UNIVERSITY OF MUMBAI

A
PROJECT ON
DIRECT TAX
MASTER OF COMMERCE PART II
SEMESTER-III
2015 - 2016
SUBMITTED
BY
SATISH SINGH RAO
ROLLNO.28
PROJECT GUIDE
PROF. KIRAN S.TEMKAR

SHANKAR NARAYAN COLLEGE OF

ART&COMMERCE
BHAYANDAR (EAST), THANE 401105

DECLARATION

SATISH

SINGH

RAO

student

of

M.COM-II

(Semester-

III).SHANKAR NARAYAN COLLEGE OF ART& COMMERCE hereby declare

that we have completed this project on DIRECT TAX in the academic year
2015-2016.
I declared that the project report is my original work and it has not been submitted by me
in part or full to any other university/institution/statutory body for the award of any
degree/diploma/certificate.
Name of Candidate: SATISH SINGH RAO

Sing.

Place: BHAYANDAR.

Date:
CERTIFICATE

We certify that the above declaration is true to the best of our knowledge and belief.
Project Guide

Coordinator
Prof. Ajit Jadhav

Date:

Date:

SHANKAR NARAYAN COLLEGEOF ART & COMMERCE

BHAYANDAR (EAST) NAVGHAR ROAD THANE-401105
CERTIFICATE
This is certifying that SATISH SINGH RAO

has completed the project titled

DIRECT-TAX under the guidance of PROF. KIRAN S. TEMKER in practical fulfillment

of the requirement for the award of Master of Commerce part-II studies degree for academic
period 2015-2016.
PROJECTGUIDE

PRINCIPAL

Dr. V.N. Yadav

EXTERNAL GUIDE

CO-

ORDINATOR
Prof. Ajit Jadhav
Date:
PLACE: BHAYANDAR.

ACKNOWLEDGEMENT
ACKNOWLEDGEMENT
I take immense pleasure to thank a number of people who have supported & helped me
throughout the completion of my project on DIRECT-TAX
It gives me heartily pleasure and satisfaction to present this project. I have
endeavored to present this project in most suitable and lucid form. First I would like to take the
opportunity to thank my very own coordinator PROF.AJIT JADHAV who encouraged and
showed me the value of time. I would also sincerely thank my project guide PROF. KIRAN S.
TEMKER, and of course Mr. V.N.YADAV our Principal.
Providing me with his valuable time from his busy schedule, I would like to thank
Mr. AJIT JADAV who helped me to provide all kind of information. And I also would like to
thank my parents and friends who have helped and encouraged me throughout the working of the
project.

S.No.

TOPICS

PAGE No.

INTRODUCTION

6-10

BASIS OF CHARGES

10-11

RESIDENTIAL STATUS

11-12

COMPUTATION OF TOTAL INCOME

13-15

INCOME FROM HOUSE PROPERTY

16-19

INCOME FROM OTHER SOURCE

20-22

GROSS TOTAL INCOME

23-24

DEDUCTION UNDER SECTION 80.

25-27

COMPUTATION OF ADVANCE TAX.

28-36

10.

INCOME TAX SLAB & DEDUCTION (F.Y 2014-15)

37

11.

COMPUTATION OF TOTAL ONCOME & THEIR FORMAT

.
REFERENCES.

38

12.

1 . INTRODUCTION
Basis of Charge-Income

39

WHAT IS BASIS OF CHARGE [ Sec. 56]

The Fifth and residuary head of income is Income from Other Sources. Every income
which does not specifically fall under any of the preceding Four heads of income (viz.,
Salaries, Income from House Property, Profit and Gains of Business or Profession, or
Capital Gain) shall be included in this head. Sub-Section (1) of Section 26 covers any
income which does not fall under any other head of income. However, Sub-section (2) of
section 56 specifies 8 Incomes which are always taxable under the head Income from other
Sources.

General Provisions [ Sec. 56(1) :

The following incomes are generally chargeable under the head Income from Other
Sources:
a. income from subletting ;
b. interest on bank deposits and loans ;
c. income from royalty
d. directors fee ;
e. ground rent ;
f. agricultural income from a place outside India ;
g. directors commission for standing as a guarantor to bankers ;
h. directors commission for underwriting shares of new company ;
i. examination fees received by a teacher from a person other than his employer;
j. rent of plot of land ;
k. insurance commission
l. mining rent and royalty ;
m. casual income
n. annuity payable under a will, contract, trust deed ;
o. salaries payable to a Member of Parliament ;

p. interest on securities issued by a foreign Government ;

q. family pension received by family members of a deceased employee ;
r. in case of retirement , interest on employees contribution if provident fund is
unrecognized.
s. Income from undisclosed sources ;
t. Gratuity paid to a director who is not an employee of the company ;
u. Income from racing establishments ;
v. Compensation received for use of business assets ;
w. Annuity payable to the lender of a trade mark.

General Provisions [ Sec. 56(2 ] :

The following 8 incomes are always taxable under the head Income from Other Sources
1.
Dividend:
if such income is not chargeable to income-tax under the head "Profits
and gains of business of profession.
2.
Winning from Lotteries, etc : it includes any winning from lotteries, crossword
puzzle, races including horse races, card games and other games of any sort or from gambling
or betting of any form or nature whatsoever.
3.

Employees contribution towards staff welfare scheme :

4.
Interest on securities : Interest on Debentures, Government securities / bonds is
taxable under the head Income from other sources
5.
Rental income of machinery, plant or furniture: Rental income from machinery,
plant, or furniture let on hire is taxable as income from other sources.
6.
Rental income of letting out of plant, machinery or furniture along with letting out of
building and the two meetings are not separable.
7.

Sum received under Key man Insurance Policy :

8.
Gift: if any sum of money is received during a previous year without consideration
by an individual or a HUF from any person or persons exceeds Rs. 50,000 the whole of such
amount is taxable in the hands of the recipient as income from other sources.

