BB0019-IncomeTax Valuation Perquisites

BB 0019/BM 0015 (A)Business Taxation Assessment Year 2008-2009

Contents

Unit 1Terms and Concepts, Residential Status and Tax Liability 1

Unit 2Tax-free Incomes, Deductions and Rebates 31

Unit 3Income from Salaries 83

Unit 4Income from House Property 151

Unit 5Profits and Gains of Business or Profession 195

Unit 6Capital Gains 227

Unit 7Income from Other Sources 268

Unit 8Set-off and Carry Forward of Losses 291

References 309

Edition: Fall 2008

BKID B0881 5th May 2008

Brig. (Dr). R. S. Grewal VSM (Retd.)Pro Vice ChancellorSikkim Manipal University of Health, Medical & Technological Sciences

Board of StudiesMr. Rajen PadukoneMember Academic Senate, Sikkim Manipal University

Ms. Vimala Parthasarathy Prof. K. V. VaramballyHOD DirectorConvener Manipal Institute of ManagementDepartment of Management & Commerce ManipalDirectorate of Distance EducationSikkim Manipal University

Prof. Raj Dorai Mr. JagadeeshIndustry Consultant and Assistant ProfessorVisiting Faculty, IBA, IFIM and BIM, Department of Management &Bangalore Commerce, Directorate of Distance

Education, Sikkim Manipal University

Mr. Umesh Maiya Mr. R. Ravindra RaoAssistant Professor Senior FacultyDepartment of Management & Commerce Manipal Institute of Management Directorate of Distance Education ManipalSikkim Manipal University

Content Preparation TeamContent Writing & Editing Format Editing

Mr.N.S.Gopala Krishna Bhat, MBA, AICWA Mr. Umesh MaiyaPrincipal, Trisha Classes, Udupi Assistant Professor

Dept. of Management & Commerce Sikkim Manipal University of Health, Medical & Technological Sciences (SMU), Manipal 576 104

Edition: Fall 2008

This book is a distance education module comprising of collection of learning

material for our students.

All rights reserved. No part of this work may be reproduced in any form by any

means without permission in writing from Sikkim Manipal University of Health,

Medical and Technological Sciences, Gangtok, Sikkim.

Printed and Published on behalf of Sikkim Manipal University of Health, Medical and

Technological Sciences, Gangtok, Sikkim by Mr. Rajkumar Mascreen, GM, Manipal

Universal Learning Pvt. Ltd., Manipal 576 104. Printed at Manipal Press Limited,

Manipal.

Success is the sweetest yield of all hard work and efforts. It is the result of

urge to win and constant efforts towards the achievement of the goal. A

modest attempt has been made in this book to ignite the passion for

continuous effort. This book contains a compilation of theory, formats,

Solved illustrations, theory questions, Self Assessment Questions (SAQ)

and Terminal Questions (exercise for practice). Information overload has

been avoided and it has been ensured that the book gives the student what

he is required and expected to study. It is expected that the student would

derive the maximum benefit from the book by adopting the following

procedure.

Read and understand the theory portions. Understand the manner of deriving the solutions to numerical type

questions.

Solve the illustrations once again, independently, in order to develop confidence level.

Solve the practice questions given at the end of the each chapter. Attend online sessions to gain more knowledge and to clarify any doubts

on subject matter.

The difficult to understand matters relating Income Tax are explained in a

very simple way, which can be understood even by a common man not

knowing anything about Income Tax & its Rules.

Unit structure has been given for each chapter to have birds eye view of the

topics discussed. Various formats have been given to simplify the language

of law and to work out the problems easily which is the unique feature of this

book. Memorising techniques are also included to remember the difficult

provisions of Income Tax Act.

SUBJECT INTRODUCTION

This edition includes important student notes and authors comments for

quick reference of simplified Income Tax provisions. Special highlights of

latest amendments have also been made in this book.

This edition also includes multiple choice questions (MCQs) which are given

in the last SAQ of each chapter before the summary to have an idea of type

of questions that may be asked in the examination.

Today, in India, a large number of salaried employees, businessmen etc.

are required to pay incometax. Law is quite essential for every taxpayer. In

fact, tax planning is a must for every incometax assessee.

The subject Taxation is intended to give the readers a fairly good idea of

the Indian Income tax law applicable for individuals.

Taxation covers the following aspects of the Indian Income- tax Act, 1961:

Unit 1: This unit covers important Terms and Concepts, Individual

Residential Status and incidence of tax liability.

Unit 2: This unit covers Tax- free Incomes, Deductions and Rebates.

Unit 3: This unit covers Income from Salaries.

Unit 4: This unit covers Income from House Property.

Unit 5: This unit covers Profit & gains of Business or Profession.

Unit 6: This unit covers Capital Gains.

Unit 7: This unit covers Income from Other Sources.

Unit 8: This unit covers Set-off and carry Forward of losses.

This edition is applicable only for the assessment year 2008-09.

Business Taxation Assessment Year 2008-2009 Unit 1

Sikkim Manipal University Page No. 1

Unit 1 Terms and Concepts, Residential Status

and Tax LiabilityStructure:

1.1 Introduction

Objectives

1.2 Income Tax An Introduction

1.2.1 Definitions

1.2.2 Charge of Income Tax

1.3 Agricultural Income

1.4 Income

1.5 Important Terms

1.5.1 Assessee

1.5.2 Person

1.5.3 Assessment Year

1.5.4 Previous Year

1.6 General rule of Income Tax

Self Assessment Questions (SAQ1)

1.7 Residential status

1.8 Incidence of Tax Liability

1.9 Illustrations

Self Assessment Questions (SAQ2, SAQ3)

1.10 Summary

1.11 Terminal Questions

1.12 Answers to SAQs and TQs

1.1 Introduction

This unit introduces the basic concepts and terms of income tax. It also

includes computation of residential status and scope of total income of an

individual. The main aim of this unit is to make students to understand the

fundamentals of individual income tax.



Learning Objectives:

After studying this unit, you will be able to

Understand the various terms and concepts Know the General rule of Income Tax and exceptions Determine the residential status of an individual Know the scope of total income Learn the specific formats

1.2 Income Tax An Introduction

Income tax is a tax on income. It is a direct tax. Its impact and incidence

falls on the same person. It is levied with the twin objective of collecting

revenue to the state and achieving social justice. Social justice is achieved

by causing the people with higher income to pay tax at progressively higher

rate. The tax is collected by the Central Government machinery and is

apportioned between the Central and State Governments as per the

recommendations of Finance Commission, which is appointed every five

years. The Central Board of Direct Taxes (CBDT) supervises the entire tax

collection process.

In India, Constitution is the parent law. All other laws should be enacted

without exceeding the framework of the Constitution and subject to the

norms laid down therein. The Constitution of India empowers Central

Government to levy tax on Income. By virtue of this power and to achieve

this objective, the Income-tax Act, 1961 was enacted in the place of the

Income-tax Act, 1922 which was prevalent earlier.

According to Sec.1 of the Income tax Act, the Act is to be called as The

Income-tax Act, 1961 and it extends to the whole of India. It came into force

on the 1st day of April 1962, i.e., from assessment year 1962-63 onwards.



1.2.1 Definitions

Section 2 of the Income-tax Act gives definitions of the various terms and

expressions used in the Act. Unless the context otherwise requires, these

definitions should be applied. The words means, includes and means and

includes are used in these definitions and the significance of these terms

needs to be understood.

When a definition uses the word means, the definition is self-explanatory,

restrictive and in a sense exhaustive. It implies that the term or expression

so defined means only as to what it is defined as and nothing else. For

example, the terms Agricultural Income, Assessment Year, Capital Asset

are exhaustively defined.

When the legislature wants to widen the scope of a term or expression, and

where an exhaustive definition cannot be given, it uses the word includes in

the definition. Hence, the inclusive definition provides an illustrative meaning

and not an exhaustive meaning. In practical application, the definition could

include what is not specifically stated or mentioned in the definition so long

as the stipulated criteria are satisfied. To illustrate, reference is drawn to the

terms Income, Person, Transfer.

When the legislature intends to define a term or expression to mean

something and also intends to specify certain items to be included, both the

words meanss well as includes are used. Such a definition is not only

exhaustive but also illustrative in an exhaustive definition in order to avoid

ambiguity and with a view to provide clarity. One can find that these words

are used in the definition of terms Assessee, Indian Company,

Recognised Provident Fund

1.2.2 Charge of Income Tax

As provided in Section 4, the total income of the previous year of every

person shall be charged to income tax at the rates prescribed in the



annual Finance Act as applicable to the relevant assessment year. The

income shall be so charged in accordance with and subject to the provisions

of the Income tax Act.

