is not regarded as transfer for the
purpose of capital gains. Therefore, capital gains tax liability does not arise in the given
situation.
(iii) As per the provisions of section 47(x), conversion of bonds or debentures, debenture stock
or deposit certificates in any form of a company into shares or debentures of that
company is not regarded as transfer for the purpose of capital gains. Therefore, capital
gains tax liability does not arise in the given situation.

ILLUSTRATION 3
Mr. Abhishek a senior citizen, mortgaged his residential house with a bank, under a notified
reverse mortgage scheme. He was getting loan from bank in monthly installments. Mr. Abhishek
did not repay the loan on maturity and hence gave possession of the house to the bank, to
discharge his loan. How will the treatment of long-term capital gain be on such reverse
mortgage transaction?
SOLUTION
Section 47(xvi) provides that any transfer of a capital asset in a transaction of reverse mortgage
under a scheme made and notified by the Central Government shall not be considered as a
transfer for the purpose of capital gain.
Accordingly, the mortgaging of residential house with bank by Mr. Abhishek will not be
regarded as a transfer. Therefore, no capital gain will be charged on such transaction.
Further, section 10(43) provides that the amount received by the senior citizen as a loan,
either in lump sum or in installment, in a transaction of reverse mortgage would be exempt from
income-tax. Therefore, the monthly installment amounts received by Mr. Abhishek would not be
taxable.
ILLUSTRATION 4
Examine, with reasons, whether the following statements are True or False.
(i) Alienation of a residential house in a transaction of reverse mortgage under a scheme made
and notified by the Central Government is treated as "transfer" for the purpose of capital
gains.
(ii) Zero coupon bonds of eligible corporation, held for 14 months, will be long- term capital
assets.
(iii) Zero Coupon Bond means a bond on which no payment and benefits are received or
receivable before maturity or redemption.
SOLUTION
(i) False: As per section 47(xvi), such alienation in a transaction of reverse mortgage under a
scheme made and notified by the Central Government isnot regarded as "transfer" for the
purpose of capital gains.
(ii) True: Section 2(42A) defines the term 'short-term capital asset'. Under the proviso to
section 2(42A), zero coupon bond held for not more than 12 months will be treated as a
short-term capital asset. Consequently, such bond held for more than 12 months will be
a long-term capital asset.
 CAPITAL GAINS (Unit - iv) | 3.21
(iii) True: As per section 2(48), ‘Zero Coupon Bond’ means a bond issued by any infrastructure
capital company or infrastructure capital fund or infrastructure debt fund or a public
sector company, or Scheduled Bank on or after 1st June 2005, in respect of which no
payment and benefit is received or receivable before maturity or redemption from such
issuing entity and which the Central Government may notify in this behalf.

Example 21
Harish Jayaraj Pvt. Ltd. is converted into Harish Jaya raj LL Pon 1-1-2023. The following particulars are
available to you:

(i) SDV of land as on 1-4-2022 5,00,000

(ii) WDV ofmachinery as on 1-4-2023 3,30,000
(iii) Patents acquired on 1-6-2023 3,00,000
(iv) Building acquired on 12-3-2021 for which deduction was 7,00,000
allowed
under section 35 AD.
(v) Above building was revalued as on the date of conversion into LLP as 12,00,000
(vi) Unabsorbed business loss as on 1-4-2022 (A.Y. 2018-19) 9,00,000
Though the conversion into LLP took place on 1-1-2023, there was disruption of business and the
assets were put into use by the LLP only from 1st March, 2023 onwards. The company earned
profits of ` 8 lacs, prior to computation of depreciation. Assuming that the necessary conditions
laid down in section 47 (xiiib) of the Income- tax Act, 1961 have been complied with, explain the tax
treatment of the above in the hands of the LLP.

Answer. Un absorbed business Loss Coming forward by LLP 2,09,995/-

MODE OF COMPUTATION OF CAPITAL GAINS (SECTION 48)

(1) Computation of capital gains: The income chargeable under the head ‘capital gains’
shall be computed by deducting the following items from the full value of the
consideration received or accruing as a result of the transfer of the capital asset:
(i) Expenditure incurred wholly and exclusively in connection with such transfer.
(ii) The cost of acquisition and cost of any improvement thereto.
(2) No deduction in respect of STT paid: However, no deduction shall be allowed in
computing the income chargeable under the head “Capital Gains” in respect of any
amount paid on account of securities transaction tax under Chapter VII of the Finance
(No.2) Act, 2004.
(3) Cost inflation index: Under section 48, for computation of long term capital
gains, the cost of acquisition and cost of improvement increased by applying
the cost inflation index (CII). Once the cost inflation index is applied to the cost
of acquisition and cost of improvement, it becomes indexed cost of
acquisition and indexed cost of improvement.
 CAPITAL GAINS (Unit - iv) | 3.22

The cost inflation indices for the financial years so far have been notified as under:

Financial Year Cost Inflation Index

2001-02 100
2002-03 105
2003-04 109
2004-05 113
2005-06 117
2006-07 122
2007-08 129
2008-09 137
2009-10 148
2010-11 167
2011-12 184
2012-13 200
2013-14 220
2014-15 240
2015-16 254
2016-17 264
2017-18 272
2018-19 280
2019-20 289
2020-21 301
2021–22 317
2022–23 331
2023-24 348

(4) Full value of consideration of shares, debentures or warrants issued under

ESOP in case of transfer under a gift etc. - Employees' Stock Option Plan or
Scheme in accordance with the guidelines issued in this behalf by the Central
Government are transferred under a gift or irrecoverable trust, then the market
value on the date of such transfer shall be deemed to be the full value of
consideration received or accruing as a result of transfer of such asset.

COST OF ACQUISITION [SECTION 55]

(2) Goodwill of a business or a trademark or brand name associated with a business
or a right to manufacture, produce or process any article or thing, or right to
carry on any business or profession, tenancy rights, stage carriage permits and
loom hours
(i) In case of acquisition from previous owner: In the case of the above capital
assets, if the assessee has purchased them from a previous owner, the cost of
acquisition means the amount of the purchase price.

(ii) In case of self-generated assets - cost of acquisition will be taken to be nil.

 CAPITAL GAINS (Unit - iv) | 3.23
Example 22
A doctor starts his profession. With the passage of time, the doctor acquires lot of reputation. He
opens a clinic and runs it for 5 years. After 5 years he sells the clinic to another doctor for ` 10 lacs
which includes ` 2 lacs for his reputation or goodwill.

Now a question arises as to how to find out the profit in respect of goodwill. It is obvious that the
goodwill is self-generated and hence it is difficult to calculate the cost of its acquisition. However, it is
certainly a capital asset.
The Supreme Court in CIT v. B.C. Srinivasa Shetty [1981] 128 ITR 294 (SC) held that in order to bring
the gains on sale of capital assets to charge under section 45, it is necessary that the provisions
dealing with the levy of capital gains tax must be read as a whole.

(iii) In case of other modes - In the following cases, cost of acquisition of goodwill of a business
or a trademark or brand name associated with a business or a right to manufacture, produce
or process any article or thing, or right to carry on any business or profession, tenancy rights,
stage carriage permits and loom hours shall not be nil, but will be deemed to be the cost for
which the previous owner of the property acquired it:
Where the capital asset became the property of the assessee —
(a) On any distribution of assets on the total or partial partition of a Hindu
undivided family.
(b) Under a gift or will.
(c) By succession, inheritance.

(3) Financial assets - Shares or securities are referred to as financial assets in Income- tax
Act. Section 55 provides the basis for ascertaining the cost of acquisition of such
financial assets.
(i) Original shares (which form the basis of entitlement of rights shares): –
cost of acquisition means the amount actually paid for acquiring the
original financial assets.
(ii) Rights entitlement (which is renounced by the assessee in favour of a
person): cost of acquisition shall be taken to be nil in the case of such assessee.
(iii) Rights shares acquired by the assesse: the amount actually paid by him for
acquiring such asset.
(iv) Bonus Shares:
where bonus shares are allotted without any payment on the basis of
holding of original shares, the cost of such bonus shares will be nil in the
hands of the original shareholder.
Bonus shares allotted before 01.04.2001:
the cost of acquisition of the shares is nil, the assessee may opt for the fair
market value as on 1.4.2001 as the cost of acquisition of such bonus
shares.
(v) Rights shares which are purchased by the person in whose favour the assessee has
renounced the rights entitlement: In the case of any financial asset purchased by
the person in whose favour the right to subscribe to such assets has been
renounced, cost of acquisition means the aggregate of theamount of the
 CAPITAL GAINS (Unit - iv) | 3.24
purchase price paid by him to the person renouncing such right and the amount
paid by him to the company or institution for acquiring such financial asset.
Problem: Under a stock option scheme, a company allotted 10,000 shares to its employees at
their face value of Rs. 100 each, although the market value of the shares on the date of
allotment as per quotation was Rs. 240 per share. Discuss the tax consideration, if any, of the
said allotment.
Employees sold entire equity shares Rs. 300 per shar.
(4) Equity shares received on demutualisation or corporatisation of a recognized
stock exchange – In relation to equity shares allotted to a shareholder of a
recognised stock exchange in India.
(5) Long-term capital assets referred to in section 112A
The cost of acquisition in relation to the long-term capital assets being,
o equity shares in a company on which STT is paid both at the time ofpurchase
and transfer or
o unit of equity oriented fund or unit of business trust on which STT is paid
atthe time of transfer.
acquired before 1st February, 2018 shall be the higher of
(i) cost of acquisition of such asset; and
(ii) lower of
(a) the fair market value of such asset; and
(b) he full value of consideration received or accruing as a result of the
transfer of the capital asset.
rket value
S.No. Circumstance Fair Market Value
(i) In a case where the capital If there is trading in such asset on
asset is listed on any such exchange on 31.01.2018
recognized stock exchange as The highest price of the capital asset
on 31.01.2018 quoted on such exchange on the said
date
If there is no trading in such asset
on such exchange on 31.01.2018
The highest price of such asset on such
exchange on a date immediately
preceding 31.01.2018 when such asset
was traded on such exchange.
(ii) In a case where the capital The net asset value of such unit as on
asset is a unit which is not the said date
listed on any recognized stock
exchange as on 31.01.2018
(iii) In a case where the capital An amount which bears to the cost of
asset is an equity share in a acquisition the same proportion as
company which is CII for the financial year 2017-18
– not listed on a recognized bears to the CII for the first year in
which the asset was
 CAPITAL GAINS (Unit - iv) | 3.25
stock exchange as on held by the assessee or on 01.04.2001,
31.01.2018 but listed on whichever is later.
such exchange on the date
of transfer
– listed on a recognized stock
exchange on the date of
transfer and which became
the property of the assessee
in consideration of share
which is not listed on such
exchange as on 31.01.2018
by way of transaction not
regarded as transfer under
section47

(1) Any other capital asset–

(i) Where the capital asset become the property of the assessee before 1-4-2001,
cost of acquisition means the cost of acquisition of the asset to the assessee or the
fair market value of the asset on 1-4-2002 at the option of the assessee.
Example 23
ABC Ltd. converts its capital asset acquired for an amount of `50,000 in June, 2003 into
stock-in- trade in the month of November, 2019. The fair market value of the asset on the
date of conversion is ` 4,50,000. The stock-in-trade was sold for an amount of 6,50,000 in the
month of September, 2023. What will be the tax treatment?

Financial year Cost InflationIndex

2003-04 109
2019-20 289
2023-24 348
Solution
The capital gains on the sale of the capital asset converted to stock-in-trade is taxable in the given
case. It arises in the year of conversion (i.e. P.Y. 2019-20) but will be taxable only in the year in
which the stock-in-trade is sold (i.e. P.Y. 2023-24). Profits from business will also be taxable in the
year of sale of the stock-in-trade (P.Y. 2023-24).
The long-term capital gains and business income for the A.Y.2024-25 are calculated as under:
Particulars ` `

Profits and Gains from Business or Profession

Sale proceeds of the stock-in-trade 6,50,000
Less: Cost of the stock-in-trade (FMV on the date of 4,50,000 2,00,000
conversion)
Long Term Capital Gains
Full value of the consideration (FMV on the date of the 4,50,000
conversion)
Less: Indexed cost of acquisition ( 50,000 × 289/109) 1,32,569 3,17,431

Note: For the purpose of indexation, the cost inflation index of the year in which the asset
is converted into stock-in-trade should be considered.
 CAPITAL GAINS (Unit - iv) | 3.26
Example 24
Ms. Usha purchases 1,000 equity shares in X Ltd., an unlisted company, at a cost of 30 per
share (brokerage 1%) in January 1996. She gets 100 bonus shares in August 2000. She again gets
1,100 bonus shares by virtue of her holding on February 2006. Fair market value of the shares
of X Ltd. on April 1, 2001 is 80.
On 1st January 2024, she transfers all her shares @ ` 200 per share (brokerage 2%). Compute
the capital gains taxable in the hands of Ms. Usha for the A.Y. 2024-25
Cost Inflation Index for F.Y. 2001-02: 100, F.Y.2005-06: 117 & F.Y.2023-24:348.
Solution
Computation of capital gains for the A.Y. 2024-25

Particulars `
1000 Original shares
Sale proceeds (1000 × 200) 2,00,000
Less : Brokerage paid (2% of 2,00,000) 4,000
Net sale consideration 1,96,000
Less : Indexed cost of acquisition [ 80 × 1000 × 331/100] 2,64,800
Long term capital loss (A) (68,800)
100 Bonus shares
Sale proceeds (100 × 200) 20,000
Less : Brokerage paid (2% of 20,000) 400
Net sale consideration 19,600
Less : Indexed cost of acquisition [ 80 × 100 × 348/100] [See Note below]
Long term capital loss (B)
1100 Bonus shares
Sale proceeds (1100 × 200) 2,20,000
Less: Brokerage paid (2% of 2,20,000) 4,400
Net sale consideration 2,15,600
Less : Cost of acquisition NIL
Long term capital gain (C) 2,15,600

฀ Long term capital gain (A+B+C) 1,39,920

Note: Cost of acquisition of bonus shares acquired before 1.4.2001 is the FMV as on1.4.2001
(being the higher of the cost or the FMV as on 1.4.2001).

Illustration 5
Mr. R holds 1,000 shares in Star Minus Ltd., an unlisted company, acquired in the year 2001-
02 at a cost of ` 75,000. He has been offered right shares by the company in the month of
August, 2021 at ` 160 per share, in the ratio of 2 for every 5 held. He retains 50% of the
rights and renounces the balance right shares in favour of Mr. Q for ` 30 per share in
September 2022. All the shares are sold by Mr. R for ` 300 per share in January 2023 and
Mr. Q sells his shares in December 2023 at ` 280 per share. What are the capital gains
taxable in the hands of Mr. R and Mr. Q?
 CAPITAL GAINS (Unit - iv) | 3.27

Financial year Cost Inflation Index

2001-02 100
2023-24 348
Solution

Computation of capital gains in the hands of Mr. R for the A.Y.2023-24

Particulars
`
1000 Original shares
Sale proceeds (1000 × 300) 3,00,000
Less : Indexed cost of acquisition [ 75,000 × 331/100] 2,48,250
Long-term capital gain (A) 51,750
200 Right shares
Sale proceeds (200 × 300) 60,000

Less : Cost of acquisition [ 160 × 200] [Note 1] 32,000

Short-term capital gain (B) 28,000
Sale of Right Entitlement
Sale proceeds (200 × ` 30) 6,000
Less : Cost of acquisition [Note 2] NIL
Short-term capital gain (C) 6,000
Capital Gains (A+B+C) 85,750
Note 1: Since the holding period of these shares is less than 24 months, they are short
term capital assets and hence cost of acquisition will not be indexed.
Note 2: The cost of the rights renounced in favour of another person for aconsideration is
taken to be nil. The consideration so received is taxed as short-term capital gains in full. The
period of holding is taken from the date of the rights offer to the date of the renouncement.
Computation of capital gains in the hands of Mr. Q for the A.Y.2023-24
Particulars `
Sale proceeds (200 shares × 280) 56,000
Less: Cost of acquisition [200 shares × ( ` 30 +` 160)] [See Note below] 38,000
Short-term capital gain 18,000

Note: The cost of the rights is the amount paid to Mr. R as well as the amount paid to the
company. Since the holding period of these shares is less than 24 months, they are short
term capital assets.

14 COST OF IMPROVEMENT [SECTION 55]

(1) Goodwill of a business, etc.: In relation to a capital asset being goodwill of a
business or a right to manufacture, produce or process any article or thing, or right
to carry on any business or profession, the cost of improvement shall be taken to be
Nil.
(2) Any other capital asset:
 CAPITAL GAINS (Unit - iv) | 3.28
(i) Where the capital asset became the property of the previous owner or the
assessee before 1-4-2001, cost of improvement means all expenditure of a
capital nature incurred in making any addition or alteration to the capital
asset on or after the said date by the previous owner or the assessee.
(ii) In any other case, cost of improvement means all expenditure of a capital
nature incurred in making any additions or alterations to the capital
assets by the assessee after it became his property.
Example 25
X & sons, HUF, purchased a land for ` 1,20,000 in the P.Y. 2002-03. In the P.Y. 2006-07, a
partition takes place when Mr. A, a coparcener, is allotted this plot valued at ` 1,50,000.
In
P.Y. 2007-08, he had incurred expenses of ` 2,35,000 towards fencing of the plot. Mr. A sells
this plot of land for ` 15,00,000 in P.Y. 2022-23 after incurring expenses to the extent
of
` 20,000. You are required to compute the capital gain for the A.Y.2023-24.

Financial Cost Inflation Index

year
2002-03 105
2006-07 122
2007-08 129
2022-23 331
Solution

Computation of taxable capital gains for the A.Y.2023-24

Particulars ` `

Sale consideration 15,00,000

Less: Expenses incurred for transfer 20,000
14,80,000
Less: (i) Indexed cost of acquisition ( 1,20,000 × 331/122) 3,25,574
(ii) Indexed cost of improvement ( 2,35,000 × 331/129) 6,02,984 9,28,558
Long term capital gains 5,51,442
Note - As per the view expressed by Bombay High Court in CIT v. Manjula J. Shah 16
Taxman 42, in case the cost of acquisition of the capital asset in the hands of the assessee is
taken to be cost of such asset in the hands of the previous owner, the indexation benefit
would be available from the year in which the capital asset is acquired by the previous
owner. If this view is considered, the indexed cost of acquisition would have to be
calculatedby considering the Cost Inflation Index of F.Y.2002-03.
Example 26
Mr. C purchases a house property for 1,06,000 on May 15, 1975. The following expenses
are incurred by him for making addition/alternation to the house property:

Particulars `
a. Cost of construction of first floor in 1982-83 3,10,000
b. Cost of construction of the second floor in 2002-03 7,35,000
c. Reconstruction of the property in 2012-13 5,50,000
 CAPITAL GAINS (Unit - iv) | 3.29
Fair market value of the property on April 1, 2001 is ` 8,50,000. The house property issold by
Mr. C on August 10, 2022 for ` 68,00,000 (expenses incurred on transfer: 50,000).
Compute the capital gain for the assessment year 2023-24.
Cost Inflation Index: F.Y. 2001-02: 100, F.Y. 2002-03: 105, F.Y. 2012-13: 200,
F.Y. 2022-23: 331.

Solution
Computation of capital gain of Mr. C for the A. Y. 2023-24
Particulars ` `
Gross sale consideration 68,00,000
Less: Expenses on transfer 50,000
Net sale consideration 67,50,000
Less: Indexed cost of acquisition (Note 1) 28,13,500
Less: Indexed cost of improvement (Note 2) 32,27,250 60,40,750
Long-term capital gain 7,09,250
Notes:
Indexed cost of acquisition: ` 8,50,000 × 331/100 = ` 28,13,500
Fair market value on April 1, 2001 (actual cost of acquisition is ignored as it is lower
than market value on April 1, 2001.)

Indexed cost of improvement is determined as under:

Particulars `
Construction of first floor in 1982-83 Nil
(expenses incurred prior to April 1, 2001 are not considered)
Construction of second floor in 2002-03 (i.e., 7,35,000 331/105) 23,17,000
Alternation/reconstruction in 2012-13 (i.e., 5,50,000 331/200) 9,10,250
Indexed cost of improvement 32,27,250
15 COMPUTATION OF CAPITAL GAINS IN CASE OF DEPRECIABLE ASSETS
[SECTIONS 50 & 50A]
(1) Transfer of depreciable assets [Section 50]: Section 50 provides for the
computation of capital gains in case of depreciable assets.
 Where the full value of consideration received or accruing for the transfer of
the asset plus the full value of such consideration for the transfer of any
other capital asset falling with the block of assets during previous year
exceeds the aggregate of the following amounts namely:
(1) expenditure incurred wholly and exclusively in connection with such
transfer;
(2) WDV of the block of assets at the beginning of the previous year;
(3) the actual cost of any asset falling within the block of assets
acquired during the previous year
such excess shall be deemed to be the capital gains arising from the transfer of
short-term capital assets.
 CAPITAL GAINS (Unit - iv) | 3.30
 Where all assets in a block are transferred during the previous year, the block
itself will cease to exist. In such a situation, the difference between the sale
value of the assets and the WDV of the block of assets at the beginning of the
previous year together with the actual cost of any asset falling within that
block of assets acquired by the assessee during the previous year will be
deemed to be the capital gains arising from the transfer of short- term capital
assets.

Symbol Description
V Full value of consideration
C Opening WDV of Block (+) Actual Cost of Asset acquired in the
Block during the P.Y. (+) Expenses in connection with transfer of
asset
STCG Short Term Capital Gain

STCL Short Term Capital Loss

WDV Written Down Value
(2) Cost of acquisition in case of power sector assets [Section 50A]: With respect to
the power sector, in case of depreciable assets referred to in section 32(1)(i), the
provisions of sections 48 and 49 shall apply subject to the modification that the
WDV of the asset (as defined in section 43(6)), as adjusted, shall be taken to be the
cost of acquisition.
Example 27
Singhania & Co., a sole proprietorship own six machines, put in use for business in March, 2023.
The depreciation on these machines is charged @15%. The written down value of these machines
as on 1st April, 2023 was ` 8,50,000. Three of the old machines were sold on 10th June, 2023
for
` 11,00,000. A second hand plant was bought for ` 8,50,000 on 30th November, 2023. You are
required to:
(i) Determine the claim of depreciation for Assessment Year 2024-25.
(ii) compute the capital gains liable to tax for Assessment Year 2024-25.
(iii) If Singhania & Co. had sold the three machines in June, 2023 for `21,00,000, will
therebe any difference in your above workings? Examine.
Solution
(i) Computation of depreciation for A.Y.2024-25
Particulars
`
W.D.V. of the block as on 1.4.2023 8,50,000
Add: Purchase of second hand plant during the year 8,50,000
17,00,000
Less: Sale consideration of old machinery during the year 11,00,000
W.D.V of the block as on 31.03.2024 6,00,000
Since the value of the block as on 31.3.2023 comprises of a new asset which has been put
to use for less than 180 days, depreciation is restricted to 50% of the prescribed
percentage of 15% i.e. depreciation is restricted to 7½%. Therefore, the depreciation
allowable for the year is ` 45,000, being 7½% of ` 6,00,000.
 CAPITAL GAINS (Unit - iv) | 3.31

(ii) The provisions under section 50 for computation of capital gains in the case of depreciable
assets can be invoked only under the following circumstances:
(a) When one or some of the assets in the block are sold for consideration more
thanthe value of the block.
(b) When all the assets are transferred for a consideration more than the value of the
block.
(c) When all the assets are transferred for a consideration less than the value of the
block.
Since in the first two cases, the sale consideration is more than the written down value of
the block, the computation would result in short term capital gains.

In the third case, since the written down value exceeds the sale consideration, the resultant
figure would be a short-term capital loss.
In the given case, capital gains will not arise as the block of asset continues to exist, and
some of the assets are sold for a price which is lesser than the written down value of the
block.
If the three machines are sold in June, 2023 for ` 21,00,000, then short term capital gains
would arise, since the sale consideration is more than the aggregate of the written down
value of the block at the beginning of the year and the additions made during the year.
Particulars
Sale consideration 21,00,000
Less: W.D.V. of the machines as on 1.4.2022 8,50,000
Purchase of second hand plant during the year 8,50,000 17,00,000
Short term capital gains 4,00,000

You are requested to briefly comment on the tax treatment of the above three items
under the provisions of the Income-tax Act, 1961.

16 CAPITAL GAINS IN RESPECT OF SLUMP SALE [SECTION 50B]

(1) Long term capital gains - Any profits or gains arising from the slump sale ofone
or more undertakings held for more than 36 months, shall be chargeable to income-tax
as capital gains arising from the transfer of long-term capital assets and shall be
deemed to be the income of the previous year in which the transfer took place.
Short term capital gains - Any profits and gains arising from such transfer ofone
or more undertakings held by the assessee for not more than thirty-six months shall
be deemed to be short-term capital gains.
(2) Deemed cost of acquisition and cost of improvement - The net worth of the
undertaking
(3) Report of a Chartered Accountant - Every assessee in the case of slump sale shall
furnish in the prescribed form along with the return of income, a report ofa chartered
accountant indicating the computation of net worth
 CAPITAL GAINS (Unit - iv) | 3.32

Meaning of Certain Terms:

Explanation Term Particulars

1 Net worth Aggregate value of total assets of the
undertaking or division as reduced by the
value of liabilities of such undertaking or
division as appearing in the books of
account.
However, any change in the value of assets
on account of revaluation of assets shall not
be considered for this purpose.

2 Aggregate value of In the case of depreciable assets: The

total assets of written down value of block of assets
Undertaking or determined in accordance with the
division provisions contained in sub- item (C) of
item (i) of section 43(6)(c);
Capital asset in respect of which 100%
deduction is claimed: In case of capital
assets in respect of which the whole of the
expenditure has been allowed or is
allowable as a deduction under section
35AD: Nil;
For all other assets: Book value
 CAPITAL GAINS (Unit - iv) | 3.33

DEEMED FULL VALUE OF CONSIDERATION FOR OMPUTING

CAPITAL GAINS [SECTIONS 50C, 50CA & 50D]
S. Capital Section Circumstance Deemed Full Value of
No. Asset consideration for
computing Capital
Gains

1. Land or 50C (1) If Stamp Duty Value >110% Stamp Duty Value
Building of consideration received or
or both accruing as a result oftransfer
(a) If date of agreement is Stamp Duty Value on the
different from the date date of agreement
of transfer and wholeor
part of the
consideration
is
received by way of
account payee cheque
or account payee bank
draft or ECS or through
such other prescribed
electronic modes
(IMPS, UPI, RTGS, NEFT,
Net banking, debit card,
credit card or BHIM
Aadhar Pay) on or
before the date of
agreement
(b) If date of agreement is Stamp Duty Value on the
different from the date date of transfer
of transfer but the
whole or part of the
consideration has not
been received by wayof
account payeecheque or
account payee bank
draft or ECS or
through such
other prescribed
electronic mode on or
before the date of
agreement
 CAPITAL GAINS (Unit - iv) | 3.34

However, if the stamp duty Consideration so

value on the date of agreement received
or the date of transfer, as the
case may be 110% of the sale
consideration received

Example 6
Let us take a case where for
transfer of building –
 the actual consideration is
100 lakh;
 the stamp duty value on the
date of agreement is 109
lakh; and
 the stamp duty value on the
date of transfer is 112 lakh
(i) If any part of the
consideration is paid by
prescribed electronic mode
on or before the date of
agreement
The actual consideration of
` 100 lakh would be the full
value of consideration, since
stamp duty value of ` 109
lakhs on the date of agreement
does not exceed 110% of
actual consideration
of ` 100 lakhs.

(ii) If no part of the

consideration is paid by
prescribed electronic mode
on or before the date of
agreement
Stamp duty value of 112
lakhs on the date of transfer
would be the full value of
consideration, since the same
exceeds 110% of actual
consideration of 100 lakhs.
 CAPITAL GAINS (Unit - iv) | 3.35

(2) Where the Assessing Officer

refers the valuation to a
Valuation Officer, on the
assessee’s claim that the
stamp duty value exceeds the
FMV of the property on the
date of transfer and the stamp
duty value has not been
disputed in any appeal or
revision or no reference has
been made before any other
authority, court or High Court

(a) If Valuation by Stamp Duty Value

Valuation Officer >
Stamp Duty Value

(b) If Valuation by Valuation by Valuation

Valuation Officer < Officer
155(15)
Stamp Duty Value
(3) If stamp duty value has been Value so revised in such
adopted as full value of appeal or revision
consideration, and
subsequently the value is
revised in any appeal or
revision
2. Unquote 50CA If consideration received or FMV of such share
d shares accruing as a result of transfer < determined in the
FMV of such share determined in prescribed manner
the prescribed manner
The provisions of this section
would not, however, be applicable
to any consideration received or
accruing as a result of transfer by
such class of persons and subject to
such conditions as may be
prescribed.

3. Any 50D Where the consideration received FMV of the said asset on
Capital or accruing as a result of the the date of transfer
asset transfer of a capital asset by an
assessee is not ascertainable or
cannot be determined

Meaning of certain terms:

S. Term Section Meaning
No.
(i) Stamp 50C The value adopted or assessed or assessable by any
Duty authority of a State Government (Stamp Valuation
Value Authority) for the purpose of payment of stamp
duty
 CAPITAL GAINS (Unit - iv) | 3.36

(ii) Assessable 50C The term ‘assessable’ has been defined to mean the
price which the stamp valuation authority would
have, notwithstanding anything to the contrary
contained in any other law for the time being in
force, adopted or assessed, if it were referred to
such authority for the purposes of the payment of
stamp duty. The term“assessable” has been added to
cover transfers executed throughpower of attorney.

(iii) Quoted 50CA The share quoted on any recognized stock exchange
Shares with regularity from time to time, where the
quotation of such share is based on current
transaction made in the ordinary course of business.

Note – The valuation rules prescribed in Rule 11UA for valuation of unquoted equity
shares would be dealt with at the Final level.

Example 28
Mr. A is a proprietor of Akash Enterprises having 2 units. He transferred on 1.4.2023 his
Unit1 by way of slump sale for a total consideration of ` 25 lacs. The fair market value of the
unit on 1.4.2023 is` 30 lacs. Unit 1 was started in the year 2005-06. The expenses incurred for
this transfer were 28,000. His Balance Sheet ason 31.3.2023 is as under:

Liabilities Total Assets Unit 1(`) Unit 2 Total

(`) (`) (`)
Own Capital 15,00,000 Building 12,00,000 2,00,000 14,00,000
Revaluation 3,00,000 Machinery 3,00,000 1,00,000 4,00,000
Reserve(for
building of unit 1)
Bank loan (70% for 2,00,000 Debtors 1,00,000 40,000 1,40,000
unit 1)
Trade creditors Other
(25% for unit 1) 1,50,000 assets 1,50,000 60,000 2,10,000
Total 21,50,000 Total 17,50,000 4,00,000 21,50,000
Other information:
(i) Revaluation reserve is created by revising upward the value of the building of Unit 1.
(ii) No individual value of any asset is considered in the transfer deed.
(iii) Other assets of Unit 1 include patents acquired on 1.7.2021 for ` 50,000
onwhich nodepreciation has been charged.
Compute the capital gain for the assessment year 2024-25.
 CAPITAL GAINS (Unit - iv) | 3.37
Solution
Computation of capital gains on slump sale of Unit 1
Particulars `
Full value of consideration [Fair market value on 1.4.2023] 30,00,000
Less: Expenses for transfer 28,000
29,72,000
Less: Net worth (See Note 1 below) 12,50,625
Long-term capital gain 17,21,375
Notes:
1. Computation of net worth of Unit 1 of Akash Enterprises
Particulars ` `
Building (excluding ` 3 9,00,000

Machinery 3,00,000
Debtors 1,00,000
Patents (See Note2 below) 28,125
Other assets ( 1,50,000 – 50,000) 1,00,000
Total assets 14,28,125
Less: Creditors (25% of 1,50,000) 37,500
Bank Loan (70% of 2,00,000) 1,40,000 1,77,500
Net worth 12,50,625

2. Written down value of patents as on 1.4.2023

Value of patents: `
Cost as on 1.7.2021 50,000
Less: Depreciation @ 25% for Financial Year 2021-22 12,500
Balance as on 1.4.2022 37,500
Less: Depreciation for Financial Year 2022-23 9,375
Balance as on 1.4.2023 28,125

For the purposes of computation of net worth, the written down value determined as
per section 43(6) has to be considered in the case of depreciable assets. The
problem has been solved assuming that the Balance Sheet values of 3 lakh and 9
lakh (`12 lakh – ` 3 lakh) represent the written down value of machinery and
building, respectively, of Unit 1.
3. Since the Unit is held for more than 36 months, capital gain arising would be long
term capital gain. However, indexation benefit is not available in case of slump
sale.
 CAPITAL GAINS (Unit - iv) | 3.38
SPECIAL PROVISION FOR FULL VALUE OF CONSIDERATION IN CERTAIN CASES
[SECTION 50C]

(1) Stamp Duty Value would be the Full value of consideration:

a capital asset, being land or building or both,
– is less than the value adopted or assessed or assessable by any authority of a State
Government (Stamp Valuation Authority) for the purpose of payment of stamp duty in
respect of such asset, such value adopted or assessed or assessable shall be deemed to be
the full value of the consideration received or accruing as a result of such transfer.