2. Charge of income- tax

Section 4 in the Income- Tax Act, 1995
(1) Where any Central Act enacts that income- tax shall be charged for any assessment year at
any rate or rates, income- tax at that rate or those rates shall be charged for that year in
accordance with, and 2 subject to the provisions (including provisions for the levy of additional
income- tax) of, this Act] in respect of the total income of the previous year] of every person:
Provided that where by virtue of any provision of this Act income- tax is to be charged in respect
of the income of a period other than the previous year, income- tax shall be charged accordingly.
(2) In respect of income chargeable under sub- section (1), income- tax shall be deducted at the
source or paid in advance, where it is so deductible or payable under any provision of this Act.
1. Substituted for' subject to the provisions of, this Act" by the Direct Tax Laws (Amendment)'
Act, 1987, w. e. f. 1- 4- 1989. This amendment was consequent to the insertion of Chapter XIVB (comprising of section 158B), but after the withdrawal of the chapter, without even coming
into effect, this amendment too needs to be undone.
3. the words" or previous years, as the case may be," omitted by the Direct Tax Laws
(Amendment) Act, 1987, w. e. f. 1- 4- 1989.
(3)Liability arising from contracts as well as torts. it would be incorrect to assume that the
shareof an assesses in a form consists only of income yielding assets. It equally comprises of risk
and liability of paying debts on behalf of the firm. An assesses cannot, under the Hindu law make
a declaration whereby the joint family would have to bear the risk and liability of the business
and such a declaration should be ignored altogether.
6 Where payment is made to compensate for the loss of the use of any goods in which the
assesses does not carry on any business or the payment is a just equivalent of the cost incurred by
the assesses, but excess accrues due to fortuitous circumstances or is a windfall, then accrual
may be a receipt, but it would not be income arising from business, and, therefore, not taxable
under the Act.
7 In the hands of an assesses, who maintains his accounts on the mercantile system, sales tax
collected but not paid to the Sales Tax Department pending adjudication of dispute over his
liability to pay sales tax, is a revenue receipt of the year in which it is collected.
8 Where a company goes into liquidation and the liquidator distributes the assets of the
company among the shareholders, what each shareholder gets is in lieu of his shareholding. That
is the worth, the value and the price of his shareholding. A shareholder participates in the
distribution of the assets of a company on its liquidation by virtue of and because of his
shareholding. It is true that a liquidator does not sell the shares. It is equally true that there is no
transfer of shares by the shareholder to the liquidator or to any other person. That is not really
necessary. So long as money is received in lieu of shares, there is a receipt and where an assesses
is a dealer in shares, any surplus amount received by him constitutes his income. The money
received by the assesses in lieu of its shareholding partakes of the same character in which he
held the shares. If he held the shares as stock- in- trade, the money received by it represents his
7

income i. e. a revenue receipt in its hands. If it held them by way of investment, the money it
receives represents a capital receipt by it.

3.Commutation of income
Circumstances can arise to consider transferring existing income stream/s to
another income stream provider. Alternatively a person may wish to combine
accumulated superannuation with an existing income stream. In both cases,
it is necessary to commute an income stream.
The tax and social security consequences must be evaluated before
commuting an income stream. Particular care should be taken when
commuting a death benefit income stream because the tax efficiency of the
benefit may be lost.
Generally, provided the original income stream allows for commutation, a
person will be able to change income stream providers (either transferring
from one income stream to another or to another income stream with the
same provider) irrespective of their age or employment status.
A commutation refers to the conversion of an income stream to a lump sum.
A commutation occurs where:
a partial or full lump sum is withdrawn from an income stream
a partial or full lump sum is rolled over from an existing income stream to a
new income stream
a partial or full lump sum is rolled over from an existing income stream to
accumulation phase.A commuted lump sum will consist of tax components
that are calculated using the proportioning rule. For income streams, the
proportioning rule means the proportions of tax free and taxable components
at the commencement of the income stream apply to any commuted lump
sum (or income stream payments).Therefore a full or partial commutation
will consist of tax-free and/or taxable components in the same proportion as
these components make up the purchase price at commencement.Before
considering a commutation it is wise to seek professional financial advice to
ensure that all considerations are taking into account. We can help you with
all financial advice.At Money Works Financial Planning We Make Your Money
Work For You. If you would like any more information on the blog above
please email us at assist@moneyworkspl.com.au.

4.Residential status sec 6 (1)

Financial Year 13-14 (Assessment Year 14-15)
8

Compiled by Prof. M.B. Thakoor RESIDENTIAL STATUS PERSON Legal Status

Residential Status Resident Non Resident Legal Status1. Individual Resident & Resident
but2. Firm Ordinarily Resident not Ordinarily3. Companies Resident4. Institution5. Local
Authorities6. H.U.F.7. A.O.P.8. B.O.I. Page No. 1

Compiled by Prof. M.B. Thakoor RESIDENTIAL STATUS: SEC. 6 (1)After determining

the legal status of an Assesses u/s. 2 (31)the Residential Status of an Assesses is to be
determined.1. Determined of every PREVIOUS YEAR: Residential Status is determined
for every previous year. It depends on the number of days a person is in India during the
concerned previous year.2. Different terms of Citizenship An Individual may be a Citizen
of Britain, but a resident in India. In the same way a Citizen of India may be a nonresident of India.3. Residential Status is important in deciding whether Foreign Income of
a person is Taxable or not. TEST OF RESIDENCE1. For an INDIVIDUAL Basic 2
conditions An Individual is said to be resident when he satisfies any one of the basic 2
conditions.

1. He must be in India for 182 days or more in that relevant previous year. OR

2. a. He must be in India for 365 days or more during 4 previous year immediately
preceding the relevant previous year. AND

b. He must be in India during that relevant previous year for a period of 60 day or more.
Page No. 2

Compiled by Prof. M.B. Thakoor EXCEPTION: FOLLOWING ARE THE

TWOEXCEPTIONS TO RULE OF STAY IN INDIAFOR A PERIOD OF 60 DAYS IN
THE SECONDCONDITION ABOVE.1. If a citizen of India or a member of a crew of an
Indian ship leaves India in the previous year for the purpose of employment then he
becomes resident if the 60 days are replaced by 182 days.

Employment : Self Employment Salaried Employed Professional Non-professional i.e.

he becomes resident only if he stays in India for 182 days or more and not 60 days or
more.

2. A citizen of India or a person of Indian Origin staying outside India, come on a visit to
India in the previous year, then the 60 days must be replaced by 182 days. i.e. he become
resident only if he stays in India for 182 days and not 60 days.