In respect of income chargeable to income tax, tax shall be deducted at

source or paid in advance in accordance with the relevant provisions.

Though the Finance Act normally prescribes the rates of tax, in respect of

certain types of income the income tax

Act has prescribed specific rates. To illustrate section 112 prescribes rate of

tax @ 20% in respect of long term capital gains and section 115BB

prescribes rate of tax @ 30% for winning from lotteries, races, etc. These

provisions along with the specified rates of tax are also referred to and

incorporated in the Finance Act.

Rates of Tax

In the case of Individuals, HUFs, AOPs or BOIs and every artificial juridical

person (except where different rates or maximum marginal rates are

specifically provided) the tax rates are as follows:

Income Tax Rate

Upto Rs. 1,10,000/-Above Rs. 1,10,000/- Upto Rs. 1,50,000/-Above Rs. 1,50,000/- Upto Rs. 2,50,000/-Above Rs. 2,50,000/-

Nil10%20%30%

Tax Slabs for Woman Resident (Below 65 years)

Tax Slabs for Senior Citizen (Above 65 years)

Income Tax Rate

Upto Rs. 1,45,000/-Above Rs. 1,45,000/- Upto Rs. 1,50,000/-Above Rs. 1,50,000/- Upto Rs. 2,50,000/-Above Rs. 2,50,000/-

Nil10%20%30%



Surcharge:

Surcharge is not leviable if the total income does not exceed Rs. 10,00,000.

In a case where the total income exceeds Rs. 10,00,000 surcharge is levied

at the rate of 10% on the income tax. Surcharge is payable on income-tax

payable after claiming rebate u/s 88E, if any. Surcharge is also payable in

respect of tax on long-term capital gains u/s 112 and in respect of winnings

from lotteries etc. u/s 115BB. Surcharge is payable even by non-resident

assesses.

Education Cess:

In addition to income tax and surcharge, an additional levy of 2% towards

Education Cess to be made on the aggregate of income tax and surcharge

payable for the A.Y. 2008-2009.

Secondary Higher Education Cess:

In addition to income tax, surcharge and education cess, an additional levy

of 1% of income tax and surcharge (not including the education cess on

income tax) towards Secondary Higher Education Cess in all cases shall

be levied so as to fulfil the commitment of the government to provide and

finance secondary and higher education for the A.Y. 2008-2009.

Marginal Relief:

In the case of such individual, HUF, AOP/BOI having a total income

exceeding Rs. 10,00,000, the total amount payable as income tax and

surcharge on such income shall not exceed the amount by which the

income exceeds Rs. 10,00,000. This is called marginal relief

Income Tax Rate

Upto Rs. 1,95,000/-Above Rs. 1,95,000/- Upto Rs. 2,50,000/-Above Rs. 2,50,000/-

Nil20%30%



1.3 Agriculture Income

Since beginning, Agriculture income was not taxed for two reasons firstly it

is the state list. Secondly, land revenue is levied on agricultural land. So the

people began to treat all their incomes, which have some connection with

land, as agricultural income. In order to check such a practice, the income

tax Act of 1961 has defined agricultural income.

According to Sec. 2 (1) of the Act, Agricultural Income means:

1. Any rent or revenue derived from land which is situated in India

and is used for agricultural purposes.

When we go through the above definition three important conditions

emerge in order to treat a particular item as Agriculture Income. They

are

1. The rent or revenue must be derived from the land.

2. The land must be situated in India.

3. The land must be used for agricultural purposes.

The Act has not defined the term agriculture purpose. Agriculture in its root

sense means agar a field and culture, cultivation of a field. It is the art or

science of cultivating the ground especially in fields or large quantities

including the preparation of the soil, the planting of seeds, the raising and

harvesting of crops and rearing, feeding and management of livestock, till

age, husbandry and farming.

Justice Bhagawathi laid following principles to serve as a guide in the

determination of the scope of agriculture purposes.

i) Basic operations involving human skill and labour upon the land

itself such as tilling of land, sowing of seeds etc. must have been

performed.

ii) Subsequent operations are performed after the produce sprouts

such as weeding, tending, pruning, cutting, harvesting and rendering

the produce fit for the market.



iii) Agriculture does not merely include food and grains. It includes all

products from the performance of basic and subsequent operations

such as grain, vegetables, fruits, groves, grass, coffee, tea, spices,

tobacco, betel etc.

iv) Mere connection with the land is not enough. Products which grow

wild on the land or of spontaneous growth not involving any human

labour or skill upon land are not agricultural products.

Some examples of agricultural income:

1. If denuded parts of the forest are replanted and subsequent operations

in forestry are carried out, the income arising from the sale of replanted

trees.

2. Profit on sale of standing crop or the produce after harvesting by a

cultivating owner or tenant of land.

3. Rent of agricultural land received from sub tenants by mortgagee in

possession.

4. Income from growing flowers and creepers.

5. Interest on capital received by a partner from the firm engaged in

agricultural operations.

Some examples of non agricultural income:

1. Annual annuity received by a person in consideration of agricultural land

even if it is charged on land, as source of annuity is covenant and not

land.

2. Interest on areas of rent in respect of agricultural land, as it is neither

rent nor revenue derived from land.

3. Interest accrued on promissory notes obtained by a zamindar from

defaulting tenants.

4. Income from sale of forest trees, fruits and flowers growing on land

naturally, spontaneously and without the intervention of human agency.

5. Income from sale of wild grass and reeds of spontaneous growth.



6. Income of sale produced by flooding the land with seawater, as it is not

derived from land used for agricultural purpose.

A note on partly agricultural income:

At times an income may be partly agricultural and partly non-agricultural i.e.,

chargeable under the head profits and gains from business. For example

income of a sugar factory owning farms. Then, the market value of any

agricultural produce which has been raised by the assessee and utilised as

raw material shall be deducted from the total income. There shall be no

deduction in respect of expenditure incurred as a cultivator.

The market value shall be deemed to be

a) Where the agricultural produce is ordinarily sold in the market, the value

calculated as per the average price at which it is sold.

b) Where the agricultural produce is not sold in the market, total of the

following shall be the market value:

i) The expenses of cultivation

ii) The land revenue or rent for the land on which it was grown.

iii) Reasonable profit.

In the case of income from the manufacturing of tea and coffee, 60% of the

income derived from the sale of tea and coffee grown and manufactured by

the seller in India is deemed to be agricultural income. While computing

such income the loss due to planting bushes in replacement of died bushes

shall be deducted as an allowance. Similarly in the case of rubber, 65% of

the income derived from the sale of rubber latex or cenex is treated as

agricultural income.

1.4 Income

An assessee has to pay tax on the income earned by him in the previous

year. Hence we must know how the Act defines income. Sec. 2(24) of the

Act gives a list of items that are to be treated as income, which is as follows:



1. Profit and gains

2. Dividend

3. Voluntary contribution received by a trust created for charitable

purposes.

4. The value of any perquisite or profit in lieu of salary taxable under the

head salaries.

5. The value of any benefit or perquisite obtained by representative

assessee or by any beneficiary.

6. The value of any benefit or perquisite obtained from a company either

by a director or a person having substantial interest in the company or a

relative of the director or such person.

7. Any sum paid by such company in respect of any obligation which, but

for such payment, would have been paid by the director or other person.

8. Any sum chargeable to tax under Sec. 28.

9. The value of any benefit or perquisite chargeable under Sec. 28.

10. Any sum recovered in the previous year, which had been allowed as a

deduction earlier.

11. Capital gains under Sec. 45.

12. Any winnings from lotteries, crossword puzzles, races including horse

race, card games, gambling or betting of any sort. (Sec. 56)

The following principles which are mainly based on judicial decisions may

be applied to income.

1. Income must come from a definite source.

2. The source must be external. A person cant earn income by trading

with himself. Thus pocket money paid by a father to his son is not

taxable in the hands of the son.

3. It is not necessary that the income must be actually received. Even

accrued incomes are taxable.



4. Taint of illegality is immaterial. Whether legal or illegal the income

attracts tax liability.

5. It is not necessary that the income must be received periodically. Even

lump sum receipts are taxable as income.

6. If an item is not treated as income originally, later it cant be treated as

an income. E.g. Advance money forfeited.