Condition for taking Stamp duty value of the date of agreement:

However, the stamp duty value on the date of agreement can be adopted only in a case
where the amount of consideration, or a part thereof, has been paid by way of an account
payee cheque or account payee bank draft or use of electronic clearing system through a bank
account or through such other prescribed electronic mode, on or before the date of the
agreement for the transfer of such immovable property.
However, where the stamp duty value does not exceed 110% of the sale consideration
received or accruing as a result of the transfer, the consideration so received or accruing
shall be deemed to be the full value of the consideration.
Finance Act, 2020 where the stamp duty value does not exceed 110% of the sale
consideration received or accruing as a result of the transfer, the consideration so
received or accruing shall be deemed to be the full value of the consideration

(2) Reference to Valuation Officer: The Assessing Officer may refer the valuation of the
asset to a valuation officer as defined in section 2(r) of the Wealth-tax Act, 1957 in the
following cases –
(i) Where the assessee claims before any Assessing Officer that the value adopted or
assessed or assessable by the authority for payment of stamp duty exceeds the fair
market value of the property as on the date of transfer and
(ii) the value so adopted or assessed or assessable by such authority has not been disputed in
any appeal or revision or no reference has been made before any other authority, court or
High Court.
(3) Where the value ascertained by such valuation officer exceeds the value adopted or
assessed or assessable by the Stamp authority the value adopted or assessed or
assessable shall be taken as the full value of the consideration received or accruing as a
result of the transfer.
SPECIAL PROVISION FOR FULL VALUE OF CONSIDERATION FOR TRANSFER OF
UNLISTED SHARES [SECTION 50CA]
the full consideration is not understated in case of transfer of unlisted shares, section
50CA provides that where the consideration received or accruing as a result of transfer of a
capital asset, being share of a company other than a quoted share, is less than the fair
market
value of such share determined in such manner as may be prescribed, such fair market
value shall be deemed to be the full value of consideration received or accruing as a
result of such transfer.
 CAPITAL GAINS (Unit - iv) | 3.39
19 FAIR MARKET VALUE OF THE CAPITAL ASSET ON THE DATE OF TRANSFER
TO BE TAKEN AS SALE CONSIDERATION, IN CASES WHERE THE
CONSIDERATION IS NOT DETERMINABLE [SECTION 50D]
Section 50D provides that, in case where the consideration received or accruing as a result of
the transfer of a capital asset by an assessee is not ascertainable or cannot be determined,
then, for the purpose of computing income chargeable to tax as capital gains, the fair market
value of the said asset on the date of transfer shall be deemed to be the full value of
consideration received or accruing as a result of such transfer.
Note – The valuation rules prescribed in Rule 11UA for valuation of unquoted equity shares
would be dealt with at the Final level.

Example 29
Mr. Mukesh who transfers land and building on 2 Jan .2024, furnishes the following information:
(i) Net consideration received Rs. 10 lakhs.
(ii) Value adopted by stamp valuation authority, which was not contested by Mr. Mukesh Rs. 12
lakhs.
(iii) Value ascertained by Valuation Officer on reference by the Assessing Officer Rs. 13 lakhs.
(iv) This fund was distributed to Mr. MUKESH on the partial partition of his HUF on 1.4.2001.
Fair market value of the land as on 1.4.2001 was Rs. 10,000.
(v) Mukesh residential building was constructed on the above land by Mr. Mukesh at a cost of
Rs.3,20.000 (construction completed on 1.12.2009) during the Financial Year2009-10.
(vi) Short-term capital loss incurred on sale of shares during the Financial Year 2019-2020
Rs.2,05,000.
Mr. Mukesh seeks your advice as to the amount to be invested in NHAI bonds so as to be exempt
from capital gain tax.
COI 2001-02 :- 100, 2009-10 :- 148, 2018-19 :- 280, 2023-24 =348
Ans. LTCG

Example 30
Mr. Jams inherited a house in Jaipur under will of his father in May, 2005. The house was purchased
by his father in January, 2001 for Rs. 2,50,000. He invested an amount of Rs. 7,00,000 in
construction ofone more floor in this house in June, 2007. The house was sold by him in November,
2023 for Rs. 37,50,000. The valuation adopted by the registration authorities for charge of stamp
duty was Rs. 47,25,000 which was not contested by the buyer, but as per assessee's request, the
Assessing officermade a reference to Valuation officer. The value determined by the Valuation officer
was Rs. 47,50,000.Brokerage @ 1% of sale consideration was paid by Mr. Jams to Mr. Sunil. The market
value of house as on01.04.2001 was Rs.2,70,000 and SDV 3,00,000.

You are required to compute the amount of capital gain chargeable to tax for A. Y. 2024-25
withthe help of given information.
COI 2001-02 :- 100, 2005-06 :- 117, 2007-08 :- 129, 2023-24 :- 348

Ans. Rs.
 CAPITAL GAINS (Unit - iv) | 3.40
Tax treatment of advance money forfeited
on failure of negotiations for transfer of a
capital asset [Sections 51 & 56(2)(ix)]

If advance was If advance was

received and received and
forfeited before forfeited on or
1-4-2014 after 1-4-2014

Advance forfeited to be deducted Advance forfeited to be taxed

while determining Cost of acquisition under 56(2)(ix) as Income from
for computing capital gains other sources

Taxability is postponed to Tax liability is attracted in

the year of actual transfer the year of forfeiture of
of capital asset. advance

amount shall not be deducted from the cost for which the asset was acquired or the
written down value or the fair market value, as the case may be, in computing the cost of
acquisition.
Example 31

Mr. Kay purchases a house property on April 10, 1992 for ` 65,000. The fair market value ofthe
house property on April 1, 2001 was 2,70,000. On August 31, 2004, Mr. Kay enters into an
agreement with Mr. Jay for sale of such property for ` 3,70,000 and received an amount of
`60,000 as advance. However, as Mr. Jay did not pay the balance amount, Mr. Kay forfeited the
advance. In May 2008, Mr. Kay constructed the first floor by incurring a cost of 2,35,000.
Subsequently, in January 2009, Mr. Kay gifted the house to his brother Mr. Dee. On February
10, 2024, Mr. Dee sold the house for ` 15,00,000.

CII for F.Y.2001-02: 100; 2004-05: 113; 2008-09: 137; 2023-24: 348.

Compute the capital gains in the hands of Mr. Dee for A.Y.2023-24.
Solution
Computation of taxable capital gains of Mr. Dee for A.Y.2024-25
Particulars
Sale consideration 15,00,000
Less: Indexed cost of acquisition (See Note below)
Indexed cost of improvement (See Note below) 1220110
Long-term capital gain 2,79,890

Note: For the purpose of capital gains, holding period is considered from the date on which the house
was purchased by Mr. Kay, till the date of sale. However, indexation of cost of acquisition is
considered from the date on which the house was gifted by Mr. Kay to Mr. Dee, till the date of sale.
i.e. from January 2009 (P.Y. 2008-09) to February, 2024 (P.Y. 2023-24).
Indexed cost of acquisition = ( 2,70,000 × 348/137) = 6,52,336

Indexed cost of improvement = (2,35,000 × 348/137) = 5,67,774

 CAPITAL GAINS (Unit - iv) | 3.41
Amount forfeited by previous owner, Mr. Kay, shall not be deducted from cost of acquisition.
Alternative view – As per the view expressed by Bombay High Court in CIT v. Manjula J. Shah 16
Taxman 42, in case the cost of acquisition of the capital asset in the hands of the assessee is taken to
be cost of such asset in the hands of the previous owner, the indexation benefit would be
available from the year in which the capital asset is acquired by the previous owner. If this view is
considered, the indexed cost of acquisition would have to be calculated by taking the CII of F.Y.2001-
02, since the Fair Market Value as on 1.4.2001 has been taken as the cost of acquisition.

Note – In case, Mr. Kay had gifted the house to his friend Mr. Dee on or after 1.10.2009, the stamp
duty value of the property which was subject to tax in the hands of Mr. Dee under section 56(2)
would be deemed to be the cost of acquisition for computation of capital gains.
Example 32
Mr. X purchases a house property in December 1993 for 5,25,000 and an amount of1,75,000
was spent on the improvement and repairs of the property in March, 1997. The property was
proposed to be sold to Mr. Z in the month of May, 2007 and an advance of40,000 was taken from
him. As the entire money was not paid in time, Mr. X forfeited the advance and subsequently
sold the property to Mr. Y in the month of March, 2024 for 52,00,000. The fair value of the
property on April 1, 2001 was 11,90,000. What is the capital gain chargeable in the hands of Mr.
X for the A.Y. 2023-24?

Financial year Cost Inflation Index

2001-02 100
2007-08 129
2023-24 348
Solution
Capital gains in the hands of Mr. X for the A.Y.2022-23 is computed as under
Particulars
Sale proceeds 52,00,000
Less : Indexed cost of acquisition [Note 1] 38,06,500
Indexed cost of improvement [Note 2] –
Long term capital gains 13,93,500

Note 1: Computation of indexed cost of acquisition

Cost of acquisition (higher of fair market value as on April 1, 2001 11,90,000
and the actual cost of acquisition)
Less : Advance taken and forfeited 40,000
Cost for the purposes of indexation 11,50,000
Indexed cost of acquisition ( ` 11,50,000 × 348/100)

Note 2: Any improvement cost incurred prior to 1.4.2001 is to be ignored when fair market
value as on 1.4.2001 is taken into consideration.
 CAPITAL GAINS (Unit - iv) | 3.42

21. EXEMPTION OF CAPITAL GAINS

Exemption of Capital Gains
Exemption underSection 10 Exemption under section
54/54B/54D/54EC/54EE/54F

(1) Exemption under section 10

The following g are the exemption in respect of capital gains under section 10:
(i) Exemption of capital gain on transfer of a unit of Unit Scheme, 1964 (US 64)[Section
10(33)]
This clause provides that any income arising from the transfer of specified units,shall
be exempt from tax. Such transfer should take place on or after 1.4.2002.
(ii) Exemption of capital gains on compulsory acquisition of agricultural land situatedwithin
specified urban limits [Section 10(37)]
With a view to mitigate the hardship faced by the farmers whose agricultural land situated
in specified urban limits has been compulsorily acquired, clause (37) provide to exempt the
capital gains arising to an individual or a HUF from transfer of urban agricultural land by way
of compulsory acquisition.
Such exemption is available where the compensation or the enhanced compensation or
consideration, as the case may be, is received on or after 1.4.2004.

(2) Exemption of Capital Gains under section 54/ 54B/ 54D/ 54EC/ 54EE/ 54F/

(i) Capital Gains on sale of residential house [Section 54] Eligible assessees –
Individual & HUF
Conditions to be
fulfilled

 There should be a transfer of residential house (buildings or lands appurtenant

thereto)
 It must be a long-term capital asset
 Income from such house should be chargeable under the head “Income from
houseproperty”
 Where the amount of capital gains exceeds ` 2 crore
Where the amount of capital gain exceeds 2 crore, one residential house in India
should be –
 purchased within 1 year before or 2 years after the date of transfer (or)
 constructed within a period of 3 years after the date of transfer.
 Where the amount of capital gains does not exceed ` 2
crore
 Where the amount of capital gains does not exceed ` 2 crore, the
assesseei.e.,individual or HUF, may at his option,
 purchase two residential houses in India within 1 year before or 2 years after
the date of transfer (or)
 construct two residential houses in India within a period of 3 years after
the date of transfer.
 CAPITAL GAINS (Unit - iv) | 3.43
Where during any assessment year, the assessee has exercised the option to purchase or
construct two residential houses in India, he shall not be subsequently entitled to exercise the
option for the same or any other assessment year.
This implies that if an assessee has availed the option of claiming benefit of section 54
in respect of purchase of two residential houses in Jaipur and Jodhpur, say, in respect of
capital gains of ` 1.50 crores arising from transfer of residential house at Bombay in the
P.Y.2019-20 then, he will not be entitled to avail the benefit of section 54 again in
respect of purchase of two residential houses in, say, Pune and Baroda, in respect of
capital gains of ` 1.20 crores arising from transfer of residential house in Jaipur in the
P.Y.2023-24, even though the capital gains arising on transfer of the residential house
at Jaipur does not exceed 2 crore.
Quantum of Exemption
 If cost of new residential house or houses, as the case may be ≥ Long term capital
gains,entire long term capital gains is exempt.
 If cost of new residential house or houses, as the case may be < Long term capital
gains,long term capital gains to the extent of cost of new residential house is exempt.
 Example 1 - If the long-term capital gains is ` 5 lakhs and the cost of
thenewhouse is ` 7 lakhs, then, the entire long-term capital gains of ` 5
lakhs is exempt.
 Example 2 - If long-term capital gains is ` 5 lakhs and cost of new house is 3
lakhs, then, long-term capital gains is exempt only upto `

Consequences of transfer of new asset before 3 years

 If the new asset is transferred before 3 years from the date of its acquisition or
construction, then, cost of the asset will be reduced by capital gains exempted earlier for
computing capital gains.
 Continuing Example 1, if the new house was sold after 21 months for 8 lakhs, then
short term capital gain chargeable to tax would be –

Particulars

Net Consideration 8,00,000

Less: Cost of acquisition minus capital gains exempt
earlier ( 7,00,000 – 5,00,000) 2,00,000

Short term capital gains chargeable to tax 6,00,000

Example 33
Mr. Cee purchased a residential house on July 20, 2020 for ` 10,00,000 and made some
additions to the house incurring 2,00,000 in August 2020. He sold the house property in April
2022 for ` 20,00,000. Out of the sale proceeds, he spent ` 5,00,000 to purchase another house
property inSeptember 2022.

What is the amount of capital gains taxable in the hands of Mr. Cee for the A.Y. 2023-24?
Solution
The house is sold before 24 months from the date of purchase. Hence, the house is a short- term
capital asset and no benefit of indexation would be available.
Particulars
`
 CAPITAL GAINS (Unit - iv) | 3.44

Sale consideration 20,00,000

Less: Cost of acquisition 10,00,000
Cost of improvement 2,00,000

Short-term capital gains 8,00,000

Note: The exemption of capital gains under section 54 is available only in case of long-term
capital asset. As the house is short-term capital asset, Mr. Cee cannot claim exemption under
section 54. Thus, the amount of taxable short-term capital gains is 8,00,000.

(ii) Capital Gains on transfer of agricultural land [Section 54B] Eligible assessee –
Individual & HUF Conditions to be fulfilled

 There should be a transfer of urban agricultural land.

 Such land must have been used for agricultural purposes by the assessee, being
an individual or his parent, or a HUF in the 2 years immediately preceding the
date of transfer.
 He should purchase another agricultural land (urban or rural) within 2 years
from the date of transfer.
 If such investment is not made before the date of filing of return of income, then the
capital gain has to be deposited under the CGAS (Refer points (x) and (xi) at the
end of 7.21). Amount utilized by the assessee for purchase of new asset and the
amount so deposited shall be deemed to be the cost of new asset.
Quantum of exemption
 If cost of new agricultural land ≥ capital gains, entire capital gains is exempt.
 If cost of new agricultural land < capital gains, capital gains to the extent of cost of
new agricultural land is exempt.
Examples:
• Example 1 - If the capital gains is ` 3 lakhs and the cost of the new agricultural land is4
lakhs, then the entire capital gains of ` 3 lakhs is exempt.
• Example 2 - If capital gains is ` 3 lakhs and cost of new agricultural land is ` 2 lakhs,
then capital gains is exempt only upto ` 2 lakhs.

Consequences of transfer of new agricultural land before 3 years

 If the new agricultural land is transferred before 3 years from the date of its acquisition,
then cost of the land will be reduced by capital gains exempted earlier for computing
capital gains of new agricultural land.
 However, if the new agricultural land is a rural agricultural land, there would be no
capital gains on transfer of such land.
 Continuing Example 1, if the new agricultural land (urban land) is sold after, say, 1 year
for ` 6 lakhs, then short term capital gain chargeable to tax would be –



 CAPITAL GAINS (Unit - iv) | 3.45
Particulars ` `
Net consideration 6,00,000
Less: Cost of acquisition minus capital gains exempt 1,00,000
earlier ( 4,00,000 – 3,00,000)
Short-term capital gains chargeable to tax 5,00,000
(iii) Capital Gains on transfer by way of compulsory acquisition of land and building
of an industrial undertaking [Section 54D]
Eligible assessee – Any assessee
Conditions to be fulfilled

 There must be compulsory acquisition of land and building or any right in land or
building forming part of an industrial undertaking.
 The land and building should have been used by the assessee for purposes of the
business of the industrial undertaking in the 2 years immediately preceding the date
oftransfer.
 The assessee must purchase any other land or building or construct any building
(for shifting or re-establishing the existing undertaking or setting up a new
industrial undertaking) within 3 years from the date of transfer.
 If such investment is not made before the date of filing of return of income, then the
capital gain has to be deposited under the CGAS. (Refer point (x) and (xi) at the end of
7.21). Amount utilized by the assessee for purchase of new asset and the amount so
deposited shall be deemed to be the cost of new asset
Quantum of exemption
 If cost of new asset ≥ Capital gains, entire capital gains is exempt.
 If cost of new asset < Capital gains, capital gains to the extent of cost of new asset is
exempt.

Note: The exemption in respect of capital gains from transfer of capital asset would be
available even in respect of short-term capital asset, being land or building or any
right in any land or building, provided such capital asset is used by assessee for the
industrial undertaking belonging to him, even if he was not the owner for the said
period of 2 years.
Consequences of transfer of new asset before 3 years
 If the new asset is transferred before 3 years from the date of its acquisition, then cost
of the asset will be reduced by capital gains exempted earlier for computing capital
gains.
Example 34
PQR Ltd., purchased a land for industrial undertaking in May 2004, at a cost of ` 3,50,000.
Theabove property was compulsorily acquired by the State Government at a compensation
of ` 15,00,000 in the month of January, 2023. The compensation was received in February,
2023.The company purchased another land for its industrial undertaking at a cost of
` 2,00,000 in the month of March, 2024. What is the amount of the capital gains chargeable to
taxin the hands of the company for the A.Y. 2024-25?
 CAPITAL GAINS (Unit - iv) | 3.46
Financial year Cost Inflation Index
2004-05 113
2023-24 348
Solution
Computation of capital gains in the hands of PQR Ltd. for the A.Y.2023-24
Particulars `
Sale proceeds (Compensation received) 15,00,000
Less : Indexed cost of acquisition [ 3,50,000 × 348/113]
4,74,779
Less: Exemption under section 54D (Cost of acquisition of land for its 2,00,000
undertaking)
Taxable long term capital gain 2,74,779
(iv) Capital Gains not chargeable on investment in certain bonds [Section 54EC]
Eligible assessee – Any assesse Conditions to be fulfilled

 There should be transfer of a long-term capital asset being land or building orboth.
 Such asset can also be a depreciable asset held for more than 36 months. [CIT v. Dempo
Company Ltd (2016) 387 ITR 354 (SC)]
 The capital gains arising from such transfer should be invested in a long-term specified
asset within 6 months from the date of transfer.
 Long-term specified asset means specified bonds, redeemable after 5 years, issued on
or after 1.4.2018 by the National Highways Authority of India (NHAI) or the Rural
Electrification Corporation Limited (RECL) or any other bond notified by the Central
Government in this behalf.
 The assessee should not transfer or convert or avail loan or advance on the security of
such bonds for a period of 5 years from the date of acquisition of such bonds.
Other Points
 In case of conversion of capital asset into stock in trade and subsequent sale of
stock in trade - Period of 6 months to be reckoned from the date of sale of stock
in trade for the purpose of section 54EC exemption [CBDT Circular No.791 dated
2- 6-2000].
 Receipt of money on liquidation of company – is chargeable to tax in the hands of
shareholders [Section 46(2)] – However, there is no transfer of capital asset in such a
case – Therefore, exemption under section 54EC is not available – CIT v. Ruby Trading
Co. (P) Ltd. 259 ITR 54 (Raj.)
Quantum of exemption

Capital gains or amount invested in specified bonds, whichever is lower.

Ceiling limit for investment in long-term specified asset

The maximum investment which can be made in notified bonds or bonds of NHAI and RECL,
out of capital gains arising from transfer of one or more assets, during the previous year in
which the original asset is transferred and in the subsequent financial year cannot
exceed 50 lakhs.
 CAPITAL GAINS (Unit - iv) | 3.47
Violation of condition
 In case of transfer or conversion of such bonds or availing loan or advance on
security of such bonds before the expiry of 5 years, the capital gain exempted earlier
shall be taxed as long-term capital gain in the year of violation of condition.
Example 35
Long term capital gain of ` 75 lakh arising from transfer of building on 1.5.2023 will be fully
exempt from tax if such capital gain is invested in the bonds redeemable after five years,
issued by NHAI under section 54EC. Examine with reasons whether the given statement is true
or falsehaving regard to the provisions of the Income-tax Act, 1961.
Solution
False: The exemption under section 54EC has been restricted, by limiting the maximum
investment in long term specified assets (i.e. bonds of NHAI or RECL or any other bond
notified by Central Government in this behalf, redeemable after 5 years) to ` 50 lakh,
whether such investment is made during the relevant previous year or the subsequent
previous year, or both. Therefore, in this case, the exemption under section 54EC can be
availed only to the extent of ` 50 lakh, provided the investment is made before 1.11.2023
(i.e., within six months from the date of transfer).
(v) Capital gains in cases of investment in residential house [Section 54F]
Eligible assessees: Individuals/ HUF
Conditions to be fulfilled
 There must be transfer of a long-term capital asset, not being a residential house.
 Transfer of plot of land is also eligible for exemption
 The assessee should –
 Purchase one residential house situated in India within a period of 1 year
before or 2 years after the date of transfer; or

 Construct one residential house in India within 3 years from the date of
transfer.
 If such investment is not made before the date of filing of return of income, then the
net sale consideration has to be deposited under the CGAS. (Refer points (x)
and
(xi) at the end of 7.21) Amount utilized by the assessee for purchase or
construction of new asset and the amount so deposited shall deemed to be the
costof new asset.
 The assessee should not own more than one residential house on the date
oftransfer.
 The assessee should not –
 purchase any other residential house within a period of 2 year or
 construct any other residential house within a period of 3 years from the date
oftransfer of the original asset.
Quantum of exemption
 If cost of new residential house ≥ Net sale consideration of original asset,
entire
capital gains is exempt.
 If cost of new residential house < Net sale consideration of original asset,
onlyproportionate capital gains is exempt i.e.
Amount invested in new residential house
LTCG×
Net sale consideration
 CAPITAL GAINS (Unit - iv) | 3.48
Example 43
From the following particulars, compute the taxable capital gains of Mr. D for A.Y.2024-25.
Particulars Amount (`)
Cost of jewellery [Purchased in F.Y.2005-06] 4,52,000
Sale price of jewellery sold in January 2024 15,00,000
Expenses on transfer 7,000
Residential house purchased in March 2024 5,00,000
The cost inflation Index are as follows:

Financial Year Cost Inflation Index

2005-06 117
2023-24 348
Solution
Computation of taxable capital gains for A.Y.2024-25
Particulars `
Gross consideration 15,00,000
Less: Expenses on transfer 7,000
Net consideration 14,93,000
Less: Indexed cost of acquisition ( ` 4,52,000 × 348/117)

Less: Exemption under section 54F (` 5,00,000/

14,93,000)
Taxable capital gains 1,42,508

Consequences if the new house of transfer within 3 years from the date of its purchase
 If the new asset is transferred before 3 years from the date of its acquisition, then
the Capital gains would arise on transfer of the new house and capital gain exempted
earlier under section 54F would be taxable as long-term capital gains.
 In the given illustration, if the new residential house is sold for 6,00,000 after
say,1 year, then
 1,00,000 [i.e. 6,00,000 (-) 5,00,000] would be chargeable as short-term capital gain of
that year in which the new house is sold.
Note – In case the new residential house is sold after 2 years, the capital gains would be
long-term capital gains and indexation benefit would be available.
 11,601, being the capital gains exempt earlier, would be taxable as long- term capital
gains of the year in which the new house is sold.
Consequences where assessee purchases any other residential house within 2
years or constructs within 3 years from the date of transfer of original asset
The capital gain exempted earlier under section 54F would be deemed to be long-term
capital gains and chargeable to tax in the previous year in which such residential
houseis purchased or constructed.
 CAPITAL GAINS (Unit - iv) | 3.49
22 REFERENCE TO VALUATION OFFICER [SECTION 55A]
Section 55A provides that the Assessing Officer may refer the valuation of a capital asset to a
Valuation Officer in the following circumstances with a view to ascertaining the fair market
value of the capital asset for the purposes of capital gains –
(i) In a case where the value of the asset as claimed by the assessee is in accordance with
the estimate made by a registered valuer, if the Assessing Officer is of the opinion
that the value so claimed is at variance with its fair market value.
Under this provision, the Assessing Officer can make a reference to the Valuation
Officer in cases where the fair market value is taken to be the sale consideration
ofthe asset. An Assessing Officer can also make a reference to the Valuation Officer
ina case where the fair market value of the asset as on 01.04.2001 is taken as the
costof the asset, if he is of the view that there is any variation between the value as on
01.04.2001 claimed by the assessee in accordance with the estimate made by a
registered valuer and the fair market value of the asset on that date.
(ii) If the Assessing Officer is of the opinion that the fair market value of the asset
exceeds the value of the asset as claimed by the assessee by more than 15% of the
value of asset as so claimed or by more than 25,000.
(iii) The Assessing Officer is of the opinion that, having regard to the nature of asset and
other relevant circumstances, it is necessary to make the reference.

TAX ON SHORT TERM CAPITAL GAINS IN RESPECT OF EQUITY SHARES/ UNITS

OF AN EQUITY ORIENTED FUND/ UNITS OF A BUSINESS TRUST [SECTION 111A]
(1) Concessional rate of tax in respect of STCG on transfer of certain assets: This
section provides for a concessional rate of tax (i.e. 15%) on the short-term
capital gains on transfer of -
(i) an equity share in a company or
(ii) a unit of an equity oriented fund or
(iii) a unit of a business trust.
(2) Conditions: The conditions for availing the benefit of this concessional rate are –
(i) the transaction of sale of such equity share or unit should be entered into on or
after 1.10.2004, being the date on which Chapter VII of the Finance (No. 2) Act,
2004 came into force; and
(ii) such transaction should be chargeable to securities transaction tax under
the said Chapter.
However, short-term capital gains arising from transactions undertaken in foreign
currency on a recognized stock exchange located in an International Financial
Services Centre (IFSC) would be taxable at a concessional rate of 15% even
though STT is not leviable in respect of such transaction.
Adjustment of Unexhausted Basic Exemption Limit: In the case of resident
individuals or HUF, if the basic exemption is not fully exhausted by any other income,
then the short– term capital gain will be reduced by the unexhausted basic exemption
limit and only the balance would be taxed at 15%. However, the benefit of availing the
basic exemption limit is not available in the case of non-residents.
 CAPITAL GAINS (Unit - iv) | 3.50
(3) No deduction under Chapter VI-A against STCG taxable under section 111A:
Deductions under Chapter VI-A cannot be availed in respect of such short-term
capital gains on equity shares of a company or units of an equity oriented mutual
fund or unit of a business trust included in the total income of the assessee.

TAX ON LONG TERM CAPITAL GAINS [SECTION 112]

(1) Concessional rate of tax: Where the total income of an assessee includes long-term
capital gains, tax is payable by the assessee @20% on such long-term capital gains.
The treatment of long-term capital gains in the hands of different types of assessees
are as follows -
(i) Resident individual or Hindu undivided family: Income-tax payable at
normal rates on total income as reduced by long-term capital gains plus
20% on such long- term capital gains.
However, where the total income as reduced by such long-term capital gains
is below the maximum amount which is not chargeable to income-tax then such
long- term capital gains shall be reduced by the amount by which the total
income as so reduced falls short of the maximum amount which is not
chargeable to income-tax and the tax on the balance of such long-term capital
gains will be calculated @20%.
(ii) Domestic Company: Long-term capital gains will be charged @ 20%.
(iii) Non-corporate non-resident or foreign company:
(i) Long-term capital gains arising from the transfer of a capital asset, being
unlisted securities or shares of a company not being a company in which
public are substantially interested, would be calculated at the rate of
10% on the capital gains in respect of such asset without giving effect to
the indexation provision under second proviso to section 48 and
currency fluctuation under first proviso to section 48.
(ii) In respect of other long-term capital gains, the applicable rate of tax
would be 20%.
(iv) Residents (other than those included in (i) above): Long-term capital
gains will be charged @20%.
Lower rate of tax for transfer of listed securities and zero coupon bonds: Where the tax
payable in respect of any income arising from the transfer of a listed security (other than a
unit) or a zero coupon bond, being a long-term capital asset, exceeds 10% of the amount
of capital gains before indexation, then such excess shall be ignored while computing the
tax payable by the assessee.
long term capital gains on transfer of units and unlisted securities are not eligible for
concessional rate of tax@10% (without indexation benefit). Therefore, the long- term
capital gains, in such cases, are taxable @20% (with indexation benefit).
However, in case of non-corporate non-residents and foreign companies, long term
capital gains arising from transfer of a capital asset, being unlisted securities or shares
in a company in which public are not substantially interested are eligible for a
concessional rate of tax @10% (without indexation benefit).
 CAPITAL GAINS (Unit - iv) | 3.51
(2) No deduction under Chapter VI-A against LTCG:
Tax on long-term Capital Gains [Section 112]
Person Rate of Particulars
tax

1. Resident persons, In case of transfer of

listed
other than securitie
companies s (other than units)
and Zero Coupon
Resident Individuals 20% Unexhausted Bonds, LTCG would
and HUF exemption limit can be taxable at the
lower of the
be exhausted against following rates –
(1) 10% without
LTCG taxable u/s 112 indexation
Resident AOPs and 20% Unexhausted benefit; and

BOIs exemption limit (2) 20% with

indexation
cannot be adjusted benefit.

against LTCG taxable

u/s 112
Resident Firms and 20%
LLPs

2. Domestic companies 20%

3. Non-corporate non- 20% Capital assets, other

residents and than unlisted
foreign companies securities or shares of
closely held
companies
10% Unlisted securities or
shares of closely held
companies (without
benefit of indexation
or foreign currency
fluctuation)
 CAPITAL GAINS (Unit - iv) | 3.52
TAX ON LONG TERM CAPITAL GAINS ON CERTAIN ASSETS [SECTION 112A]
(1) Concessional rate of tax in respect of LTCG on transfer of certain assets: a
concessional rate of tax @10% will be leviable on the long-term capital gains
exceeding ` 1,00,000 on transfer of –
(a) an equity share in a company or
(b) a unit of an equity oriented fund or
(c) a unit of a business trust.

(2) Conditions: The conditions for availing the benefit of this concessional rate are–
(a) In case of equity share in a company, STT has been paid on acquisition and
transfer of such capital asset
(b) In case of unit of an equity oriented fund or unit of business trust, STT has
been paid on transfer of such capital asset.

(3) Adjustment of Unexhausted Basic Exemption Limit: In the case of resident

individuals or HUF, if the basic exemption is not fully exhausted by any other
income, then such long- term capital gain exceeding 1 lakh will be reduced by the
unexhausted basic exemption limit and only the balance would be taxed at 10%.
However, the benefit of adjustment of unexhausted basic exemption limit is not
available in the case of non-residents. It is also not available in case of resident AOPs
and BOIs.
(4) No deduction under Chapter VI-A against LTCG taxable under section 112A:
Deductions under Chapter VI-A cannot be availed in respect of such long-term capital
gains on equity shares of a company or units of an equity oriented mutual fund or
unit of a business trust included in the total income of the assessee.
(5) No benefit of rebate under section 87A against LTCG taxable under section
112A: Rebate under section 87A is not available in respect of tax payable @10% on
LTCG under section 112A.
Illustration 1
How will you calculate the period of holding in case of the following assets?
(1) Shares held in a company in liquidation
(2) Bonus shares
(3) Flat in a co-operative society
SOLUTION
(1) Shares held in a company in liquidation - The period after the date on which the
company goes into liquidation shall be excluded while calculating the period of holding.
Therefore, the period of holding shall commence from the date of acquisition and end
with the date on which the companygoes into liquidation.
(2) Bonus shares - The period of holding shall be reckoned from the date of allotment of bonus
shares and will end with the date of transfer.
(3) Flat in a co-operative society - The period of holding shall be reckoned from the
date of allotment of shares in the society and will end with thedate of transfer.
Note – Any transaction whether by way of becoming a member of, or acquiring shares in, a
co-operative society or by way of any agreement or any arrangement or in any other
manner whatsoever which has the effect of transferring, or enabling enjoyment of, any
immovable property is a transfer as per section 2(47)(vi).
 CAPITAL GAINS (Unit - iv) | 3.53
Hence, it is possible to take a view that any date from which such right is obtained may be taken as
the date of acquisition.
Illustration 2
A is the owner of a car. On 1-4-2023, he starts a business of purchase and sale of motor cars. He treats
the above car as part of the stock-in-trade of his new business. He sells the same on 31-3-2024
and gets a profit of ` 1 lakh. Discuss thetax implication in his hands under the head “Capital gains”.
Solution
Since car is a personal asset, conversion or treatment of the same as the stock-in- trade of his business
will not be trapped by the provisions of section 45(2). Hence,A is not liable to capital gains tax.
Illustration 3
X converts his capital asset (acquired on June 10, 2005 for ` 60,000) into stock-in-trade on March 10,
2023. The fair market value on the date of the above conversion was ` 5,50,000. He subsequently
sells the stock-in-trade so converted for ` 6,00,000 on June 10, 2023. Discuss the year of chargeability
of capital gain and business income.
Solution
Since the capital asset is converted into stock-in-trade during the previous year 2022-23 relevant to
the A.Y. 2023-24, it will be a transfer u/s 2(47) during the
P.Y. 2022-23. However, the profits or gains arising from the above conversion will be chargeable to
tax during the A.Y. 2024-25, since the stock-in-trade has been sold only on June 10, 2023. For this
purpose, the fair market value on the date of such conversion (i.e. 10th March, 2023) will be the full
value of consideration for computation of capital gains. The business income of ` 50,000 (i.e.,
`6,00,000 (-) ` 5,50,000, being the fair market value on the date of conversion) would also be taxable
in the A.Y.2024-25. Thus, both capital gains and business income wouldbe chargeable to tax in the
A.Y.2024-25.