Note: A person is deemed to be of an Indian origin, if he or his parents or any of his

grandparents were born in Undivided India. (i.e. India, Pakistan, Bangladesh)For Current
ASSESSMENT yearAn Individual will become a resident in India in the P.Y.2006-2007
i.e. for current assessment year 2007-2008 if he satisfies any one of the following 2 basic
conditions.1. He is in India for 182 days or more in the previous year 2006-2007. OR
9

Page No. 3

Compiled by Prof. M.B. Thakoor2. He is in India for 365 days or more during the period
1.04.2002 to 31.03.2006 AND He is in India for 60 days or more in the previous year
2006-2007.EXCEPTIONS1. If a citizen of India, or a member of crew of Indian ship,
leaves India in 2006-2007 for the purpose of employment will became a resident only if
he stays in India for 182 days or more & not 60 days during 2006-2007 and he must be in
India for 365 days or more during 4 previous years preceding the P.Y. 2006-2007 i.e. He
must be in India for 365 days or more from 01/04/2002 to 31/03/2006.2. A citizen of
India or a person of Indian Origin, who is staying outside India comes on a visit to India
in 2006-20074 becomes a resident only if he stays in India for 182 days or more (and not
60 days) during 2006-2007 and he must be in India for 365 days or more during 4
previous year preceding the previous year 2006-2007 i.e. He must be in India for 365
days or more from 1.04.2002 31.03.2006.NON-RESIDENT FOR AN INDIVIDUAL
Non-resident is a person who is not a resident. An Individual who does not satisfy the test
laid down in Sec (1) above is called a non-resident i.e. An individual who do not satisfy
any of the basic conditions above is called a non-resident. Page No. 4

Compiled by Prof. M.B. Thakoor RESIDENT & ORDINARILY RESIDENT - Sec 6 (6)If
an Individual satisfies the test of Resident then further 2tests are to be made i.e. If an
Individual is a Resident in India, he may be either Resident and Ordinarily Resident or
Resident but not ordinarily resident. An Individual may be Resident and Ordinarily
Resident if he satisfies following 2 conditions 1. He has been resident in India for at least
2 out of 10 years immediately proceeding the previous year. AND2. He has been present
in India for a period of 730 days or more during 7 years immediately proceeding the
previous year. Current A.Y. 2007-2008Thus during the current Assessment Year 20072008 a Resident Individual is tested as an Ordinary resident. If1. He has been a resident
in India for at least 2 out of 10 years immediately preceding the P.Y. 2006-2007. 1. 19961997 2. 1997-1998 3. 1998-1999 4. 1999-2000 5. 2000-2001 6. 2001-2002 7. 2002-2003
8. 2003-2004 9. 2004-2005 10. 2005-2006i.e. from 1st April 1996 to 31st March 2006 for
these 10 year she must have been a resident for 2 years i.e. from1.04.1996-31.03.2006.
Page No. 5

Compiled by Prof. M.B. Thakoor2. He has been physically present in India for a period
of 730 days or more during 7 years immediately proceeding the previous year 2006-2007.
1. 1999-2000 2. 2000-2001 3. 2001-2002 4. 2002-2003 5. 2003-2004 6. 2004-2005 7.
2005-2006i.e. He must have stayed in India physically for 730 days from1.04.1999
31.03.2006.If both the above conditions are satisfied then the Individual is Resident and
Ordinarily Resident. But if the additional 2tests are not satisfied by an Individual then he
is said to be Resident but not Ordinarily Resident. Counting of Days While counting of
number of days in all the above cases the following points are to be noted.1. The stay
need not be at the same place.2. The stay need not be continuous.3. Where the stay is for
part of the day, physical presence should be calculated on timely basis. Stay of 24 Hrs.
will be counted as stay for 1 day. Where such information is not available, both the days
of entry and exit will be counted as full days.4. A stay in a boat anchored in territorial
area of India, is treated as stay in India. Page No. 6
10

Compiled by Prof. M.B. Thakoor RESIDENTIAL STATUS FOR HUF SEC 6 (2)A
Hindu Undivided Family (HUF), is said to be resident in India IF ITS CONTROL AND
MANAGEMENT ISSITUATED IN INDIA either WHOLLY OR PARTLY during that
PREVIOUS YEAR.A Resident HUF is an ORDINARILY RESIDENT if the KARTA or
MANAGER of the Family is a Resident and Ordinarily Resident. A Hindu Undivided
Family (HUF), is said to be NONRESIDENT in India. IF ITS CONTROL
ANDMANAGEMENT IS SITUATED WHOLLY OUTSIDEINDIA during that
PREVIOUS YEAR.CONTROL AND MANAGEMENT IS SITUATED AT APLACE
WHERE THE HEAD/BRAIN, THE SEAT OF THEDIRECTING POWER IS
SITUATED.RESIDENT BUT NOT ORDINARY RESIDENT Sec.(6) (g)A HINDU
UNDIVIDED FAMILY IS SAID TO BE NONORDINARILY RESIDENT IN INDIA in
any previous year if its Manager is treated as an NOT ORDINARILYRESIDENT in
India during that previous year. Page No. 7

Compiled by Prof. M.B. Thakoor RESIDENTIAL STATUS FOR A COMPANY Sec. 6

(3)A COMPANY SAID to be Resident in India in any previous year if 1) It is an
INDIAN COMPANY OR2) DURING THAT YEAR THE CONTROL AND
MANAGEMENT OF ITS AFFAIRS IS SITUATED WHOLLY IN INDIA.THUS AN
INDIA COMPANY IS ALWAYS RESIDENT IFCONTROL & MANAGEMENT IS IN
INDIA OR OUTSIDEINDIA.FOREIGN COMPANY IS ALWAYS RESIDENT
IFCONTROL & MANAGEMENT OF ITS AFFAIRS ISSITUATED WHOLLY IN
INDIA, DURING THAT YEAR.CONTROL & MANAGEMENT indicates THE HEAD
ANDBRAIN WHICH DIRECT THE AFFAIR OF THECOMPANY IN RESPECT OF
ITS POLICY, FINANCE,DISPOSAL OF PROFIT, MANAGEMENT ETC. i.e.
PLACEWHERE THE MEETING OF ITS BOARD OF DIRECTORARE HELD. Page
No. 8

Compiled by Prof. M.B. Thakoor RESIDENTIAL STATUS OF A FIRM OR AN

ASSOCIATIONOF PERSON EVERY OTHER PERSON S 6(4) A PARTNERSHIP
FIRM OR AN ASSOCIATION OFPERSONS (AOP) OR EVERY OTHER PERSON IS
SAIDTO BE A RESIDENT IN INDIA IF THE CONTROL ANDMANAGEMENT OF
ITS AFFAIRS ARE SITUATED ININDIA EITHER WHOLLY OR PARTLY during that
previous year. A PARTNERSHIP FIRM OR AN ASSOCIATION OFPERSONS (AOP) or
every other person is SAID TO BENON RESIDENT IN INDIA IF ITS CONTROL
ANDMANAGEMENT IS SITUATED WHOLLY OUTSIDEINDIA during THAT
PREVIOUS YEAR.CONTROL AND MANAGEMENT IS SITUATED AT APLACE
WHERE THE HEAD/BRAIN THE SEAT OF THEDIRECTING POWER IS
SITUATED. Page No. 9

5.Sec 5 Scope of Total Income

Financial Year 13-14 (Assessment Year 14-15)