7. Income may be received in cash or in kind.

8. If there is any dispute regarding the title of income it will not affect the

chargeability.

9. Mere relief from expenses is not an income. If the manager forgoes his

commission it will not be treated as income in the hands of the

company.

10. Where there is a legal charge on the income of a person, to that extent

his income is reduced.

Thus income in the true sense is the amount of wealth, which comes to a

person during a stated period of time.

1.5 Important Terms

1.5.1 Assessee

Assessee means a person by whom any tax or any other sum of money is

payable under Income Tax Act (sec. 2[7]).

Deemed assessee includes legal representatives, agent of a non resident,

guardian of an infant etc.

1.5.2 Person (Sec. 2[3])

The term person includes the following

i) An individual

ii) A Hindu Undivided Family

iii) A company

iv) A firm



v) An association of persons or body of individuals whether incorporated

or not.

vi) A local authority.

vii) Every artificial person not covered in the above categories.

1.5.3 Assessment Year: (Sec. 2[9]):(AY)

Assessment year means a period of twelve months commencing on 1st

April every year. It ends on 31st March.

1.5.4 Previous Year: (Sec. 3): (PY)

Till the AY 1988 89, an assessee could have different previous years for

different sources of income. In order to bring uniformity in the assessment

procedure the Direct Taxes (amendment) Act 1987 has amended Sec. 3 of

the I.T. Act with effect from 1-4-1989. The section now reads as follows.

Previous year means the financial year immediately preceding the

assessment year.

In the case of newly set up business or profession the previous year begins

with the date of the setting up of the business or profession and ends with

the financial year.

1.6 The general rule and exceptions

As the rule, the income of previous year is chargeable to tax during the

assessment year. There are certain exceptions to this rule, which are

engrafted so as to check the evasion of tax by those assesses who would

not be traceable in the assessment year. These exceptions are:

1. Income of a non-resident from shipping business

2. Income of persons leaving India

3. Bodies formed for a shorter duration

4. Transfer of property to avoid tax

5. On discontinued business or profession



I. Self Assessment Questions (SAQ1)

1. Agricultural Income means:

_________________________________________________________

_________________________________________________________

2. The term Person Includes

_________________________________________________________

_________________________________________________________

3. Assessee means a _______ by whom any tax or any other sum of

money is payable under Income Tax Act (sec. 2[7]).

4. As the general Rule, the income of _______ is chargeable to tax during

_________.

5. The basic exemption limit for woman resident is given to the extent of

________.

1.7 Residential Status

According to Section 4 of the Income Tax Act income-tax is charged on the

income of an assessee earned in the previous year according to the rates

fixed by the Finance Act. The tax liability is determined on the basis of

residence in India in the previous year. The residential status of an

assessee need not be the same for each year. The rules determining the

Residential Status are not the same for all the assesses.

RESIDENTIAL STATUS

Resident Non-Resident (NR)

Ordinarily Resident (OR) Not-Ordinarily Resident (NOR)



Individual:

Sec. 6(1) lays down that if an individual assessee fulfills any one of the

following two conditions, he is said to be a resident in India in the relevant

previous year:

a) He has been in India in that year for a period or periods amounting in

all to 182 days or more; or

b) He has been in India for a period or periods aggregating 365 days or

more during 4 years proceeding the previous year and is in India for a

period or periods amounting in all to 60 days or more in the previous

year.

Exceptions:

i) In the case of an Indian citizen, who leaves India in any previous year

for the purpose of employment outside India, or as a member of the

crew of an Indian ship, his stay in India in that previous year should be

for 182 days or more instead of 60 days referred to in condition (b)

given above.

ii) In the case of an Indian citizen or a person of Indian origin who is living

outside India (whether employed or doing business, or neither

employed nor doing business) comes to India in the previous year on a

visit for a short spell, his stay in India in that previous year should be for

182 days or more instead of 60 days as referred above.

Authors comments:

In case of exceptions, the assessee has to fulfill the first basic condition

u/s 6(1) i.e. condition (a) in the above table. Condition (b) in the above

table does not apply to exceptions as it merges with first condition.

Non-resident: Under Section 2(30) of the Income-tax Act, if an individual

does not satisfy any one of the basic conditions (specified in the case of a

resident), he is said to be a non-resident.



Not Ordinarily Resident:

In addition to fulfilling any one of the basic conditions specified u/s 6(1) if an

individual satisfies any of the following two conditions u/s 6(6) he is treated

as Not Ordinarily Resident in India in that previous year

(a) He has been a non-resident in India in 9 out of 10 years preceding the

previous year or

(b) He has been in India for a period of not exceeding 729 days during

7 years preceding the previous year.

In short, an individual is said to be not ordinarily resident, in India, in any

previous year, if he satisfies any one of the two basic conditions and any

one of the subsequent conditions.

In connection with the rules or conditions relating to resident, the following

points may also be noted:

Under Section 6(6) of the Income-tax Act, if an individual satisfies any one

of the two basic conditions (specified in the case of a resident), but does not

satisfy the subsequent conditions (stated in the case of resident), he

becomes a not ordinarily resident.

Ordinarily Resident:

If an individual fails to satisfy both the above additional conditions he is

considered as ordinarily resident. In other words, an individual becomes an

ordinarily resident if

(a) he has been resident in India for two or more years out of 10 preceding

previous years and

(b) stayed in India for 730 days or more during 7 preceding previous years.



Illustrations:

Problem 1: HARI left India for the first time on 5th March 2005 after having

lived here for 15 years. He returned India on 10th Sept 2007. Determine the

residential status for the assessment year 2008-2009

Solution:

Assessee : Mr. HARI

Assessment Year (AY) : 2008-2009: Previous Year (PY) :2007-2008

India Foreign India

05.03.05 10.09.07

Stay during the PY (10-09-2007 to 31-3-2008)

= Sep + Oct + Nov + Dec + Jan + Feb + Mar

= 21 + 31 + 30 + 31 + 31 + 29 + 31 = 204 days

Years preceding the PY

2006- 07 - NR 2001- 02 - R

2005- 06 - NR 2000- 01 - R

2004- 05 - R 1999-00 - R

2003- 04 - R 1998-99 - R

2002- 03 - R 1997-98 - R

Assessee was in India for more than 182 days in the PY 2007-2008. He

fulfilled the first basic condition mentioned u/s 6(1). Hence he becomes a

resident . To become a not ordinarily resident, he has to fulfill any one of

the additional conditions mentioned u/s 6(6). Assessee was a non resident

only for 2 out of 10 years preceding the PY and stayed for not less than 729

days during 7 years preceding the PY (more than 729 days). He failed to

fulfill the additional conditions to become not ordinarily resident.

In simple he satisfied the conditions for ordinarily resident.

Therefore, HARI is an ordinarily resident



Problem 2:

NARAYANA was sponsored by his employer in India for some training in

U.S.A. He left India on 3rd June 2007. He came back to India on 5th April

2008. Determine Narayanas residential status for the assessment year

2008-2009, assuming that he did not go out of India previously.

Solution:

Assessee : Narayana

Assessment Year (AY) : 2008-2009

Previous Year (PY) : 2007-2008

Narayanas stay in India in the previous year 2007-2008

April, 2007 30 days

May, 2007 31 days

June, 2007 3 days (including the day of leaving, i.e., 3rd June)

Total 64 days

Comment:

Narayanas stay in India in the previous year 2007-2008 is for 64 days. That

means, he satisfies the second basic condition required to be satisfied to be

a resident (i.e., his stay in India in the 4 years preceding the previous year

was more than 365 days, and during the previous year 2007-2008, his stay

in India was more than 60 days). So, he is a resident.

Further, he does not satisfy the subsequent condition/s to become not

ordinarily resident. So, he is resident and ordinarily resident during the

previous year 2007-2008, relevant to the assessment year 2008-2009.

Student Note:

Problem 3:

It may be noted that he left for U.S.A. only for training, and not for employment. So, the first exception (i.e., stay for 182 days in the previous year) does not apply to him, and only a minimum stay for 60 days in the

previous year also applies to him.



Problem 3:

R, a British national, comes to India for the first time during 2003-04. During

the financial years 2003 - 2004; 2004-2005; 2005 2006; 2006 2007, 2007

2008 he is in India for 55 days, 60 days, 80 days, 160 days and 70 days

respectively. Determine his residential status for the assessment year 2008

2009.

Solution:

R does not stay for minimum 182 days during the financial year 2007-08.