Illustration 4
M held 2000 shares in a company ABC Ltd., an Indian company. This company amalgamated with
another Indian company XYZ Ltd. during the previous year ending 31-3-2024. Under the scheme of
amalgamation, M was allotted 1000 shares in the new company. The market value of shares allotted is
higher by ` 50,000 than the value of holding in ABC Ltd. The Assessing Officer proposes to treat the
transaction as an exchange and to tax ` 50,000 as capital gain. Is he justified?
Solution
In the above example, the transaction is squarely covered by the exemption explained above and the
proposal of the Assessing Officer to treat the transaction as a transfer is not justified.
Illustration 5
In which of the following situations capital gains tax liability does not arise?
(vii) Mr. A purchased gold in 1970 for ` 25,000. In the P.Y. 2023-24, he gifted it to his son at
the time of marriage. Fair market value (FMV) of the gold on the day the gift was made
was ` 1,00,000.
(viii) A house property is purchased by a Hindu undivided family in 1945 for ` 20,000. It is given
to one of the family members in the P.Y. 2023-24 at the time of partition of the family. FMV
on the date of partition was ` 12,00,000.
 CAPITAL GAINS (Unit - iv) | 3.54
(ix) Mr. B purchased 50 convertible debentures for ` 40,000 in 1995 which are converted into
500 shares worth ` 85,000 in November 2023 by the company.
Solution
We know that capital gains arises only when we transfer a capital asset. The liability of capital
gains tax in the situations given above is discussed as follows:
(iv) As per the provisions of section 47(iii), gift of a capital asset is not regarded as transfer
for the purpose of capital gains. Therefore, capital gains tax liability does not arise in the
given situation.
(v) As per the provisions of section 47(i), distribution of a capital asset (being in kind) on the
total or partial partition of Hindu undivided family is not regarded as transfer for the
purpose of capital gains. Therefore, capital gains tax liability does not arise in the given
situation.
(vi) As per the provisions of section 47(x), conversion of bonds or debentures, debenture stock
or deposit certificates in any form of a company into shares or debentures of that
company is not regarded as transfer for the purpose of capital gains. Therefore, capital
gains tax liability does not arise in the given situation.
Illustration 6
Mr. Abhishek a senior citizen, mortgaged his residential house with a bank, under a notified reverse
mortgage scheme. He was getting loan from bank in monthly installments. Mr. Abhishek did not
repay the loan on maturity and hence gave possession of the house to the bank, to discharge his
loan. How will the treatment of long-term capital gain be on such reverse mortgage transaction?
Solution
Section 47(xvi) provides that any transfer of a capital asset in a transaction of reverse mortgage under a
scheme made and notified by the Central Government shall not be considered as a transfer for the
purpose of capital gain.
Accordingly, the mortgaging of residential house with bank by Mr. Abhishek will not be regarded as a
transfer. Therefore, no capital gain will be charged on such transaction.
Further, section 10(43) provides that the amount received by the senior citizen as a loan, either in
lump sum or in installment, in a transaction of reverse mortgage would be exempt from income-tax.
Therefore, the monthly installment amounts received by Mr. Abhishek would not be taxable.
Illustration 7
Examine, with reasons, whether the following statements are True or False.
(iv) Alienation of a residential house in a transaction of reverse mortgage under a scheme made and
notified by the Central Government is treated as "transfer" for the purpose of capital gains.
(v) Zero coupon bonds of eligible corporation, held for 14 months, will be long- term capital assets.
(vi) Zero Coupon Bond means a bond on which no payment and benefits are received or receivable
before maturity or redemption.
Solution
(i) False: As per section 47(xvi), such alienation in a transaction of reverse mortgage under a scheme
made and notified by the Central Government is not regarded as "transfer" for the purpose of
capital gains.
 CAPITAL GAINS (Unit - iv) | 3.55
(ii) True: Section 2(42A) defines the term 'short-term capital asset'. Under the proviso to section
2(42A), zero coupon bond held for not more than 12 months will be treated as a short-term capital
asset. Consequently, such bond held for more than 12 months will be a long-term capital asset.
(iii) True: As per section 2(48), ‘Zero Coupon Bond’ means a bond issued by any infrastructure capital
company or infrastructure capital fund or infrastructure debt fund or a public sector company, or
Scheduled Bank on or after 1st June 2005, in respect of which no payment and benefit is received or
receivable before maturity or redemption from such issuing entity and which the Central
Government may notify in this behalf.
Illustration 8
Mr. A converts his capital asset acquired for an amount of ` 50,000 in June, 2003 into stock-in-trade in
the month of November, 2022. The fair market value of the asset on the date of conversion is `
4,50,000. The stock-in-trade was sold for an amount of ` 6,50,000 in the month of September, 2023.
What will be the tax treatment?

Financial year Cost Inflation Index

2003-04 109
2022-23 331
2023-24 348
Solution
The capital gains on the sale of the capital asset converted to stock-in-trade is taxable in the given case.
It arises in the year of conversion (i.e. P.Y. 2022-23) but will be taxable only in the year in which the
stock-in-trade is sold (i.e. P.Y. 2023- 24). Profits from business will also be taxable in the year of sale of
the stock-in- trade (P.Y. 2023-24).
The LTCG and business income for the A.Y.2024-25 are calculated as under:
Particulars ` `
Profits and Gains from Business or Profession
Sale proceeds of the stock-in-trade 6,50,000
Less: Cost of the stock-in-trade (FMV on the date of 4,50,000 2,00,000
conversion)

Long Term Capital Gains

Full value of the consideration (FMV on the date of the 4,50,000
conversion)

Less: Indexed cost of acquisition (` 50,000 x 331/109) 1,51,835 2,98,165

Note: For the purpose of indexation, the cost inflation index of the year in whichthe asset is
converted into stock-in-trade should be considered.
Illustration 9
Singhania & Co., a sole proprietorship owns six machines, put in use for business in March, 2022.
The depreciation on these machines is charged@15%. The opening balance of these machines after
providing depreciation for P.Y. 2022-23 was` 8,50,000. Three of the old machines were sold on
10th June, 2023 for ` 11,00,000. A second hand plant was bought for ` 8,50,000 on 30th
November, 2023.
 CAPITAL GAINS (Unit - iv) | 3.56
You are required to:
(i) determine the claim of depreciation for Assessment Year 2024-25.
(ii) compute the capital gains liable to tax for Assessment Year 2024-25.
(iii) If Singhania & Co. had sold the three machines in June, 2023 for ` 21,00,000, will there be
any difference in your above workings? Explain.
Solution
(i) Computation of depreciation for A.Y.2024-25
Particulars `
Opening balance of the block as on 1.4.2023 [i.e., W.D.V. ason 8,50,000
31.3.2023 after providing depreciation for P.Y. 2022-23]
Add: Purchase of second-hand plant during the year 8,50,000
17,00,000
Less: Sale consideration of old machinery during the year 11,00,000
W.D.V of the block as on 31.03.2024 6,00,000

Since the value of the block as on 31.3.2024 comprises of a new asset whichhas been put
to use for less than 180 days, depreciation is restricted to 50% of the prescribed
percentage of 15% i.e. depreciation is restricted to 7½%. Therefore, the depreciation
allowable for the year is ` 45,000, being 7½% of ` 6,00,000.
(ii) The provisions under section 50 for computation of capital gains in the case of depreciable
assets can be invoked only under the following circumstances:
(a) When one or some of the assets in the block are sold forconsideration more than
the value of the block.
(b) When all the assets are transferred for a consideration more than thevalue of the
block.
(c) When all the assets are transferred for a consideration less than thevalue of the
block.
Since in the first two cases, the sale consideration is more than the written down value of the
block, the computation would result in short term capital gains.
In the third case, since the written down value of the block exceeds the sale consideration, the
resultant figure would be a short-term capital loss of the block.
In the given case, capital gains will not arise as the block of asset continues to exist, and
some of the assets are sold for a price which is lesser than the written down value of the
block.
If the three machines are sold in June, 2023 for ` 21,00,000, then short term capital gains would
arise, since the sale consideration is more than the aggregate of the written down value of the
block at the beginning of the year and the additions made during the year.
 CAPITAL GAINS (Unit - iv) | 3.57
Particulars ` `
Sale consideration 21,00,000
Less: Opening balance of the block as on 1.4.2023 8,50,000
[i.e., W.D.V. as on 31.3.2023 after providing
depreciation for P.Y. 2022-23]
Purchase of second plant during the year 8,50,000 17,00,000
Short term capital gains 4,00,000

Illustration 10
Mr. A is a proprietor of Akash Enterprises having 2 units. He transferred on 1.4.2023 his Unit 1 by
way of slump sale for a total consideration of ` 25 lacs. The fair market value of capital assets of
unit 1 on 1.4.2023 is ` 30 lacs. Unit 1 was started in the year 2005-06. The expenses incurred for
this transfer were ` 28,000. His Balance Sheet as on 31.3.2023 is as under:
Liabilities Total Assets Unit 1(`) Unit 2 (`) Total
(`) (`)
Own Capital 15,00,000 Building 12,00,000 2,00,000 14,00,000
Revaluation 3,00,000 Machinery 3,00,000 1,00,000 4,00,000
Reserve (for
building of unit 1)
Bank loan (70% for 2,00,000 Debtors 1,00,000 40,000 1,40,000
unit 1)
Trade creditors Other
(25% for unit 1) 1,50,000 assets 1,50,000 60,000 2,10,000
Total 21,50,000 Total 17,50,000 4,00,000 21,50,000

Other information:
(i) Revaluation reserve is created by revising upward the value of the building of Unit 1.
(ii) No individual value of any asset is considered in the transfer deed.
(iii) Other assets of Unit 1 include patents acquired on 1.7.2021 for ` 50,000 onwhich no
depreciation has been charged.
Compute the capital gain for the assessment year 2024-25.
Solution
Computation of capital gains on slump sale of Unit 1
Particulars `
Full value of consideration [Higher of FMV of capital assets of Unit 30,00,000
1 on 1.4.2023 or FMV of monetary consideration received]
Less: Expenses for transfer 28,000
29,72,000
Less: Net worth (See Note 1 below) 12,50,625
Long-term capital gain 17,21,375
 CAPITAL GAINS (Unit - iv) | 3.58
Notes:
1. Computation of net worth of Unit 1 of Akash Enterprises
Particulars ` `
Building (excluding ` 3 lakhs on account of 9,00,000
revaluation)
Machinery 3,00,000
Debtors 1,00,000
Patents (See Note 2 below) 28,125
Other assets (` 1,50,000 – ` 50,000) 1,00,000
Total assets 14,28,125
Less: Creditors (25% of ` 1,50,000) 37,500
Bank Loan (70% of ` 2,00,000) 1,40,000 1,77,500
Net worth 12,50,625

2. Written down value of patents as on 1.4.2023

Value of patents: `
Cost as on 1.7.2021 50,000
Less: Depreciation @ 25% for Financial Year 2021-22 12,500
Balance as on 1.4.2022 37,500
Less: Depreciation for Financial Year 2022-23 9,375
Balance as on 1.4.2023 28,125

For the purposes of computation of net worth, the written down value determined as
per section 43(6) has to be considered in the case of depreciable assets. The problem has
been solved assuming that the Balance Sheet values of ` 3 lakh and ` 9 lakh (` 12 lakh –
` 3 lakh) represent the written down value of machinery and building, respectively, of
Unit 1.
3. Since the Unit is held for more than 36 months, capital gain arising wouldbe long term
capital gain. However, indexation benefit is not available incase of slump sale.
Illustration 11.
Mr. Cee purchased a residential house on July 20, 2021 for ` 10,00,000 and made some additions
to the house incurring ` 2,00,000 in August 2021. He sold the house property in April 2023 for `
20,00,000. Out of the sale proceeds, he spent
` 5,00,000 to purchase another house property in September 2023.
What is the amount of capital gains taxable in the hands of Mr. Cee for the A.Y.2024-25?
Solution
The house is sold before 24 months from the date of purchase. Hence, the house is a short-
term capital asset and no benefit of indexation would be available.
 CAPITAL GAINS (Unit - iv) | 3.59
Particulars `
Sale consideration 20,00,000
Less: Cost of acquisition 10,00,000
Cost of improvement 2,00,000
Short-term capital gains 8,00,000

Illustration 12.
Long term capital gain of ` 75 lakh arising from transfer of building on 1.5.2023 will be exempt from
tax if such capital gain is invested in the bonds redeemable after five years, issued by NHAI under
section 54EC. Examine with reasons whether the given statement is true or false having regard to the
provisions of the Income-tax Act, 1961.
SOLUTION
False: The exemption under section 54EC has been restricted, by limiting the maximum
investment in long term specified assets (i.e. bonds of NHAI or RECL or any other bond notified by
Central Government in this behalf, redeemable after 5 years) to ` 50 lakh, whether such investment
is made during the relevant previous year or the subsequent previous year, or both. Therefore, in this
case, the exemption under section 54EC can be availed only to the extent of ` 50 lakh, provided
the investment is made before 1.11.2023 (i.e., within six months from the date of transfer).
Illustration 13.
Calculate the income-tax liability for the assessment year 2024-25 in the following cases:
Mr. A Mrs. B Mr. C Mr. D
(age 45) (age 62) (age 81) (age 82)
Status Resident Non-resident Resident Non-resident

Total income 2,40,000 3,10,000 5,90,000 4,80,000

other than long-
term capital gain

Long-term 85,000 10,000 60,000 Nil

capital gain from sale from sale of listed from sale of
of vacant equity shares (STT agricultural
site paid on sale and land in
purchase of rural area
shares)
(i) If Mr. A, Mrs. B, Mr. C and Mr. D pay tax under default tax regime u/s 115BAC.

(ii) If Mr. A, Mrs. B, Mr. C and Mr. D exercise the option to shift out of the default tax regime
and pay tax under the optional tax regime as per the normalprovisions of the Act.
Solution
 CAPITAL GAINS (Unit - iv) | 3.60
(i) If Mr. A, Mrs. B, Mr. C and Mr. D pay tax under default tax regime u/s115BAC.
Computation of income-tax liability for the A.Y.2024-25
Particulars Mr. A Mrs. B Mr. C Mr. D
(age 45) (age 62) (age 81) (age 82)

Residential Status Resident Non-resident Resident Non-

resident

Applicable basic ` 3,00,000 ` 3,00,000 ` 3,00,000 ` 3,00,000

exemption limit

Asset sold Vacant site Listed equity Rural -

shares (STT agricultural
paid on both land
sale and
purchase of
shares)
Long-term capital gain ` 85,000 ` 10,000 ` 60,000 -
(on sale of above [Taxable [exempt u/s (Exempt –
asset) 112A since it not a
@20% u/s
112] is less than capital
` 1,00,000] asset)

Other income ` 2,40,000 ` 3,10,000 ` 5,90,000 ` 4,80,000

Tax liability
On LTCG (after adjusting ` 5,000 - - -
unexhausted basic
exemption limit of
` 60,000)
On Other income Nil ` 500 ` 14,500 ` 9,000
` 5,000 ` 500 ` 14,500 ` 9,000
Less: Rebate u/s 87A ` 5,000 - ` 14,500 -
Nil ` 500 Nil ` 9,000
Add: Health & education Nil ` 20 Nil ` 360
cess (HEC) @4%

Total tax liability Nil ` 520 Nil ` 9,360

Note: Since Mr. A and Mr. C are residents whose total income does not exceed ` 7 lakhs, they are
eligible for rebate of ` 25,000 or the actual tax payable, whichever is lower, under section 87A.
 CAPITAL GAINS (Unit - iv) | 3.61

LET US RECAPITULATE

Scope and year of chargeability [Section 45]

Any profits or gains arising from the transfer of a capital asset effected in the
previous year will be chargeable to tax under the head ‘Capital Gains’, and shall be
deemed to be the income of the previous year in which the transfer took place
[Section 45(1)]

Section Profits and gains P.Y. in which Deemed Full Value of

arising from the income is consideration for
following chargeable totax computation of capital
transactions gains under section 48
chargeable as
income

45(1A) Money or other asset The previous year The value of money or the
received under an in which such fair market value of other
insurance from an money or other asset received.
insurer on account of asset is received.
damage/destruction
of any capital asset, as
a result of, flood,
hurricane, cyclone,
earthquake or other
convulsion of nature,
riot or
civildisturbance,
accidental fire or
explosion, action by
an enemy or action
taken in combating
an enemy

45(2) Transfer by way of The previous year The fair market value of the
conversion by the in which such capital asset on the date of
owner of a capital stock-in-trade is such conversion
asset into stock-in- sold or otherwise
trade of a business transferred by him
carried on by him.
 CAPITAL GAINS (Unit - iv) | 3.62
45(5) Transfer by way of The previous year Compensation or
compulsory in which the consideration determinedor
acquisition under any consideration or approved in the first
law, or a transfer, the part thereof is instance by the Central
consideration for first received. Government or RBI
which was
determined or
approved by the
Central Government
or RBI

If the compensation The previous year Amount by which the

or consideration is in which the compensation or
further enhanced by amount was consideration is enhancedor
any court,Tribunal or received by the further enhanced. For this
otherauthority, the assessee. purpose cost of acquisition
enhanced amount and cost of improvement
will be deemed to be shall be taken as ‘Nil’.
the income

However, any
amount of
compensation
received in
pursuance of an
interim order of a
court, Tribunal or
other authority
shall be deemed to
be income
chargeable under the
head “Capital Gains”
of the previous year
in which the final
order of such court,
Tribunal or other
authority is made.

Definitions [Section 2]
Section Term Definition
 CAPITAL GAINS (Unit - iv) | 3.63
2(14) CapitalAsset Capital Asset means –
(a) property of any kind held by an assessee, whether or
not connected with his business or profession;
(b) any securities held by a Foreign Institutional Investor
which has invested in such securities in accordance
with the regulations made under the SEBI Act, 1992.
Exclusions from the definition of Capital Asset:
 Stock in trade [other than securities referred to in
(b) above], raw materials or consumables held for the
purposes of business or profession;
 Personal effects except jewellery, archeological
collections, drawings, paintings, sculptures or any
work of art;
 Rural agricultural land in India i.e. agricultural land
not situated within specified urban limits.
The agricultural land described in (a) and (b) below, being
land situated within the specified urban limits, would fall
within the definition of “capital asset”, and transfer of such
land would attract capital gains tax -
(a) agricultural land situated in any area within the
jurisdiction of a municipality or cantonment board
having population of not less than ten thousand, or
(b) agricultural land situated in any area within such
distance, measured aerially, in relation to the range of
population as shown hereunder -

Shortest Population according to

aeria the last preceding census
l distance from the of which the relevant
local limits of a figures have been
municipality or published before the first
cantonment board day of the
referred to in item (a) previous year.

(i) ≤ 2 kms > 10,000

(ii) > 2 kms but ≤ 6 kms > 1,00,000
(iii) > 6 kms but ≤ 8 kms > 10,00,000
 CAPITAL GAINS (Unit - iv) | 3.64
 Gold Deposits Bonds issued under the Gold Deposit
Scheme, 1999 or deposit certificates issued under
the Gold Monetisation Scheme, 2015 and Gold
Monetisation Scheme, 2018 notified by the Central
Government;
 6½% Gold Bonds, 1977 or 7% Gold Bonds, 1980
or National Defence Gold Bonds, 1980, issued by the
Central Government;
 Special Bearer Bonds, 1991 issued by the Central
Government.
Note: ‘Property’ includes and shall be deemed to have
always included any rights in or in relation to an Indian
company, including rights of management or control or
any other rights whatsoever.

2(42A) Short-term Asset Period of holding to be

capital treated as STCA
asset
A security (other than a not more than 12 months
unit) listed in a immediately preceding the
recognized stock date of its transfer
exchange in India(other
than market linked
debenture and unit of a
specified mutual fund),
a unit of UTI or a unit of
an equity oriented fund
or a zero coupon bond

A share of a company not more than 24 months

(not being a share listed immediately preceding the
in a recognized stock date of its transfer
exchange in India)

An immovable not more than 24 months

property, being land or immediately preceding the
building or both date of its transfer

Any other capital asset not more than 36 months

immediately preceding the
date of its transfer

Note – Capital gains arising from transfer of market linked debenture

and unit of a specified mutual fund would always be capital gains arising
from transfer of short-term capital assets, irrespective of the period of
holding of such assets. This is provided in section 50AA.

2(29A) Long-term Capital asset which is not a short-term capital asset isa
capital long-term capital asset.
asset
Asset Period of holding to
be treated as LTCA
 CAPITAL GAINS (Unit - iv) | 3.65
A security (other than a More than 12 months
unit) listed in a recognized immediately
stock exchange in India preceding the date ofits
(other than market linked transfer
debenture and unit of a
specified mutual fund), a
unit of UTI or a unit of an
equity oriented fund or a
zero coupon bond

A share of a company (not More than 24 months

being a share listed in a immediately
recognized stock exchange preceding the date ofits
in India) transfer

An immovable property, More than 24 months

being land or building or immediately preceding
both the date of its transfer

Any other capital asset More than 36 months

immediately preceding
the date of its transfer

Note – Capital gains arising from transfer of market linked debenture

and unit of a specified mutual fund would always be capital gains arising
from transfer of short-term capital assets, irrespective of the period of
holding of such assets. This is provided in section 50AA.

Transactions not regarded as transfer [Section 47]: Some Examples

 Any distribution of capital assets on the total or partial partition of a HUF
 Any transfer of capital asset under a gift or will or an irrevocable trust
 Any transfer of capital asset by a holding company to its 100% subsidiary
Indian company or by a subsidiary company to its 100% holding Indian
company
 Any transfer or issue of shares by the resulting company, in a schemeof
demerger to the shareholders of the demerged company
 Any transfer by a shareholder in a scheme of amalgamation of shares held
by him in the amalgamating company
 Any transfer by an individual of sovereign gold bonds issued by RBI by way
of redemption
 Any transfer of a capital asset, being conversion of gold into Electronic Gold
Receipt issued by a Vault Manager, or conversion of Electronic Gold
Receipt into gold.
 Any transfer by way of conversion of bonds, debentures, debenture stock,
deposit certificates of a company, into shares or debentures of that
company.
 Any transfer by way of conversion of preference shares of a company into
equity shares of that company
 Any transfer of a capital asset in a transaction of reverse mortgage
under a scheme made and notified by the Central Government
 CAPITAL GAINS (Unit - iv) | 3.66
Mode of computation of Capital Gains [Section 48]
Computation of long-term capital gains
Full value of consideration received or accruing as a result of transfer xx
Less: Expenditure incurred wholly and exclusively in connection with
such transfer (e.g. brokerage on sale) xx
However, the cost of acquisition of the asset or the cost of
improvement thereto would not include the deductions claimed in
respect of interest u/s 24(b) or under the provisions of Chapter VI-A
[i.e., under sections 80EE/ 80EEA]

(Note: Deduction on account of STT paid will not be allowed)

Net Sale Consideration xx
Less: Indexed cost of acquisition and indexed cost of improvement xx
Less: Exemption under sections 54/54B/54D/54EC/54F xx
Long-term capital gains xx
Notes:
(i) Deduction on account of securities transaction tax paid will not be allowed.
(ii) Indexed Cost of Acquisition =

(iii) Indexed Cost of Improvement =

(iv) Benefit of indexation will, however, not be available in respect of long term
capital gains from transfer of bonds or debentures other than capital
indexed bonds issued by the Government and sovereign gold bonds issued
by RBI and in respect of long-term capital gains chargeable to tax under
section 112A.

Computation of short-term capital gains

Full value of consideration received or accruing as a result oftransfer xxx

Less: Expenditure incurred wholly and exclusively in connection

with such transfer (e.g. brokerage on sale) xxx
However, the cost of acquisition of the asset or the cost of
improvement thereto would not include the deductions
claimed on account of interest u/s 24(b) or under the
provisions of Chapter VI-A [i.e., under the provisions of
sections 80EE/80EEA]
(Note: Deduction on account of STT paid will not be allowed)
Net Sale Consideration xxx
Less: Cost of acquisition and cost of improvement xxx
Less: Exemption under sections 54B/54D xxx
 CAPITAL GAINS (Unit - iv) | 3.67
Short-term capital gains xxx
Capital Gains: Special Provisions
Section Particulars
50 Any income from transfer of depreciable assets is deemed to be
capital gains arising from transfer of short-term capital assets,
irrespective of the period of holding (i.e., indexation benefit would
not be available even if the period of holding of such assets is more
than 36 months).

50AA Any income from transfer of unit of a Specified Mutual Fund or Market
Linked Debenture is deemed to be capital gains arising from transfer
of short-term capital assets.

50B Capital Gains on Slump Sale

Any profits and gains arising from slump sale effected in the previous
year shall be chargeable to income-tax as capital gains arising from
the transfer of capital assets and shall be deemed to be the income of
the previous year in which the transfer took place.
Where the undertaking being transferred under slump sale is held for
more than 36 months, the resultant gain is long-term; However, no
indexation benefit would be available. If the undertaking is held for
less than 36 months, the resultant gain is short-term.
Net worth is deemed to be the cost of acquisition and the cost of
improvement - ‘Net worth’ shall be aggregate value of total assets
minus value of liabilities of such undertaking as per books of account.
Fair market value is deemed to be the full value of consideration
- Fair market value of the capital asset as on the date of transfer,
calculated in the prescribed manner, shall be deemed to be the full
value of the consideration received or accruing as a result of the
transfer of such capital asset.
Accordingly, the CBDT has prescribed that, for the purpose of section
50B(2)(ii), the fair market value (FMV) of capital assets would be the
higher of –
(i) FMV 1, being the fair market value of capital assets transferred
by way of slump sale (determined on the date of slump sale);
and
(ii) FMV 2, being the fair market value of the consideration
(monetary and non-monetary) received or accruing as a result of
transfer by way of slump sale
Capital gains = Fair market value – Net Worth
Aggregate value of total assets would be the aggregate of the
following :
i) Written Down Value of depreciable assets;
ii) Nil, in case of self generated goodwill
iii) Nil, in case of capital assets in respect of which the whole of the
expenditure has been allowed or is allowable as deduction
under section 35AD; and
iv) Book value for other assets.
Revaluation of assets shall be ignored for computing Net Worth.
 CAPITAL GAINS (Unit - iv) | 3.68
50C Computation of capital gains on sale of land or building or both

Sl. Condition Deemed Sale

No. Consideration

1. Stamp Duty Value > Actual

Consideration

If Stamp Duty Value > 110% of

Stamp Duty Value
actual consideration

If Stamp Duty Value  110% of Actual sale consideration

actual sale consideration

2. Actual Consideration > Stamp Actual Sale Consideration

Duty Value

3. Value ascertained by Valuation Stamp Duty Value

Officer > Stamp Duty Value

4. Value ascertained by Valuation Value ascertained by

Officer < Stamp Duty Value Valuation Officer

Note – If the date of agreement is different from the date of

transfer, stamp duty value on the date of agreement can be
considered, if whole or part of the consideration is received by way of
account payee cheque/bank draft or ECS or prescribed electronic
modes (IMPS, UPI, RTGS, NEFT, Net banking, debit card, credit card or
BHIM Aadhar Pay) on or before the date of agreement. Otherwise,
stamp duty value on the date of transfer hasto be considered.

50CA Fair Market Value deemed to be full value of consideration in

case of transfer of unlisted shares in certain cases

If consideration received or accruing FMV of such share

as a result of transfer of unquoted determined in the
share < FMV of such share prescribed manner would be
determined in the prescribed manner deemed as the full value of
The provisions of this section consideration
would not, however, be applicable to
any consideration received or
accruing as a result of transfer by
such class of persons and subject to
such conditions as may be prescribed.

50D Fair Market Value deemed to be full value of consideration in

certain cases
Where the consideration received or FMV of the said asset on the
accruing as a result of the transfer of date of transfer would be
a capital asset by an assessee is not deemed as the full value of
ascertainable or cannot be consideration
determined
 CAPITAL GAINS (Unit - iv) | 3.69
51 Advance money received and forfeited upto 31.3.2014
Where the assessee has received advance money on an earlier
occasion for transfer of capital asset, but the transfer could not be
effected due to failure of negotiations, then, the advance money
forfeited by the assessee has to be reduced from the cost of
acquisition (and indexation would be calculated on the cost so
reduced) while computing capital gains, when the capital asset is
transferred or sold.
Advance money received and forfeited on or after 1.4.2014
Such advance money received on or after 1.4.2014 would be taxable
under section 56(2) under the head “Income from other sources”.
Therefore, advance money received and forfeited on or after 1.4.2014
should not be deducted from the cost for determining the indexed
cost of acquisition while computing capital gains arising on transfer
of the asset.

111A Tax on short-term capital gains on transfer of equity shares and

units of equity oriented fund on which STT is chargeable
 Any short-term capital gains on transfer of equity shares or units
of an equity oriented fund shall be liable to tax @15%, if
securities transaction tax has been paid on such sale.
 In case of resident individuals and HUF, the short-term capital
gain shall be reduced by the unexhausted basic exemption
limit and the balance shall be taxed at 15%.
 No deduction under Chapter VI-A can be claimed in respect
of such short-term capital gain.
 Short-term capital gains arising from transaction undertakenin
foreign currency on a recognized stock exchange located in an
International Financial Services Centre (IFSC) would be taxable at
a concessional rate of 15% even when STT is not paid in respect
of such transaction.
112 Tax on long-term capital gains
 Any long-term capital gains, other than long term capital gains
taxable under section 112A, shall be liable to tax@20%.
 In case of resident individuals and HUFs, the long-term capital
gain shall be reduced by the unexhausted basic exemption
limit, and the balance shall be subject to tax at 20%.
 In case of non-corporate non-resident or foreign company, capital
gains arising from the transfer of a capital asset, being unlisted
securities, or shares of a closely held company shall be chargeable
to tax @10% without giving effect to the indexation provision
under second proviso to section 48 and currency conversion
under first proviso to section 48.
 Capital gains on transfer of listed securities (other than units)
or zero coupon bonds shall be chargeable to tax@10%
computed without the benefit of indexation or @20%
availing the benefit of indexation, whichever is more
beneficial to the assessee.
 No deduction under Chapter VI-A can be claimed in respect
of long-term capital gains.
 CAPITAL GAINS (Unit - iv) | 3.70
112A Tax on long-term capital gains on certain assets
 Any long-term capital gains exceeding ` 1,00,000 on
transfer of equity shares or units of an equity oriented fund shall
be liable to tax @10% on such capital gain, if securities
transaction tax has been paid on acquisition and such salein
case of equity share, and on such sale in case of units of an
equity oriented mutual fund.
 In case of resident individuals and HUF, the long-term capital
gain shall be reduced by the unexhausted basic exemption
limit and the balance shall be taxed at 10%.
 No deduction under Chapter VI-A or rebate under section
87A can be claimed in respect of such long-term capital gain.
Long-term capital gains (in excess of ` 1,00,000) arising from
transaction undertaken on a recognized stock exchange located in
an International Financial Services Centre (IFSC) would be taxable at
a concessional rate of 10%, where the consideration for transfer is
received or receivable in foreign currency, even when STT is not
paid in respect of such transaction.

Cost of Acquisition [Section 55]

Sl. Nature of asset Cost of acquisition
No.
1 Goodwill of business or profession,
trademark, brand name or any other
intangible asset etc.,
- Self generated Nil
- Acquired from previous owner Purchase price
However, in case of capital asset, Purchase price as reduced by the
being goodwill of a business or total amount of depreciation
profession, in respect of which obtained by the assessee under
depreciation u/s 32(1) has been section 32(1).
obtained by the assessee in any
P.Y. (upto P.Y.2019-20)

- became the property of the assessee Purchase price for such

by way of distribution of assets on previous owner
total or partial partition of HUF,
under a gift or will, by succession,
inheritance,
distribution of assets on
liquidation of a company, etc. and
previous owner has acquired it by
purchase

However, in case of capital asset,being Purchase price as reduced by

goodwill of a business or the total amount of
 CAPITAL GAINS (Unit - iv) | 3.71
profession which was acquired by depreciation obtained by the
the previous owner by purchase and assessee under section 32(1).
in respect of which depreciation u/s
32(1) has been obtained by the
assessee in any
P.Y. (upto P.Y.2019-20)
The cost of improvement of such assets
would be Nil.