Scope of total income

5. (1) Subject to the provisions of this Act, the total income of any previous
year of a person who is a resident includes all income from whatever source
11

derived which
(a) is received or is deemed to be received in India in such year by or on
behalf of such person ; or
(b) Accrues or arises or is deemed to accrue or arise to him in India during
such year; or
(c) Accrues or arises to him outside India during such year:
Provided that, in the case of a person not ordinarily resident in India within
the meaning of sub-section (6) of section 6, the income which accrues or
arises to him outside India shall not be so included unless it is derived from a
business controlled in or a profession set up in India.
(2) Subject to the provisions of this Act, the total income of any previous year
of a person who is a non-resident includes all income from whatever source
derived which
(a) Is received or is deemed to be received in India in such year by or on
behalf of such person; or
(b) Accrues or arises or is deemed to accrue or arise to him in India during
such year.
Explanation 1.Income accruing or arising outside India shall not be deemed
to be received in India within the meaning of this section by reason only of
the fact that it is taken into account in a balance sheet prepared in India.
Explanation 2.For the removal of doubts, it is hereby declared that income
which has been included in the total income of a person on the basis that it
has accrued or arisen or is deemed to have accrued or arisen to him shall not
again be so included on the basis that it is received or deemed to be
received by him in India.

6. Basis of Charge for Salary Income

Financial Year 14-15 (Assessment Year 15-16)
Q) What does one mean by the term Basis of Charge?
Basis of Charge of an Income lets us know that on what grounds Income earned by a
person is chargeable to tax. It specifically defines whether Income so received is tax
chargeable on receipt basis or accrual basis, or in case of variations in accounting
method how tax should be charged. All five heads of Income have different Basis of
Charge which you will come to know as you surf through each head of Income.
12

Q) What is the Basis of Charge for Salary Income?

Salary Income is chargeable to tax on DUE OR RECEIPT BASIS WHICHEVER IS
EARLIER
Income Tax Act however specifically states that where any salary in advance is included in
the total income of any person for any previous year it shall not be included again in the
total income of the person when the salary becomes due. It is also worthwhile to note that
the Accounting Method employed by the Assesses is absolutely irrelevant to violate the
chargeability rule as stated above in bold.
Lets go through the following examples to gain more clarity on this rule:
You being an employee of a MNC are faced with the following alternative situations during
the P.Y. 2009-10 (A.Y. 2010-11)
1)

You received your annual salary of Rs. 9, 00,000/- due & receivable by you in the
previous year.
-

2)

An Annual salary due to you of Rs. 9,00,000/- out of which only Rs. 5,50,000/was received during the P.Y. 2009-10 and rest was received by you in the next P.Y.
i.e., 2010-11.
-

3)

The salary of Rs. 9, 00,000/- will be chargeable to tax in P.Y. 2009-10 in

your hands.

The whole salary amount of Rs. 9,00,000/- will be chargeable to tax in

your hands in the P.Y. 2009-10 i.e., A.Y. 2010-11. The salary of Rs
3,50,000/- received in P.Y. 2010-11 will not be chargeable to tax again in
P.Y. 2010-11 i.e., A.Y. 2011-12 since it has already been taxed earlier.

Advance salary received during the P.Y. 2009-10 pertaining to P.Y. 2010-11 of
Rs. 2,50,000/-.
- The salary received of Rs. 2, 50,000/- will be chargeable to tax in the P.Y.
2009-10 instead of P.Y. 2010-11 since the rule specifically says due or
receipt whichever is earlier, however it will not be charged to tax again in
P.Y. 2010-11.

4)

Arrears of salary pertaining to P.Y. 2008-09 received in P.Y. 2009-10 amounting

to Rs. 4,00,000/-.
- The amount so received of Rs. 4,00,000/- will not be tax chargeable in your
hands in P.Y. 2009-10 since it must had been already taxed in your hands
in P.Y. 2008-09, i.e., A.Y. 2009-10.

13

7. Income under the Head Salaries

Financial Year 13-14 (Assessment Year 14-15)
What is included in salary

The statute enjoins every employer to estimate the liability of tax deductible at source and to
deduct tax at an average rate. For this the employer is required to determine the salary payable to
the employee and accordingly compute the tax liability. The employer must estimate this tax
liability at the very beginning of the financial year in accordance with the following sequence of
steps :
(1) The employer should first compute the gross salary payable to the employee during the year
taking into account any salary received/receivable by the employee from any other
employer/former employer.
(2) The gross salary is to be reduced by those payments which are exempt from taxation.
(3) Standard deductions and other deductions u/s 16 are to be reduced from the above amount to
arrive at the net salary payable.
(4) Income chargeable under any other head as reported by the employee is to be added and
accordingly the gross total income (GTI) is to be computed.
(5) Deduction under Chapter VI-A for which the employee is eligible is to be reduced from gross
total income and thus the total income is to be computed.
(6) On the basis of the rates in force, the tax liability on the total income of the employee is to be
computed. From this amount, rebate u/s 88, 88B and 88C is to
be reduced.
(7) The tax liability so computed is to be increased by the surcharge pay-able and l/12th of this
net tax payable is to be deducted every month by the employer.

1 WHAT

IS

"SALARY"?

Salary is said to be the remuneration received by or accruing to an individual for service

rendered as a result of an express or implied contract. The statute, gives an inclusive but not
exhaustive definition of salary. As per sec 17(1), salary includes therein: (i) Wages; (ii)
Annuity or pension; (iii) Gratuity; (iv) fees, commission, perquisites or profits in lieu of
salary; (v) Advance salary; (vi) Receipt from provident fund; (vii) Contribution of
employer to a recognized provident fund in excess of prescribed limit; (vii) Leave
encashment; (viii) compensation as a result of variation of service contract etc.

14

Exceptions to salary income:

The existence of an 'employer-employee' relationship is a must for a payment to be

taxed under the head salaries. Accordingly, the following class of payments do not fall under the
purview of the head 'salaries'.
(i) Salary received by a partner from his partnership firm carrying on
business: This income is taxable under the head profits and gains of
business and professions.
(ii) Salary received by a person as MP or MLA: This income is taxable
under the head "income from other sources." However, the salary
received by a person as a Minister of Central government/State
Government is chargeable under the head salaries.
(iii Family pension that is pension received by the members of the
)
family of an employee subsequent to his death: This is a taxable
under the head "income from other sources." However, the pension
received by an employee from his former employer is taxable under the
head salaries.