Therefore he fails to fulfill the first basic condition. Having stayed for more

than 60 days (actual stay 70 days) during 2007 2008, he has stayed only

for 355 days during the preceding four financial years. Thus he fails to fulfill

even the second basic condition. Consequently, his residential status for the

AY 2008-2009 is that of a non-resident.

Problem 4: (Exception to General Rule)

APARNA an Indian citizen left India on appointment by the Government of

Korea for the first time on 27.9.2004 to join the duty. During the financial

year 2007-2008, she came to India and stayed for 175 days. Determine her

residential status for the assessment year 2008-2009.

Solution: In this case, during previous year 2007-2008 Aparna has stayed

in India for less than 182 days (175 days stay) on her visit. She is covered

by the exception and therefore does not fulfill the basic condition. Thus she

is a Non-Resident for the A.Y. 2008-2009.

Note : For exceptions 2nd basic condition does not apply.



1.8 Incidence of tax liability (Scope of total income Sec 5)

Tax liability of an assessee is based on his residential status as shown

below

Resident (i.e., ordinarily Resident):

Under Section 5(1) of the Income-tax Act, the total income of ordinarily

resident includes the following incomes, from whatever source derived:

(a) Income received or deemed to be received in India during that previous

year by or on behalf of such person, whether accrued or arisen in India

or outside India.

(b) Income accrues or arises or is deemed to accrue or arise in India during

that previous year, whether received in India or outside India.

(c) Income accrues or arises and also received outside India during that

previous year from a business controlled from or profession set up in

India, whether remitted to India or not.

(d) Income accrues or arises and also received outside India during that

previous year from any other source (i.e., any source other than the

business) controlled from India or profession set up in India.

Not Ordinarily Resident:

Under Section 5(1) of the Income-tax Act, the total income of not ordinarily

resident, includes the following incomes, from whatever source derived:

(a) Income received or deemed to be received in India during that previous

year, whether accrued or arisen in India or outside India.

(b) Income accrues or arises or is deemed to accrue or arise in India during


(c) Income accrues or arises and also received outside India during that

previous year from a business controlled from India or profession set up

in India, whether remitted to India or not.



Non-Resident:

Under Section 5(2) of the Income-tax Act, the total income, of any previous

year, of a person, who is non-resident, includes the following incomes, from

whatever source derived:

(a) Income received or deemed to be received in India, during that

previous year, whether accrued or arisen in India or outside India.

(b) Income accrues or arisen or deemed to accrue or arise in India during


The tax liability (i.e., the scope or extent of the total income) of assessee

having different residential status can be summarized as follows:

Format 1: Scope of total income

Kinds of Income OR NOR NR

1. Income received in India 2. Income accrued in India

(eg. Business in India, Indian Co, property in India)3. Income received outside India 4. Income received outside India

But business/profession controlled in India

Note:

(1) Agriculture Income in India and dividend from Indian Company shares is

exempt

(2) Past untaxed profits are not taxable

(3) The word received means first receipt but not the second receipt. Hence

any amount remitted to India is considered as second receipt.

1.9 Illustrations

Problem 5: The following are the incomes of ROBERT for the PY 2007-

2008:

(a) Profit from business in Iran received in India Rs. 5000.

(b) Income from house property in Canada received in India Rs. 500.



(c) Income from house property in Pakistan deposited in a bank there

Rs. 1,000.

(d) Income accrued in India but received in England Rs. 2,000.

(e) Profit earned from business in Kanpur Rs. 6,000.

(f) Past untaxed foreign income brought into India during the previous year

Rs. 10,000.

(g) Dividend from a company in Japan Rs. 60,000 (Rs. 30% received in

India).

From the above particulars, ascertain the taxable income of ROBERT the

previous year 2007-2008, if he is (i) resident, (ii) not ordinarily resident and

(iii) non-resident

Statement of Total Income of ROBERT for the AY 2008-2009

ORRs.

NORRs.

NRRs.

(i) Profit from business in Iran received in India

(ii) Income from House Property in Canada received in India

(iii) Profit earned from business in Kanpur(iv) (a) Portion of Dividend from Company in

Japan received in India (60,000 30%)(b) Received outside India (60,000 70%)

(v) Income accrued in India, but received in England.

(vi) Income from House Property in Pakistan deposited in a bank there.

(vii)Past untaxed foreign income

5,000

5006,000

18,00042,000

2,000

1,000NT

5,000

5006,000

18,000--

2,000

NTNT

5,000

5006,000

18,000--

2,000

NTNT

Total Income 74,500 31,500 31,500

Notes:

1. Past untaxed foreign income brought into India during the previous year is not taxable in the hands of any assessee, as it is an income of the earlier years, and not an income of the previous year.

2. Portion of dividend from a company in Japan, viz., Rs. (60,000 30%) 18,000 is received in India. So, it is taxable in the hands of all the three types of assessee. The remaining portion of dividend, viz., (60,000 70%) 42,000 is income earned and also received outside India



Problem 6. Following are the taxable incomes of SHARIQ for the previous

year 2007-2008

Rs.

1. Salary accrued and received in India 40,000

2. Dividend declared in Syria but received in India 8,000

3. Profit on hotel business at New York 60,000

4. Interest on debentures of a company at

Perth, which was received in India 12,000

5. Income from transfer of a long-term capital

Asset situated in India 12,000

6. Interest received from Mr. M, a non-resident Indian on the

loan provided to him for a business carried on in India 10,000

7. Royalty received in London from K, a resident in India for technical

services provided for a business carried on in London 40,000

8. Fees from an Indian company carrying on business

at Bangladesh for technical services rendered at Bangladesh 60,000

9. Income from agriculture in India 22,000

Compute the gross total income of Shariq, if he is (i) OR (ii) NOR and

(iii) NR.

Solution:

Statement Total Income of SHARIQ for the assessment year 2008-2009

OR NOR NR

(i) Dividend declared in Syria but received in India

(ii) Interest on debenture of a company at Perth received in India

(iii) Income from transfer of a long term capital asset situated in India

(iv) Interest received from a non resident Indian on the loan provided to him for a business carried on in India

(v) Fees from an Indian company carrying on business at Bangladesh

8,000

12,000

12,000

10,000

60,000

8,000

12,000

12,000

10,000

60,000

8,000

12,000

12,000

10,000

60,000



(vi) Salary accrued and received in India

(vii) Profit of Hotel business at New York

(viii) Royalty received in London from a resident in India for technical services provided for business carried on in London

40,000

60,000

40,000

40,000

NT

NT

40,000

NT

NT

Gross Total Income 2,42,000 1,42,000 1,42,000

Notes:1. Interest received from a non-resident Indian on the loan provided to him

for a business carried on in India should be taken as interest on loan received in India.

2. Dividend declared in Syria is taken as dividend received from a foreign company. Hence it is taxable.

3. Agricultural income in India is exempt from tax.

Problem 7: Compute the taxable income of ARIF if he is resident, not

ordinarily resident and non resident. (2 Marks)

1. Interest on German development Bonds (one third is received in India)

Rs. 51,000.

2. Income earned from business in Uganda, which is controlled from

Bombay (Rs. 25,000 is receive in India) Rs. 65,000.

3. Dividend from Indian Company Rs. 5,000

4. Agricultural income in Bangalore Rs. 10,000

Solution:Statement Total Income of ARIF for the assessment year 2008-2009

OR NOR NR1. Interest on German Development Bonds a) Income received in India

(1/3rd Rs. 51,000/-) b) Income received outside India (2/3 51,000/-)2. Business Income a) Income received in India b) Income received outside India, business being controlled 3. Dividend from Indian Company4. Agricultural income in Bangalore

17,000

34,000

25,000

40,000ExemptExempt

17,000

-

25,000

40,000ExemptExempt

17,000

-

25,000

40,000ExemptExempt

Gross Total income 1,16,000 82,000 42,000



Student Notes:

II. Self Assessment Questions (SAQ 2)

1. Mention the basic conditions u/s 6 (1) to become a resident.

_________________________________________________________

_________________________________________________________

_________________________________________________________

_______________________________________________________.

2. Mention the additional conditions u/s 6 (6) to become not ordinarily

resident.

_________________________________________________________

_________________________________________________________

_________________________________________________________

3. Mr. Rakshith, a not ordinarily resident earns the following incomes

during the previous year. Compute total income

(1) Agricultural income in Bangladesh Rs. 10,000

(2) Business income in Pakistan (Controlled from India) Rs. 20,000

(3) Pension from former employer in India, received in Srilanka Rs.