2. Bonus shares
If bonus shares are allotted before FMV on 1.4.2001
1.4.2001
Nil
If bonus shares are allotted on orafter
1.4.2001
The higher of –
Bonus shares allotted before 1.2.2018,
(i) Actual cost of acquisition
on which STT has been paid at the time
(i.e., Nil, in case of bonus
of transfer
shares allotted on or after
1.4.2001; and
FMV on 1.4.2001, in case of
bonus shares allotted
before 1.4.2001)
(ii) Lower of –
(a) FMV as on 31.1.2018;
and
(b)Actual sale
consideration

3. Rights Shares
Original shares (which forms the basis Amount actually paid for
of entitlement of rights shares) acquiring the original shares
Rights shares subscribed for by the Amount actually paid for
assessee acquiring the rights shares
Rights entitlement (which is Nil
renounced by the assessee in favour of
a person)
Rights shares which are purchased by Purchase price paid to the
the person in whose favour the renouncer of rights entitlement as
assessee has renounced the rights well as the amount paid to the Co.
entitlement which has allotted the rights shares.
 CAPITAL GAINS (Unit - iv) | 3.72
4. Long term capital assets being, Cost of acquisition shall be the
- equity shares in a company on higher of -
which STT is paid both at the time (i) cost of acquisition of such
of purchase and transfer or
asset; and
- unit of equity oriented fund on
which STT is paid at the time of (ii) lower of
transfer. - the FMV of such asset
acquired before 1st February, 2018 on 31.1.2018; and
- the full value of
consideration recd or
accruing as a result of
the transfer of the
capital asset.
5. Any other capital asset Cost of the asset to the
Where such capital asset became the assessee, or FMV as on
property of the assessee before 1.4.2001, at the option of the
1.4.2001 assessee. However, in case of
capital asset being land or
building, FMV as on 1.4.2001
shall not exceed stamp duty
value as on 1.4.2001.
Where capital assets became the Cost to the previous owner or
property of the assessee by way of FMV as on 1.4.2001, at the option
distribution of assets on total or of the assessee. However, in case
partial partition of HUF, under a gift or of capital asset being land or
will, by succession, inheritance, building, FMV as on 1.4.2001
distribution of assets on liquidation of shall not exceed stamp duty
a company, etc and the capital asset value as on 1.4.2001.
became the property of the previous
owner before 1.4.2001.

The provisions contained in (5) above shall also apply to the assets
mentioned in (3) and (4) above.
Cost of the property in the hands of The FMV on the date on which
previous owner cannot be the capital asset become the
ascertained property of the previous
owner would be considered as
cost of acquisition.

Cost of improvement of certain assets [Section 55]

Sl. Nature of asset Cost of improvement
No.
 CAPITAL GAINS (Unit - iv) | 3.73
1 Goodwill or any other Nil
intangible asset of a business,
right to manufacture, produce
or process any article or thing,
right to carry on any business
or profession or any other
right.
2 Where the capital asset All expenditure of a capital nature
became the property of the incurred in making any addition or
previous owner or the alteration to the capital asset on or
assessee before after 1.4.2001 by the previous owner or
1-4-2001 the assessee.
3 In relation to any other capital All capital expenditure incurred in
asset making additions or alterations to the
capital asset on or after 1.4.2001 –
- by the assessee after it became his
property; and
- by the previous owner [in a case
where the assessee acquired the
property by modes specified in
section 49(1)].
Capital Gains: Exemptions under section 10
Section Particulars
10(37) Where any individual or HUF owns urban agricultural land which
has been used for agricultural purposes for a period of two
years immediately preceding the date of transfer by such
individual or a parent of his or by such HUF and the same is
compulsorily acquired under any law or the consideration for such
transfer is determined or approved by the Central Government or
the RBI, resultant capital gain will be exempt provided the
compensation or consideration for such transfer is received on or
after 1.4.2004.
10(43) The amount received by the senior citizen as a loan, either in
lump sum or in installments, in a transaction of reverse mortgage
would be exempt from income-tax.
 CAPITAL GAINS (Unit - iv) | 3.74
Exemption of Capital Gains [Sections 54 to 54F]
S. Particulars Section 54 Section 54B Section 54D Section 54EC Section 54F
No.
1 Eligible Individual/ HUF Individual/ HUF Any assessee Any assessee Individual/ HUF
Assessee
2 Asset Residential Urban Land & building Land or buildingor Any LTCA other than
transferred House (LTCA) Agricultural forming part of an both (LTCA) Residential House.
Land industrial
undertaking

3 Other Income from Land should be Land & building have - Assessee should not own
Conditions such house used for been used for business more than one residential
agricultural of undertaking for at house on the date of
should be
purposes by least 2 years transfer. He should not
chargeable immediately preceding
under the head assessee or his purchase within 2 years
the date of transfer.
“Income from parents or HUF
The transfer should be
or construct within 3
house property” for 2
by way of compulsory
years after the date of
years acquisition of the transfer, another
immediately industrial undertaking residential house.
preceding the
date of transfer

4 Qualifying One Residential Land for being Land or Building or Bonds of NHAI or One Residential House
asset i.e., asset House situated in used for right in land or RECL or any other situated in India
in which India/Two agricultural building bond notified by
capital gains residential purpose C.G. (Redeemable
has to be houses in India, (Urban/ after 5 years)
invested at the option of Rural)

the assessee,
where capital
gains does not
exceed ` 2 crore
 CAPITAL GAINS (Unit - iv) | 3.75
5 Time limit for Purchase within Purchase within Purchase/ construct Purchase within a Purchase within 1 year
purchase/ 1 year before or a period of 2 within 3 years after period of 6 before or 2 years after
construction 2 years after the years after the the date of transfer, months after the the date of transfer
date of transfer date of transfer for shifting or re- date of transfer (or)
(or) establishing the Construct within 3 years
construct within existing undertaking after the date of transfer
3 years after the or setting up a new
date of transfer industrial
undertaking.

6 Amount of Cost of new Cost of new Cost of new asset or Capital Gain or Cost of new Residential
Exemption Residential Agricultural Capital Gain, amount invested in House ≥ Net sale
House or two Land or Capital whichever is lower. specified bonds, consideration of original
houses, as the Gain, whichever whichever is lower. asset, entire Capital gain
Maximum is exempt.
case may be or is lower,
permissible Cost of new Residential
Capital Gain, isexempt investment out of
whichever House < Net sale
capital gains arising
islower, in any financial year consideration of original
is exempt. is ` 50 lakhs, asset, proportionate
However, if the whether such capital gain is exempt.
cost of new investment is made However, if the cost of
residential in the current FY or new residential house
subsequent FY or exceeds ` 10 crore, the
house exceeds
both. amount exceeding ` 10
`
10 crore, the
amount
 CAPITAL GAINS (Unit - iv) | 3.76
exceeding ` crore would not be taken
10crore would into account for
notbe exemption.
taken into
account for
exemption. The
maximum
exemption that
can be claimed
by the assessee
is ` 10 crore.
 CAPITAL GAINS (Unit - iv) | 3.77

PAST QUESTIONS
Problem 1
What is the meaning of long term capital gains under the new tax regime for long
term capital gains?
Solution
Long term capital gains mean gains arising from the transfer of long-term capitalasset. It provides
for a new long-term capital gains tax regime for the following assets–
i. Equity Shares in a company listed on a recognised stock exchange;
ii. Unit of an equity oriented fund; and
iii. Unit of a business trust.
The new tax regime applies to the above assets, if–

a. the assets are held for a minimum period of twelve months from the date of acquisition;
and
b. the Securities Transaction Tax (STT) is paid at the time of transfer. However, in the case of
equity shares acquired after 1.10.2004, STT is required to be paid even at the time of
acquisition (subject to notified exemptions).
Problem 2
What is the point of chargeability of the tax?
Answer
The tax will be levied only upon transfer of the long-term capital asset on or after 1st April,
2018, as defined in clause (47) of section 2 of the Act.
Problem 3

What is the method for calculation of long-term capital gains?

Solution
The long-term capital gains will be computed by deducting the cost of acquisition from the
full value of consideration on transfer of the long-term capital asset.

Problem 4
How do we determine the cost of acquisition for assets acquired on or before 31st January,
2018?
Solution
The cost of acquisition for the long-term capital asset acquired on or before 31st of
January,2018 will be the actual cost.
 CAPITAL GAINS (Unit - iv) | 3.78
However, if the actual cost is less than the fair market value of such asset as on 31st of January,
2018, the fair market value will be deemed to be the cost of acquisition.
Further, if the full value of consideration on transfer is less than the fair market value, then
such full value of consideration or the actual cost, whichever is higher, will be deemed to be the
cost of acquisition.

Problem 6
Whether the cost of acquisition will be inflation indexed?
Solution
Third proviso to section 48, provides that the long-term capital gain will be computed without
giving effect to the provisions of the second provisos of section 48. Accordingly, it is clarified
that the benefit of inflation indexation of the cost of acquisition would not be available for
computing long-term capital gains under the new tax regime.
Problem 7
What will be the tax treatment of transfer made on or after 1st April 2018?
Solution

The long-term capital gains exceeding ` 1 lakh arising from transfer of these assets made on
after 1st April, 2018 will be taxed at 10 per cent. However, there will be no tax on gains
accrued upto 31st January, 2018.
Problem 8
What is the date from which the holding period will be counted?
Solution
The holding period will be counted from the date of acquisition.
Problem 9
Whether tax will be deducted at source in case of gains by resident tax payer?
Solution
No. There will be no deduction of tax at source from the payment of long-term capital gains
to a resident tax payer.
Problem 10
What will be the cost of acquisition in the case of bonus shares acquired before 1st
February 2018?
Solution
The cost of acquisition of bonus shares acquired before 31st January, 2018 will be determined
as per section 55(2)(ac). Therefore, the fair market value of the bonus shares as on 31st
January, 2018 will be taken as cost of acquisition (except in some typical situations explained
in Ans 5), and hence, the gains accrued upto 31st January, 2018 will continue to be exempt.
Problem 11
What will be the cost of acquisition in the case of right share acquired before 1st
February 2018?
 CAPITAL GAINS (Unit - iv) | 3.79
Solution
The cost of acquisition of right share acquired before 31st January, 2018 will be
determined as per section 55(2)(ac). Therefore, the fair market value of right share as on
31st January, 2018 will be taken as cost of acquisition (except in some typical situations
explained in Ans 5), and hence, the gains accrued upto 31st January, 2018 will continue to be
exempt.
Problem 12
What will be the treatment of long-term capital loss arising from transfer made on or
after 1st April, 2018?

The Finance (No. 2) Act, 2019 has levied an enhanced surcharge of 25% and 37%, where the
total income of individuals/HUF/AOPs/BOIs exceeds ` 2 crores and ` 5 crores, respectively.
However, the enhanced surcharge has been withdrawn on tax payable at special rates under
section 111A and 112A on short-term and long-term capital gains arising from the transfer
of equity share in a company or unit of an equity-oriented fund/ business trust, which has
been subject to securities transaction tax. Refer to Chapter 1 containing rates of surcharge for
understanding the manner of computation of surcharge on capital gains and other income
components of total income.
Solution
Long-term capital loss arising from transfer made on or after 1st April, 2018 will be allowed to
be set-off and carried forward in accordance with existing provisions of the Act. Therefore, it can
be set-off against any other long-term capital gains and unabsorbed loss can be carried forward
to subsequent eight years for set-off against long-term capital gains.
 CAPITAL GAINS (Unit - iv) | 3.80
Questions & Answers
1. Mr. Mithun purchased 100 equity shares of M/s Goodmoney Co. Ltd. on 01- 04-2007 at rate of
`1,000 per share in public issue of the company by paying securities transaction tax.
Company allotted bonus shares in the ratio of 1:1 on 01.12.2022. He has also received dividend of
`10 per share on 01.05.2023.
He has sold all the shares on 01.10.2023 at the rate of ` 4,000 per share through a recognized
stock exchange and paid brokerage of 1% and securities transaction tax of 0.02%.
Compute his total income and tax liability for A.Y. 2024-25 if Mr. Mithun pays tax under default tax
regime, assuming that he is having no income other than given above. Fair market value of shares
of M/s Goodmoney Co. Ltd. on 31.1.2018 is ` 2,000.
Answer
Computation of total income & tax liability of Mr. Mithun for A.Y. 2024-25
Particulars `
Long term capital gains on sale of original shares
Gross sale consideration (100 x ` 4,000) 4,00,000
Less: Brokerage@1% 4,000
Net sale consideration 3,96,000
Less: Cost of acquisition (100 x ` 2,000) (Refer Note 2) 2,00,000
Long term capital gains 1,96,000
Short term capital gains on sale of bonus shares
Gross sale consideration (100 x ` 4,000) 4,00,000
Less: Brokerage@1% 4,000
Net sale consideration 3,96,000
Less: Cost of acquisition of bonus shares NIL
Short term capital gains 3,96,000
Income from other sources
Dividend received from M/s Goodmoney Co. Ltd. is taxable inthe 2,000
hands of shareholders [200 shares x 10 per share]
Total Income 5,94,000
Tax Liability
Tax on dividend (since it is lower than the basic exemption Nil
limit)
Tax on STCG u/s 11A
15% of (` 3,96,000 - ` 2,98,000, being unexhausted basic 14,700
exemption limit)
Tax on LTCG u/s 112A
10% of (` 1,96,000 - ` 1,00,000) 9,600
24,300
Less: Rebate u/s 87A 14,700
9,600
Add: Health and education cess @4% 384
Tax liability 9,984
Tax liability (rounded off) 9,980
 CAPITAL GAINS (Unit - iv) | 3.81
Notes:
(1) Long-term capital gains exceeding ` 1 lakh on sale of original shares through a recognized stock
exchange (STT paid at the time of acquisition and sale) is taxable under section 112A at a
concessionalrate of 10%, without indexation benefit.
(2) Cost of acquisition of such equity shares acquired before 1.2.2018 is higherof
- Cost of acquisition i.e., ` 1,000 per share and
- lower of
Fair market value of such asset i.e., ` 2,000 per share andFull value of consideration
i.e., ` 4,000 per share.
Therefore, the cost of acquisition of original share is ` 2,000 per share.
(3) Since bonus shares are held for less than 12 months before sale, the gain arising therefrom is
a short-term capital gain chargeable to tax@15% as per section 111A after adjusting the
unexhausted basic exemption limit (` 3,00,000 less ` 2,000, being the amount of dividend).
Since Mr. Mithun is paying tax under default tax regime, he is entitled for a basic exemption
limit of ` 3,00,000 for A.Y. 2024-25.
(4) Brokerage paid is allowable since it is an expenditure incurred wholly and exclusively in
connection with the transfer. Hence, it qualifies for deduction under section 48(i).
(5) Cost of bonus shares will be Nil as such shares are allotted after 1.04.2001.
(6) Securities transaction tax is not allowable as deduction.

2. Aarav converts his plot of land purchased in July, 2004 for ` 80,000 into stock-in-trade on 31st
March, 2023. The fair market value as on 31.3.2023 was ` 3,00,000. The stock-in-trade was sold
for ` 3,25,000 in the month of January, 2024.
Find out the taxable income, if any, and if so under which head of income and for which
Assessment Year?
Cost Inflation Index: F.Y. 2004-05:113; F.Y. 2022-23: 331; F.Y. 2023-24: 348.
Answer
Conversion of a capital asset into stock-in-trade is a transfer within the meaning of section 2(47) in the
previous year in which the asset is so converted. However, the capital gains will be charged to tax only in
the year in which the stock-in-trade is sold.
The cost inflation index of the financial year in which the conversion took place should be considered for
computing indexed cost of acquisition. Further, the fair market value on the date of conversion would be
deemed to be the full value of consideration for transfer of the asset as per section 45(2). The sale price
less the fair market value on the date of conversion would be treated as the business income of the year
in which the stock-in- trade is sold.
Therefore, in this problem, both capital gains and business income would be charged to tax in the A.Y.
2024-25.
Particulars `
Capital Gains
Full value of consideration (Fair market value on the date of 3,00,000
conversion)
Less: Indexed cost of acquisition (` 80,000 × 331/113) 2,34,336
Long-term capital gain 65,664
Profits & Gains of Business or Profession
 CAPITAL GAINS (Unit - iv) | 3.82
Sale price of stock-in-trade 3,25,000
Less: Fair market value on the date of conversion 3,00,000
25,000

Computation of taxable income of Mr. Aarav for A.Y.2024-25

Particulars `
Profits and gains from business or profession 25,000
Long term capital gains 65,664
Taxable Income 90,664
3. Mrs. Harshita purchased a land at a cost of ` 35 lakhs in the F.Y. 2004-05 and held the same as her
capital asset till 20th March, 2023.
She started her real estate business on 21st March, 2023 and converted the said land into stock-in-
trade of her business on the said date, when the fair market value of the land was ` 210 lakhs.
She constructed 15 flats of equal size, quality and dimension. Cost of construction of each flat is `
10 lakhs. Construction was completed in February, 2024. She sold 10 flats at ` 30 lakhs per flat in
March, 2024. The remaining 5 flats were held in stock as on 31st March, 2024.
She invested ` 50 lakhs in bonds issued by National Highways Authority of India on 31st March,
2024 and another ` 50 lakhs in bonds of Rural Electrification Corporation Ltd. in April, 2024.
Compute the amount of chargeable capital gain and business income in the hands of Mrs. Harshita
arising from the above transactions for
A.Y. 2024-25 indicating clearly the reasons for treatment for each item. [Cost Inflation Index: F.Y.
2004-05: 113; F.Y. 2022-23: 331; F.Y. 2023-24: 348].
Answer
Computation of capital gains and business income ofHarshita for A.Y. 2024-25
Particulars `
Capital Gains
Fair market value of land on the date of conversion deemed asthe 2,10,00,000
full value of consideration for the purposes of section 45(2)

Less: Indexed cost of acquisition [` 35,00,000 × 331/113] 1,02,52,212

1,07,47,788
Proportionate capital gains arising during A.Y. 2024-25[` 71,65,192
1,07,47,788 x 2/3]

Less: Exemption under section 54EC 50,00,000

Capital gains chargeable to tax for A.Y.2024-25 21,65,192
Business Income
Sale price of flats [10 × ` 30 lakhs] 3,00,00,000
Less: Cost of flats
Fair market value of land on the date of conversion[` 1,40,00,000
210 lacs × 2/3]
1,00,00,000
Cost of construction of flats [10 × ` 10 lakhs]
Business income chargeable to tax for A.Y.2024-25
60,00,000
 CAPITAL GAINS (Unit - iv) | 3.83
Notes:
(1) The conversion of a capital asset into stock-in-trade is treated as atransfer under section 2(47). It
would be treated as a transfer in the year in which the capital asset is converted into stock-in-
trade (i.e., P.Y.2022-23, in this case).
(2) As per section 45(2), the capital gains arising from the transfer by way of conversion of
capital assets into stock-in-trade will be chargeableto tax only in the year in which the stock-
in-trade is sold.
(3) The indexation benefit for computing indexed cost of acquisition would, however, be available
only up to the year of conversion of capital asset into stock-in-trade (i.e., P.Y.2022-23) and not
up to the year of sale of stock-in-trade (i.e., P.Y.2023-24).
(4) For the purpose of computing capital gains in such cases, the fair market value of the capital
asset on the date on which it was converted into stock-in-trade shall be deemed to be the full
value of consideration received or accruing as a result of the transfer of thecapital asset.
In this case, since only 2/3rd of the stock-in-trade (10 flats out of 15 flats) is sold in the P.Y.2023-
24, only proportionate capital gains (i.e., 2/3rd) would be chargeable to tax in the A.Y.2024-25.
(5) On sale of such stock-in-trade, business income would arise. The business income chargeable
to tax would be the difference between the price at which the stock-in-trade is sold and the
fair market value on the date of conversion of the capital asset into stock-in-trade.
(6) In case of conversion of capital asset into stock-in-trade and subsequent sale of stock-in-trade, the
period of 6 months is to be reckoned from the date of sale of stock-in-trade for the purpose of
exemption under section 54EC [CBDT Circular No.791 dated 2.6.2000]. In this case, since the
investment in bonds of NHAI has been made within 6 months of sale of flats, the same qualifies
for exemption under section 54EC. With respect to long-term capital gains arising on land or
building or both in any financial year, the maximum deduction under section 54EC would be ` 50
lakhs, whether the investment in bonds of NHAI or RECL are made in the same financial year or
next financial year or partly in the same financial year and partly in the next financial year.
(7) Therefore, even though investment of ` 50 lakhs has been made in bonds of NHAI during the P.Y.
2023-24 and investment of ` 50 lakhs has been made in bonds of RECL during the P.Y. 2024-25,
both within the stipulated six month period, the maximum deduction allowable for A.Y. 2024-25,
in respect of long-term capital gain arising on sale of long-term capital asset(s) during the P.Y.
2023-24, is only ` 50 lakhs.
4. Mr. A is an individual carrying on business. His stock and machinery were damaged and
destroyed in a fire accident.
The value of stock lost (total damaged) was ` 6,50,000. Certain portion of the machinery could be
salvaged. The opening balance of the block as on 1.4.2023 (i.e., WDV as on 31.3.2023
after providing depreciation for P.Y. 2022-23) was ` 10,80,000.
During the process of safeguarding machinery and in the fire fighting operations, Mr. A lost his
gold chain and a diamond ring, which he had purchased in April, 2005 for ` 1,20,000. The
market value of these two itemsas on the date of fire accident was ` 1,80,000.
Mr. A received the following amounts from the insurance company:
(i) Towards loss of stock ` 4,80,000
(ii) Towards damage of machinery ` 6,00,000
(iii) Towards gold chain and diamond ring ` 1,80,000
 CAPITAL GAINS (Unit - iv) | 3.84
You are requested to briefly comment on the tax treatment of the above threeitems under the
provisions of the Income-tax Act, 1961.
Answer
(i) Compensation towards loss of stock: Any compensation received from the insurance
company towards loss/damage to stock in trade isto be construed as a trading receipt. Hence,
` 4,80,000 received as insurance claim for loss of stock has to be assessed under the head
“Profit and gains of business or profession”.
Note - The assessee can claim the value of stock destroyed by fire as revenue loss, eligible for
deduction while computing income under the head “Profits and gains of business or profession”.
(ii) Compensation towards damage to machinery: The question does not mention whether the
salvaged machinery is taken over by the Insurance company or whether there was any
replacement of machinery during the year. Assuming that the salvaged machinery is taken over
by the Insurance company, and there was no fresh addition of machinery during the year, the
block of machinery will cease to exist. Therefore, ` 4,80,000 being the excess of written
down value (i.e.` 10,80,000) over the insurance compensation (i.e. ` 6,00,000) will be
assessable as a short-term capital loss.
Note – If new machinery is purchased in the next year, it will constitute the new block of
machinery, on which depreciation can be claimed for that year.
(iii) Compensation towards loss of gold chain and diamond ring: Gold chain and diamond ring are
capital assets as envisaged by section 2(14). They are not “personal effects”, which alone are to be
excluded. If any profit or gain arises in a previous year owing to receipt of insurance claim, the
same shall be chargeable to tax as capital gains. The capital gains has to be computed by reducing
the indexed cost of acquisition of jewellery from the insurance compensation of ` 1,80,000.
5. Mr. Sarthak entered into an agreement with Mr. Jaikumar to sell his residential house
located at Kanpur on 16.08.2023 for ` 1,50,00,000.
The sale proceeds were to be paid in the following manner:
i. 20% through account payee bank draft on the date of agreement.
ii. 60% on the date of the possession of the property.
iii. Balance after the completion of the registration of the title to theproperty.

Mr. Jaikumar was handed over the possession of the property on 15.12.2023 and the
registration process was completed on 14.01.2024. He paid the sale proceeds as per the sale
agreement.
The value determined by the Stamp Duty Authority-(a) on

16.08.2023 was ` 1,70,00,000;

(b) on 15.12.2023 was ` 1,71,00,000; and(c) on
14.01.2024 was ` 1,71,50,000.
Mr. Sarthak had acquired the residential house at Kanpur on 01.04.2001 for
` 30,00,000. After recovering the sale proceeds from Jaikumar, he purchased two residential
house properties, one in Kanpur for ` 20,00,000 on 24.3.2024 and another in Delhi for `
35,00,000 on 28.5.2024.
 CAPITAL GAINS (Unit - iv) | 3.85
Compute the income chargeable under the head "Capital Gains" of Mr. Sarthak for the
Assessment Year 2024-25.
Cost Inflation Index for Financial Year(s): 2001-02 - 100; 2023-24 – 348
Answer
Computation of income chargeable under the head “Capital Gains”
of Mr. Sarthak for A.Y. 2024-25
Particulars `
Capital Gains on sale of residential house
Actual sale consideration ` 1,50,00,000
Value adopted by Stamp Valuation `
1,70,00,000Authority on the date of agreement
[As per section 50C, where the actual sale consideration is
less than the value adopted by the Stamp Valuation
Authority for the purpose of charging stamp duty, and
such stamp duty value exceeds 110% of the actual sale
consideration, then, the value adopted by the Stamp
Valuation Authority shall be taken to be the full value of
consideration.
In a case where the date of agreement is different from the
date of registration, stamp duty value on the date of
agreement can be considered provided the whole or part
of the consideration is paid by way of account payee
cheque/bank draft or by way of ECS through bank account
or through such other electronic mode as may be
prescribed, on or before the date of agreement.
In this case, since 20% of ` 150 lakhs is paid through
account payee bank draft on the date of agreement, stamp
duty value on the date of agreement would be considered
for determining the full value of consideration]
Full value of sale consideration [Stamp duty value on the 1,70,00,000
date of agreement, since it exceeds 110% of the actual sale
consideration]
Less: Indexed cost of acquisition of residential house
[` 30 lakhs x 348/100] 1,04,40,000
Long-term capital gains [Since the residential house 65,60,000
property was held by Mr. Sarthak for more than 24 months
immediately preceding the date of its transfer]
Less: Exemption u/s 54 55,00,000
Since, long-term capital gains does not exceed ` 2 crore,
he would be eligible for exemption in respect of both the
residential house properties purchased in India. The capital
gain arising on transfer of a long-term residential property
shall not be chargeable to tax to the extent such capital
gain is invested in the purchase of these residential house
properties in India within one year before or two years
 CAPITAL GAINS (Unit - iv) | 3.86
after the date of transfer of original asset. Thus, he would
be eligible for exemption of ` 55,00,000 being `
20,00,000
and ` 35,00,000 invested on acquisition of residential
house property in Kanpur and Delhi, respectively.
Long term capital gains chargeable to tax 10,60,000

6. Mrs. Yuvika bought a vacant land for ` 80 lakhs in May 2005. Registration and other
expenses were 10% of the cost of land. She constructed a residential building on the said land
for ` 100 lakhs during the financial year 2007-08.
She entered into an agreement for sale of the above said residential house with Mr. Johar
(not a relative) in April 2015. The sale consideration was fixedat ` 700 lakhs and on 23-4-
2015, Mrs. Yuvika received ` 20 lakhs as advance in cash by executing an agreement.
However, due to failure on part ofMr. Johar, the said negotiation could not materialise and
hence, the said amount of advance was forfeited by Mrs. Yuvika.
Mrs. Yuvika, again entered into an agreement on 01.08.2023 for sale of thishouse at ` 810
lakhs. She received ` 80 lakhs as advance by RTGS. The stamp duty value on the date of
agreement was ` 890 lakhs. The sale deed was executed and registered on 14-1-2024 for the
agreed consideration. However, the State stamp valuation authority had revised the values,
hence, the value of property for stamp duty purposes was ` 900 lakhs. Mrs. Yuvika paid 1% as
brokerage on sale consideration received.
Subsequent to sale, Mrs. Yuvika made following acquisition/investments:

(i) Acquired two residential houses at Delhi and Chandigarh for ` 130 lakhs and ` 50
lakhs, respectively, on 31.1.2024 and 15.5.2024
(ii) Acquired a residential house at UK for ` 180 lakhs on 23.3.2024.
(iii) Subscribed to NHAI capital gains bond (approved under section 54EC) for ` 50 lakhs on
29-3-2024 and for ` 40 lakhs on 12-5-2024.
Compute the income chargeable under the head 'Capital Gains' of Mrs. Yuvika for A.Y.2024-25.
The choice of exemption must be in the manner most beneficial to the assessee.
Cost Inflation Index: F.Y. 2005-06 – 117; F.Y. 2007-08 – 129; F.Y. 2023-24 - 348.
Answer
 CAPITAL GAINS (Unit - iv) | 3.87
Computation of income chargeable under the head “Capital Gains” of
Mrs. Yuvika for A.Y.2024-25
Particulars ` (in ` (in
lakhs) lakhs)
Capital Gains on sale of residential building
Actual sale consideration ` 810 lakhs
Value adopted by Stamp Valuation Authority ` 890
lakhs
[Where the actual sale consideration is less than the
value adopted by the Stamp Valuation Authority for the
purpose of charging stamp duty, and such stamp duty
value exceeds 110% of the actual sale consideration,
then, the value adopted by the Stamp

Valuation Authority shall be taken to

be the full value of consideration as per section 50C.
However, where the date of agreement is different
from the date of registration, stamp duty value on
the date of agreement can be considered provided
the whole or part of the consideration is received by
way of account payee cheque/bank draft or by way
of ECS through bank account or through prescribed
electronic modes on or before the date of
agreement.
In this case, since advance of ` 80 lakh is received by
RTGS, i.e., one of the prescribed modes, stamp duty
value on the date of agreement can be adopted as
the full value of consideration. However, in the
present case since stamp duty value on the date of
agreement does not exceed 110% of the actual
consideration, actual sale consideration would be
taken as the full value of consideration]
Gross Sale consideration (Actual consideration, since 810.00
stamp duty value on the date of agreement does not
exceed 110% of the actual consideration)
Less: Brokerage @1% of sale consideration (1% of
` 810 lakhs) 8.10
Net Sale consideration 801.90
Less: Indexed cost of acquisition
- Cost of vacant land, ` 80 lakhs, plus 261.74
registration and other expenses i.e., ` 8
lakhs, being 10% of cost of land [` 88
lakhs × 348/117]
- Construction cost of residential building
(` 100 lakhs x 348/129) 269.77 531.51
 CAPITAL GAINS (Unit - iv) | 3.88

Long-term capital gains 270.39

Since the residential house property was held by
Mrs. Yuvika for more than 24 months immediately
preceding the date of its transfer, the resultant gain
is a long-term capital gain]

Less: Exemption under section 54 130.00

Where long-term capital gains exceed ` 2
crore, the capital gain arising on transfer of a long-
term residential property shall not be chargeable
to tax to the extent such capital gain is invested
in the purchase of one residential house property
in India, one year
before or two years after the date of transfer of
original asset.

Therefore, in the present case, the exemption

would be available only in respect of the one
residential house acquired in India and not in
respect of the residential house in UK. It would be
more beneficial for her to claim the cost of
acquisition of residential house at Delhi, i.e.,
` 130 lakhs as exemption.

Less: Exemption under section 54EC 50.00

Amount invested in capital gains bonds of NHAI
within six months after the date of transfer (i.e.,
on or before 13.7.2024), of long- term capital
asset, being land or building or both, would
qualify for exemption, to the maximum extent of `
50 lakhs, whether such investment is made in the
current financial yearor subsequent financial year.
Therefore, in the present case, exemption can be
availed only to the extent of ` 50 lakh out of ` 90
lakhs, even if the both the investments are made
on or before 13.7.2024 (i.e., within six months
after the date of transfer).

Long term capital gains chargeable to tax 90.39

Note: Advance of ` 20 lakhs received from Mr. Johar, would have been chargeable to tax
under the head “Income from other sources”, in the A.Y. 2016-17, as per section 56(2)(ix), since
the same was forfeited on or after 01.4.2014 as a result of failure of negotiation. Hence, the same should
not be deducted while computing indexed cost of acquisition.

7. Mr. Shiva purchased a house property on February 15, 1979 for ` 3,24,000. In addition, he has
also paid stamp duty value @10% on the stamp duty value of `3,50,000.
In April, 2008, Mr. Shiva entered into an agreement with Mr. Mohan for saleof such property
for ` 14,35,000 and received an amount of ` 1,11,000 as advance. However, the sale
consideration did not materialize and Mr. Shiva forfeited the advance. In May 2015, he again
entered into an agreement forsale of said house for ` 20,25,000 to Ms. Deepshikha and
 CAPITAL GAINS (Unit - iv) | 3.89
received ` 1,51,000 as advance. However, as Ms. Deepshikha did not pay the balance amount,
Mr. Shiva forfeited the advance. In August, 2015, Mr. Shiva constructed the first floor by
incurring a cost of ` 3,90,000.
On November 15, 2023, Mr. Shiva entered into an agreement with Mr. Manish for sale
of such house for ` 30,50,000 and received an amount of `1,50,000 as advance through an
account payee cheque. Mr. Manish paid the balance entire sum and Mr. Shiva transferred the
house to Mr. Manish on February 20, 2024. Mr. Shiva has paid the brokerage @1% of sale
consideration to the broker.
On April 1, 2001, fair market value of the house property was ` 11,85,000 and Stamp duty value
was ` 10,70,000. Further, the Valuation as per Stamp duty Authority of such house on 15th
November, 2023 was ` 39,00,000 and on 20thFebruary, 2024 was ` 41,00,000.
Compute the capital gains in the hands of Mr. Shiva for A.Y.2024-25.
CII for F.Y. 2001-02: 100; F.Y. 2008-09: 137; F.Y. 2015-16: 254; F.Y. 2023-24: 348
Answer
Computation of Capital gains in the handsof Mr. Shiva for A.Y. 2024-25
Particulars Amount Amount
(`) (`)
Actual sale consideration 30,50,000
Valuation as per Stamp duty Authority on the date 39,00,000
of agreement
(Where the actual sale consideration is less than the
value adopted by the Stamp Valuation Authority for
the purpose of charging stamp duty, and such
stamp duty value exceeds 110% of the actual sale
consideration then, the value adopted by the Stamp
Valuation Authority shall be taken to be the full
value of consideration as per section 50C.
However, where the date of agreement is different
from the date of registration, stamp duty value on
the date of agreement can be considered, provided
the whole or part of the consideration is received
by way of account payee cheque/bank draft or by
way of ECS through bank account or such other
electronic mode as may be prescribed on or before
the date of agreement.
In the present case, since part of the payment is
made by account payee cheque on the date of
agreement, the stamp duty value on the date of
agreement would be considered as full value of
consideration)

Deemed Full value of consideration [Since stamp 39,00,000

duty value on the date of agreement exceeds 110%
of the actual consideration, stamp duty value would
be deemed as Full Value of Consideration]
30,500
Less: Expenses on transfer (Brokerage @1% of
 CAPITAL GAINS (Unit - iv) | 3.90
` 30,50,000) 38,69,500
Net sale consideration

Less: Indexed cost of acquisition (Note 1) 33,37,320

Less: Indexed cost of improvement (Note 2) 38,71,651
5,34,331

Long term capital loss (2,151)

Notes:
(7) Computation of indexed cost of acquisition
Particulars Amount (`) Amount (`)
Cost of acquisition, 10,70,000
Being the higher of
(i) lower of Fair market value i.e., 10,70,000
` 11,85,000 and Stamp duty value
i.e., ` 10,70,000, on April 1, 2001
(ii) Actual cost of acquisition 3,59,000
(` 3,24,000 + ` 35,000, being stamp
duty @10% of ` 3,50,000)
Less: Advance money taken from
Mr. Mohan and forfeited 1,11,000
Cost of acquisition for indexation 9,59,000
Indexed cost of acquisition 33,37,320
(` 9,59,000 x 348/100)

(8) Computation of indexed cost of improvement

Particulars Amount (`)
Cost of construction of first floor in August, 2015 3,90,000
Indexed cost of improvement (` 3,90,000 x 348/254) 5,34,331

(9) Where advance money has been received by the assessee, and retained by him, as a result
of failure of the negotiations, section 51 will apply. The advance retained by the assessee
will go to reduce the cost of acquisition. Indexation is to be done on the cost of acquisition
so arrived at after reducing the advance money forfeited [i.e. ` 10,70,000 – ` 1,11,000
(being the advance money forfeited during the P.Y.2008-09) = ` 9,59,000]. However,
where the advance money is forfeited during the previous year 2014-15 or thereafter, the
amount forfeited would be taxable under the head “Income from Other Sources” and such
amount will not be deducted from the cost of acquisition of such asset while calculating
capital gains. Hence, ` 1,51,000, being the advance received from Ms. Deepshikha and
retained by him, would have been taxable under the head “Income from other sources” in
the hands of Mr. Shiva in A.Y.2016-17.