VALUATION OF PERQUISITES:

The taxable value of perquisites in the hands of the employee is normally taken to be its cost to
the employer. However, there are specific rules for valuation of certain perquisites laid down in
Rule 3 of the I.T. Rules, which have been revised by CBDT notification dated 25.9.2001. These
are briefly given below. It may be noted that while the revised rule 3 relating to valuation of
perquisites shall be deemed to have come into force on 1.4.2001. The employer may at the
option of employee compute the value of all perquisites made available to him for the period
from 1.4.2001 to 30.9.2001, in accordance with the rule 3 as it stood before this amendment.
However this option of the tax payer of using old or new rules for the period specified above
shall be applied uniformly in respect of all perquisites in case of a particular tax payer.

3.1 Valuation of residential accommodation provided by

the employer:
(a) Union or State Government Employees: The value of perquisite is the license fee as
15

determined by the Govt. as reduced by the rent actually paid by the employee.
(b) Non Govt. Employees: The value of perquisite is an amount equal to 10% of the salary
(7.5% of salary in cities where population as per 1991 census, is below 4lacs). In case the
accommodation provided is not owned by the employer, but is taken on lease or rent, then the
value of the perquisite would be the actual amount of lease rented paid/payable by the employer
or 10% of the salary, whichever is lower. In both of above cases, the value of the perquisite
would be reduced by the rent, if any, actually paid by the employee.

3.2 Value of Furnished Accommodation :

The value would be the value of unfurnished accommodation as computed above
increased by 10% per annum of the cost of furniture (including
T.V./radio/refrigerator/A.C./other gadgets). In case such furniture is hired from a third
party, the value of unfurnished accommodation would be increased by the hire charges
paid/payable by the employer. However, any payment recovered from the employee towards
the above would be reduced from this amount.

3.3 Value of hotel accommodation provided by the

employer:
The value of perquisite arising out of the above would be 24% of salary or the actual
charges paid or payable to the hotel, whichever is lower. The above would be reduced by
any rent actually paid by the employee. It
may be noted that no perquisite would arise if the employee is provided such
accommodation on transfer from one place to another for a period of 15 days or less.

3.4 Perquisite of motor car

provided by the employer:

a. If it is used wholly and exclusively for the official purpose, the value of the
perquisite would be nil. Rule 3(2 )(B) provides that the value would be taken as
nil provided the following documents are maintained by the employer :
(i) Complete details of journey undertaken (including date of journey,
destination, mileage etc.)
(ii) Certificate by the employee that the expenses were wholly and
exclusively for official purposes.
(iii Certificate by the supervising authority that the expenses were wholly
)
and exclusively for official purposes.
b. If it is used exclusively for private purposes of the employee or any member of
his household, the value of the perquisite would be the actual expenses
incurred by the employer on the running/maintenance of the car, remuneration
paid to the chauffeur and normal wear and tear of the car. For the purpose of this
sub-rule, the normal wear & tear of a car shall be taken as 10% per annum of the
16

actual cost.
c. If it is used for both personal and official purposes, the value of the perquisite
would Rs. 1200 (Rs. 1600 if the car has H.P. greater than 16) plus Rs. 600 for
chauffeur, if any. In case, the expenses on running/ maintenance relating to
personal use are met by the employee, the value of the perquisite would be
Rs. 400 (Rs. 600 if car has H.P. greater than 16) plus Rs. 600 for chauffeur.
d. In case the motor car is owned by the employee but the running/maintenance
charges and chauffeur's salary, if any, are met by the employer, then the value
of the perquisite would be :(i) Nil if the vehicle is used only for official purposes and the documents
listed at (a) above are maintained.
(ii) If used for both personal and official purposes, the value would be the
actual expenses incurred by the employer as reduced by an amount of
Rs. 1200 (Rs. 1600 if car has H.P. greater than
e. Plus Rs. 600 in case any driver has been engaged.

3.5 Perquisite arising out of supply of gas, electric

energy or water:
This shall be determined as the amount paid by the employer to the agency
supplying the same. If the supply is from the employer's own resources, the value of the
perquisite would be the manufacturing cost per unit incurred by the employer.

3.6 Free/Concessional Education Facility:

Value of the perquisite would be expenditure incurred by the employer. If the
educational institution is maintained & owned by the employer, the value would be nil if the
value of the benefit per child is below Rs. 1000/- p.m. or else the reasonable cost of such
education in a similar institution in or near the locality.
3.7 Free/Concessional journeys provided by an undertaking engaged
in carriage or passengers or goods:
Value

of perquisite would be the value at which such amenity is offered to general public as
reduced by any amount, if recovered from the employee.

3.8 Value of certain other benefits:

17

(a) Interest free/concessional loansThe value of the perquisite shall be the sum equal to
the simple interest computed @ 10% per annum in respect of house or conveyance loans and @
13% per annum for other loans as reduced by any interest actually paid by the employee.
(b) Value of free mealsShall be the expenditure incurred by the employer. However, free meals
provided during office hours or through non-transferable paid vouchers usable only at eating
joints shall be exempt upto Rs. 50/- per meal.
(c) Value of gift or voucher or tokenreceived by the employee from the employer would be the
sum equal to the amount of such gift. However, if the aggregate value of such gifts during the
year is below Rs. 5000/- the perquisite shall be taken as nil.
(d) Credit card provided by employerThe value of the perquisite shall be the amount of
expenses including membership fees and annual fees incurred by the employee. However, if the
same is used exclusively for official purposes, the value of the perk shall be nil.
(e) Club Membership provided by employerThe value of the perquisite shall be the amount of
all expenses incurred by the employer or reimbursed to the employee including the
annual fees. However, if the same is incurred exclusively for official purposes, the value of the
perquisite shall be nil.
(f) Provision of sweeper, gardener, watchman or attendantThe value of perquisite
resulting from provision of a sweeper, a gardener, a watchman pr a personal attendant shall be
the actual cost to the employer as reduced by the amount paid by the employee in respect of
such services. (Cost to the employer in respect of the above will be the salary paid/payable).
The value of any other benefit or amenity provided by the employer shall be determined on
the basis of cost to the employer under an arms' length transaction as reduced by the
employee's contribution.

3.4 EXEMPTIONS FROM SALARY INCOME:

Section 10 of the I.T. Act provides for certain categories of payments to be exempt from
taxation, either wholly or partly. Such payment is not to be included under the head 'salary' for
computing the tax deductible. Some of these are listed below and are discussed in detail in
Chapter-5 of this booklet.
ii)

Death-cum-retirement gratuity or any other

gratuity: Exempt to the extent specified u/s 10(10).

iii)

Commutation of pension : Exempt to the extent as provided in

sec 10(10A).

iv)

Leave encashment: Exempt to the extent provided in sec

10(10A).
18

v)

Retirement Compensation: Exempt to the extent provided by

section 10(10B).

vi)

Compensation on voluntary retirement: Exempt to the

extent provided by sec l0(10C).

vii)

Payment from provident fund: Exempt to the extent

provided in sec. 10(11) & sec 10(12).

viii
)

Payment from approved superannuation fund:

Exempt under section 10(13).

iX)

Interest income & investments: As provided u/s 10(15).