30,000

(4) Interest on Dutch Co. debenture (half which is received in India)

Rs. 40,000

Basic exemption for woman resident (below 65 yrs) is Rs 1,45,000 instead of Rs 1,10,000

Basic exemption for senior citizen is Rs 1,95,000 instead of Rs 1,10,000 Computation of Total income is included in the Unit 8



III. Self Assessment Questions (SAQ 3)

1. Past untaxed foreign income brought into India during the P.Y. is taxed

to _________.

A. Ordinarily Resident

B. Not Ordinarily Resident

C. Non Resident

D. None.

2. Agriculture income in Pakistan is _______under the head

income from other sources to the resident individual

A. Partly exempt

B. Fully taxable

C. Fully exempt

D. None of these

3. Mr. Y commenced business on 1 6-2005. His first

previous year will be __________.

A. 1 6-2005 to 31-12-2005

B. 1 1-2005 to31-12-2005

C. 1 6-2005 to 31-3- 2006

D. 1-4-2005 to 31-3-2006

4. Dividend on shares of Indian company is ____ for the AY 2008-2009.

A. Exempt

B. Taxable

C. Partially exempt

D. None of these

5. According to section 2 (1) of IT Act 1961, Agricultural Income

means_______ derived from the land, which is situated in India and is

used for ____.

A. Any income, any purposes



B. Any income, agricultural purposes

C. Any rent or revenue, any purposes

D. Any rent or revenue, agricultural purposes

6. Additional basic exemption of 35,000 is available for ______.

A. Any citizen

B. Senior citizen

C. Woman resident

D. None of these

7. In case of an individual, who leaves India for the purpose of employment

abroad, he must stay at least _______ days during _______ in order to

become a resident for the A.Y. 2008 2009.

A. 60, 2006 - 2007

B. 60, 2007 2008

C. 182, 2007 2008

D. 182, 2005 2006

8. Compute the taxable income of Mr. X if he is resident, Not ordinarily

resident and non resident

1. Interest on Japan development Bonds (one third is received in India)

Rs. 51,000.

2. Income earned from business in Korea which is controlled from

Bombay (Rs. 25,000 is receive in India) Rs. 65,000.

A. 116000, 82,000, 17,000

B. 116000, 116000, 42,000

C. 116000, 82,000, 42,000

D. 116000, 42,000,42,000

9. Following are the income of Ram Prasad for the PY

a) Profit form business in Iran received in India Rs. 5,000.

b) Income from house property in Iran received in India Rs. 5,000



c) Income from house property in Pakistan deposited in a bank there

Rs. 10,000

d) Profit of business established in Pakistan deposited in bank Rs.

20,000, but business controlled in India. Compute the taxable

income if he is

1. Ordinarily resident, 2. Not ordinarily resident, 3. Non resident

A. 20,000, 10,000, 10,000

B. 40,000, 20,000, 10,000

C. 40,000, 30,000, 20,000

D. 40,000, 30,000, 10,000

10. Mr. R, a not ordinarily resident earns the following incomes during the

previous year. Compute total income

1) Agricultural income in Bangladesh Rs. 10,000

2) Business income in Pakistan (Controlled from India) Rs. 20,000.

3) Pension from former employer in India, received in Srilanka Rs.

30,000.

4) Interest on Dutch Co. debenture (half which is received in India)

Rs. 40,000.

A. 70,000

B. 90,000

C. 1,00,000

D. None of these

1.10 Summary

Income tax is a direct tax levied on income of a person. An individuals tax

liability depends on factors such as the income level, the individuals sex

and age. The rates of tax applicable is fixed in the Finance Act of every

year. The incidence of tax liability depends on whether a person is a

resident, not ordinarily resident or non resident.




1.11 (A) Questions

1. State the different kinds of assessee liable to tax.

2. Define previous year and assessment year.

3. Give the meaning of (a) Person and (b) Assessee.

4. Define income and state the principles applicable to income.

5. What is agricultural income? Give examples of agricultural incomes.

6. Write a note on partly agricultural incomes.

7. Explain the conditions of residential status

8. Define previous year and mention the exceptions to the general rule.

9. Explain the incidence of tax liability (Scope of total income)

1.11 (B) Exercises

1. State the legal status of the following:

a) Dr. Bhaskar

b) Bharath Bank Ltd.

c) AB Trading Co.

d) Delhi University (Juridical person)

e) Aligarh Panchayat Council. (Local authority)

f) Lord Murugan of Palani. (Artificial Juridical person)

2. JYOTHI DSOUZA, is an Indian citizen, she returned from Canada on

10.11.2003. She was there since 1.8.1999. Determine her residential

status relevant to the assessment year 2008-2009.

3. Dr. UMESH is an Indian citizen running his clinic in Australia since

15.9.1994. He regularly visits India for 4 months from September to

December every year since 1997. During the financial year 2007-2008,

he came to India on 20.9.2007 and stayed upto 20.2.2008.

Determine his residential status for the previous year 2007-2008.

4. NITHIN came to India for the first time on 1st November, 2001.During

his stay in India upto 30th October 2004, he stayed in Mumbai.

Determine his residential status for the assessment year 2008-2009.



5. SIDDARTH is an Indian citizen, left India on appointment by the

Government of Iran for the first time on 12th September 2004 to join his

duty. During the financial year 2007-2008, he came to India and stayed

for 80 days.

Determine his residential status for the assessment year 2008-2009.

6. The following are the incomes of SHARATH for the PY 2007-2008:

1) Profit from business in Delhi Rs. 7,000.

2) Income accrued in India, but received in Italy Rs. 6,000.

3) Profit from business in England received in India Rs. 5,000.

4) Income from house property in Africa received in India Rs. 4,000.

5) Profit from business established in Iran and deposited in a bank

there, the business being controlled from India Rs. 3,000.

6) Income from house property in Pakistan and deposited in a bank

there Rs. 2,000.

7) Past untaxed foreign income brought into India during the previous

year Rs. 1,000.

Compute the total income of Sharath for the assessment year 2008-2009, if

he is (a) Resident, (b) Not ordinarily resident and (c) Non-resident.

7. From the following particulars of income of MITHRA KUMAR for the

previous year 2007-2008. Compute his taxable income, if he is (a)

Resident, (b) Not ordinarily resident and (c) Non-resident.

1. Salary received in India Rs. 25,000.

2. Payment received in England for the services rendered in India Rs.

12,000.

3. Served for 2 months in Indian Embassy situated in U.S.A. and

salary received there Rs. 24,000.

4. Business profit earned in the past but remitted to India from

Canada in the previous year Rs. 75,000.

5. Income from cultivation of land situated in Bangladesh received

there and remitted to India Rs. 15,000.



6. Interest received on bank deposits in London and received there

Rs. 10,000.

7. Gift received from father-in-law in U.S.A. on his birthday Rs.

10,000.

8. Mr. DINESH earns the following incomes during the previous year

a) Salary earned in Mangalore, but received in U.S.A. Rs.10,000/-

b) Profits earned from business in England which is controlled from

India Rs.25,000/-

c) Income from House Property in England Rs.9,000/-

d) Income from agriculture in Sri Lanka and brought to India Rs.

7,000/-

e) Dividends from Indian Company received Rs.6,000/-

f) Income from agriculture in India received in England Rs.22,000/-

g) Interest on Investments in U.S.A. Rs.10,000/- half of which is

received in India .

h) Past untaxed foreign income brought to India during previous year

Rs.12,000/-

Calculate the Gross Total Income of Mr. Dinesh if he is a

a) Resident b) Not-Ordinarily Resident and c) Non- Resident


SAQ 1

1. Refer Para 1.3

2. Refer Para 1.5.2

3. Person

4. Previous Year, Assessment Year

5. Rs. 1,45,000

SAQ 2

1. Refer Para 1.7

2. Refer Para 1.7

3. Rs 70,000



SAQ 3

1. D 6. C

2. B 7. C

3. C 8. A

4. A 9. D

5. B 10. A

TQs

1. 11(A) 1. Refer Para 1.5.2

2. Refer Para 1.5.4 and 1.5.3

3. Refer Para 1.5.2 and 1.5.1

4. Refer Para 1.4

5. Refer Para 1.3

6. Refer Para 1.3

7. Refer Para 1.7

8. Refer Para 1.5.4 and 1.6

9. Refer Para 1.8

1.11 (B) Refer relevant Theories, formats and illustrations for all the

problems

Additional Hints:

Q. No 7

1. Salary for service in the Indian embassy in U.S.A. and received there is

salary earned in India. It is taxable in the hands of all the assessee.