****************
 INCOME FROM OTHER SOURCES (Unit - v)| 3.1

CHAPTER – 3 (Unit –V) INCOME FROM OTHER SOURCES

CHAPTER – 3
Unit - V
INCOME FROM OTHER SOURCES

 Any income which is not taxable under Salary, IFHP, PGBP, Capital Gain, and
 Such income are not exempt under any section of income tax.
 shall be taxable under IFOS.
METHOD OF ACCOUNTING [SECTION 145]
Income chargeable under the head “Income from other sources” has to be computed in
accordance with the
 Cash system or
 Mercantile system
accounting regularly employed by the assessee.
Central Government has notified ten ICDSs u/s 145(2)
 followed by all assessees (other than an individual or a HUF who is not required
to get his accounts of the previous year audited in accordance with the provisions
of section 44AB)
 following the mercantile system of accounting, for the purpose of computation
of income chargeable to income-tax.
 under the head “Profits and gains from business or profession” or “Income
from other sources”
Items taxable under the head “IFOS”
1. Interest on securities (if security held as stock-in-trade, then interest taxable under PGBP)
2. Rent from letting out of plant, machinery, furniture.
3. Dividend from shares of Indian co & foreign co.
4. Casual Income u/s 115BB i.e. Winning from lotteries, puzzles, card games, etc.
5. Interest on bank deposit & loan given
6. Royalty income
7. Directors sitting fees
8. Agricultural income from land located outside India
9. Income from sub-letting of house property
10. Salary of MP/MLA
11. Interest on income tax refund
12. Amount received under family pension [deduction u/s 57]
13. Interest on compensation of compulsory acquisition of capital asset [50% deduction
allowed u/s 57].
14. Advance Money received ( W.e.f. 1-April-2014 )
15. Gift, ( Aggregate Gift Exceed Rs 50,000/- P.A.) etc.
 TAXATION OF GIFT
1. Any gift received by employee from employer due to employment – employer
relationship – always taxable [even if received on marriage] under income from
salary
2. Any benefit / gift / perquisite arising due to business or profession – always taxable
under PGBP (Sec 28)
3. Other Gift – IFOS
 INCOME FROM OTHER SOURCES (Unit - v)| 3.2

Any gift/ asset acquired for low

consideration by any person

Sec 56 (2)(x) applicable w.e.f.

01/04/2017

M.R.I.D.H.U.LA.I.T. Note - 1 OTHERWISE

Sec 56 (2)(x) not applicable not

taxable

Money (without consideration) Movable property [s.s.j.a.d.p.s.w.b.] Immovable Property (land &
building or both)

If Without With Without

Aggregate Consideration With Consideration
Consideration Consideration
Money >
If per property
`50,000 The If Agg. Fmv> If Agg (FMV – If Per property .
whole of `50,000 then consideration) > (i) (SDV – consideration) >
SDV> `50,000
money shall entire FMV `50,000, then `50,000,
then entire SDV
be taxable shall be different b/w shall be taxable (ii) SDV > 110% actual sale con.
taxable FMV & Which ever is higher
consideration
shall be taxable &
then different b/w SDV
consideration shall be
taxable
 INCOME FROM OTHER SOURCES (Unit - v)| 3.3

– : Money /Property NOT TAXABLE if it is receipt

On the occasion of Marriage.

From any Relative (note –3)

under will or way of inheritance

In contemplation of Death

From any Trust registered U/s 12AA & 12 AB

From any Hospital or medical institution

Note (2) : Property:- A capital asset of the assessee. (movable & immovable)

 Immovable Property :- Land Or Building or Both

 Movable Property
a. Shares & Securities
b. Jewellery
c. Archaeological collection
d. Drawings
e. Painting
f. Sculptures
g. Any other work of art or Bullion

Any property received as gift or acquired for low consideration other than above, sec 56(2)(x) Not
applicable – Not taxable.

Example :-Car, i-phone, Music system, T.V., LED, Furniture, Wrist watch, etc received by individual
then not taxable

 They are not covered in property Definition.

 even value is more than `50,000.

Note 3 : Meaning of Relative

a) In case of Individual
 INCOME FROM OTHER SOURCES (Unit - v)| 3.4

Lineal Ascendant & Spouse Lineal Ascendant & Spouse

Brother &
Mother & Father Mother & Father
Spouse

Sister &
Spouse

Brother & Individual / Assessee Spouse Brother &

Spouse Spouse

Sister &
Sister &
Spouse
Linear Descendant & Spouse
Spouse
 INCOME FROM OTHER SOURCES (Unit - v)| 3.5

(B) in case of HUF Any member of HUF

* Note 4: If assessee not satisfied with SDV then his case may be referred to Valuation Officer
(Same as sec. 50C)

* Note 5 : Sec 56(2) (x) applicable only if property is in the nature of capital asset of the recipient, if
it is stock-in-trade then sec 56(2) (x) Not applicable (CBDT Circular)

* Note 6 : Sec 49(4) : if any person received any asset as gift or acquired for inadequate
consideration & he already assessed u/s 56(2)(x) on FMV / SDV then COA of such asset shall be
FMV/ SDV which was considered under IFOS u/s sec 56(2) (x)

Example:1

Mr. Anil acquired a house property for `2 lakh during PY 2001-02, He gifted such property to his
friend Sun on 08/07/2023 [SDV on date of gifting – `10 lakh] Mr.Sun sells such property to Mr.
Vikas on on 21/03/2024 for `12 Lakhs discuss tax treatment.

* In hands of Anil

Gift not treated as transfer – No capital gain

* in hands of Sun

He received immovable property without consideration & SDV> `50,000, so total SDV of `10 lakh
shall be taxable u/s 56 (2) (x) in hands of Sun for AY 2024-25.

Capital Gain applicable on transfer of asset

Sale Consideration Rs.1200,000

Less : cost of acquisition Rs.10,00,000

STCG Rs.200,000

Example:2
Suppose in example 1 Anil & Sun are relative ( Brother) what will be the tax treatment

* In hands of Anil

Gift not treated as transfer – No capital gain

* in hands of Sun

As per section 56 (2) (x) not applicable, Since assets received from relative.
 INCOME FROM OTHER SOURCES (Unit - v)| 3.6

Capital Gain applicable on transfer of asset

Sale Consideration Rs.1200,000

Less : cost of acquisition ( cost of previous owner) Rs.2,00,000

( 2,00,000 X 348/348 )

LTCG Rs.10,00,000

* Section 56(2) (viib): Shares issued on Premium

If any closely held company issues shares to any resident shareholder on premium then–

[issue price of share – FMV of such shares] shall be taxable in hands of company under IFOS.

INCOMES CHARGEABLE UNDER THIS HEAD [SECTION 56]

(1) Income Chargeable only under the head “Income From Other Sources”.
(i) Dividend income [Section 56(2)(i)]

The term ‘dividend’ as used in the Act has a wider scope and meaning than under the general
law.
Dividend [covered by sections 2(22)(a) to (e)]:
According to section 2(22), the following receipts are deemed to be dividend:
(a) Any Distribution of assets :- Distribution of accumulated profits, entailing the
release of company’s assets - Any distribution of accumulated profits, whether
capitalised or not, by a company to its shareholders is dividend if it entails the
release of all or any part of its assets.
Example
If accumulated profits are distributed in cash it is dividend in the hands of the
shareholders. Where accumulated profits are distributed in kind, for example by
delivery of shares etc. entailing the release of company’s assets, the market value of
such shares on the date of such distribution is deemed dividend in the hands of the
shareholder.

(b) Distribution of debentures, deposit certificates to shareholders and bonus

shares to preference shareholders - Any distribution to its shareholders by a
company of debenture, debenture stock or deposit certificate in any form, whether
with or without interest, and any distribution of bonus shares to preference
shareholders to the extent to which the company possesses accumulated profits,
whether capitalised or not, will be deemed as dividend.
The market value of such bonus shares is deemed as dividend in the hands of the
preference shareholder.
In the case of debentures, debenture stock etc., their value is to be taken at the market
rate and if there is no market rate they should be valued according to accepted
principles of valuation.
Note: Bonus shares given to equity shareholders are not treated as dividend.
(c) Distribution on liquidation - Any distribution made to the shareholders of a company
 INCOME FROM OTHER SOURCES (Unit - v)| 3.7

on its liquidation, to the extent to which the distribution is attributable to the

accumulated profits of the company immediately before its liquidation, whether
capitalised or not, is deemed to be dividend income.
Note: Any distribution made out of the profits of the company after the date of the
liquidation cannot amount to dividend. It is a repayment towards capital.
(d) Distribution on reduction of capital - Any distribution to its shareholders by a
company on the reduction of its capital to the extent to which the company possessed
accumulated profits, whether capitalised or not, shall be deemed to be dividend.
(e) Advance or loan by a closely held company to its shareholder - Any payment by
a company in which the public are not substantially interested of any sum by way of
advance or loan to any shareholder who is the beneficial owner of 10% or more of the
equity capital of the company will be deemed to be dividend to the extent of the
accumulated profits. If the loan is not covered by the accumulated profits, it is not
deemed to be dividend.
Advance or loan by a closely held company to a specified concern - Any payment by
a company in which the public are not substantially interested to any concern (i.e.
HUF/ Firm/ AOP/ BOI/ Company) in which a shareholder, having the beneficial
ownership of atleast 10% of the equity shares is a member or a partner and in which he
has a substantial interest (i.e. atleast 20% share of the income of the concern) will be
deemed to be dividend.
Also, any payments by such a closely held company on behalf of, or for the individual
benefit of any such shareholder will also deemed to be dividend. However, in both cases
the ceiling limit of dividend is the extent of accumulated profits.
Exceptions: The following payments or loan given would not be deemed as dividend:
(i) Loan granted in the ordinary course of business by the money lending
company - If the loan is granted in the ordinary course of its business and
lending of money is a substantial part of the company’s business, the loan or
advance to a shareholder or to the specified concern is not deemed to be dividend.
(ii) Dividend paid if set off against the deemed dividend - Where a loan had
been treated as dividend and subsequently the company declares and distributes
dividend to all its shareholders including the borrowing shareholder, and the
dividend so paid is set off by the company against the previous borrowing, the
adjusted amount will not be again treated as a dividend.
Illustration 1
Rahul holding 28% of equity shares in a company, took a loan of ` 5,00,000 from the same
company. On the date of granting the loan, the company had accumulated profit of ` 4,00,000.
The company is engaged in some manufacturing activity.

(i) Is the amount of loan taxable as deemed dividend, if the company is a company in which
the public are substantially interested?
(ii) What would be your answer, if the lending company is a private limited company (i.e. a
company in which the public are not substantially interested)?
Solution
Any payment by a company, other than a company in which the public are substantially
interested, of any sum by way of advance or loan to an equity shareholder, being a person
 INCOME FROM OTHER SOURCES (Unit - v)| 3.8

who is the beneficial owner of shares holding not less than 10% of the voting power, is
deemed as dividend under section 2(22)(e), to the extent the company possesses accumulated
profits

(i) The provisions of section 2(22)(e), however, will not apply where the loan is given by
a company in which public are substantially interested. In such a case, the loan would
not be taxable as deemed dividend.
(ii) However, if the loan is taken from a private company (i.e. a company in which the
public are not substantially interested), which is a manufacturing company and not a
company where lending of money is a substantial part of the business of the company,
then, the provisions of section 2(22)(e) would be attracted, since Rahul holds more
than 10% of the equity shares in the company.
The amount chargeable as deemed dividend cannot, however, exceed the accumulated profits
held by the company on the date of giving the loan. Therefore, the amount taxable as deemed
dividend would be limited to the accumulated profit i.e., ` 4,00,000 and not the amount of
loan which is ` 5,00,000.

(ii) Casual Income [Section 56(2)(ib)]

Casual income means income in the nature of winning from lotteries, crossword puzzles,
races including horse races, card games and other games of any sort, gambling, betting
etc. Such winnings are chargeable to tax at a flat rate of 30% under section 115BB.
(iii) Consideration received in excess of FMV of shares issued by a closely held
company to be treated as income of such company, where shares are issued at a
premium [Section 56(2)(viib)]
(a) Section 56(2)(viib) brings to tax the consideration received from a resident person by a
company, other than a company in which public are substantially interested, which is
in excess of the fair market value (FMV) of shares.
(b) Such excess is to be treated as the income of a closely held company taxable under
section 56(2) under the head “Income from Other Sources”, in cases where
consideration received for issue of shares exceeds the face value of shares i.e. where
shares are issued at a premium.
(c) However, these provisions would not be attracted where consideration for issue of
shares is received:
(1) by a Venture Capital Undertaking (VCU) from a Venture Capital Fund
(VCF) or Venture Capital Company (VCC); or
(2) by a company from a class or classes of persons as notified by the Central
Government for this purpose.
Accordingly, the Central Government had, vide Notification No. 45/2016, dated
14.6.2016, notified classes of persons, being a person defined under section 2(31) of
the Income-tax Act, 1961, being a resident, who makes payment of an amount
exceeding the face value of shares of the “startup” company, as consideration for issue
of such shares.

For the purpose of this notification, “startup” means a company in which public are not
substantially interested and which fulfills the conditions notified by the Ministry of
Commerce and Industry, Department of Industrial Policy and Promotion (‘DIPP’).
 INCOME FROM OTHER SOURCES (Unit - v)| 3.9

Accordingly, the Ministry of Commerce and Industry has, vide notification no. G.S.R.
364(E) dated 11.04.2018, specified that a startup, being a private limited company shall
be eligible to apply for approval for the purposes of section 56(2)(viib), if the
following conditions are fulfilled:

(i) the aggregate amount of paid up share capital and share premium of the startup after
the proposed issue of shares does not exceed ten crore rupees,
(ii) the investor/ proposed investor, who proposes to subscribe to the issue of shares of the
startup has,
(a) an average returned income of twenty five lakh rupees or more for the
preceding three financial years; or
(b) a net worth of two crore rupees or more as on the last date of the preceding
financial year, and
(c) However, a private limited company shall not be considered a ‘Startup’, if it is formed
by splitting up or reconstruction of an existing business.

(d) Fair market value of the shares shall be the higher of, the value as may be –

No. No. of Face FMV of Issue

shares value shares price Applicability of section 56(2)(viib)
of (`) of
shares shares
(`) (`)
A (P) 10,000 100 120 130 The provisions of section 56(2)(viib) are
Ltd. attracted in this case since the shares are
issued at a premium (i.e., issue price
exceeds the face value of shares). The excess
of the issue price of the shares over the
FMV would be taxable under section
56(2)(viib). ` 1,00,000 [10,000 × ` 10 (`
130 - ` 120)] shall be treated as income in
the hands of A (P) Ltd.

B (P) 20,000 100 120 110 The provisions of section 56(2)(viib) are
Ltd. attracted since the shares are issued at a
premium. However, no sum shall be
chargeable to tax in the hands of B (P) Ltd.
C (P) Ltd. 30,000 100 90 98 under
Section the said section
56(2)(viib) is not as the shares
attracted since are
the
issued at a price less than the FMV
shares are issued at a discount, thoughof shares.
the
issue price is greater than the FMV.

D (P) Ltd. 40,000 100 90 110 The provisions of section 56(2)(viib) are
attracted in this case since the shares are
issued at a premium. The excess of the issue
price of the shares over the FMV would be
taxable under section 56(2)(viib). Therefore,
` 8,00,000 [40,000 × ` 20 (` 110 - ` 90)] shall
be treated as income in the hands of D (P) Ltd.
 INCOME FROM OTHER SOURCES (Unit - v)| 3.10

(iv) Interest received on compensation/ enhanced compensation deemed to be income

in the year of receipt and taxable under the head “Income from Other Sources”
[Section 56(2)(viii)]
(a) As per section 145(1), income chargeable under the head “Profits and gains of
business or profession” or “Income from other sources”, shall be computed in
accordance with either cash or mercantile system of accounting regularly
employed by the assessee.
(b) Section 145B(1) provides that notwithstanding anything contained in
section 145(1), the interest received by an assessee on compensation or on
enhanced compensation shall be deemed to be his income of the previous year in
which it is received.
(c) Section 56(2)(viii) provides that income by way of interest received on
compensation or on enhanced compensation referred to in section 145B(1)
shall be assessed as “Income from other sources” in the year in which it is
received.

(v) Advance forfeited due to failure of negotiations for transfer of a capital asset to
be taxable as “Income from other sources” [Section 56(2)(ix)]
(a) Prior to A.Y.2015-16, any advance retained or received in respect of a negotiation
for transfer which failed to materialise is reduced from the cost of acquisition of
the asset or the written down value or the fair market value of the asset, at the
time of its transfer to compute the capital gains arising therefrom as per section
51. In case the asset transferred is a long-term capital asset, indexation benefit
would be on the cost so reduced.
(b) With effect from A.Y.2015-16, section 56(2)(ix) provides for the taxability of any
sum of money, received as an advance or otherwise in the course of negotiations
for transfer of a capital asset. Such sum shall be chargeable to income-tax
under the head ‘Income from other sources’, if such sum is forfeited and the
negotiations do not result in transfer of such capital asset.
(c) computing the cost of acquisition. In order to avoid double taxation of the advance
received and retained, section 51 has been amended to provide that where any
sum of money received as an advance or otherwise in the course of negotiations
for transfer of a capital asset, has been included in the total income of the
assessee for any previous year, in accordance with section 56(2)(ix), such
amount shall not be deducted from the cost for which the asset was acquired or
the written down value or the fair market value, as the case may be, in
It may be noted that advance received and forfeited upto 31.3.2014 has to be
reduced from cost of acquisition while computing capital gains, since such
advance would not have been subject to tax under section 56(2)(ix). Only the
advance received and forfeited on or after1.4.2014 would be subject to tax under
section 56(2)(ix). Hence, such advance would not be reduced from the cost of
acquisition for computing capital gains.
 INCOME FROM OTHER SOURCES (Unit - v)| 3.11

Illustration 2

Mr. A, a dealer in shares, received the following without consideration

during the P.Y.2023-24 from his friend Mr. B, -
(1) Cash gift of ` 75,000 on his anniversary, 15th April, 2023.
(2) Bullion, the fair market value of which was ` 60,000, on his birthday, 19th June, 2023.
(3) A plot of land at Faridabad on 1st July, 2023, the stamp value of which is ` 5 lakh on
that date. Mr. B had purchased the land in April, 2009.
Mr. A purchased from his friend Mr. C, who is also a dealer in shares, 1000 shares of X
Ltd. @ ` 400 each on 19th June, 2023, the fair market value of which was ` 600 each on
that date. Mr. A sold these shares in the course of his business on 23rd June, 2023.

Further, on 1st November, 2023, Mr. A took possession of property (building) booked by
him two years back at ` 20 lakh. The stamp duty value of the property as on 1st November,
2023 was ` 32 lakh and on the date of booking was ` 23 lakh. He had paid ` 1 lakh by
account payee cheque as down payment on the date of booking.

On 1st March, 2024, he sold the plot of land at Faridabad for ` 7 lakh.

Compute the income of Mr. A chargeable under the head “Income from other sources” and
“Capital Gains” for A.Y.2024-25.
Solution

Computation of “Income from other sources” of Mr. A for the A.Y.2024-25

Particulars `
(1) Cash gift is taxable under section 56(2)(x), since it exceeds ` 50,000 75,000

(2) Since bullion is included in the definition of property, therefore, when 60,000
bullion is received without consideration, the same is taxable, since the
aggregate fair market value exceeds ` 50,000

(3) Stamp value of plot of land at Faridabad, received without 5,00,000

consideration, is
taxable under section 56(2)(x)
(4) Difference of ` 2 lakh in the value of shares of X Ltd. purchased from –
Mr. C, a dealer in shares, is not taxable as it represents the stock-in-
trade of Mr. A. Since Mr. A is a dealer in shares and it has been
mentioned that the shares were subsequently sold in the course of his
business, such shares represent the stock-in-trade of Mr. A.
(5) Difference between the stamp duty value of ` 23 lakh on the date of 3,00,000
booking and the actual consideration of ` 20 lakh paid is taxable
under section 56(2)(x) since the difference exceeds ` 2 lakh being, the
higher of ` 50,000 and 10% of consideration.

Income from Other Sources 9,35,000

 INCOME FROM OTHER SOURCES (Unit - v)| 3.12

Particulars `
Sale Consideration 7,00,000
Less: Cost of acquisition [deemed to be the stamp value charged to
tax under section 56(2)(x) as per section 49(4)] 5,00,000

Short-term capital gains 2,00,000

Illustration 3

Discuss the taxability or otherwise of the following in the hands of the recipient under
section 56(2)(x) the Income-tax Act, 1961 -

(i) Akhil HUF received ` 75,000 in cash from niece of Akhil (i.e., daughter of Akhil’s sister).
Akhil is the Karta of the HUF.
(ii) Nitisha, a member of her father’s HUF, transferred a house property to the HUF
without consideration. The stamp duty value of the house property is ` 9,00,000.
(iii) Mr. Akshat received 100 shares of A Ltd. from his friend as a gift on occasion of his
25th marriage anniversary. The fair market value on that date was ` 100 per share.
He also received jewellery worth ` 45,000 (FMV) from his nephew on the same day.
(iv) Kishan HUF gifted a car to son of Karta for achieving good marks in XII board
examination. The fair market value of the car is ` 5,25,000.

Solution
Taxable Amount Reason
/ Non- liable to
taxable tax (`)
(i) Taxable 75,000 Sum of money exceeding ` 50,000 received without
consideration from a non-relative is taxable under section
56(2)(x). Daughter of Mr. Akhil’s sister is not a relative of
Akhil HUF, since she is not a member of Akhil HUF.

(ii) Non-taxable Nil Immovable property received without consideration by a HUF

from its relative is not taxable under section 56(2)(x). Since
Nitisha is a member of the HUF, she is a relative of the HUF.
However, income from such asset would be included in the
hands of Nitisha under 64(2).
(iii) Taxable 55,000 As per provisions of section 56(2)(x), in case the aggregate
fair market value of property, other than immovable
property, received without consideration exceeds ` 50,000,
the whole of the aggregate value shall be taxable.
(Rs.10000+ Rs.45000)=Rs.55000
case, the aggregate fair market value of shares (` 10,000) and
jewellery (` 45,000) exceeds ` 50,000. Hence, the entire amount
of ` 55,000 shall be taxable.

(iv) Non-taxable Nil Car is not included in the definition of property for the
purpose of section 56(2)(x), therefore, the same shall not be
taxable.
 INCOME FROM OTHER SOURCES (Unit - v)| 3.13

Illustration 4
Mr. Hari, a property dealer, sold a building in the course of his business to his friend Mr. Rajesh,
who is a dealer in automobile spare parts, for ` 90 lakh on 1.1.2024, when the stamp duty value
was ` 150 lakh. The agreement was, however, entered into on 1.9.2023 when the stamp duty
value was ` 140 lakh. Mr. Hari had received a down payment of ` 15 lakh by a crossed cheque
from Mr. Rajesh on the date of agreement. Discuss the tax implications in the hands of Mr. Hari
and Mr. Rajesh, assuming that Mr. Hari has purchased the building for ` 75 lakh on 12th July, 2022.

Would your answer be different if Hari was a share broker instead of a property dealer and Mr.
Rajesh was a property dealer instead of dealer in automobile spare parts?

Answer

Case 1: Tax implications if Mr. Hari is a property dealer

In the hands of Mr. Hari In the hands of Mr. Rajesh

In the hands of Hari, the provisions of section Since Mr. Rajesh is a dealer in automobile
43CA would be attracted, since the building spare parts, the building purchased would be a
represents his stock-in-trade and he has capital asset in his hands. The provisions of
transferred the same for a consideration less section 56(2)(x) would be attracted in the
than the stamp duty value; and the stamp hands of Mr. Rajesh who has received
duty value exceeds 110% of consideration. immovable property, being a capital asset, for
Under section 43CA, the option to adopt the inadequate consideration and the difference
stamp duty value on the date of agreement between the consideration and stamp duty
can be exercised only if whole or part of the value exceeds ` 9,00,000, being the higher of `
consideration has been received on or before 50,000 and 10% of consideration.
the date of agreement by way of account Therefore, ` 60 lakh, being the difference
payee cheque or draft or by use of ECS between the stamp duty value of the property
through a bank account or through credit card, on the date of registration (i.e., ` 150 lakh) and
debit card, net banking, IMPS (Immediate the actual consideration (i.e., ` 90 lakh) would
payment Service), UPI (Unified Payment be taxable under section 56(2)(x) in the hands
Interface), RTGS (Real Time Gross Settlement), of Mr. Rajesh, since the payment on the date of
NEFT (National Electronic Funds Transfer), agreement is made by crossed cheque and not
and BHIM (Bharat Interface for Money) Aadhar account payee cheque/draft or ECS or through
Pay on or before the date of agreement. In this credit card, debit card, net banking, IMPS
case, since the down payment of ` 15 lakh is
received on the date of agreement by crossed
cheque and not account payee cheque, the
option cannot be exercised.
Therefore, ` 75 lakh, being the difference (Immediate payment Service), UPI (Unified
between the stamp duty value on the date of Payment Interface), RTGS (Real Time Gross
transfer i.e., ` 150 lakh, and the purchase Settlement), NEFT (National Electronic Funds
price i.e., ` 75 lakh, would be chargeable as Transfer), and BHIM (Bharat Interface for
business income in the hands of Mr. Hari, Money) Aadhar Pay.
since stamp duty value exceeds 110% of the
consideration.
 INCOME FROM OTHER SOURCES (Unit - v)| 3.14

Case 2: Tax implications if Mr. Hari is a stock broker

In the hands of Mr. Hari In the hands of Mr. Rajesh

In case Mr. Hari is a share broker and not a In case Mr. Rajesh is a property dealer and not
property dealer, the building would represent a dealer of automobile spare parts, the building
his capital asset and not stock-in-trade. In would represent his stock-in-trade and not a
such a case, the provisions of section 50C capital asset. In such a case, the provisions of
would be attracted in the hands of Mr. Hari, section 56(2)(x) would not be attracted in the
since building is transferred for a hands of Mr. Rajesh and no amount will be
consideration less than the stamp duty value; taxable in the hands of Mr. Rajesh for purchase
and the stamp duty value exceeds 110% of of the said building.
consideration.
Thus, ` 75 lakh, being the difference
between the stamp duty value on the
date of registration (i.e., ` 150 lakh) and
the purchase price (i.e., ` 75 lakh) would
be chargeable as short-term capital gains.
It may be noted that under section 50C, the
option to adopt the stamp duty value on the
date of agreement can be exercised only if
whole or part of the consideration has been
received on or before the date of agreement
by way of account payee cheque or draft or by
use of ECS through a bank account or through
credit card, debit card, net banking, IMPS
(Immediate payment Service), UPI (Unified
Payment Interface), RTGS (Real Time Gross
Settlement), NEFT (National Electronic Funds
Transfer), and BHIM (Bharat Interface for
Money) Aadhar Pay on or before the date of
agreement. In this case, since the down
payment of ` 15 lakhs has been received on
the date of agreement by crossed cheque and
not account payee cheque, the option cannot
be exercised.

Question

The following details have been furnished by Mrs. Meenakshi Amma pertaining to the year
ended 31.3.2024:

(i) Cash gift of ` 51,000 received from her friend on the occasion of her “wedding
anniversary”, a wedding function celebrated on her husband completing 60 years of age.
This was also her 25th wedding anniversary.
(ii) On the above occasion, a diamond necklace worth ` 2 lacs was presented by her sister
living in Dubai.
(iii) When she celebrated her daughter's wedding on 21.2.2024, her friend assigned in Mrs.
Meenakshi Amma's favour, a fixed deposit held by the said friend in a scheduled bank;
the value of the fixed deposit and the accrued interest on the said date was
` 52,000.
Compute the income, if any, assessable as income from other sources.
 INCOME FROM OTHER SOURCES (Unit - v)| 3.15

Answer
(i) Any sum of money received by an individual on the occasion of the marriage of the
individual is exempt. This provision is, however, not applicable to a cash gift received
during a wedding function celebrated on completion of 60 years of age.
The gift of ` 51,000 received from a non-relative is, therefore, chargeable to tax under
section 56(2)(x) in the hands of Mrs. Meenakshi Amma, since the same exceeds
` 50,000.
(ii) The provisions of section 56(2)(x) are not attracted in respect of any sum of money or
property received from a relative. Thus, the gift of diamond necklace received from her
sister is not taxable under section 56(2)(x), even though jewellery falls within the
definition of “property”
(iii) To be exempt from applicability of section 56(2)(x), the property should be received on
the occasion of the marriage of the individual, not that of the individual’s son or
daughter. Therefore, this exemption provision is not attracted in this case.
Any sum of money received without consideration by an individual is chargeable to tax
under section 56(2)(x), if the aggregate value exceeds ` 50,000 in a year. “Sum of money”
has, however, not been defined under section 56(2)(x).
Therefore, there are two possible views in respect of the value of fixed deposit assigned
in favour of Mrs. Meenakshi Amma –
(1) The first view is that fixed deposit does not fall within the meaning of “sum
of money” and therefore, the provisions of section 56(2)(x) are not attracted.
It may be noted that fixed deposit is also not included in the definition of
“property”.
(2) However, another possible view is that fixed deposit assigned in favour of Mrs.
Meenakshi Amma falls within the meaning of “sum of money” received.
Income assessable as “Income from other sources”
If the first view is taken, the total amount chargeable to tax as “Income from other sources”
would be ` 51,000, being cash gift received from a friend on her wedding anniversary.

As per the second view, the provisions of section 56(2)(x) would also be attracted in respect of
the fixed deposit assigned and the “Income from other sources” of Mrs. Meenakshi Amma
would be ` 1,03,000 (` 51,000 + ` 52,000).

However, the following Interest income arising to certain persons would be

exempt under section 10(15):
(a) Income by way of interest, premium on redemption or other payment on notified
securities, bonds, annuity certificates or other savings certificates is exempt subject
to such conditions and limits as may be specified in the notification.
It may be noted that interest on Post Office Savings Bank Account which was so far
fully exempt would henceforth be exempt from tax for any assessment year only to
the extent of:
(1) ` 3,500 in case of an individual account.
` 7,000 in case of a joint account.
 INCOME FROM OTHER SOURCES (Unit - v)| 3.16

Exemption in case of Income by way of Interest [Sec.10(15)]

 Railway Bond

 7 % Capital Investment Bonds

 9% Relief Bonds, 1987

 Interest on notified bonds/debentures of a public sector company

 Interest on securities held by the Welfare Commissioner, or interest on deposits for the
benefit of the victims of the Bhopal gas leak disaster
 Notified bonds issued by local authority or by State Pooled Finance Entity

 Interest on Gold Deposit Bondsissued under the Gold DepositScheme, 1999 notified by
theCentral government

 Interest on Public.Provident Fund

 Interest on deposit with Off Shore Banking Unit

Scholarships granted to meet the Cost of Education [Sec. 10(16)]

Scholarships granted to meet the cost of education are exempt.