X)

Exemption of pension/family pension to awardees of PVC, MVC

and VC: Clause (18) of section 10 provides for exemption of any
income by way of pension received by an individual or family pension
received by any member of the family of an individual who has been in
the service of the Central Government or State Government and has
been awarded "Param Vir Chakra" or "Maha Vir Chakra" or "Vir
Chakra" or such other gallantry award as may be specifically notified by
the Central Government.

Exemption of Allowances:
There are various other receipts besides the above given regularly in addition to salary for
meeting specific requirements of the employee. These are referred to as allowances, in common
parlance and taxability of some of these are discussed here.

(i)

Leave Travel Concession :

The value of any travel concession or assistance accrued by or due to an employee
from his employer or former employer in connection of his proceeding on leave (a) to
any place in India; (b) to any place in India or retirement or after termination of
service. The amount exempt as prescribed in Rule 2B is the amount actually incurred
on performance of travel on leave in India by the shortest route to that place, subject
to economy air fare of A.C. 1st class fare. This exemption is available only in respect
of two journeys in a block of 4 calender years.

(ii)

House Rent Allowance:

House rent allowance granted to the employee is exempt u/s 10(13A) to the
following extent.

Provided expenditure on rent is actually incurred, the amount of exemption granted is the least
19

of:
(1) HRA received;
(2) Rent paid Less 10% of salary;
40% of salary (50% in case of Mumbai, Chennai, Kolkata &
(3) Delhi) salary means bonus + Dearness allowance, where provided
by terms of employment.
It has to be noted that only the expenditure actually incurred on payment of rent in respect of
residential accommodation occupied by the assesses subject to the limits laid down in rule 2A,
qualifies for exemption from income-tax. Thus, house rent allowance granted to an employee
who is residing in a house/flat owned by him is not exempt from income-tax. The disbursing
authorities should satisfy themselves in this regard by insisting on production of evidence of
actual payment of rent before excluding the house rent allowance or any portion thereof from the
total income of the employee. Though incurring actual expenditure on payment of rent is a
prerequisite for claiming deduction under section 10(13A), it has been decided as an
administrative measure that salaried employees drawing house rent allowance up to Rs 3000 per
month will be exempted from production of rent receipt, it may, however, be noted that this
concession is only for the purpose of tax deduction at source, and, in the regular assessment of
the employee, the assessing officer will be free to make such enquiry as he deems fit for the
purpose of satisfying himself that the employee has incurred actual expenditure on payment of
rent.
(iii)

Allowances exempt u/s 10(14):

Certain allowances given by the employer to the employee are exempt u/s 10(14)
w.e.f. 1-7-1995, all these exempt allowance are detailed in Rule 2BB of Income Tax
Rules and are briefly given below :
(i) Allowance granted to meet cost of travel on tour or transfer.
(ii) Allowance granted to tour or journey in connection with transfer to
meet the daily charges incurred by the employee.
(iii) Allowance granted to meet conveyance expense incurred in
performance of duty, provided no free conveyance is provided.
(iv) Allowance granted to meet expenses incurred on a helper engaged for
performance of official duty.
(v) Academic, research or training allowance granted in educational or
research institutions.
(vi) Uniform purchase or maintenance allowance.
(vii Other allowances as prescribed in Rule 2BB(2) for the purpose of
20

) Section 10(14)(ii).
Perquisites exempt from Income Tax:
Some instances of perquisites exempt from tax are given below :
(i) Provision of medical facilities (proviso to Sec. 17(2)): Value of medical
treatment in any hospital maintained by the Government or any local
authority or by the employer or approved by the employer or approved
by the Chief Commissioner of. Income Tax. Besides, any sum paid by
the employer towards medical reimbursement other than as discussed
above is exempt upto Rs. 15,000/-.
(ii) Perquisites allowed outside India by the Government to a citizen of
India for rendering services outside India (Sec. 10(7)).
(iii Rent free official resident provided to a Judge of High Court or
) Supreme Court or an Officer of Parliament, Union Minister or Leader
of Opposition.
(iv) No perquisite shall arise if interest free/concessional loans are made
available for medical treatment of specified diseases in Rule 3A or
where the loan is petty not exceeding in the aggregate Rs. 20,0007-.
(v) No perquisite shall arise in relation to expenses on telephones including
a mobile phone incurred on behalf of the employee by the employer.

DEDUCTION FROM SALARY INCOME:

The deductions allowable from the salary income as specified in Section 16 of the IT Act and are
being given below :

Standard Deduction:

For assessment year 2002-03, the standard deduction is to be allowed at the following rates :
a. where the gross income under the head
salaries is less than Rs 1.5 Lakes

Rs. 30,000/- or l/3rd of

salary whichever is less.

b. where gross income under the head salaries is

more than Rs. 1.5 lakhs but less than Rs. 3
Rs. 25,000/21

lakhs

c.
where gross income under the head salaries is Rs. 20,000/more than Rs. 3 lakhs but less than Rs. 5
lakhs
d.
where gross income under the head salaries is Nil
more than Rs. 5 lakhs.

2 Professional/employment tax: As Levied by the State Government.

3 Entertainment allowance: With effect from AY 2002-03, this deduction is admiscible only to government employees to the extent of Rs. 5,000 or 20% of salary whichever
less is.

8.Perquisite Not Taxable

Financial Year 14-15 (Assessment Year 15-16)
The
following
shall,
however,
not
constitute
as
perquisite:
1) Value of medical treatment provided to an employee or his family member in a hospital
maintained by his employer;
2) Reimbursement of expenditure incurred on medical treatment of and employee or his family
member in a Government approved hospital (like CHS or CGHS);
3) Reimbursement of expenditure incurred by the employee in a hospital approved by the Chief
Commissioner in connection with the medical treatment of the employee or any member of his
family. This concession will be admissible for treatment of prescribed diseases or ailments. The
employee is required to attach with his return of income

A certificate from the hospital specifying the disease or ailment for which medical
treatment was required, and

22

The receipt for the amount paid to the hospital.