2. Gift received from father-in-law in U.S.A. as a birthday gift is not taxable

(Sec 10(39)- new amendment).



Unit 2 Tax-free Incomes, Deductions andRebates

Structure:

2.1 Introduction

Learning Objectives

2.2 Tax-free Incomes

Self Assessment Questions (SAQ1)

2.3 Deductions from Gross Total Income

2.4 Rebate of Tax

2.5 Illustrations

Self Assessment Questions ( SAQ2, SAQ3)

2.6 Summary



2.1 Introduction

This unit explains exemptible incomes under section 10, deductions under

section 80 and rebate under section 88E.

Learning Objectives:

After studying this Chapter, you will be able to understand:

The various incomes exempt from tax The various deductions from gross total income The various tax rebates Learn the specific formats to remember the provisions

2.2 Tax-free Incomes (Section 10)

An assessee need not pay tax on all the incomes. Section 10 of the act

deals with the incomes fully exempted from tax provided they satisfy the

conditions specified therein. Followings are tax-free incomes.



2.2.1 Agriculture Income section 10 (1) : ( already discussed)

2.2.2 Share of income from HUF section 10 (2): As HUF is assessed

separately, any share of income received by an assessee, as a member of

HUF is fully exempt. It is based on the principle of avoidance of double

taxation.

2.2.3 Share of income from partnership firm Section 10 (2A): Where a

person is a partner of firm which is separately assessed as such, his share

in the total inc one of the firm is fully exempt from tax from the assessment

year 1993-94 onwards.

Casual income: From the assessment year 2003-04 exemption is not

available in respect of casual income. Casual income means any receipts,

which are of casual and non-recurring in nature. For example winning from

lotteries and races etc., Tax is levied at a flat rate of 30% + S.C.

2.2.4 Leave Travel concession Section 10 (5)

The value of travel concession received by or due to an Indian citizen from

his employer for him or his family in connection within India is exempt

subject to the following condition:

a) The CBDT is empowered to frame rules regarding the exemption.

b) The exemption will be limited to the amount of expenses actually

incurred by the employee for the purpose of the travel. He has to

maintain an account of actual expenses in order to furnish evidence for

claiming LTC.

1. The conditions under the rule 2B are as follows: The amount exempt

u/s 10 (5) in respect of LTC received by or due to an individual from

his employer in connection with his proceeding:

2. On leave to any place in India



3. To any place in India after retirement from service or after termination

shall be the amount actually spent subject to the following

conditions:

i) Where journey is by air, economy class air fare by shortest route

or actual amount spent, whichever is less

ii) Where the journey is by rail, an amount not exceeding the air

conditioned

iii) Class fare by the shortest route

iv) Where the origin and destination are connected by rail and the

journey is made by conveyance other than rail an amount not

exceeding ii class fare by the shortest route

v) Where origin and destination is are not connected by rail and the

journey is performed, exemptible amount shall be:

i) If there is a recognised public transport system, an amount

not exceeding I class or deluxe class fare on such transport

by shortest route

ii) If there is no such system, an amount equivalent to the air-

conditioned II class train fare by shortest route as if the

journey is by rail.

4. Salary received by a ships crew who is a non-resident foreign

national provided his stay in India does not exceed 90 days in the

previous year.

5. Tax paid on behalf of non-resident where such income arises in

pursuance of the agreement between Government of India & the

foreign state.

6. Foreign allowance & perquisites received by an employee of the

Government of India outside India provided he is a citizen of India &

is rendering service outside India (sec.10 [7])



7. Remuneration or fees received by non resident consultants &

their foreign employees (sec.10 [8a] & [8b]): u/s 10[8a]) the following

two incomes of a consultant are exempt:

a) Any remuneration received by him out of the funds made

available to an international agency under a technical assistance

grant agreement between the agency & the foreign state; &

b) Any other income, which accrues or rises to him outside India &

is not deemed to accrue or rise in India, on which he has to pay

tax to the foreign state.

Consultant means any individual who either not a citizen of India, or being

a citizen of India is not ordinarily resident in India or any person who is non-

resident.

Sec.10 (8B) provides that the remuneration received by an employee of the

consultant referred to in the above para is exempt, provided he is either not

a citizen of India, or being a citizen of Indian is not ordinarily resident in India

& the contract of service is approved by prescribed authority before the

commencement of his service.

2.2.5 Death cum retirement gratuity (sec.10 [10]): Gratuity is an amount

paid to an employee on his retirement or to his family members on his

death, in appreciation of his past services in an organization. The employer

considers the length of service of the employee while paying gratuity.

a) Government employees: Any death cum retirement gratuity received

by all categories of government employees or an employee of local

authority is fully exempt from tax.

b) Employees covered under payment of gratuity act 1972: In the case

of non-government employees covered under payment of Gratuity Act.

1972, any gratuity received is exempt up to the least of the following.



i) 15 days salary (7 days for seasonal employment) based on the

salary last drawn for each year of completed service or part there

of in excess of six months or

ii) Rs. 3,50,000 or

iii) Actual amount of gratuity received.

Format 1:

Computation of Exempted and taxable gratuity

Amount of gratuity received

Less: Exemption (least of the following)

i) 15 days salary based on last drawn

salary for completed years

(15/26 last salaryno. of years) ii) Statutory limit

iii) Actual gratuity received

Taxable Gratuity

XXX

3,50,000

XXX

XXX

XXX

XXX

Note:

Salary for this purpose means Basic + DA. It does not include dearness pay or commission.

Salary is calculated by dividing the salary last dawn by 26 (Number of working days in a month). In the case of piece rated employee 15 days

salary is calculated based on the average of total wages received during

three months immediately preceding the day of retirement.

Excess of 6 months should be taken as one year.

Problem 1:

After serving for 31 years 8 months, AVINASH retired from TRISHA

CO.LTD. on 25th Sep. of the Previous Year. He received Rs. 2,50,000 as

gratuity. His salary for the last month was Rs. 12,000. He is covered under

payment of Gratuity of act 1972. Find out taxable gratuity.



Solution:

Note: Excess of 6 months should be taken as one year.

Computation of taxable gratuity


Less Gratuity exempt u/s 10 (10) least of the following

i) 15 days salary based on last drawn salary for completed years (15/26 last salary no. of years)(15/26 x12000 x 32)

ii) Statutory limit


Taxable Gratuity

2,21,538

3,50,000

2,50,000

2,50,000

- 2,21,538

28,462

Problem 2:

After serving for 28 years 6 months and 4 days AKRAM retired from Y Ltd.

on 31st August. He received Rs. 3,25,000 as gratuity. His last month basic

was Rs. 10,000 and DA Rs 3,000.He is covered under the Payment of

Gratuity Act. Compute the taxable gratuity.

Solution: Computation of taxable gratuity


Less Gratuity exempt u/s 10 (10) least

15 days salary based on last drawn salary for completed years (15/26 last salary no. of years)(15/26 13,000 29)ii) Statutory limit


Taxable Gratuity

2,17,500

3,50,000

3,25,000

3,25,000

-2,17,500

1,07,500

Note:

1. Salary for this purpose means Basic + DA i. e 10000 + 3000 =13000

c) Employees not covered under payment of gratuity Act 1972: In the

case of Non-government employees not covered by the payment of Gratuity



Act 1972 the amount of gratuity received by him or by his widow, children

and dependents on his death exempt up to the least of the following:

i) Half month salary for each year of completed service calculated on the

basis of average salary for 10 months immediately preceding the month

of his death, retirement or termination of service, or

ii) Rs. 3,50,000 being statutory limit, or

iii) Actual amount of gratuity received.

Format 2:


Less: Exempt (least of the following)

i) Half months salary for each year of

Completed service ( Avg. Salary No. of years)

ii) Statutory limit

iii) Actual amount received

Taxable Gratuity

XXXX

3,50,000

XXXX

XXXX

XXX

XXX

Note:

Half months salary for each year of completed service calculated on thebasis of average salary for 10 months immediately preceding the month

of his death, retirement or service

While calculating the completed years, any fraction of the year will be ignored.

Salary for this purpose means only basic. DA will be included only if the terms of employment provide that it is considered for retirement benefits.

Where the commission is paid as a fixed percentage of turnover

achieved during those 10 months, it will also be included.

When the gratuity is received from more than one employer, the aggregate amount of exemption shall not exceed the maximum

exemptible limit.