Daily and Constituency allowance, etc. received by MPs and MLAs [Sec. 10(17)]
The following incomes shall be exempt in hands ofthe persons specified:
(i) Daily allowance received by any person by reason of his membership of Parliament
or of any State Legislature or of any Committee thereof;
(ii) Any allowance received by any person by reason of his membership of Parliament
under the Members of Parliament (Constituency Alldwance) Rules, 1986;
(iii) Any constituency allowance received by any person by reason of his membership of
any State Legislature under any Act or Rules made by that State Legislature.
Award or Reward [Sec.10(17A))
Any payment made, whether in cash or in kind, shall be exempt from tax provided it is made:
(i) in pursuance of any award instituted in the public interest by the Central Government
or any State Government or instituted by any other body and approved by the Central
Government in this behalf;
or
(ii) As a reward by the Central Government or any State Government for such purposes as
may be approved by the Central Government in this behalf in the public interest

APPLICABLE RATE OF TAX IN RESPECT OF CASUAL INCOME [SECTION 115BB]

(1) This section provides that income by way of winnings from lotteries, crossword
puzzles, races including horse races or card games and other games of any sort or
from gambling or betting of any form would be taxed at a flat rate of 30% plus
surcharge, if applicable, plus health and education cess @4%.
(2) No expenditure or allowance can be allowed from such income.
(3) Deduction under Chapter VI-A is not allowable from such income.
(4) Adjustment of unexhausted basic exemption limit is also not permitted against such
income.
 INCOME FROM OTHER SOURCES (Unit - v)| 3.17

Question :-
Shri Sudhir Nagpal aged about 66 years has earned a lottery income of Rs. 2,35,000
(Gross) during the accounting year 2023-24. he invested an amount of Rs. 10,000 in PPF
account maintained with SBI and Rs. 24,000 in national saving certificates. Calculate the
tax payable by him for the assessment year 2024-25.
Shri Sudhir Nagpal exercises the option of shifting out of the default tax regime provided
under section 115BAC(1A).
Ans. Rs.60,320/-

Manjoo and Co. (2011) (Kerala)

Facts/ Matter Can winnings of prize money on unsold lottery tickets held by the
distributor of lottery tickets be assessee as business income and be subject
to normal rates of tax instead of the rates prescribed under section 115BB?

Court observation HC observed that the receipt of the prize money is not in his capacity as a
lottery distributor but as a holder of the lottery ticked which won the prize.
Further, winning from lotteries are assessable under the special provisions
of section 115BB, irrespective of the head under which such income falls.

Final Conclusion The rate of 30% prescribed u/s 115BB is applicable in respect of winnings
from lottery received by the distributor.

DEDUCTIONS ALLOWABLE [SECTION 57]

in case of income by way of compensation/ enhanced compensation received
chargeable to tax under section 56(2)(viii):

 Deduction of 50% of such income.

 No deduction would be allowable under any other clause of section 57 in respect of

such income.

Illustration 5

Interest on enhanced compensation received by Mr. G during the previous year 2023-24 is
` 5,00,000. Out of this interest, ` 1,50,000 relates to the previous year 2015-16, ` 1,65,000
relates to previous year 2016-17 and ` 1,85,000 relates to previous year 2017-18. Discuss the
tax implication, if any, of such interest income for A.Y.2024-25.
Solution
The entire interest of ` 5,00,000 would be taxable in the year of receipt, namely,
P.Y.2023-24.
Particulars `
Interest on enhanced compensation taxable u/s 56(2)(viii) 5,00,000
Less: Deduction under section 57(iv) @50% 2,50,000

Interest chargeable under the head “Income from other sources” 2,50,000

 In the case of income in the nature of family pension: A deduction of a sum equal to
 INCOME FROM OTHER SOURCES (Unit - v)| 3.18

33- 1/3 percent of such income or ` 15,000, whichever is less, is allowable.

For the purposes of this deduction “family pension” means a regular monthly amount
payable by the employer to a person belonging to the family of an employee in the event
of his death.
Exemption in respect of family pension
1. The family pension received by the widow or children or nominated heirs, of a
member of the armed forces (including para-military forces) of the Union,
where the death of such member has occurred in the course of operational
duties, in specified circumstances would, however, be exempt under section
10(19).
2. The family pension received by any member of the family of an individual who
had been in the service of Central or State Government and had been awarded
“Param Vir Chakra” or “Vir Chakra” or “Vir Chakra” or other notified gallantry
awards would be exempt under section 10(18)(ii).

Question
Subrata Roy died on 23-7-2017 while being in central Govt. service in terms of rules governing
his service, his widow Mrs. Subrata Roy is paid a family pension of Rs. 40,000 per month and
dearness allowance of 40% there of state whether the amount of family pension is assessable
in her hands and if so under what head of income can she claim any relief?
Deduction on such receipt? Compute taxable income for the assessment year 2023-24 and tax
there on.
Mrs. Subrata Roy exercises the option of shifting out of the default tax regime provided under
section 115BAC(1A).

Ans. Rs. 45,656/–

Deductions allowable [Section 57]

(a) In case of dividends or income in respect of units of a xxx
mutual fund or income in respect of units from a
specified company
- interest expenditure allowable as deduction subject to
a maximum of 20% of such income included in the
total income for that year, without deduction under this
section

(b) In case of interest on securities xxx

- Any reasonable sum paid by way of commission or
remuneration to a banker or any other person
(c) Income consists of recovery from employees as xxx
contribution to any PF, superannuation fund etc.
- Amount of contribution remitted before the due date
under the respective Acts, in accordance with the
provisions of section 36(1)(va)
 INCOME FROM OTHER SOURCES (Unit - v)| 3.19

(d) Income from letting on hire of machinery, plantand xxx

furniture, with or without building
- current repairs to the machinery, plant, furniture or
building
- insurance premium
- depreciation/unabsorbed depreciation
(e) Family Pension – 33-1/3% of such income or ` 15,000, xxx
whichever is less
(f) Interest on compensation/enhanced compensation xxx
received – 50% of such interest

(g) Any other expenditure not in the nature of capital xxx xxx
expenditure incurred wholly and exclusively for
earning such income

DEDUCTIONS NOT ALLOWABLE [SECTION 58]

No deduction shall be made in computing the “Income from other sources” of an assessee
in respect of the following items of expenses:
(1) In the case of any assessee:
(i) any personal expense of the assessee;
(ii) any interest chargeable to tax under the Act which is payable outside India
on which tax has not been paid or deducted at source.
(iii) any payment taxable in India as salaries, if it is payable outside India
unless tax has been paid thereon or deducted at source.
(2) Any expenditure in respect of which a payment is made to a related person or made
in cash in excess of ` 10,000: In addition to these disallowances, section
58(2) specifically provides that the disallowance of any expenditure in
respect of which a payment is made to a related person, to the extent the same
is considered excessive or unreasonable by the Assessing Officer, having
regard to the FMV. and disallowance of payment or aggregate of payments
exceeding `10,000 made to a person during a day otherwise than by account
payee cheque or draft or ECS through bank account covered by section 40A
will be applicable to the computation of income under the head ‘Income from
other sources’ as well
(3) Disallowance of 30% of expenditure: 30% of expenditure shall not be allowed,
in respect of a sum which is payable to a resident and on which tax is deductible
at source, if
 such tax has not been deducted or;
 such tax after deduction has not been paid on or before the due date of
return specified in section 139(1).
(4) No deduction in respect of any expenditure incurred in connection with casual
income: No deduction in respect of any expenditure or allowance in connection
with income by way of earnings from lotteries, cross word puzzles, races
including horse races, card games and other games of any sort or from gambling or
 INCOME FROM OTHER SOURCES (Unit - v)| 3.20

betting of any form or nature whatsoever shall be allowed in computing the said
income.
The prohibition will not, however, apply in respect of the income of an assessee,
being the owner of race horses, from the activity of owning and maintaining such
horses. In respect of the activity of owning and maintaining race horses, expenses
incurred shall be allowed even in the absence of any stake money earned. Such
loss shall be allowed to be carried forward in accordance with the provisions of
section 74A.

BOND WASHING TRANSACTIONS AND DIVIDEND STRIPPING [SECTION 94]

 A bond-washing transaction is a transaction where securities are sold some time
before the due date of interest and
 Re-acquired after the due date is over.
 This practice is adopted by persons in the higher income group to avoid tax.
 by transferring the securities to their relatives/friends in the lower income group
just before the due date of payment of interest.
 In such a case, interest would be taxable in the hands of the transferee, who is
the legal owner of securities.
 where the owner of a security transfers the security just before the due date of interest
and buys back the same immediately after the due date and interest is received by the
transferee, such interest income will be deemed to be the income of the
transferor and would be taxable in his hands.
Question:-
Govid Bhai Mamaiya received the following income as interest during the previous year 2022-
23.
(i) Rs. 4,000 as interest on Government Securities
(ii) Rs. 3,582 as interest on debentures issued by local authority.
(iii) Rs. 7,164 as interest on debentures of Meghdoot Ltd. (not listed at any recognized
stock exchange)
(iv) Rs. 10,776 as interest on debentures of X Ltd. (Listed on Delhi stock exchange)
(v) Rs. 5,582 as interest on debentures of Gunjan Ltd. (Not listed)
Determine the income from other sources for the assessment year 2023-24 assuming bank
charges 2% on amount collected.
Answer
Income from Other Sources (for assessment year 2023-24)
Rs.
(i) Rs. 4,000 as Interest on Government securities 4,000
(ii) Rs. 3,582 as interest on debentures issued by local authority Exempt
(iii) Rs. 7,164 as interest on debentures of Meghdoot Ltd. Grossing up 7,164 x 100 /90 7,960
(iv) Rs. 10,776 as interest on debentures of X Ltd. Grossing up 10,776 x 100/90 11,973
(v) Rs. 5,582 as interest on debentures of Gunjan Ltd.
Grossing up 3,582 x 100/90 6,202
Total income 30,135
Less: Expense on collection (2% bank charges on Rs. 27,522
 INCOME FROM OTHER SOURCES (Unit - v)| 3.21

i.e. Rs. 4,000 + 7,164 + 10,776 + 3,582) 550

Income from other sources 29,585
Note: Although the collection of charges on Rs. 3,582 will be paid but no deduction shall be
allowed of such charges as its income is exempt. U/S 10 (15)

Question:-
Pramod Mittal who maintain book of accountant on mercantile basis borrowed Rs. 33000 at 7%
per annum on August 1, 2022 and Invested it in 8% tax free securities of the Central Government
purchases at Rs. 110 ( Face value Rs. 100 ), Due date of interest is January 1 & July 1 every year.
On August 31, 2022, he borrowed Rs.40,000 at 7% per annum for investing it in 11% per annum
listed debenture of ABC Ltd. (Date of payment of interest April 15 every year). Interest on
borrowing for the period ending March 31, 2023 is, however, paid by the Pramod Mittal on April
25, 2023. Compute his income chargeable under the under the head income from other sources.
Ans. (–) 1973/–

Question:-

Mr. Jai furnishes the following particulars relating to his house properties and other incomes and
expenditure for the year2022-23:
This house is taken by him on lease for 10 years which is let to a tenant, for his residence, at a
monthly rent of Rs. 2,400.
He has incurred the following expenses during this year:
Lease rent Rs. 1,000 per month
Salary of Durban Rs. 200 per month
Interest on loan taken to pay for the acquisition of the
lease Rs 200 per month
Answer Rs.12000/–
INCOME FROM OTHER SOURCES (Unit - v)| 3.22
INCOME FROM OTHER SOURCES (Unit - v)| 3.23
INCOME FROM OTHER SOURCES (Unit - v)| 3.24
INCOME FROM OTHER SOURCES (Unit - v)| 3.25
 INCOME FROM OTHER SOURCES (Unit - v)| 3.26

5. Any expenditure in respect of which a payment or aggregate payments

exceeding ` 10,000 is made to a person in a day otherwise than by account
payee cheque or draft or ECS through bank account or through such other
prescribed electronic mode such as credit card, debit card, net banking,
IMPS, UPI, RTGS, NEFT, and BHIM Aadhar Pay.

6. Any expenditure or allowance in connection with income by way of earnings

from lotteries, cross word puzzles, races including horse races, card games
and other games of any sort or from gambling or betting of any form or nature

7. 30% of expenditure in respect of sum which is payable to a resident on which

tax is deductible at source, if such tax has not been deducted or after
deduction has not been paid on or before the due date of return specified in
section 139(1)
 INCOME FROM OTHER SOURCES (Unit - v)| 3.27

QUESTIONS AND ANSWERS

Question 1
Examine under which heads the following incomes are taxable:
(i) Rental income in case property held as stock-in-trade for 3 years
(ii) Salary received by a partner from his partnership firm
(iii) Rental income of machinery
(iv) Winnings from lotteries by a person having the same as businessactivity
(v) Salaries received by a Member of Parliament
(vi) Receipts without consideration
(vii) In case of retirement, interest on employee’s contribution if provident fund is
unrecognized.
(viii) Rental income in case of a person engaged in the business of letting outof properties.
Answer
Head under which following incomes are taxable:
Particulars Head of Income
(i) Rental income in case property Income from house property
held as stock-in trade for 3 years
(ii) Salary by partner from his Profits and gains of business or
partnership firm profession
(iii) Rental income of machinery (See Profits and gains of business or
Note below) profession/Income from other
sources
(iv) Winnings from lotteries by a Income from other sources
person having the same as business
activity
(v) Salaries payable to a Member of Income from other sources
Parliament
(vi) Receipts without consideration Income from other sources
(vii) In case of retirement, interest on Income from other sources
employee’s contribution if
provident fund is unrecognized
(viii) Rental income in case of a person Profits and gains from businessor
engaged in the business of letting profession
out of properties

Note - As per section 56(2)(ii), rental income of machinery would be chargeable to

tax under the head “Income from Other Sources”, if the same is not chargeable to
income-tax under the head “Profits and gains of business or profession”.

Question 2
Examine whether the following are chargeable to tax and the amount liableto tax:
 INCOME FROM OTHER SOURCES (Unit - v)| 3.28

(i) A sum of ` 1,20,000 was received as gift from non-relatives by Raj onthe occasion of
the marriage of his son Pravin.
(ii)Interest on enhanced compensation of ` 96,000 received on 12-3-2024 foracquisition of
urban land, of which 40% relates to P.Y.2022-23.
Answer:

1. Taxability of Receipts
S. Taxable/ Not Answer Amount Reason
No. Taxable liableto tax (`)

(i) Taxable 1,20,000 The exemption from applicability of

section 56(2)(x) would be available if,
inter alia, gift is received from a relative
or gift is received on the occasion of
marriage of the individual himself. In
this case, since gift is received by Mr.
Raj from a non-relative on the occasion
of marriage of his son, it would be
taxable in his hands under section
56(2)(x).

(ii) Taxable 48,000 As per section 145B(1), interest

received by the assessee on enhanced
compensation shall be deemed to be
the income of the year in which it is
received, irrespective of the method of
accounting followed by the assessee.
Interest of ` 96,000 on enhanced
compensation is chargeable to tax in
the year of receipt i.e. P.Y. 2023-
24 under section 56(2)(viii) after
providing deduction of 50% under
section 57(iv). Therefore, ` 48,000 is
chargeable to tax under the head
“Income from other sources”.

Question 3
On 10.10.2023, Mr. Govind (a bank employee) received ` 5,00,000 towards interest on enhanced
compensation from State Government in respect of compulsory acquisition of his land effected
during the financial year 2015-16.
Out of this interest, ` 1,50,000 relates to the financial year 2016-17; ` 1,65,000 to the
financial year 2017-18; and ` 1,85,000 to the financial year 2018-19. He incurred `50,000 by way
of legal expenses to receive the interest on such enhanced compensation.

How much of interest on enhanced compensation would be chargeable to tax in the A.Y.2024-25?
 INCOME FROM OTHER SOURCES (Unit - v)| 3.29

Answer
Section 145B provides that interest received by the assessee on enhanced compensation shall be
deemed to be the income of the assessee of the year in which it is received, irrespective of the
method of accounting followed by the assessee and irrespective of the financial year to which it
relates.
Section 56(2)(viii) states that such income shall be taxable as ‘Income fromother sources’.
50% of such income shall be allowed as deduction by virtue of section 57(iv)and no other
deduction shall be permissible from such Income.
Therefore, legal expenses incurred to receive the interest on enhancedcompensation would not
be allowed as deduction from such income.
Computation of interest on enhanced compensation taxable as “Income from other sources”
for the A.Y 2024-25:
Particulars `
Interest on enhanced compensation taxable u/s 56(2)(viii) 5,00,000
Less: Deduction under section 57(iv) (50% x ` 5,00,000) 2,50,000
Taxable interest on enhanced compensation 2,50,000

Question 4
The following details have been furnished by Mrs. Hemali pertaining to the year ended
31.3.2024:
(i) Cash gift of ` 51,000 received from her friend on the occasion of her a wedding function
celebrated on her husband completing 60 years of age. This was also her 25th wedding
anniversary.
(ii) On the above occasion, a diamond necklace worth ` 2 lacs was presented by her sister living
in Dubai.
(iii) When she celebrated her daughter's wedding on 21.2.2024, her friend assigned in Mrs.
Hemali's favour, a fixed deposit held by the said friend in a scheduled bank; the value of the
fixed deposit and the accrued interest on the said date was ` 52,000.
Compute the income, if any, assessable as “Income from other sources” for A.Y.2024-25.
Answer
(i) Any sum of money received by an individual on the occasion of the marriage of the
individual is exempt. This provision is, however, not applicable to a cash gift received
during a wedding function celebrated on completion of 60 years of age.
The gift of ` 51,000 received from a non-relative is, therefore, chargeable to tax under section
56(2)(x) in the hands of Mrs. Hemali, since the same exceeds ` 50,000.

(ii) The provisions of section 56(2)(x) are not attracted in respect of any sum of money or
property received from a relative. Thus, the gift of diamond necklace received from her
sister, being a relative, is not taxable under section 56(2)(x), even though jewellery falls
within the definition of “property”.
(iii) To be exempt from applicability of section 56(2)(x), the property should be received on
the occasion of the marriage of the individual, not that of the individual’s son or daughter.
Therefore, this exemption provision is not attracted in this case.
 INCOME FROM OTHER SOURCES (Unit - v)| 3.30

Any sum of money received without consideration by an individual is chargeable to tax under
section 56(2)(x), if the aggregate value exceeds ` 50,000 in a year. “Sum of money” has,
however, not been defined under section 56(2)(x).
Therefore, there are two possible views in respect of the value of fixed deposit assigned in
favour of Mrs. Hemali –
(1) The first view is that fixed deposit does not fall within the meaning of “sum of
money” and therefore, the provisions of section 56(2)(x) are not attracted. It may be
noted that fixed deposit is also not included in the definition of “property”.
(2) However, another possible view is that fixed deposit assigned in favour of Mrs.
Hemali falls within the meaning of “sum of money” received.
Income assessable as “Income from other sources”
If the first view is taken, the total amount chargeable to tax as “Income from other
sources” would be ` 51,000, being cash gift received from a friend on her Shastiaptha
Poorthi.
As per the second view, the provisions of section 56(2)(x) would also be attracted in
respect of the fixed deposit assigned and the “Income from other sources” of Mrs. Hemali
would be ` 1,03,000 (` 51,000 + ` 52,000).
Question 5
Examine the following transactions in the context of Income-tax Act, 1961:
(i) Mr. B transferred 500 shares of R (P) Ltd. to M/s. B Co. (P) Ltd. on 10.10.2023 for `
3,00,000 when the fair market value was ` 5,00,000. The indexed cost of acquisition of
shares for Mr. B was computed at ` 4,45,000. The transfer was not subjected to
securities transaction tax.
Determine the income chargeable to tax in the hands of Mr. B and M/s. B Co. (P) Ltd.
because of the above said transaction.

(ii) Mr. Chezian is employed in a company with taxable salary income of ` 5,00,000. He
received a sum of ` 1,00,000 from Atma Charitable Trust (registered under section 12AB) by
account payee cheque in December 2023 for meeting his medical expenses.
Is the sum of money so received from the trust chargeable to tax in the hands of Mr.
Chezian?

ANSWER
(i) Any movable property received for inadequate consideration by any person is chargeable
to tax under section 56(2)(x), if the difference between aggregate Fair Market Value of the
property and consideration exceeds `50,000.
Thus, share received by M/s B. Co. (P) Ltd. from Mr B for inadequate consideration is
chargeable to tax under section 56(2)(x) to the extentof `2,00,000.
As per section 50CA, since, the consideration is less than the fair market value of unquoted
shares of R (P) Ltd., fair market value of shares of the company would be deemed to be the
full value of consideration. It is presumed that the shares of R (P) Ltd are unquoted shares.
The full value of consideration (` 5,00,000) less the indexed cost of acquisition (` 4,45,000)
would result in a long term capital gains of `55,000 in the hands of Mr. B.
 INCOME FROM OTHER SOURCES (Unit - v)| 3.31

(ii) The provisions of section 56(2)(x) would not apply to any sum of money or any
property received from any trust or institution registered under section 12AB. Therefore,
the sum of ` 1 lakh received from Atma Charitable Trust, being a trust registered under
section 12AB, for meeting medical expenses would not be chargeable to tax under section
56(2)(x) in the hands of Mr. Chezian.
 Income Tax Liability - Computation And Optimisation | 9.1

CHAPTER – 9 INCOME TAX LIABILITY - COMPUTATION AND OPTIMISATION

Chapter – 9

INCOME TAX LIABILITY - COMPUTATION AND OPTIMISATION

Assessment of Individuals

Computation of Total Income

Income from Salary U/s 15 XXX
Income from House Property U/s 22 XXX
Income from Business & Profession U/s 28 XXX
Income from Capital Gain U/s 45 XXX
Income from Other Source U/s 56 XXX
Gross Total Income u/s 14 XXX
Less : Deduction under chapter VI –A XXX
( Sec. 80 C to 80 U )
Total Income XXX
Rounded off XXX
(Nearest multiple Rs. 10 U/s 288 A)
* If Agriculture Income Exceed Rs. 5,000 P.A. XXX
Add: Agriculture Income (Agri. Income > 5,000 P.A.)
Aggregate of Income XXX

Computation of Tax Liabilities.

Tax on Above aggregate of Income XXX
Less: Tax on Agriculture Income XXX
(Basic Exemption + Agriculture Income)
XXX
Less: Rebate u/s 87 A XX
(Total Income < Rs. 5,00,000)
XX
Add : 4 % H.E.C XXX
Tax Liabilities XXX
Rounded off
(Nearest Multiple Rs. 10) U/s 288 B
 Income Tax Liability - Computation And Optimisation | 9.2

Example 1

For the assessment year 2023–24, net agricultural income of Mrs. X (age : 37 years) is Rs.
8,00,000 and non-agricultural income in Rs. 5,50,000. Mrs. X pays Rs. 1,00,000 as life
insurance premium. Mrs. X exercises the option of shifting out of the default tax regime
provided under section 115BAC(1A).

Answer

Rs.
Gross Total Income 5,50,000
Less: Deduction under section 80 C 1,00,000
Net Income 4,50,000
Income tax will be computed as under :
Income – tax on Rs. 12,50,000 (i.e. agricultural income Rs. 8,00,000 + non 1,87,500
agricultural income Rs. 4,50,000)
Income –tax on Rs. 10,50,000 (i.e, agricultural income Rs. 8,00,000 + exempted 1,27,500
slab of income Rs. 2,50,000)
Income –tax computed at (1) minus income-tax computed at (2) 60,000
Less: Rebate u/s 87A 12,500
Tax [(i.e., (3)+(4)] 47,500
4% HEC 1,900
Tax Liability (rounded off) u/s 288 B 49,400

Example 2

For the assessment year 2023–24, Mr. Z, an individual (age 70 years), submits the
following information:

Rs.

House Property Income computed 4,20,000

Revenue from the business of growing and manufacturing roasted coffee in India 7,00,000
Expenditure on earning coffee income 3,20,000
Determine the tax liability of Mr. Z for the assessment year 2023–24 on the
assumption that purchase of NSC Rs. 1,00,000. Mr. Z exercises the option of shifting
out of the default tax regime provided under section 115BAC(1A).

Answer

Computation of Income Agricultural Non-

Income Agricultural
Rs. Rs.
House Property Income – 4,20,000
Income from growing and manufacturing coffee (i.e. Rs. 2,28,000 1,52,000
7,00,000 - 3,20,000 =3,80,000[60% of Rs. 3,80,000 is
agricultural income and balance is Treated as non agricultural
income]
Total 2,28,000 1,52,000
Gross Total Income 5,72,000
Less: Deduction under section 80C 1,00,000
Net Income 4,72,000
 Income Tax Liability - Computation And Optimisation | 9.3

Computation of Tax Liability on Non – Agricultural Income

1. Income tax on Rs. 7,00,000 (Rs. 2,28,000 + Rs. 4,72,000) 50,000
2. Income tax on Rs. 5,28,000 (i.e. agricultural income Rs. 15,600
2,28,000 + exempted slab of income Rs. 3,00,000)
3. Balance [i.e., (1) (2)] 34,400
4. Add: Surcharge (not applicable) 12,500
5. Rebate u/s 87A 21,900
6. 4% H.E.C. 876
7. Tax Liability 22776
8. Tax liability (rounded off) 22780

Alternate Minimum Tax (AMT)

AMT is applicable to all Assessee except company
Sec 115 JC: Income tax payable by any person Higher of
(i) Income tax payable as per Normal Prov. of Income Tax
(ii) 18.5% of Adjustment Total Income (ATI)
(Surcharge (if applicable) + 4% cess)
NOTE:
1. Calculation of Adjustment Total Income (ATI)
Total Income (NTI) as per Normal Prov. of Income Tax XXX
Add: i) Deduction us 10AA (SEZ) XXX
ii) Deduction us 35 AD (14 Business) XXX
iii) Deduction under Chapter VI–A
[Sec 80IA to 80 RRB except Sec. 80 P] XXX
XXXX
Less : Dep. allowable as per Sec. 32 assuming
that deduction u/s 35AD was not allowed on assets on
which deduction u/s35AD is claimed. (XXX)

Adjustment Total Income (ATI) XXXX

2. AMT shall not be applicable if ATI (Adjusted Total Income) is up to `20 lakhs in case of
individual / HUF/ AOP/ BOI/ Artificial Judicial Person.
3. The provision of AMT apply only if assessee is claiming deduction u/s 10AA, 35AD, 80IA
to 80 RRB (Except 80P).
 Sec 115 JD : AMT Credit
a. If AMT > Normal income tax then excess, shall be treated as AMT credit.
b. AMT credit be C/F and Setoff for 15 years.
c. Credit can be set off in the year in which regular tax is more than AMT.
d. The credit allowed to be set off will be restricted to the difference between the regular income
tax computed under normal provision of IT & the AMT.
e. Assessee can claim AMT credit in such subsequent P.Y. even if AMT is not applicable in
subsequent P.Y.
NOTE:
1. All other provisions of income tax Act like advance tax, interest u/s 234A /B/C shall apply
to Assessee.
 Income Tax Liability - Computation And Optimisation | 9.4

2. Assessee will obtain report form CA for computation of ATI & AMT.
Example 3
Mr. Rajesh has income of ` 45 lakhs under the head “Profits and gains of business or
profession”. One of his businesses is eligible for deduction @ 100% of profits under section
80-IB for A.Y. 2023-24. The profit from such business included in the business income is ` 20
lakhs. Compute the tax payable by Mr. Rajesh, assuming that he has no other income during
the P.Y. 2022-23

Mr. Rajesh exercises the option of shifting out of the default tax regime provided under
section 115BAC(1A).

Answer
Computation of regular income-tax payable under the provisions of the Act

Particulars `
Profits and gains of business or profession 45,00,000
Less: Deduction under section 80-IB 20,00,000
Total Income 25,00,000
Tax payable
Up to ` 2,50,000 Nil
5% on next ` 2,50,000 12,500
20% on next ` 5,00,000 1,00,000
30% on balance ` 15,00,000 4,50,000
5,62,500

Computation of Alternate Minimum Tax (AMT)

Particulars `
Total Income as per the Income-tax Act, 1961 25,00,000
Add: Deduction under section 80-IB 20,00,000
Adjusted Total Income 45,00,000
AMT = 18.5% × 45,00,000 = 8,32,500

Since the regular income-tax payable as per the provisions of the Act is less than the
AMT, the adjusted total income of ` 45 lakhs would be deemed to be the total income
of Mr. Rajesh and he would be liable to pay tax @ 18.5% thereof. The tax payable by Mr.
Rajesh for the A.Y.2022-23 would, therefore, be ` 8,32,500 plus health and education
cess @ 4%, totaling ` 8,65,800.
Mr. Rajesh would be eligible for credit to the extent of ` 2,80,800 [` 8,65,800 – ` 5,85,000
(i.e.,
5,62,500 + 4% cess)] to be set-off in the year in which tax on total income computed
under the regular provisions of the Act exceeds the AMT. Such credit can be carried
forward for succeeding 15 assessment years.
 Income Tax Liability - Computation And Optimisation | 9.5

Example 4

PQR LLP, a limited liability partnership set up a unit in Special Economic Zone (SEZ)
in the financial year 2018-19 for production of washing machines. The unit fulfills all
the conditions of section 10AA of the Income-tax Act, 1961. During the financial year
2021-22, it has also set up a warehousing facility in a district of Tamil Nadu for storage
of agricultural produce. It fulfills all the conditions of section 35AD. Capital
expenditure in respect of warehouse amounted to ` 75 lakhs (including cost of land `
10 lakhs). The warehouse became operational with effect from 1st April, 2022 and the
expenditure of ` 75 lakhs was capitalized in the books on that date.

Relevant details for the financial year 2022-23 are as follows:

Particulars `
Profit of unit located in SEZ 40,00,000
Export sales of above unit 80,00,000
Domestic sales of above unit 20,00,000
Profit from operation of warehousing facility (before considering 1,05,00,000
deduction under Section 35AD).
Compute income tax (including AMT under Section 115JC) payable by PQR LLP for
Assessment Year 2023-24.

Answer

Computation of total income and tax liability of PQR LLP for A.Y.2023-24
(under the regular provisions of the Income-tax Act, 1961)

Particulars ` `
Profits and gains of business or profession
Unit in SEZ 40,00,000
Less: Deduction under section 10AA [See Note (1) below] 32,00,000
Business income of SEZ unit chargeable to tax 8,00,000
Profit from operation of warehousing facility 1,05,00,000
Less: Deduction under section 35AD [See Note (2) below] 65,00,000
Business income of warehousing facility chargeable to tax 40,00,000
Total Income 48,00,000
Computation of tax liability (under the normal/ regular
provisions)
Tax @ 30% on ` 48,00,000 14,40,000
Add: Health and Education cess @ 4% 57,600
Total tax liability 14,97,600
 Income Tax Liability - Computation And Optimisation | 9.6

Computation of adjusted total income of PQR LLP for levy of Alternate Minimum Tax

Particulars ` `
Total Income (as computed above) 48,00,000
Add: Deduction under section 10AA 32,00,000
80,00,000
Add: Deduction under section 35AD 65,00,000
Less: Depreciation under section 32
On building @ 10% of ` 65 lakhs8 6,50,000 58,50,000
Adjusted Total Income 1,38,50,000
Alternate Minimum Tax @ 18.5% 25,62,250
Add: Surcharge @ 12% (since adjusted total income > ` 1 3,07,470
crore)
28,69,720
Add: Health and Education cess @ 4% 1,14,789
29,84,509
Tax liability under section 115JC (rounded off) 29,84,510

Since the regular income-tax payable is less than the alternate minimum tax payable, the
adjusted total income shall be deemed to be the total income and tax is leviable @ 18.5%
thereof plus surcharge @ 12% and cess @ 4%. Therefore, the tax liability is ` 29,84,510.

AMT Credit to be carried forward under section 115JEE

`
Tax liability under section 115JC 29,84,510
Less: Tax liability under the regular provisions of the Income-tax Act, 14,97,600
1961
14,86,910

(1) Deduction under section 10AA in respect of Unit in SEZ =

Profit of the Unit in Sez ×

Rs. 40,00,000X Rs.80,00,000/ RS.100,00,000 = Rs. 32,00,000

(2) Deduction @ 100% of the capital expenditure is available under section 35AD for
A.Y.2022-23 in respect of specified business of setting up and operating a warehousing
facility for storage of agricultural produce which commences operation on or after
01.04.2012.
Further, the expenditure incurred, wholly and exclusively, for the purposes of such
specified business, shall be allowed as deduction during the previous year in which he
commences operations of his specified business if the expenditure is incurred prior to
the commencement of its operations and the amount is capitalized in the books of
account of the assessee on the date of commencement of its operations.
 Income Tax Liability - Computation And Optimisation | 9.7

Deduction under section 35AD would, however, not be available on expenditure incurred on
acquisition of land.
In this case, since the capital expenditure of ` 65 lakhs (i.e., ` 75 lakhs – ` 10 lakhs, being
expenditure on acquisition of land) has been incurred in the F.Y.2018-19 and capitalized in
the books of account on 1.4.2019, being the date when the warehouse became operational, `
65,00,000, being 100% of ` 65 lakhs would qualify for deduction under section 35AD.

Illustration 1
Mr. A, aged 32 years, is employed with XYZ (P) Ltd. on a basic salary of ` 50,000 p.m. He
has received transport allowance of ` 15,000 p.m. and house rent allowance of ` 20,000
p.m. from the company for the P.Y. 2023-24. He has paid rent of ` 25,000 p.m. for an
accommodation in Delhi. Mr. A has paid interest of ` 2,10,000 for housing loan taken for
the construction of his house in Mumbai. The construction of the house is completed in March,
2024 and his parents live in that house.

Other Information

- Contribution to PPF - ` 1,50,000

- Contribution to pension scheme referred to in section 80CCD - ` 50,000
- Payment of medical insurance premium for father, who is of the age of 65 -` 55,000
- Payment of medical insurance premium for self and spouse - ` 32,000
Compute the total income and tax liability of Mr. A for the A.Y. 2024-25 in the most beneficial
manner.