4) Premium paid by an employer to keep in effect an insurance on the health of a employee

under a scheme approved by the Central Authority for the purpose of section 36(1) (ib);
5) Medical insurance premium paid by an employer for the health of an employee or his family
member under a scheme approved by the Central Authority u/s 80D (i.e. MEDICLAIM);
6) Reimbursement of expenditure incurred on medical treatment of an employee or his family
member [other than referred to in clause (i), (ii) and (iii) above], not exceeding Rs. 15, 000 in a
previous year;
7) Expenditure incurred by the employer or reimbursement of expenditure incurred, on medical
treatment of an employee or his family member outside India, including expenditure on travel
and stay aboard of the employee or family member, as the case may be, and one attended subject
to the conditions and limits prescribed by the Board.
9) The expenditure on medical treatment and stay abroad shall be excluded from perquisites only
to the extent permitted by the Reserve Bank of India.
10) The expenditure on foreign travel shall not constitute perquisite in case the gross total
income not including the said expenditure, of the employee does not exceed Rs. 2, 00, 000.
[Section 17(2) Proviso]
Note: Family for his purpose means The spouse and children of the individual (employee),
and The parents brothers and sisters of the individual or any of them, wholly or mainly
dependent on the individual.
Perquisites, however, are exempted for the employees whose salary does not exceed one lakh and
for all others, paying Income tax is mandatory. The government employees can enjoy travel
concession even outside the country.
- See more at: http://www.lessmytax.com/perquisites-taxable-taxable/#sthash.QOLkY2zN.dpuf

9 Profits in Lieu of Salary V

. Financial Year 13-14 (Assessment Year 14-15)Profits n Lieu of Salary
Receipts which are included under the head Salary but Exempted u/s 10.
1. Leave Travel Concession (LTC) - Exempt upto rules.

23

2. Any Foreign Allowance or perks - If given by Govt. to its employees posted

abroad are fully exempted.
3. Gratuity: A Govt. Employee or semi-Govt. employee where Govt. rules are applicable -Fully Exempted.
A. For employees covered under Payment of Gratuity Act.-Exempt up to least of following:
(a) Notified limit = Rs. 10, 00,000
(b) 15 days Average Salary for every one completed year of
service (period exceeding 6 months =1 year)
1/2 months salary = (Average monthly salary or wages x 15/26
(c) Actual amount received.
B. Other Employees -- Exempted up to least of following provided service is more than 5
years or employee has not left service of his own:
(a) Notified limit = Rs. 10, 00,000
(b) 1/2 months average salary for every one year of completed service (months to be
ignored.)
(c) Actual amount received

Average Salary = Salary for 10 months preceding the month of retirement divided by 10.

Gratuity
Financial Year 14-15 (Assessment Year 15-16)
Gratuity is a part of salary that is received by an employee from
his/her employer in gratitude for the services offered by the
employee in the company
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24

explains everything about Gratuity and the tax implications for you.
Gratuity is a part of salary that is received by an employee from his/her
employer in gratitude for the services offered by the employee in the
company. Gratuity is a defined benefit plan and is one of the many
retirement benefits offered by the employer to the employee upon leaving
his job. An employee may leave his job for various reasons, such as retirement/superannuation, for a better job elsewhere, on being retrenched
or by way of voluntary retirement.
Eligibility
As per Sec 10 (10) of Income Tax Act, gratuity is paid when an employee
completes 5 or more years of full time service with the employer (minimum
240 days a year).
How does it work?
An employer may offer gratuity out of his own funds or may approach a life
insurer in order to purchase a group gratuity plan. In case the employer
chooses a life insurer, he has to pay annual contributions as decided by the
insurer. The employee is also free to make contributions to his gratuity fund.
The gratuity will be paid by the insurer based upon the terms of the group
gratuity scheme.
Tax treatment of gratuity
The gratuity so received by the employee is taxable under the head Income
from salary. In case gratuity is received by the nominee/legal heirs of the
employee, the same is taxable in their hands under the head Income from
other sources. This tax treatment varies for different categories of individual
assessee. We shall discuss the tax treatment of gratuity for each assessee in
detail.
For the purpose of calculation of exempt gratuity, employees may be divided
into 3 categories

Government employees and

Non-government employees covered under the Payment of Gratuity Act, 1972

Non-government employees not covered under the Payment of Gratuity Act, 1972

In case of government employees they are fully exempt from receipt of gratuity.
In case of non-government employees covered under the Payment of Gratuity Act, 1972
Maximum exemption from tax is least of the 3 below:

25

1. Actual gratuity received;

2. Rs 10,00,000;
3. 15 days salary for each completed year of service or part thereof
Note:

Here, salary = basic + DA + commission (if its a fixed % of sales turnover).

Completed year of service or part thereof means: full time service of > 6 months is
considered as 1 completed year of service; < 6 months is ignored.

Here, number of days in a month is considered as 26. Therefore, 15 days salary is arrived
as = salary * 15/26

In case of non-government employees not covered under the Payment of Gratuity Act,
1972 Maximum exemption from tax is least of the 3 below:

1. Actual gratuity received;

2. Rs 10,00,000;
3. Half-months average salary for each completed year of service (no part thereof)
Note:

Here, salary = basic + DA + commission (if its a fixed % of sales turnover).

Completed year of service (no part thereof) means: full time service of > 1 year is
considered as 1 completed year of service. < 1 year is ignored.

Average salary =10 months salary (immediately preceding the month of leaving the
job)/10

Illustration
Lets understand the above math clearly with an example:
Varun had been working with an IT company since past 10 years, 7 months. He is retiring on
15th April, 2010. His current Basic = Rs 40,000 pm, DA = Rs 5,000 pm. He is going to receive a
gratuity amount of Rs 3 lakhs on retirement. Note: Varuns basic and DA have been the same
since past 1 year.
Lets consider 2 situations here (a) Varuns employer is covered under Payment of Gratuity
Act, 1972; and (b) Varuns employer is not covered under Payment of Gratuity Act, 1972.

26

 Salary = Basic + DA = Rs 40,000 pm + Rs 5,000 pm = Rs 45,000 pm

Average salary = 10 months salary (immediately proceeding the month of leaving the job)/10
= (Rs 45,000 pm * 10)/10 = Rs 45,000 pm. Therefore, half-months average salary is = Rs
45,000/2
Important points to remember
generally, only government employers give DA to their employees. Above example is only
for illustrative purpose.
The salary of the employee may differ over a period of time on account of change in basic,
DA and/or other factors.
In case gratuity is received from more than one employer during the previous year, maximum
exemption allowed is up to Rs 10, 00,000.
Where employee has already claimed gratuity exemption in any previous year (s), the
maximum exemption amount allowed for the current previous year i.e. Rs 10, 00,000 will be
reduced by the amount of deduction already claimed in the previous years.
In case of an employee who is employed in a seasonal establishment (not employed
throughout the year), the gratuity exemption shall be for seven days wages for each season.