Problem 3:

NAGESH served in NIRANJAN FABRICS LTD for 28 years, 10 months and

retired on 31st January. He received Rs. 3,45,000 as gratuity. Salary for the

last 10 months 2,41,500. Compute the taxable gratuity if he is not covered

under the payment of Gratuity Act, 1972.

Solution: Computation of taxable gratuity: (Not Covered)




Completed service ( 24150 28) ii) Statutory limit


Taxable Gratuity

3,38,100

3,50,000

3,45,000

3,45,000

(3,38,100)

6,900

Note:

1. Only completed years of service is taken. Fraction of the year should be

ignored.

2. Average salary is calculated based on the salary drawn during last 10

months. (241500/10 = 24150) i.e. 24150 282 28 = 338100

Problem 4:

ADARSH retires from service on 28th Feb. of the previous year after serving

for 30 years, 6 months and 4 days. He received Rs. 2,60,000 as gratuity.

His last salary was Basic Rs. 13,000. D.A. Rs. 1,000. The annual increment

of Rs. 200 falls due January. Compute his taxable gratuity if:

i) He is covered under payment of gratuity act.

ii) He is not covered under the gratuity act.

Solution: i) Covered under payment of Gratuity Act

Note: Salary means Basic + DA i.e. 13000 +1000 =14000




Less: Gratuity exempt u/s 10 (10) least

i) 15 days salary based on last drawn salary for completed years (15/26 last salaryno. of years)(15/26 14000 31)

ii) Statutory limit


2,50,385

3,50,000

2,60,000

2,60,000

Taxable Gratuity 9615

Solution: ii) Not Covered under payment of gratuity act




completed service

( 12820 30) ii) Statutory limit


Taxable Gratuity

192300

350000

260000

260000

192300

67700

Note:

1. Salary means average salary for the last 10 months prior to retirement.

2. D.A. is excluded unless and otherwise stated .

3. Part of the year is to be ignored.

4. Computation of average salary

With increment (1 month) 13000 1 = 13000 Without increment (9 months) 12800 9 = 115200

128200

Average salary = 128200 / 10 = 12820



2.2.6 Commutation of pension section 10 (10A)

As per the terms of employment the employee receives pension every

month after his retirement from service. Instead of such monthly pension he

can opt for lump um amount known as commuted pension. It is considered

as tax free as in the case of all types of Government employees. But in the

case of private employees it is tax-free to the extent of:

i) The Commuted value of 1/3 of the pension received if he receives

any gratuity.

ii) The Commuted value of 1/2 of such pension in any other case.

Where the employee commutes a portion of the pension, the exemptible

amount is to be calculated based on the full commuted value.

Format 3:

A. Computation of Taxable Pension (if gratuity is received)

Pension received

Less: Exempt

1/3 of full amount of pension

Taxable Pension

XXXX

-XXXX

XXXX

B. Computation of Taxable Pension (if gratuity is not received)

Pension received

Less: of full amount of pension

Taxable Pension

XXXX

-XXXX

XXXX

Problem 5: GOVINDA retired from service on 31st March and received a

commuted pension of Rs. 1,60,000. Find out taxable commuted pension:

a) if he is in receipt of gratuity

b) if he not in receipt of gratuity.



Solution:

A) If he received gratuity:

Commuted pension received

Less: exempt u/s 10 (10A):

1/3 of commuted pension (1/3 X 160000)

Taxable commuted pension:

160000

- 53333

106667

b) If gratuity is not received:


Less: exempt u/s 10 (10A)

of commuted pension: (1/2 X 160000)

Taxable pension

160000

- 80000

80000

Problem 6: (Gratuity and Pension)

SHRAVAN retired on 31st December after serving 32 years and 10 months.

He received Rs. 150000 as gratuity. He also commuted one-half of his

pension and received Rs.60000. His average salary for the last 10 months

was Rs. 6500 where as the last salary drawn was Rs.6700. Compute the

taxable gratuity and taxable commuted pension.

Solution:

Note: Since it is not stated in the problem, we have to assume that he was

not covered under the Payment of Gratuity Act 1972.

Computation of Taxable Gratuity (not covered)

Gratuity Received

Less: exempt u/s 10 (10) least of the following

Gratuity received

Statutory Limit

months salary for each year of completed service

( x 6500 x 32)

Taxable Gratuity

150000

350000

104000

150000

-104000

46000



Computation of taxable commuted pension


Less: exempt u/s 10 (10A)

1/3 of full amount of pension [1/3 x (60000 x 2)]

Taxable pension

60000

-40000

20000

2.2.7 Encashment of leave Section 10 (10AA)

Cash equivalent of leave salary received by a Government employee in

respect of the earned leave to his credit at the time of retirement is fully

exempt in the case of non government employee the exempted amount is

subject to a maximum of the least of the following:

1. 10 months salary based on the average salary drawn during the last 10

months before retirement or

2. Amount of salary on the basis of average salary for the approved period

for which earned leave has not been availed of

3. The sum not exceeding Rs. 3,00,000

It is to be noted that the non-government employees is entitled to an earned

leave of not more than 30 days for each year of service for the purpose of

this section. Again salary means only Basic or Basic + DA or Basic + DA +

Commission. Where the employee receives such payment in more than one

previous year the exemption amount will not exceed the limit so specified as

reduced by the amount already received from former employer that has

exempt. However any amount paid to the legal heirs of the deceased

employee in respect of earned leave to his credit at the time of death is fully

exempt.

Problem 7:

From the following particulars compute taxable portion of earned leave

encashed by Kashi Ram Pai at the time of his retirement on 1st August:

Earned leave to his credit- 12 months.

Average salary for last 10 months Rs. 8,000

Amount received on encashment Rs. 90,000



Solution:

Computation of taxable earned leave encashment

Amount received on encashment

Less: exempt u/s 10 (10AA): least of the following:

i) Actual amount received

ii) 10 months salary

iii) Amount of salary for approved period (of 12 months)

iv) Statutory limit

Taxable earned leave encashment

90,000

80,000

96,000

3,00,000

90,000

- 80,000

10,000

2.2.8 Retrenchment Compensation section 10 (10B)

Under Section 10 (10B) of the Income-tax Act, retrenchment compensation

received by an employee is exempt from tax. The amount so received is

exempt from tax to the least of the following:

An amount calculated as per the provisions of Industrial Disputes Act 1947 or

Amount notified by Government of India Rs. 5,00,000 Actual amount received.

As per industrial disputes Act the amount is calculated at months

average salary for every completed years of service or part there of in

excess of 6 month s based on the salary for last three calendar months.

2.2.9 Compensation received at the time of voluntary retirement or

separation section 10 (10C): As per Section 10 (10C) of the Income-tax

Act, any lump sum received by an employee who has completed 10 years of

service or completed 45 years of age on voluntary retirement or voluntary

separation under the voluntary retirement or voluntary separation scheme is

exempt from tax.

Salary for this purpose means last drawn salary comprising basic or basic

+DA if terms of employment provide and commission paid as a percentage

of turnover (for one month)



2.2.10 Tax on perquisites paid by employer Section 10 (10CC)

the amount of tax actually paid by an employer, at his option, on perquisite

on behalf of an employee is exempt from tax in the hands of the employee.

2.2.11 Payment under Bhopal Gas leak Disaster Act 1985.

2.2.12 Receipt of employees of Public sector companies or local authorities.

2.2.13 Any sum received under a life insurance policy including the sum

allocated by way of bonus on such policy except the amount received under

a Keyman insurance policy is exempt from tax under Section 10 (10D) of the

Income-tax Act of 1961.

2.2.14 Refund from the statutory provident fund received by an employee is

fully exempt from income tax under Section 10 (11), 12 and 13 of the

Income-tax Act.

2.2.15 Under Section 10 (13A) of the Income-tax Act, house rent allowance

received by an employee is exempt from tax subject to certain limit. He

exemption is restricted to the least of the following.

2.2.16 House Rent Allowance (sec. 10[13a]): Actual HRA received by the

employee for the relevant period, or

Excess of actual rent paid over and above 1/10 of salary for relevant period

or

An amount equal to 50% of the salary, if the accommodation is situated in

Mumbai, Chennai, Delhi or Calcutta:

40% of salary, if the accommodation is situated in other cities.

Note:

Salary for this purpose means only basic: but if DA or DP is considered for retirement purposes, salary means Basic + DA + DP. If commission

is paid as percentage of turnover, it is also included.