Answer
Computation of total income and tax liability of Mr. A for A.Y. 2024-25 under default tax
regime under section 115BAC
Particulars `
Salaries
Basic Salary [` 50,000 x 12] 6,00,000
Transport allowance [` 15,000 x 12] 1,80,000
HRA received [` 20,000 x 12] 2,40,000
Gross salary 10,20,000
Less: Standard deduction u/s 16(ia) (50,000)
9,70,000
Income from house property
Interest on housing loan -
Gross Total Income 9,70,000
Less: Deductions under Chapter VI- A
Section 80C
 Income Tax Liability - Computation And Optimisation | 9.8

Contribution in PPF -
Section 80CCD
Contribution to pension scheme -
Section 80D
Mediclaim insurance premium for self and parents -
Total Income 9,70,000
Tax liability
Tax @5% on ` 3,00,000 [` 6,00,000 - ` 3,00,000] 15,000
Tax @10% on ` 3,00,000 [` 9,00,000 - ` 6,00,000] 30,000
Tax@15% on ` 70,000 [` 9,70,000 – ` 9,00,000] 10,500 55,500
Add: Health & Education cess @ 4% 2,220
Total Tax Liability 57,720

Computation of total income and tax liability of Mr. A for A.Y. 2024-25 under normal
provisions of the Act
Particulars `
Salaries
Basic Salary [` 50,000 x 12] 6,00,000
Transport allowance [` 15,000 x 12] 1,80,000
HRA received 2,40,000
Less: Least of the following exempt u/s 10(13A) 2,40,000 -
HRA Received 2,40,000
Actual rent paid – 10% of salary 2,40,000
[` 3,00,000 – ` 60,000]
50% of salary 3,00,000
Gross salary 7,80,000
Less: Standard deduction u/s 16(ia) (50,000)
7,30,000
Income from house property
[Annual Value is Nil. Deduction u/s 24(b) for interest on housing (2,00,000)
loan would be restricted to ` 2,00,000, in case of self-occupied
property, which would represent loss from house property]
Gross Total Income 5,30,000
Less: Deductions under Chapter VI-A
Section 80C
Contribution to PPF 1,50,000
 Income Tax Liability - Computation And Optimisation | 9.9

Section 80CCD(1B)
Own contribution to pension scheme 50,000
Section 80D
Mediclaim insurance premium
For self and spouse, restricted to 25,000
For father, who is a senior citizen, restricted to 50,000
75,000
Total Income 2,55,000

Tax liability
Tax @ 5% on ` 5,000 [` 2,55,000 - ` 2,50,000] 250
Less: Rebate u/s 87A 250
Total Tax Liability -

Since tax liability as per the normal provisions of the Act is lower than the tax liability under
the default tax regime under section 115BAC, it would be beneficial for Mr. A to shift out
of the default tax regime under section 115BAC for A.Y. 2024-25.
Note: In this case, Mr. A is entitled to exemption u/s 10(13A), benefit of interest on
housing loan in respect of self-occupied property and Chapter VI-A deductions, owing to
which his total income is reduced by ` 7,15,000. His total income under the regular provisions
of the Act is less than ` 5,00,000, owing to which he becomes entitled to rebate u/s 87A.
Hence, in this case, it is beneficialfor Mr. A to shift out of the default tax regime under
section 115BAC for A.Y. 2024-25.
ILLUSTRATION 2
Mr. Kadam is entitled to a salary of ` 40,000 per month. He is given an option by his employer
either to take house rent allowance or a rent free accommodation which is owned by the
company. The HRA amount payable was ` 7,000 per month. The rent for the hired
accommodation was ` 6,000 per month at New Delhi. Advice Mr. Kadam whether it would be
beneficial for him to avail HRA or Rent Free Accommodation. Give your advice on the basis of
“Net Take Home Cash benefits”. Assume Mr. Kadam exercises the option to shift out of the
default tax regime under section 115BAC.

SOLUTION

Computation of tax liability of Kadam under both the options

Particulars Option I – Option II –

HRA RFA
(`) (`)

Basic Salary (` 40,000 x 12 Months) 4,80,000 4,80,000

Perquisite value of rent-free accommodation (15% of N.A. 72,000
` 4,80,000)
 Income Tax Liability - Computation And Optimisation | 9.10

House rent Allowance (` 7,000 x 12 Months) ` 84,000

Less: Exempt u/s 10(13A) – least of the following -
- 50% of Basic Salary ` 2,40,000
- Actual HRA received ` 84,000
- Rent paid less 10% of salary ` 24,000 ` 24,000 60,000
Gross Salary 5,40,000 5,52,000
Less: Standard deduction u/s 16(ia) 50,000 50,000

Net Salary 4,90,000 5,02,000

- -
Less: Deduction under Chapter VI-A

Total Income 4,90,000 5,02,000

Tax on total income 12,000 12,900

Less: Rebate under section 87A - Lower of ` 12,500 or
income-tax of ` 12,000, since total income does not
exceed ` 5,00,000 12,000 Nil
Nil 12,900
Add: Health and Education cess@4% Nil 516
Tax liability Nil 13,416

Tax liability (Rounded off) Nil 13,420

Cash Flow Statement

Particulars Option I – HRA Option II – RFA
Inflow: Salary 5,64,000 4,80,000
Less: Outflow: Rent paid (72,000) -
Tax on total income Nil (13,420)
Net Inflow 4,92,000 4,66,580

Since the net cash inflow under option I (HRA) is higher than in Option II (RFA), it is
beneficial for Mr. Kadam to avail Option I, i.e., House Rent Allowance.
 Income Tax Liability - Computation And Optimisation | 9.11

QUESTIONS AND ANSWERS

Question 1
Compute the tax liability of Mr. Kashyap (aged 35), having total income of ` 51,75,000 for the
A.Y. 2024-25. Assume that his total income comprises of salary income, income from house
property and interest on fixed deposit. Assume that Mr. Kashyap has exercised the option of
shift out of the default tax regime under section 115BAC.
Answer

Computation of tax liability of Mr. Kashyap for the A.Y.2024-25

(A) Income-tax (including surcharge) computed on total income of ` 51,75,000
` 2,50,000 – ` 5,00,000 @5% ` 12,500
` 5,00,001 – ` 10,00,000 @20% ` 1,00,000
` 10,00,001 – ` 51,75,000 @30% ` 12,52,500
Total ` 13,65,000

Add: Surcharge @ 10% ` 1,36,500 `15,01,500

(B) Income-tax computed on total income of ` 50 lakhs
(` 12,500 plus `1,00,000 plus ` 12,00,000) ` 13,12,500
(C) Total Income Less ` 50 lakhs ` 1,75,000
(D) Income-tax computed on total income of ` 50 lakhs plus the excess of total income over
`50 lakhs(B +C) ` 14,87,500

(E) Tax liability: lower of (A) and (D) ` 14,87,500

Add: Health and education cess @4% ` 59,500
Tax liability (including cess) ` 15,47,000

(F) Marginal Relief (A – D) ` 14,000

Alternative method -
(A) Income-tax (including surcharge) computed on total income of
` 51,75,000
` 2,50,000 – ` 5,00,000@5% ` 12,500

` 5,00,001 – ` 10,00,000@20% ` 1,00,000

` 10,00,001 – ` 51,75,000@30% ` 12,52,500

Total ` 13,65,000
Add: Surcharge@10% ` 1,36,500 ` 15,01,500

(B) Income-tax computed on total income of ` 50 lakhs

(` 12,500 plus ` 1,00,000 plus ` 12,00,000) ` 13,12,500
(C) Excess tax payable (A)-(B) ` 1,89,000
 Income Tax Liability - Computation And Optimisation | 9.12

(D) Marginal Relief (` 1,89,000 – ` 1,75,000, being the amount

of income in excess of ` 50,00,000) ` 14,000
(E) Tax liability (A)-(D) ` 14,87,500
Add: Health and education cess @4% ` 59,500
Tax liability (including cess) ` 15,47,000

Question 2
Compute the tax liability of Mr. Gupta (aged 61) under default tax regime, having total income of
` 1,02,00,000 for the A.Y.2024-25. Assume that his total income comprises of salary income,
income from house property and interest on fixed deposit.
Answer
Computation of tax liability of Mr. Gupta for the A.Y.2024-25 under default tax regime
(A) Income-tax (including surcharge) computed on total income of ` 1,02,00,000
` 3,00,000 – ` 6,00,000 @5% ` 15,000
` 6,00,001 – ` 9,00,000 @10% ` 30,000
` 9,00,001 – ` 12,00,000 @15% ` 45,000
` 12,00,001 – ` 15,00,000 @20% ` 60,000
` 15,00,001 – ` 1,02,00,000 @30% ` 26,10,000
Total ` 27,60,000
Add: Surcharge @ 15% ` 4,14,000 `
31,74,000
(B) Income-tax computed on total income of ` 1crore
(` 1,50,000 plus ` 25,50,000) ` 27,00,000
Add: Surcharge@10% ` 2,70,000
` 29,70,000
(C) Total Income Less ` 1crore ` 2,00,000
(D) Income-tax computed on total income of ` 1 crore
plus the excess of total income over ` 1 crore (B +C) ` 31,70,000
(E) Tax liability: lower of (A) and (D) ` 31,70,000
Add: Health and education cess @4% ` 1,26,800
Tax liability (including cess) ` 32,96,800

(F) Marginal Relief (A – D) ` 4,000

Alternative method -
(A) Income-tax (including surcharge) computed on total income of ` 1,02,00,000
` 3,00,000 – ` 6,00,000 @5% ` 15,000
` 6,00,001 – ` 9,00,000 @10% ` 30,000
 Income Tax Liability - Computation And Optimisation | 9.13

` 9,00,001 – ` 12,00,000 @15% ` 45,000

` 12,00,001 – ` 15,00,000 @20% ` 60,000
` 15,00,001 – ` 1,02,00,000 @30% ` 26,10,000
Total ` 27,60,000
Add: Surcharge @ 15% ` 4,14,000 ` 31,74,000
(B) Income-tax computed on total income of ` 1 crore
[(` 1,50,000 plus ` 25,50,000) plus surcharge@10%] ` 29,70,000
(C) Excess tax payable (A)-(B) ` 2,04,000
(D) Marginal Relief (` 2,04,000 – ` 2,00,000, being the amount
of income in excess of ` 1,00,00,000)
` 4,000
(E) Tax liability (A)-(D) ` 31,70,000
Add: Health and education cess @4% ` 1,26,800
Tax liability (including cess) ` 32,96,800

Question 3
Mr. Agarwal aged 40 years and a resident in India, has a total income of ` 4,50,00,000,
comprising long term capital gain taxable under section 112 of ` 55,00,000, short term
capital gain taxable under section 111A of ` 65,00,000 and other income of
`3,30,00,000. Compute his tax liability for A.Y.2024-25 under the default tax regime and
optional tax regime as per the normal provisions of the Act assuming that the total income and
its components are the same in both tax regimes.
Answer
Computation of tax liability of Mr. Agarwal for the A.Y.2024-25
under default tax regime
Particulars `
Tax on total income of ` 4,50,00,000
Tax@20% of ` 55,00,000 11,00,000
Tax@15% of ` 65,00,000 9,75,000
Tax on other income of ` 3,30,00,000
` 3,00,000 – ` 6,00,000 @5% 15,000
` 6,00,000 – ` 9,00,000 @10% 30,000
` 9,00,000 – ` 12,00,000 @15% 45,000
` 12,00,000 – ` 15,00,000 @20% 60,000
` 15,00,000 – ` 3,30,00,000 @30% 94,50,000 96,00,000
1,16,75,000
Add: Surcharge @15% on ` 20,75,000 3,11,250
 Income Tax Liability - Computation And Optimisation | 9.14

@25% on ` 96,00,000 24,00,000 27,11,250

1,43,86,250
Add: Health and education cess @4% 5,75,450
Tax Liability 1,49,61,700

Computation of tax liability of Mr. Agarwal for the A.Y.2024-25

under normal provisions of the Act
Particulars `
Tax on total income of ` 4,50,00,000
Tax@20% of ` 55,00,000 11,00,000
Tax@15% of ` 65,00,000 9,75,000
Tax on other income of ` 3,30,00,000
` 2,50,000 – ` 5,00,000 @5% 12,500
` 5,00,000 – ` 10,00,000 @20% 1,00,000
` 10,00,000 – ` 3,30,00,000 @30% 96,00,000 97,12,500
1,17,87,500
Add: Surcharge @15% on ` 20,75,000 3,11,250
@25% on ` 97,12,500 24,28,125 27,39,375
1,45,26,875
Add: Health and education cess @4% 5,81,075
Tax Liability 1,51,07,950
Question 4
Mr. Sharma aged 62 years and a resident in India, has a total income of ` 2,30,00,000,
comprising long term capital gain taxable under section 112 of ` 52,00,000, short term
capital gain taxable under section 111A of ` 64,00,000 and other income of `
1,14,00,000. Compute his tax liability for A.Y.2024-25. Assume that Mr. Kashyap has exercised
the option of shift outof the default tax regime under section 115BAC.
Answer
Computation of tax liability of Mr. Sharma for the A.Y.2024-25
under normal provisions of the Act
Particulars `
Tax on total income of ` 2,30,00,000
Tax@20% of ` 52,00,000 10,40,000
Tax@15% of ` 64,00,000 9,60,000
Tax on other income of ` 1,14,00,000
` 3,00,000 – ` 5,00,000 @5% 10,000
` 5,00,000 – ` 10,00,000 @20% 1,00,000
 Income Tax Liability - Computation And Optimisation | 9.15

` 10,00,000 – ` 1,14,00,000 @30% 31,20,000 32,30,000

52,30,000
Add: Surcharge @15% 7,84,500
60,14,500
Add: Health and education cess @4% 2,40,580
Tax Liability 62,55,080

Question 5
Miss Charlie, an American national, got married to Mr. Radhey of India in USA on
2.03.2023 and came to India for the first time on 16.03.2023. She leftfor USA on 19.9.2023.
She returned to India again on 27.03.2024. While in India, she had purchased a show room in
Mumbai on 30.04.2023, which was leased out to a company on a rent of ` 25,000 p.m. from
1.05.2023. She had taken loan from a bank for purchase of this show room on which bank had
charged interest of ` 97,500 upto 31.03.2024. She had received the following cash gifts from
her relatives and friends during 1.4.2023 to 31.3.2024:
- From parents of husband ` 51,000
- From married sister of husband ` 11,000
- From two very close friends of her husband (` 1,51,000 and ` 21,000)
(a) Determine her residential status and compute the total income chargeable to tax along
with the amount of tax liability on such income for the A.Y. 2024-25 if she opts out of
the default tax regime under section 115BAC.
(b) Would her residential status undergo any change, assuming that she is a person of
Indian origin and her total income from Indian sources is ` 18,00,000 and she is not
liable to tax in USA?
Answer
Under section 6(1), an individual is said to be resident in India in any previous year, if he/she
satisfies any one of the following conditions:
(i) He/she has been in India during the previous year for a total period of 182 days or more,
or
(ii) He/she has been in India during the 4 years immediately preceding the previous year for a
total period of 365 days or more and has been in India for at least 60 days in the previous
year.
If an individual satisfies any one of the conditions mentioned above, he/she is a resident. If
both the above conditions are not satisfied, the individual is a non-resident.
Therefore, the residential status of Miss Charlie, an American National, for A.Y.2024-25
has to be determined on the basis of her stay in India during the previous year relevant to
A.Y. 2024-25 i.e., P.Y.2023-24 and in the preceding four assessment years.

Her stay in India during the P.Y.2023-24 and in the preceding four years are as under:
P.Y. 2023-24
 Income Tax Liability - Computation And Optimisation | 9.16

01.04.2023 to 19.09.2023 - 172 days

27.03.2024 to 31.03.2024 - 5 days

Total 177 days

Four preceding previous years

P.Y. 2022-23 [1.4.2022 to 31.3.2023] - 16 days

P.Y. 2021-22 [1.4.2021 to 31.3.2022] - Nil
P.Y.2020-21 [1.4.2020 to 31.3.2021] - Nil

P.Y.2019-20 [1.4.2019 to 31.3.2020] - Nil

Total 16 days
The total stay of the assessee during the previous year in India was less than 182 days and
during the four years preceding this year was for 16 days. Therefore, due to non-fulfillment of
any of the two conditions for a resident, she would be treated as non-resident for the A.Y.2024-
25.
Computation of total income of Miss Charlie for the A.Y. 2024-25

Particulars ` `
Income from house property
Show room located in Mumbai remained on
rent from 01.05.2023 to 31.03.2024@ 2,75,000
` 25,000/- p.m.
Gross Annual Value [` 25,000 x 11] (See
Note1 below)
Less: Municipal taxes Nil
Net Annual Value (NAV) 2,75,000
Less: Deduction under section 24
30% of NAV 82,500
Interest on loan 97,500 1,80,000 95,000
 Income Tax Liability - Computation And Optimisation | 9.17

Income from other sources

Cash gifts received from non-relatives is
chargeable to tax as per section 56(2)(x), if the
aggregate value of such gifts exceeds ` 50,000.
- ` 50,000 received from parents of Nil
husband would be exempt, since parents
of husband fall within the definition of
„relative‟ and gifts from a relative are not
chargeable to tax.
- ` 11,000 received from married sister of Nil
husband is exempt, since sister-in-law falls
within the definition of relative and gifts
from a relative are not chargeable to tax.
- Gift received from two friends of husband 1,72,000 1,72,000
` 1,51,000 and ` 21,000 aggregating to
` 1,72,000 is taxable under section
56(2)(x) since the aggregate of ` 1,72,000
exceeds ` 50,000. (See Note 2 below)
Total income 2,67,000

Computation of tax liability by Miss Charlie for the A.Y. 2024-25 under normal
provisions of the Act
Particulars `
Tax on total income of ` 2,67,000 850
Add: Health and Education cess@4% 34
Total tax liability 884
Total tax liability(rounded off) 880

Notes:
1. Actual rent received has been taken as the gross annual value in the absence of other
information (i.e. Municipal value, fair rental value and standard rent) in the question.
2. If the aggregate value of taxable gifts received from non-relatives exceed ` 50,000 during
the year, the entire amount received (i.e. the aggregate value of taxable gifts received) is
taxable. Therefore, the entire amount of ` 1,72,000 is taxable under section 56(2)(x).
3. Since Miss Charlie is a non-resident for the A.Y. 2024-25, rebate under section 87A would
not be available to her, even though her total income does not exceed ` 5 lacs.
(b) Residential status of Miss Charlie in case she is a person of Indian origin and her total
income from Indian sources exceeds ` 18,00,000
If she is a person of Indian origin and her total income from Indian sources exceeds `
15,00,000 (` 18,00,000, in her case), the condition of stay in India for a period exceeding
120 days during the previous year and 365 days during the four immediately preceding
previous years would be applicable for being treated as a resident. Since her stay in India
exceeds 120 days in the P.Y.2023-24 but the period of her stay in India during the four
immediately preceding previous years is less than 365 days (only 16 days), her residential
 Income Tax Liability - Computation And Optimisation | 9.18

status as per section 6(1) would continue to be same i.e., non-resident in India.
Further, since she is not a citizen of India, the provisions of section 6(1A) deeming an
individual to be a citizen of India would not get attracted in her case, even though she is a
person of Indian origin and her total income from Indian sources exceeds ` 15,00,000
and she is not liable to pay tax in USA.
Therefore, her residential status would be non-resident in India for the previous year
2023-24.
Question 6
Dr. Niranjana, a resident individual, aged 60 years is running a clinic in Surat. Her Income and
Expenditure Account for the year ending March 31st, 2024 is as under:
Expenditure `
1
B Income `
2
B

To Medicine consumed 35,38,400 By Consultation and 58,85,850

medical charges
To Staff salary 13,80,000 By Income-tax refund 5,450
(principal ` 5,000,
interest ` 450)
To Clinic consumables 1,10,000 By Dividend from units 10,500
of UTI (Gross)
To Rent paid 90,000 By Winning from game
show on T.V. (net of
TDS of ` 15,000) 35,000
To Administrative 2,55,000 By Rent 27,000
expenses
To Amount paid to 1,50,000
scientific research
association
approved u/s 35
To Net profit 4,40,400
59,63,800 59,63,800

(i) Rent paid includes ` 30,000 paid by cheque towards rent for her residential house in
Surat.
(ii) Clinic equipments are:
1.4.2023 Opening W.D.V. - ` 5,00,000
7.12.2023 Acquired (cost) by cheque - ` 2,00,000
(iii) Rent received relates to residential house property situated at Surat. Gross Annual
Value ` 27,000. The municipal tax of ` 2,000, paid in December, 2023, has been
included in "administrative expenses".
(iv) She received salary of ` 7,500 p.m. from "Full Cure Hospital" which has not been
included in the "consultation and medical charges".
(v) Dr. Niranjana availed a loan of ` 5,50,000 from a bank for higher education of her
 Income Tax Liability - Computation And Optimisation | 9.19

daughter. She repaid principal of ` 1,00,000, and interest thereon ` 55,000 during the
previous year 2023-24.
(vi) She paid ` 1,00,000 as tuition fee (not in the nature of development fees/ donation) to
the university for full time education of her daughter.
(vii) An amount of ` 28,000 has also been paid by cheque on 27th March, 2024 for her
medical insurance premium.
From the above, compute the total income of Dr. Smt. Niranjana for the
A.Y. 2024-25 under the default tax regime and optional tax regime as per the normal
provisions of the Act.
Answer
Computation of total income of Dr. Niranjana for A.Y. 2024-25 under default tax regime

Particulars
1
8B
` ` `
I Income from Salary
Basic Salary (` 7,500 x 12) 90,000
Less: Standard deduction u/s 16(ia) 50,000 40,000
1
9II
B Income from house property
Gross Annual Value (GAV) 27,000
Less: Municipal taxes paid 2,000
Net Annual Value (NAV) 25,000
Less: Deduction u/s 24@30% of 7,500 17,500
` 25,000
2
0III
B Income from profession
Net profit as per Income and 4,40,400
Expenditure account
Less: Items of income to be treated
separately

(i) Rent received (taxable under 27,000

the head “Income from house
property”)
(ii) Dividend from units of UTI 10,500
(taxable under the head “Income
from other sources”)
(iii) Winning from game show on 35,000
T.V.(net of TDS) – taxable
under the head “Income from
other sources”
(iv) Income tax refund 5,450 77,950
3,62,450
Less: Allowable expenditure
 Income Tax Liability - Computation And Optimisation | 9.20

Depreciation on clinic equipments

on ` 5,00,000@15% 75,000
on ` 2,00,[email protected]% 15,000 90,000
(On equipments acquired during
the year in December 2023, she is
entitled to depreciation @50% of
normal depreciation, since the
same are put to use for less than
180 days during the year)
2,72,450
Add: Items of expenditure not
allowable while computing
business income
(i) Amount paid to scientific 1,50,000
research association approved
u/s 35 (not allowed under
default tax regime)
(i) Rent for her residential 30,000
accommodation included in
Income and Expenditure A/c
(ii) Municipal tax paid relating to
residential house at Surat
included in administrative 2,000 1,82,000 4,54,450
expenses
IV Income from other sources
(a) Interest on income-tax 450
refund
(b) Dividend from UTI (taxable in 10,500
the hands of unit holders)
(c) Winnings from TV game show
(` 35,000 + ` 15,000) 50,000 60,950
Gross Total Income 5,72,900
Less: Deductions under Chapter VI-
A:
(a) Section 80C [Not allowed under Nil
default tax regime]
(b) Section 80D [Not allowed under Nil
default tax regime]
(c) Section 80E [Not allowed under Nil
default tax regime]
Total income 5,72,900
 Income Tax Liability - Computation And Optimisation | 9.21

Computation of total income of Dr. Niranjana for A.Y. 2024-25 under normal
provisions of the Act
Particulars
1
8
B ` `
Gross Total Income as per default tax 5,72,900
regime
Less: Items of expenditure allowable while
computing business income under normal
provisions of the Act

100% deduction is allowable in respect of 1,50,000

the amount paid to scientific research
association allowable under normal
provisions of the Act.
Gross Total Income as per normal 4,22,900
provisions of the Act
Less: Deductions under Chapter VI-A:
(a) Section 80C - Tuition fee paid to
university for full time education of her 1,00,000
daughter
(b) Section 80D - Medical insurance
premium (fully allowed since she is a 28,000
senior citizen)
(c) Section 80E - Interest on loan taken for
higher education is deductible 55,000 1,83,000
Total income 2,39,900
Notes:
(i) The principal amount received towards income-tax refund will be excluded from
computation of total income. Interest received will be taxed under the head “Income from
other sources”.
(ii) Winnings from game show on T.V. should be grossed up for the chargeability
under the head “Income from other sources” (` 35,000 + ` 15,000). Thereafter, while
computing tax liability, TDS of ` 15,000 should be deducted to arrive at the tax payable.
Winnings from game show are subject to tax @30% as per section 115BB.
(iii) Dr. Niranjana would not be eligible for deduction u/s 80GG under normal provisions of
the Act, as she owns a house in Surat, a place where she is residing as well as carrying
on her profession.
Question 7
Ms. Purvi, aged 55 years, is a Chartered Accountant in practice. She maintainsher accounts on
cash basis. Her Income and Expenditure account for the year ended March 31, 2024 reads as
follows:
 Income Tax Liability - Computation And Optimisation | 9.22

Expenditure (`) Income (`) (`

)
Salary to staff 15,50,000 Fees earned:
Stipend to articled 1,37,000 Audit 27,88,000
Assistants Taxation 15,40,300
services
Incentive to articled 13,000 Consultancy 12,70,000 55,98,300
Assistants Dividend on 10,524
shares of X Ltd.,
an Indian
company (Gross)
Office rent 12,24,000 Income from UTI 7,600
(Gross)
Printing and 12,22,000 Honorarium 15,800
stationery received from
various
institutions for
valuation of
answer papers
Meeting, seminar 31,600 Rent received 85,600
and conference from residential
flat let out
Purchase of car (for 80,000
official use)
Repair, 4,000
maintenance
and petrol of car
Travelling expenses 5,25,000
Municipal tax paid 3,000
in respect of house
property
Net Profit 9,28,224
57,17,824 57,17,824

Other Information:

(i) Allowable rate of depreciation on motor car is 15%.

(ii) Value of benefits received from clients during the course of profession is ` 10,500.
(iii) Incentives to articled assistants represent amount paid to two articled
assistants for passing CA Intermediate Examination at first attempt.
(iv) Repairs and maintenance of car include ` 2,000 for the period from1-10-
 Income Tax Liability - Computation And Optimisation | 9.23

2023 to 30-09-2024.
(v) Salary includes ` 30,000 to a computer specialist in cash for assisting Ms. Purvi in
one professional assignment.
(vi) The travelling expenses include expenditure incurred on foreign tour of ` 32,000 which
was within the RBI norms.
(vii) Medical Insurance Premium on the health of dependent brother and major son dependent
on her amounts to ` 5,000 and ` 10,000, respectively, paid in cash.
(viii) She invested an amount of ` 10,000 in National Saving Certificate.
(ix) She has paid ` 70,000 towards advance tax during the P.Y. 2023-24.
Compute the total income and tax payable by Ms. Purvi for the A.Y. 2024-25 in a most beneficial
manner.
Answer
Computation of total income and tax payable by Ms. Purvi for the A.Y. 2024-25 under
default tax regime under section 115BAC
Particulars ` `
Income from house property (See Working Note 1) 57,820
Profit and gains of business or profession 9,20,200
(See Working Note 2)
Income from other sources (See Working Note 3) 33,924
Gross Total Income 10,11,944
Less: Deductions under Chapter VI-A [not allowable -
under default tax regime]
Total Income 10,11,944
Total Income (rounded off) 10,11,940
Tax on total income
Upto ` 3,00,000
Nil
` 3,00,001 - ` 6,00,000 @5%
15,000
` 6,00,001 - ` 9,00,000 @10%
30,000
` 9,00,001 - ` 10,11,940 @ 15%
16,791 61,791
Add: Health and Education cess @ 4%
2,472
Total tax liability
64,263
Less: Advance tax paid
70,000
Less: Tax deducted at source on dividend income
1,052
from an Indian company u/s 194
Tax deducted at source on income from UTI u/s 194K
760 1,812
Tax Payable/ (Refundable)
(7,549)
 Income Tax Liability - Computation And Optimisation | 9.24

Tax Payable/ (Refundable) (rounded off) (7,550)

Computation of total income and tax payable
under normal provisions of the Act
Particulars ` `
Gross Total Income 10,11,944
[Income under the “Income from house property”
“Profits and gains from business or profession” and
“Income from other sources” would remain the same
even if Ms. Purvi opts out of the default tax regime
under section 115BAC]
Less: Deductions under Chapter VI-A (See Working 10,000
Note 4)

Total Income 10,01,944

Total Income (rounded off) 10,01,940

Tax on total income

Upto ` 2,50,000 Nil
` 2,50,001 – ` 5,00,000 @5% 12,500
` 5,00,000 - ` 10,00,000 @20% 1,00,000
` 10,00,000 – ` 10,01,940 @ 30% 582 1,13,082
Add: Health and Education cess @ 4% 4,523
Total tax liability 1,17,605
Less: Advance tax paid 70,000
Less: TDS u/s 194 on dividend 1,052
TDS u/s 194K on income from UTI 760 1,812
Tax Payable 45,793
Tax Payable (rounded off) 45,790

Since there is tax refundable under default tax regime under section 115BAC and tax payable
under the regular provisions of the Income-tax Act, 1961, it would be beneficial for Ms. Purvi to
pay tax under default tax regime under section 115BAC.
Working Notes:
(1) Income from House Property
Particulars ` `
Gross Annual Value under section 23(1) 85,600
Less: Municipal taxes paid 3,000
Net Annual Value (NAV) 82,600
Less: Deduction u/s 24@30% of NAV 24,780 57,820
 Income Tax Liability - Computation And Optimisation | 9.25

Note - Rent received has been taken as the Gross Annual Value in the absence
of other information relating to Municipal Value, Fair Rent and Standard Rent.
(2) Income under the head “Profits & Gains of Business or Profession”
Particulars ` `
Net profit as per Income and Expenditure account 9,28,224
Add: Expenses debited but not allowable
(i) Salary paid to computer specialist in cash 30,000
disallowed u/s 40A(3), since such cash
payment exceeds ` 10,000
(ii) Amount paid for purchase of car is not 80,000
allowable under section 37(1) since it is a
capital expenditure
(ii) Municipal taxes paid in respect of 3,000 1,13,000
residential flat let out
10,41,224
Add: Value of benefit received from clients
during the course of profession [taxable as 10,500
business income under section 28(iv)]
10,51,724
Less: Income credited but not taxable under
this head:
(i) Dividend on shares of X Ltd., an Indian 10,524
company (taxable under the head “Income
from other sources")
(ii) Income from UTI (taxable under the head 7,600
“Income from other sources")
(iii) Honorarium for valuation of answer papers 15,800
(iv) Rent received from letting out of 85,600 1,19,524
residential flat
9,32,200
Less: Depreciation on motor car @15% (See
Note (i) below) 12,000
9,20,200

Notes :
(i) It has been assumed that the motor car was put to use for more than 180 days during the
previous year and hence, full depreciation @ 15% has been provided for under section
32(1)(ii).
Note: Alternatively, the question can be solved by assuming that motor car has been put to use
for less than 180 days and accordingly, only 50% of depreciation would be allowable as
per the second proviso below section 32(1)(ii).
(ii) Incentive to articled assistants for passing CA Intermediate examination in their first
attempt is deductible under section 37(1).
 Income Tax Liability - Computation And Optimisation | 9.26

(iii) Repairs and maintenance paid in advance for the period 1.4.2024 to 30.9.2024 i.e. for 6
months amounting to ` 1,000 is allowable since Ms. Purvi is following the cash system of
accounting.
(iv) ` 32,000 expended on foreign tour is allowable as deduction assuming that it was
incurred in connection with her professional work. Since it has already been debited to
income and expenditure account, no further adjustment is required.
(1) Income from other sources

Particulars `
Dividend on shares of X Ltd., an Indian company (taxable 10,524
in the hands of shareholders)
Income from UTI (taxable in the hands of unit holders) 7,600
Honorarium for valuation of answer papers 15,800
33,924

(2) Deduction under Chapter VI-A :

Particulars `
Deduction under section 80C (Investment in NSC) 10,000
Deduction under section 80D (See Notes (i) & (ii) below) Nil
Total deduction under Chapter VI-A 10,000
Notes:
(i) Premium paid to insure the health of brother is not eligible for deduction under section
80D, even though he is a dependent, since brother is not included in the definition of
“family” under section 80D.
(ii) Premium paid to insure the health of major son is not eligible for deduction, even though
he is a dependent, since payment is made in cash.
Question 8
Mr. Y carries on his own business. An analysis of his trading and profit & loss for the year
ended 31-3-2024 revealed the following information:
(1) The net profit was ` 11,20,000.
(2) The following incomes were credited in the profit and loss account:
(a) Income from UTI ` 22,000 (Gross)
(b) Interest on debentures ` 17,500 (Gross)
(c) Winnings from horse races ` 15,000 (Gross)
(3) It was found that some stocks were omitted to be included in both the opening and
closing stocks, the value of which were:
Opening stock ` 8,000.
Closing stock ` 12,000.

(4) ` 1,00,000 was debited in the profit and loss account, being contribution to a University
approved and notified under section 35(1)(ii).
 Income Tax Liability - Computation And Optimisation | 9.27

(5) Salary includes ` 20,000 paid to his brother which is unreasonable to the extent of
` 2,500.
(6) Advertisement expenses include 15 gift packets of dry fruits costing ` 1,000
per packet presented to important customers.
(7) Total expenses on car was ` 78,000. The car was used both for business and
personal purposes. ¾th is for business purposes.
(8) Miscellaneous expenses included ` 30,000 paid to A & Co., a goods transport operator
in cash on 31-1-2024 for distribution of the company’s product to the warehouses.
(9) Depreciation debited in the books was ` 55,000. Depreciation allowed as per Income-
tax Rules, 1962 was ` 50,000.
(10) Drawings of ` 10,000 debited in the books.
(11) Investment in NSC ` 15,000 debited in the books.
Compute the total income of Mr. Y for the assessment year 2024-25 underoptional tax regime
as per normal provisions of the Act.