Relevant period means the period during which the house was occupied by the assessee during the previous year.



Format 4:

HRA receivedLess: HRA exempt u/s 10 (13A) (Least)1. HRA received2. Rent paid above 10% of salary (Rent p.a.- Sal p.a.)3. 40% or 50% of salary Taxable HRA

xxx

xxxxxx

xxx

-xxxxxx

Study the above format as HRA calculation is also important for the

next unit i.e., income from salaries.

Problem 8: During the previous year Sandhya received a basic of Rs. 3,000

p.m. DA at 50% of basic, CCA at Rs. 500 p.m. and HRA at Rs. 1,000 p.m.

She pays a rent of Rs. 1,200 p.m. for the house. Compute the taxable HRA

if

1. DA is not considered for retirement benefits.

2. DA is considered for retirement benefits.

Solution: DA is not considered:

HRA received 1000 12:Less: exempt u/s 10 (13A): Least of the following)

HRA received

Rent paid above 10% of salary

(120012-300012)40% of salary (30001240%)Taxable HRA

12000

10800

14400

12000

- 10800

1200

Note: Salary means basic i.e. 3000 12 = 36,000 b) DA is considered:

HRA receivedLess: HRA exempt u/s 10 (13A) (Least)HRA receivedRent paid above 10% of salary

(1200 12 - 4500 12)40% of salary (45001240%)Taxable HRA

12000

9000

21600

12000

-9000

3000



Note: Salary means basic plus D.A. i.e. (3000 + 1500) 12 = 54,000Problem 9:

From the following particulars compute taxable House Rent Allowance.

Basic: Rs 7,200 per month DA: 40% of basic HRA: Rs. 1,800 p.m. where as

rent paid Rs. 2,000 p.m.

Solution: Computation of taxable HRA

HRA received1,800 X 12

Ex: - Least of the following

1) Actual HRA received

2) Rent paid above 10% of salary

(Rent p.a.) (10% of salary)

(2,000 X12) (10% 86,400) =(24,000 8,640)

3) 40% of salary (40% of 86,400)

Taxable HRA

21,600

15,360

34,560

21,600

- 15360

6240

Note: Salary means only basic =72,000 X 12 = 86,400

Problem 10:

From the following particulars of Vishwas compute taxable HRA. Basic: Rs.

6,000 p.m. DA: Rs.2, 500 p.m. (50% enters into retirement benefit)

Commission: % of turnover of Rs. 10 lakhs. HRA: Rs. 2,500 p.m. Rent

paid for the furnished house at Mumbai Rs. 3,000 p.m.

Solution: Computation of taxable HRA

HRA received 2,500 X 12

Ex: - Least of the following

1) Actual HRA received

2) Rent paid above 10% of salary

(Rent p.a.) (10% of salary)

(3,000 X12) (10% 92,000)

36,000 9,200

3) 40% or 50% of salary (50% of 92,000)

Taxable HRA

30,000

26,800

46,000

30,000

-26,800

3,200



Note:

The word salary means Basic + DA+ Commission since the commission is given as a percentage of turnover.

Salary = Basic + DA + Commission

= (6,000 X 12) + (2500 X 50% X 12) + (1/2 % of 10lakh)

= 72,000 + 15,000 + 5,000

= 92,000

The accommodation is situated in Mumbai. Hence 50% of the salary should be taken.

2.2.17 Others

1. Under Section 10 (14) of the Income-tax Act, special allowances are

exempt from tax to a certain extent.

2. Under Section 10 (15) of the Income-tax Act, interests on certain

securities and deposits are exempt from income-tax. Some of those

securities and deposits are:

1. 12-year National Savings Annuity Certificates

2. National Defenses Gold Bonds, 1980

3. Special Bearer Bonds, 1991

4. Treasury Savings Deposit Certificates (10 years)

5. Post Office Cash Certificates (5 years)

6. National Plan Certificates (10 years)

7. National Plan Savings Certificates (12 years)

8. Post Office National Savings Certificates (12 years or 7 years)

9. Post Office Savings Bank Accounts

10. Public Account of Post Office Savings Bank Accounts (Interest

upto Rs. 5,000 is exempt from tax.)

11. Post Office Cumulative Time Deposits.

12. Special Deposit Scheme, 1981.

13. Non-resident (Non-repatriable) Rupee Deposit Scheme.



14. Interest on Tax-free Government Securities, if they are covered

under Section 10 (15).

15. Interest on Gold Deposit Bonds as notified under Gold Deposit

Scheme of 1999.

16. Scheme of Fixed Deposits governed by the Government Savings

Certificates (Fixed Deposits) Rules, 1968.

17. Scheme of Fixed Deposits governed by the Post Office (Fixed

Deposit) Rules, 1968.

18. Interest on 7% Capital Investment Bonds held by individuals and

Hindu undivided families.

19. Interests on 9% Relief Bonds, 1999.

3. Educational Scholarship [Section 10 (16)]: Scholarship granted to

meet the cost of education is exempt from tax. It is not necessary that

the scholarship should be financed by the government. Once proved

that the amount received is scholarship, it is except from tax even if

the recipient does not spend the whole amount towards education.

4. Daily allowance of MPs, MLAs, MLCs section 10 (17)

5. Literary, Scientific, Artistic work Awards instituted Central Government

or any State Government.

6. Other rewards by central government for any state government.

7. Gallantry Awards

8. Income of Hospital, existing or philanthropic purpose and not for profit.

9. Income of professional institutes such as Indian medical association

etc.

10. Income of any authority established for the administration of any public

religious or charitable trust or endowments.

11. Income of scheduled tribes residing in tribal areas.

12. Income of political parties.



13. Income of resident of Ladakh.

14. Minors income [section 10 (32)]: Under Section 10 (32) of the

Income-tax Act, if the income of an individual includes the income of

his minor child, he can claim exemption upto Rs. 1,500 in respect of

each minor childs income, provided the income of the minor child

included in the income of the individual exceeds Rs. 1,500.

15. Dividends Section (10(34)): Any income by way of dividends for which

Section 115-O applicable is exempt form tax.

16. Income from units of UTI is exempt from tax (Section 10(35))

I. Self Assessment Questions (SAQ 1)

1. Share of Income from partnership firm is taxable under the head income

from business or profession. (T/F)

2. Interest received on POSB account is fully exempt from tax. (T/F)

3. Any death cum retirement gratuity received by all categories of

government employees or an employee of local authority is __________

from tax.

4. For the calculation of taxable HRA, salary means _________________

_________________________________________________________.

5. Casual Income means ______________________________________

_________________________________________________________.

2.3 General Deductions

From the gross total income, certain allowable deductions are made. The

resulting balance is the total income of the assessee. The aggregate

amount of deduction u/s 80CCC to 80U cannot exceed the gross total

income. These deductions are discussed in the following paragraphs.

2.3.1 Deduction u/s 80C:

Section 80C: Deduction under this section can be claimed by an assessee

being individual, Hindu undivided family and association of persons, body of



individuals consisting of only husband and wife governed by the system of

community of property in force in Dadra, Nagar Haveli, Goa, Daman and

Diu, in respect of the following payments:

1. Life insurance premium and (not exceeding 20% of the actual sum

assured) on the insurance policy taken on the life of himself / his

spouse, his/ her child or children. However if the assessee

discontinues the policy before 2 years premiums have been paid, no

deduction will be allowed in respect of year in which the policy is

discontinued. Further the deduction allowed in this regard in preceding

year will deem to be income of the assessee of the year in which the

policy is discontinued.

2. Contribution to (not being repayment of loan) statutory provident fund,

superannuation fund or recognized provident fund.

3. Contribution (not being repayment of loan) to 15 years Public provident

fund by the individual in his name, in the name of his spouse of

children. In the case of HUF subscription can be in the name of any

member.

4. Contribution to unit linked insurance plan (ULIP) of UTI in the name of

self, spouse or any child, and such unit linked insurance plan of LIC

Mutual Fund notified u/s 10 (23D) (Dhanaraksha plan of LIC Mutual

Fund)

5. Any sum paid to effect or keeps in force contract for a deferred annuity

on the life of the assessee or his/ her spouse or any child.

6. Any sum paid for NSC VIII series. The accrued interest on NSC VI and

VIII issue is deemed to be reinvested every year.

7. Amount deposited in 10 or 15 years post office saving sank cumulative

time deposit account

8. Deposits under National saving scheme.

Business Taxation Assessm

BB0019-IncomeTax Valuation Perquisites

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