Answer
Computation of total income of Mr. Y for the A.Y. 2024-25
Particulars `
Profits and gains of business or profession (See Working 11,21,500
Note 1 below)
Income from other sources (See Working Note 2 below) 54,500
Gross Total Income 11,76,000
Less: Deduction under section 80C (Investment in NSC) 15,000
Total Income 11,61,000

Working Notes:

1. Computation of profits and gains of business or profession

Particulars ` `
Net profit as per profit and loss account 11,20,000
Add: Expenses debited to profit and loss
account but not allowable as
deduction
Salary paid to brother disallowed to the 2,500
extent considered unreasonable [Section
40A(2)]
Motor car expenses attributable to personal 19,500
use not allowable (` 78,000 × ¼)
Depreciation debited in the books of 55,000
account
 Income Tax Liability - Computation And Optimisation | 9.28

Drawings (not allowable since it is 10,000

personal in nature) [See Note (iii)]
Investment in NSC [See Note (iii)] 15,000 1,02,000
12,22,000
Add: Under statement of closing stock 12,000
12,34,000
Less: Under statement of opening stock 8,000
Less: Contribution to a University approved
and notified u/s 35(1)(ii) is eligible for
100% deduction. Since whole of the
actual contribution (100%) has been
debited to profit and loss account, no
-
further adjustment is required.
12,26,000
Less: Incomes credited to profit and loss
account but not taxable as business
income
Income from UTI [taxable under the head 22,000
“Income from other sources”]
Interest on debentures (taxable under 17,500
the head “Income from other sources”)
Winnings from horse races (taxable
under the head “Income from other 15,000 54,500
sources”)
11,71,500
Less: Depreciation allowable under the
Income-tax Rules, 1962 50,000
11,21,500
Notes:

(i) Advertisement expenses of revenue nature, namely, gift of dry fruits to important
customers, is incurred wholly and exclusively for business purposes. Hence, the same is
allowable as deduction under section 37.
(ii) Disallowance under section 40A(3) is not attracted in respect of cash payment exceeding
` 10,000 to A & Co., a goods transport operator, since, in case of payment made for plying,
hiring or leasing goods carriages, an increased limit of ` 35,000 is applicable (i.e. payment
of upto ` 35,000 can be made in cash without attracting disallowance under section
40A(3))
(iii) Since drawings and investment in NSC have been given effect to in the profit and loss
account, the same have to be added back to arrive at the business income.
(iv) In point no. 9 of the question, it has been given that depreciation as per Income-tax Rules,
1962 is ` 50,000. It has been assumed that, in the said figure of ` 50,000, only the
proportional depreciation (i.e., 75% for business purposes) has been included in respect of
 Income Tax Liability - Computation And Optimisation | 9.29

motor car.

2. Computation of “Income from Other Sources”

Particulars `
Dividend from UTI 22,000
Interest on debentures 17,500
Winnings from races 15,000
54,500
Question 9
Balamurugan furnishes the following information for the year ended31-03-2024:
Particulars `
Income from textile business (1,35,000)
Income from house property (15,000)
Lottery winning (Gross) 5,00,000
Speculation business income 1,00,000
Income by way of salary (Computed) 2,70,000
Long term capital gain u/s 112 70,000

Compute his total income, tax liability and advance tax obligations under default tax regime
under section 115BAC.

Answer

Computation of total income of Balamurugan

for the year ended 31.03.2024
Particulars ` `
Salaries 2,70,000
Less: Loss from house property (Cannot be set off - 2,70,000
against income under any other head)

Profits and gains of business or profession

Speculation business income 1,00,000
Less: Business loss of ` 1,35,000 set-off to the (1,00,000)
extent of ` 1,00,000
Nil
Balance current year business loss of ` 35,000 to
be set-off against long-term capital gain
Capital Gains
Long term capital gain 70,000
Less: Balance current year business loss set-off (35,000)
Long term capital gain after set off of business loss 35,000
 Income Tax Liability - Computation And Optimisation | 9.30

Income from other sources

Lottery winnings (Gross) 5,00,000
Total Income 8,05,000
Computation of tax liability for A.Y.2024-25
Particulars `
On total income of ` 2,70,000 (excluding lottery winning and Nil
LTCG)
On LTCG of ` 5,000 @20% (balance unexhausted basic 1,000
exemption limit of ` 30,000 can be adjusted against LTCG
taxable u/s 112)
On lottery winnings of ` 5,00,000 @ 30% 1,50,000
1,51,000
Add: Health and Education cess @ 4% 6,040
Total tax liability 1,57,040

The assessee need not pay advance tax since the total income (excluding lottery income) liable
to tax is below the basic exemption limit. Further, in respect of lottery income, tax would have
been deducted at source @ 30% under section 194B. Since the remaining tax liability of ` 6,040
(` 1,57,040 – ` 1,50,000) is less than ` 10,000, advance tax liability is not attracted.

Note - The first proviso to section 234C(1) provides that since it is not possible for the assessee
to estimate his income from lotteries, the entire amount of tax payable (after considering TDS)
on such income should be paid in the remaining instalments of advance tax which are due.
Where no such instalment is due, the entire tax should be paid by 31st March, 2024. The first
proviso to section 234C(1) would be attracted only in case of non- deduction or short-deduction
of tax at source under section 194B. In this case, it has been assumed that tax deductible at
source under section 194B has been fully deducted from lottery income. Since the remaining tax
liability of ` 1,040 (` 1,57,040 – ` 1,50,000) is less than ` 10,000, advance tax liability is not
attracted.

Question 10

Mr. Rajiv, aged 50 years, a resident individual and practicing Chartered Accountant,
furnishes you the receipts and payments account for the financial year 2023-24.

Receipts and Payments Account

Receipts ` Payments `
Opening balance 12,000 Staff salary, bonus and 21,50,000
(1.4.2023) Cash on stipend to articled clerks
hand and at Bank
Fee from professional 59,38,000 Other administrative 11,48,000
services (Gross) expenses
Rent 50,000 Office rent 30,000
Motor car loan from 2,50,000 Housing loan repaid to 1,88,000
Canara Bank (@ 9% SBI (includes interest of
 Income Tax Liability - Computation And Optimisation | 9.31

p.a.) ` 88,000)
Life insurance premium 24,000
(10% of sum assured)
Motor car (acquired in 4,25,000
Jan. 2024 by A/c payee
cheque)
Medical insurance 18,000
premium (for self and
wife)(paid by A/c Payee
cheque)
Books bought on 20,000
1.07.2023 (annual
publications by A/c payee
cheque)
Computer acquired on 30,000
1.11.2023 by A/c payee
cheque (for professional
use)
Domestic drawings 2,72,000
Public provident fund 20,000
subscription
Motor car maintenance 10,000
Closing balance 19,15,000
(31.3.2024) Cash on hand
and at Bank
62,50,000 62,50,000
Following further information is given to you:

(1) He occupies 50% of the building for own residence and let out the balance for
residential use at a monthly rent of ` 5,000. The building was constructed during the
year 1997-98, when the housing loan was taken.
(2) Motor car was put to use both for official and personal purpose. One- fifth of the
motor car use is for personal purpose. No car loan interestwas paid during the year.
(3) The written down value of assets as on 1-4-2023 are given below:

Furniture & Fittings ` 60,000

Plant & Machinery ` 80,000

(Air-conditioners, Photocopiers, etc.)

Computers ` 50,000

Note: Mr. Rajiv follows regularly the cash system of accounting.

Compute the total income of Mr. Rajiv for the A.Y. 2024-25 assuming that he has shifted out
of the default tax regime under section 115BAC.
 Income Tax Liability - Computation And Optimisation | 9.32

Answer

Computation of total income of Mr. Rajiv for the A.Y.2024-25

Particulars ` ` `
Income from house property
Self-occupied
Annual value Nil
Less: Deduction under section 24(b)
Interest on housing loan
50% of ` 88,000 = 44,000 but limited to 30,000
Loss from self-occupied property (30,000)
Let out property
Annual value (Rent receivable has been
taken as the annual value in the absence 60,000
of other information)
Less: Deductions u/s 24
30% of Net Annual Value 18,000
Interest on housing loan
(50% of ` 88,000) 44,000 62,000 (2,000)
Loss from house property (32,000)

Profits and gains of business or

profession
Fees from professional services 59,38,000
Less: Expenses allowable as deduction
Staff salary, bonus and stipend 21,50,000
Other administrative expenses 11,48,000
Office rent 30,000
Motor car maintenance (10,000 x 4/5) 8,000
Car loan interest – not allowable (since
the same has not been paid and the
assessee follows cash system of Nil 33,36,000
accounting)
26,02,000
Less: Depreciation
Motor car ` 4,25,000 x 7.5% x 4/5 25,500
Books being annual publications@40% 8,000
Furniture and fittings@10% of ` 60,000 6,000
 Income Tax Liability - Computation And Optimisation | 9.33

Plant and machinery@15% of ` 80,000 12,000

Computer@40% of ` 50,000 20,000
Computer (New) ` 30,000 @ 40% x 50% 6,000 77,500 25,24,500
Gross Total income 24,92,500
Less: Deductions under Chapter VI-A
Deduction under section 80C
Housing loan principal repayment 1,00,000
PPF subscription 20,000
Life insurance premium 24,000
Total amount of ` 1,44,000 is allowed as 1,44,000
deduction since it is within the limit of
` 1,50,000
Deduction under section 80D
Medical insurance premium paid 18,000 1,62,000
Total income 23,30,500

Question 11
From the following details, compute the total income and tax liability of Siddhant, aged 31
years, of Delhi both as per section 115BAC and as per the regular provisions of the Income-tax
Act, 1961 for the A.Y.2024-25. Advise Mr. Siddhant whether he should opt for section
115BAC:
Particulars `
Salary including dearness allowance 4,35,000
Bonus 15,000
Salary of servant provided by the employer 12,000
Rent paid by Siddhant for his accommodation 49,600
Bills paid by the employer for gas, electricity and water 11,000
provided free of cost at the above flat

Siddhant purchased a flat in a co-operative housing society in Delhi for ` 4,75,000 in April, 2016,
which was financed by a loan from Life Insurance Corporation of India of ` 1,60,000@15%
interest, his own savings of ` 65,000 and a deposit from a nationalized bank for ` 2,50,000 to
whom this flat was given on lease for ten years. The rent payable by the bank was ` 3,500 per
month. The following particulars are relevant:
(a) Municipal taxes paid by Mr. Siddhant ` 4,300 (per annum)
(b) House Insurance ` 860
(c) He earned ` 2,700 in share speculation business and lost ` 4,200 in cotton speculation
business.

(d) In the year 2020-21, he had gifted ` 30,000 to his wife and ` 20,000 to his
son who was aged 11. The gifted amounts were advanced to Mr. Rajesh,
 Income Tax Liability - Computation And Optimisation | 9.34

who was paying interest@19% per annum.

(e) Siddhant received a gift of ` 30,000 each from four friends.
(f) He contributed ` 50,000 to Public Provident Fund.
Answer
1. Computation of total income and tax liability of Siddhant under defaulttax regime
under section 115BAC for the A.Y. 2024-25
Particulars ` `
Salary Income
Salary including dearness allowance 4,35,000
Bonus 15,000
Value of perquisites:
(i) Salary of servant 12,000
(ii) Free gas, electricity and water 11,000 23,000
4,73,000
Less: Standard deduction under section 16(ia) 50,000
4,23,000
Income from house property
Gross Annual Value (GAV) (Rent receivable is taken as 42,000
GAV in the absence of other information) (` 3,500 × 12)
Less: Municipal taxes paid 4,300
Net Annual Value (NAV) 37,700
Less: Deductions under section 24
(i) 30% of NAV ` 11,310
(ii) Interest on loan from LIC @15%
of ` 1,60,000 [See Note 2] ` 24,000 35,310 2,390
Income from speculative business
Income from share speculation business 2,700
Less: Loss of ` 4,200 from cotton speculation business 2,700 Nil
set-off to the extent of ` 2,700
Balance loss of ` 1,500 from cotton speculation business
has to be carried forward to the next year as it cannot
be set off against any other head of income.
Income from Other Sources
(i) Income on account of interest earned from advancing 3,800
money gifted to his minor son is includible in the
hands of Siddhant as per section 64(1A) [Exemption
under section 10(32) would not be available]
 Income Tax Liability - Computation And Optimisation | 9.35

(ii) Interest income earned from advancing money gifted

to wife has to be clubbed with the income of the
assessee as per section 64(1) 5,700

(iii) Gift received from four friends (taxable undersection

56(2)(x) as the aggregate amount received during the
year exceeds ` 50,000) 1,20,000 1,29,500

Gross Total Income 5,54,890

Deduction under section 80C [No deduction under Chapter
VI-A would be allowed as per section 115BAC(2)] Nil

Total Income 5,54,890

Particulars `
Tax on total income [5% of ` 2,54,890 (` 5,54,890 - 12,745
` 3,00,000]
Less: Rebate u/s 87A, since total income does not exceed
` 7,00,000 12,745
Tax liability Nil

Computation of total income and tax liability of Siddhant for the A.Y. 2024-25 under
normal provisions of the Act
Particulars ` `
Gross total income (as per default scheme) 5,54,890
Less: Exemption u/s 10(32) in respect of interest
income of minor son included in the hands of 1,500
Siddhant
Gross total income (under the normal 5,53,390
provisions of the Act)
Less: Deductions under Chapter VI-A
Under section 80C [Contribution to PPF] 50,000
Total Income 5,03,390

Particulars `
Tax on total income [5% of ` 2,50,000 + 20% of ` 3,390] 13,178
Add: HEC @4% 527
Tax liability 13,705
Tax liability (Rounded off) 13,710

Since his total income as per the normal provisions of the Act exceeds ` 5,00,000, he
would not be eligible for rebate under section 87A.
 Income Tax Liability - Computation And Optimisation | 9.36

Since Mr. Siddhant is not liable to pay any tax under default tax regimeunder section 115BAC,
it would be beneficial for him to not to exercise the option of shift out of the default tax regime
for A.Y.2024-25.
Notes:
(1) It is assumed that the entire loan of ` 1,60,000 is outstanding as on 31.3.2024;
(2) Since Siddhant’s own flat in a co-operative housing society, which hehas rented out to
a nationalized bank, is also in Delhi, he is not eligible for deduction under section
80GG in respect of rent paid by him for his accommodation in Delhi, since one of the
conditions to be satisfied for claiming deduction under section 80GG is that the
assessee should not own any residential accommodation in the same place.

Question 12
Ramdin, aged 33 years, working as Manager (Sales) with Frozen Foods Ltd., provides the
following information for the year ended 31.03.2024:
 Basic Salary ` 15,000 p.m.
 DA (50% of it is meant for retirement benefits) ` 12,000 p.m.
0 B

 Commission as a percentage of turnover of the Company 0.5 %

 Turnover of the Company ` 50 lacs
– Bonus ` 50,000

 Gratuity ` 30,000
 Own Contribution to R.P.F. ` 30,000
 Employer’s contribution to R.P.F. 20% of basic salary
 Interest credited in the R.P.F. account @ 15% p.a. ` 15,000
 Gold Ring worth ` 10,000 was given by employer on his 25th wedding
anniversary.
 Music System purchased on 01.04.2023 by the company for ` 85,000 and
was given to him for personal use.
 Two old light goods vehicles owned by him were leased to a transport
company against the fixed charges of ` 6,500 p.m. Books of account are not
maintained.
 Received interest of ` 5,860 on bank FDRs on 24.4.2023 and interest of ` 6,786
(Net) from the debentures of Indian Companies on 5.5.2023.
 Made payment by cheques of ` 15,370 towards premium on Life Insurance policies
and ` 22,500 for Mediclaim Insurance policy for self and spouse.
 Invested in NSC ` 30,000 and in FDR of SBI for 5 years ` 50,000.
 Donations of ` 11,000 to an institution approved u/s 80G and of ` 5,100 to
Prime Minister’s National Relief Fund were given during theyear by way of cheque.
 Income Tax Liability - Computation And Optimisation | 9.37

Compute his total income and tax payable thereon for the A.Y. 2024-25. Assume that Mr.
Ramdin has exercised the option to shift out of the default tax regime under section 115BAC.

Answer
Computation of Total Income of Mr. Ramdin for the A.Y.2024-25
under normal provisions of the Act
Particulars ` `
Income from Salaries
Basic Salary (` 15,000 x 12) 1,80,000
Dearness Allowance (` 12,000 x12) 1,44,000
Commission on Turnover (0.5% of ` 50 lacs) 25,000
Bonus 50,000
Gratuity (See Note 1) 30,000
Employer‟s contribution to recognized provident fund
Actual contribution [20% of ` 1,80,000] 36,000
Less: Exempt (See Note 2) 33,240 2,760
Interest credited in recognized provident fund 15,000
account @15% p.a.
Less: Exempt upto 9.5% p.a. 9,500 5,500
th
Gift of gold ring worth ` 10,000 on 25 wedding
anniversary by employer (See Note 3) 10,000
Perquisite value of music system given for
personal use (being 10% of actual cost) i.e. 10% 8,500
of ` 85,000
4,55,760
Less: Standard deduction under section 16(ia) 50,000
4,05,760
Profits and Gains of Business or Profession
Lease of 2 light goods vehicles on contract basis
against fixed charges of ` 6,500 p.m. In this case, 1,80,000
presumptive tax provisions of section 44AE will
apply i.e. ` 7,500 p.m. for each of the two light
goods vehicle (` 7,500 x 2 x 12). He cannot claim
lower profits and gains since he has not
maintained books of account.
Income from Other Sources
Interest on bank FDRs 5,860
Interest on debentures (` 6786 x 100/90) 7,540 13,400
Gross total Income 5,99,160
 Income Tax Liability - Computation And Optimisation | 9.38

Less: Deductions under Chapter VI-A

Section 80C
1
4B

Premium on life insurance policy 15,370

Investment in NSC 30,000
FDR of SBI for 5 years 50,000
Employee‟s contribution to recognized provident 30,000 1,25,370
fund
Section 80D – Mediclaim Insurance 22,500
Section 80G (See Note 4) 10,600
Total Income 4,40,690
Tax on total income
Income-tax [5% of ` 1,90,690 (i.e., ` 4,40,690 – 9,535
` 2,50,000)
Less: Rebate u/s 87A, since total income does not
exceed ` 5,00,000 9,535
Tax liability Nil
Less: Tax deducted at source (` 7,540 – ` 6,786) 754
Net tax refundable 754
Tax refundable (rounded off) 750

Notes:
1. Gratuity received during service is fully taxable.
2. Employer’s contribution in the recognized provident fund is exempt up to 12% of the
salary i.e. 12% of (Basic Salary + DA for retirement benefits + Commission based on
turnover)
= 12% of (` 1,80,000+ (50% of ` 1,44,000)+ ` 25,000)

= 12% of 2,77,000 = ` 33,240

3. An alternate view possible is that only the sum in excess of ` 5,000 is taxable in view of
the language of Circular No.15/2001 dated 12.12.2001 that such gifts upto` 5,000 in the
aggregate per annum would be exempt, beyond which it would be taxed as a perquisite.
As per this view, the value of perquisite would be ` 5,000. In such a case the Income from
Salaries would be ` 4,00,760.
 Income Tax Liability - Computation And Optimisation | 9.39

1. Deduction under section 80G is computed as under:

Particulars `
Donation to PM National Relief Fund (100%) 5,100
Donation to institution approved under section 80G (50%
of ` 11,000) (amount contributed ` 11,000 or 10% of
Adjusted Total Income i.e. ` 45,129, whichever is lower) 5,500
Total deduction 10,600

Deductions under section 80C and 80D = ` ` 1,47,870 = ` 4,51,290

Question 13
From the following particulars furnished by Mr. X for the year ended 31.3.2024, you are
requested to compute his total income and tax payable for the assessment year 2024-25,
assuming that he opts out of the default tax regime under section 115BAC.
(a) Mr. X retired on 31.12.2023 at the age of 58, after putting in 26 years and 1 month of
service, from a private company at Mumbai.
(b) He was paid a salary of ` 25,000 p.m. and house rent allowance of ` 6,000 p.m.
He paid rent of ` 6,500 p.m. during his tenure of service.
(c) On retirement, he was paid a gratuity of ` 3,50,000. He was covered by the payment
of Gratuity Act. Mr. X had not received any other gratuity at any point of time earlier,
other than this gratuity.
(d) He had accumulated leave of 15 days per annum during the period ofhis service; this
was encashed by Mr. X at the time of his retirement. Asum of ` 3,15,000 was received by
him in this regard. His average salary for last 10 months may be taken as ` 24,500.
Employer allowed 30 days leave per annum.
(e) After retirement, he ventured into textile business and incurred a loss of ` 80,000 for
the period upto 31.3.2024.
(f) Mr. X has deposited ` 1,00,000 in public provident fund.
Answer
Computation of total income of Mr. X for A.Y.2024-25
Particulars ` `
Income from Salaries
Basic salary (` 25,000 x 9 months) 2,25,000
House rent allowance:
Actual amount received (` 6,000 x 9 months) 54,000
Less : Exemption under section 10(13A)(Note 1) 36,000 18,000
Gratuity:
Actual amount received 3,50,000
Less: Exemption under section 10(10)(ii) (Note 2) 3,50,000 -
 Income Tax Liability - Computation And Optimisation | 9.40

Leave encashment:
Actual amount received 3,15,000
Less : Exemption under section 10(10AA) (Note 3) 2,45,000 70,000
Gross Salary 3,13,000
Less: Standard deduction under section 16(ia) 50,000
2,63,000
Profits and gains of business or profession
Business loss of ` 80,000 to be carried forward as
the same cannot be set off against salary income Nil
Gross Total income 2,63,000
Less : Deduction under section 80C
Deposit in Public Provident Fund 1,00,000
Total income 1,63,000
Tax on total income(Nil, since it is lower than the Nil
basic exemption limit of ` 2,50,000)
Notes:
As per section 10(13A), house rent allowance will be exempt to the extent of least of the
following three amounts:
`
(i) HRA actually received (` 6,000 x 9) 54,000
(ii) Rent paid in excess of 10% of salary (` 6,500 – 36,000
` 2,500) x 9 months
(iii) 50% of salary 1,12,500

(1) Gratuity of ` 3,50,000 is exempt under section 10(10)(ii), being the minimum of the
following amounts:
(2) Gratuity of ` 3,50,000 is exempt under section 10(10)(ii), being the minimum of the
following amounts:
`
(i) Actual amount received 3,50,000
(ii) Half month salary for each year of completed 3,75,000
service [(` 25,000 x 15/26) x 26
years]
(iii) Statutory limit 20,00,000

(3) Leave encashment is exempt upto the least of the following:

 Income Tax Liability - Computation And Optimisation | 9.41

`
(i) Actual amount received 3,15,000
(ii) 10 months average salary (` 24,500 x 10) 2,45,000
(iii) Cash equivalent of unavailed leave calculated on the
basis of maximum 30 days for every year of actual
service rendered to the employer from whose
service he retired (See Note 4 below) 3,18,500
(iv) Statutory limit 25,00,000

(4) Since the leave entitlement of Mr. X as per his employer’s rules is 30 days credit for each
year of service and he had accumulated 15 days per annum during the period of his
service, he would have availed/taken the balance 15 days leave every year.
Leave entitlement of Mr. X on the
basis of 30 days for every year of
actual service rendered by him to = 30 days/year x 26 = 780 days
the employer
Less: Leave taken /availed by Mr. X
during the period of his service = 15 days/year x 26 = 390 days
Earned leave to the credit of Mr. X 390 days
at the time of his retirement
Cash equivalent of earned leave =390  ` 24,500/30 = ` 3,18,500
to the credit of Mr. X at the time
of his retirement

Question 14
Rosy and Mary are sisters, born and brought up at Mumbai. Rosy got married in 1982 and
settled at Canada since 1982. Mary got married and settled in Mumbai. Both of them are below
60 years. The following are the details of their income for the previous year ended 31.3.2024:
S. Particulars Rosy Mary
No. ` `
1. Pension received from State Government -- 60,000
2. Pension received from Canadian Government 20,000 --
3. Long-term capital gain on sale of land atMumbai 1,00,000 1,00,000

4. Short-term capital gain on sale of shares of 20,000 2,50,000

Indian listed companies in respect of which STT
was paid
5. LIC premium paid -- 10,000
6. Premium paid to Canadian Life Insurance 40,000 --
Corporation at Canada
7. Mediclaim policy premium paid by A/c Payee -- 25,000
Cheque
8. Deposit in PPF -- 20,000
 Income Tax Liability - Computation And Optimisation | 9.42

9. Rent received in respect of house property at 60,000 30,000

Mumbai

Compute the total income and tax liability of Mrs. Rosy and Mrs. Mary for the A.Y. 2024-25 and
tax thereon assuming both exercised the option to shift out of the default tax regime.

Answer

Computation of total income of Mrs. Rosy and Mrs. Mary for the A.Y.2024-25
S. Particulars Mrs. Mrs.
No. Rosy Mary
(Non- (ROR)
resident)

` `
(I) Salaries
Pension recd from State Govt. ` 60,000
Less: Standard deduction u/s 16(ia) ` 50,000 - 10,000
Pension received from Canadian - -
Government is not taxable in the case of a
non-resident since it is earned and
received outside India
- 10,000
(II) Income from house property
Rent received from house property at 60,000 30,000
Mumbai (assumed to be the annual value in
the absence of other information i.e.
municipal value, fair rent and standard rent)
Less: Deduction u/s 24(a)@30% 18,000 9,000
42,000 21,000
(III) Capital gains
Long-term capital gain on sale of land at 1,00,000 1,00,000
Mumbai
Short term capital gain on sale of shares of
Indian listed companies in respect of which 20,000 2,50,000
STT was paid
1,20,000 3,50,000
 Income Tax Liability - Computation And Optimisation | 9.43

1,62,000 3,81,000
(A)
Gross Total Income [(I)+(II)+(III)]
Less: Deductions under Chapter VIA
1.
Deduction u/s 80C - 10,000
1. LIC Premium paid 40,000 -
2. Premium paid to Canadian Life
Insurance Corporation - 20,000
3. Deposit in PPF 40,000 30,000
25,000
2.
Deduction u/s 80D – Mediclaim premium paid 40,000 55,000

(B)
Total deduction under Chapter VI-A is
40,000 31,000
restricted to income other than capital
gains taxable under sections 111A & 112 1,22,000 3,50,000
(C)
Total income (A-B)
Notes:

(1) Long-term capital gains on sale of land is chargeable to tax@20% as per section 112.
(2) Short-term capital gains on transfer of equity shares in respect of which securities
transaction tax is paid is subject to tax@15% as per section 111A.
(3) In case of resident individuals, if the basic exemption limit is not fully exhausted against
other income, then, the long-term capital gains u/s 112/short-term capital gains u/s
111A will be reduced by the unexhausted basic exemption limit and only the balance
will be taxed at 20%/15%, respectively. However, this benefit is not available to non-
residents. Therefore, while Mrs. Mary can adjust unexhausted basic exemption limit
against long-term capital gains taxable under section 112 and short-term capital gains
taxable under section 111A, Mrs. Rosy cannot do so.
(4) Since long-term capital gains is taxable at the rate of 20% and short- term capital gains is
taxable at the rate of 15%, it is more beneficial for Mrs. Mary to first exhaust her basic
exemption limit of ` 2,50,000 against long-term capital gains of ` 100,000 and the
balance limit of ` 1,50,000 (i.e., ` 2,50,000 – ` 1,50,000) against short-term capital
gains.
(5) Rebate under section 87A would not be available to Mrs. Rosy even though her total
income does not exceed ` 5,00,000, since she is non- resident for the A.Y. 2024-25.
Question 15
Mr. X, an individual set up a unit in Special Economic Zone (SEZ) in the financial year 2019-20
for production of washing machines. The unit fulfills all the conditions of section 10AA of the
Income-tax Act, 1961. During the financial year 2022-23, he has also set up a warehousing
facility in a district of Tamil Nadu for storage of agricultural produce. It fulfills all the conditions
of section 35AD. Capital expenditure in respect of warehouse amounted to ` 75 lakhs (including
cost of land ` 10 lakhs). The warehouse became operational with effect from 1st April, 2023 and
the expenditure of ` 75 lakhs was capitalized in the books on that date.
 Income Tax Liability - Computation And Optimisation | 9.44

Relevant details for the F.Y. 2023-24 are as follows:

Particulars `
Profit of unit located in SEZ 40,00,000
Export turnover received in India in convertible foreign 80,00,000
exchange on or before 30.9.2024
Domestic sales of above unit 20,00,000
Profit from operation of warehousing facility (before 1,05,00,000
considering deduction under Section 35AD)
Compute income-tax (including AMT under Section 115JC) liability of Mr. X for A.Y. 2024-25
both as per section 115BAC and as per regular provisions of the Income-tax Act, 1961 for A.Y.
2024-25. Advise Mr. X whether he should pay tax under default tax regime or normal provisions
of the Act.
Answer
Computation of total income and tax liability of Mr. X for A.Y.2024-25 (under default tax
regime under section 115BAC)
Particulars ` `
Profits and gains of business or profession
Profit from unit in SEZ 40,00,000
Profit from operation of warehousing facility 1,05,00,000
Less: Depreciation under section 32
On building @10% of ` 65 lakhs4
(normaldepreciation under section 32 is 6,50,000 98,50,000
allowable)
1,38,50,000
Total Income
Computation of tax liability as per section
115BAC
38,55,000
Tax on ` 1,38,50,000 5,78,250
Add: Surcharge@15%
44,33,250
1,77,330
Add: Health and Education cess@4%
46,10,580
Total tax liability
Notes:
(1) Deductions u/s 10AA and 35AD are not allowable as per section 115BAC(2). However,
normal depreciation u/s 32 is allowable.

(2) Mr. X is not liable to alternate minimum tax u/s 115JC under default tax regime under
section 115BAC.
 Income Tax Liability - Computation And Optimisation | 9.45

Computation of total income and tax liability of Mr. X for A.Y.2024-25

(under the regular provisions of the Income-tax Act, 1961)
Particulars ` `
Profits and gains of business or profession
Profit from unit in SEZ 40,00,000
Less: Deduction u/s 10AA [See Note (1) below] 32,00,000
Business income of SEZ unit chargeable to tax 8,00,000
Profit from operation of warehousing facility 1,05,00,000

Less: Deduction u/s 35AD [See Note (2) below] 65,00,000

Business income of warehousing facility 40,00,000
chargeable to tax
Total Income 48,00,000
Computation of tax liability (under the normal/
regular provisions)
Tax on ` 48,00,000 12,52,500
Add: Health and Education cess@4% 50,100
Total tax liability 13,02,600

Computation of adjusted total income of Mr. X for levy of Alternate Minimum Tax

Particulars ` `
Total Income (computed above as per 48,00,000
regular provisions of income tax)
Add: Deduction under section 10AA 32,00,000
80,00,000
Add: Deduction under section 35AD 65,00,000
Less: Depreciation under section 32
On building @10% of `65 lakhs5 6,50,000 58,50,000
Adjusted Total Income 1,38,50,000
Alternate Minimum [email protected]% 25,62,250
Add: Surcharge@15% (since adjusted total 3,84,338
income > ` 1 crore)
29,46,588
Add: Health and Education cess@4% 1,17,863
30,64,451
Tax liability u/s 115JC (rounded off) 30,64,450

Since the regular income-tax payable is less than the alternate minimum tax payable, the
adjusted total income shall be deemed to be the total income and tax is leviable @18.5%
thereof plus surcharge@15% and cess@4%. Therefore, tax liability as per section 115JC is
 Income Tax Liability - Computation And Optimisation | 9.46

`30,64,450.
Since the tax liability of Mr. X under section 115JC is lower than the tax liability as computed
u/s 115BAC, it would be beneficial for him to opt out of the default tax regime under
section 115BAC for A.Y. 2024-25. Moreover, benefit of alternate minimum tax credit is also
available to the extent of tax paid in excess over regular tax.

AMT Credit to be carried forward under section 115JEE

`
Tax liability under section 115JC 30,64,450
Less: Tax liability under the regular provisions of the Income- 13,02,600
tax Act, 1961
17,61,850
Notes:

(1) Deduction under section 10AA in respect of Unit in SEZ =

Profit of the Unit in SEZ ×

`40,00,000 × =`32,00,000

(2) Deduction@100% of the capital expenditure is available under section 35AD for
A.Y.2024-25 in respect of specified business of setting up and operating a warehousing facility
for storage of agricultural produce which commences operation on or after 01.04.2009.
Further, the expenditure incurred, wholly and exclusively, for the purposes of such specified
business, shall be allowed as deduction during the previous year in which he commences
operations of his specified business if the expenditure is incurred prior to the commencement of
its operations and the amount is capitalized in the books of account of the assessee on the date
of commencement of its operations.
Deduction under section 35AD would, however, not be available on expenditure incurred on
acquisition of land.
In this case, since the capital expenditure of ` 65 lakhs (i.e., ` 75 lakhs – ` 10 lakhs, being
expenditure on acquisition of land) has been incurred in the F.Y.2022-23 and capitalized in the
books of account on 1.4.2023, being the date when the warehouse became operational, `
65,00,000, being 100% of ` 65 lakhs would qualify for deduction under section 35AD.

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