11. Commuted pension under Income Tax Act Tax treatment of

Pension
Financial Year 14-15 (Assessment Year 15-16)
Pension is a retirement benefit. Since this is payable to an employee or to his dependents by
virtue of past employment, this is taxed as salary in the hands of the employee. Tax is deductible
on pension income under section 192 of Income Tax act on payment. However, family pension
received by the dependents of the employee will be taxed under the head income from other
sources as there is no employer employee relationship between the payer and payee. TDS is not
deductible on family pension as it is not covered under section 192 of the Income tax act. The
provisions under Income Tax are enumerated below:12 Leave encashment

LEAVE ENCASHMENT GROUP NO: 1 MEMBERS: Aashima kapil Manish

thakur Anupam aditya Anand singh negi Hargovind sahu Hemlata yadav

LEAVE ENCASHMENTEmployees defined benefit. Employees are entitled to

various types of leave while leaves in each year that he has accumulated. The cash
value of those leave will be they are in service. Under this benefit,employee gets cash
payments for unavailing the allowed deducted from the paymentswhich have been
already availed by the employee. Hence the cash payment availed by the employee in
return of the unavailed leave is known as leave encashment.

Objective of leave encashmentit encourages employees to avail the leave on planned

27

& systematic basis.For employer it favours that his work is done dy his employees in a
smooth manner.For employees, if they dont avail their leave then they are rewarded in
the form of leave encashment.But in case, when employees avail the leave within the
limit of leave allowed to them by their employer, at least they dont get deduction from
their basic salary.

Types of leaves For emergency purposes. No accumulation. Casual leave

Have to avail within the year only. For sickness. Accumulation allowed as Medical
leave per service rules. For general purposes. Carry forward is allowed. Privileged
leave Non-statutory benefit to employee on exit from service.

Employees are classified in to two categories. 2. Non-Government1.

Government employees. Employee. Leave encashment during the Leave encashment
during the service is always taxable. Service is always taxable. Encashment of
accumulated Encashment of accumulated leave at the time of leave at the time of
retirement retirement is fully exempt. is exempt up to some extent . The govt.
employees are not The non-govt. employees are allowed to accumulate leave allowed
to accumulate leave for more than 10 months. per the norms of employer.

LEAVE ENCASHMENTthe unavailed leave has to be calculated on the basis of

max 30 days leave for every completed year of services. But if employer has provided
leave, which is less than 3o days in a p.y, then this calculation shall be based on such
no.of leaves. If any employee retires from more than 1 employer then the exemption for
each employer shall be calculated separately but the total exemption shall not exceed
Rs.3, 00, 00 . Leave salary received by the family members after death of the
employees is fully exempt from tax.

LEAVE ENCASHMENT 10 months last drawn salary of just preceding the date of
retirement is considered as the average salary. Salary considers in the calculation of
unvailed leave is =B.S+COMISSION(fixed %)+D.A* Government employees mean
employees of central govt or state govt. For non govt. employees, least of below 4
values shall be exempt of tax from the accumulated leave encashment. i)actual amount
received. ii) Rs.3, 00,000 iii)10 x avg salary iv) avg salary x unavailed leave/30. Leave
salary paid to legal heirs of a deceased employee is not liable to tax.

Several case study1. Rohits employer has credited him the leave of 40 days per
year..then also the maximum permissible unavailed leave under the IT act,1967
for the 26 yrs of service is _________=26 x 30 = 780.2. If in case, 25 days are credited to
rohit being a non govt employee ..then the permissible unavailed leave will be
_______= 26 x 25 = 650.(as less than 30 days is considered).3. Mr. is an govt employee
& got Rs. 50,000 as leave encashment at the time of retirement. Then______complete
amount will be exempt as Mr. is an govt employee.4. Mr. j gets the same amount as leave
encashment during his continue service then_____his income will be added in the gross
28

total income & will be taxed according to the slab rate in which he falls in to.

Case study 3.Mr.x, non govt employee retired after serving for 16 years & 7 months to
the firm. At retirement he received a sum of Rs.50, 000 as leave encashment for
unavailed leave of 300 days. He was entitled for 40 days leave per year. Basis salary is
Rs.4800 p.m. compute leave encashment exempt from tax? Least of the following is
tax exempt: 1. 50,000 (actual amount received) 2. 3, 00,000 (maximum amount
exempted) 3. 10 x 4800 = 48000 (10 x 10 months average salary) 4. 4800 x 140/30
=22400 (avg salary x unveiled leave /30) How to compute un-availed leave?

How to compute unavailed leave? Calculation of company Tax lawunavailed leave:

Leave allowed 40 days per year 30 days per year Completed years 16 years 16 years
Total leave allowed 16 x 40 =640 days during 16 x 30 =480 days during the whole
service. The whole service. Unavailed leave 300 (given)Availed leave 640300 = 340
340Unavailed leave 300 (given) 480340 = 140

If any queries?

13.Professional Tax
Financial Year 14-15 (Assessment Year 15-16)
Professional Tax also renowned as Tax on Employment is paid to the state
government. It is deducted by the employer from the salary payable to the employee
and such tax is paid to the state government on behalf of the employee. Professional
Tax is levied by the state government under the right given in article 276 of the
Constitution. As it is a part of salary and paid to the State Government, it is allowed
as a deduction while calculating the taxable amount under the head Income from
Salaries. Thus Professional tax on employment is allowed as a deduction under
section 16 (iii) of the Income Tax Act, in the following manner:

14.WHAT IS BASIS OF CHARGE [ Sec. 56]

Financial Year 14-15 (Assessment Year 15-16)

29

The Fifth and residuary head of income is Income from Other Sources. Every income which
does not specifically fall under any of the preceding Four heads of income (viz., Salaries,
Income from House Property, Profit and Gains of Business or Profession, or Capital
Gain) shall be included in this head. Sub-Section (1) of Section 26 covers any income which
does not fall under any other head of income. However, Sub-section (2) of section 56 specifies 8
Incomes which are always taxable under the head Income from other Sources.
General Provisions [ Sec. 56(1) :
The following incomes are generally chargeable under the head Income from Other Sources:
a. income from subletting ;
b. interest on bank deposits and loans ;
c. income from royalty
d. directors fee ;
e. ground rent ;
f. agricultural income from a place outside India ;
g. directors commission for standing as a guarantor to bankers ;
h. directors commission for underwriting shares of new company ;
i. examination fees received by a teacher from a person other than his employer;
j. rent of plot of land ;
k. insurance commission
l. mining rent and royalty ;
m. casual income
n. annuity payable under a will, contract, trust deed ;
o. salaries payable to a Member of Parliament ;
p. interest on securities issued by a foreign Government ;
q. family pension received by family members of a deceased employee ;

30

r. in case of retirement , interest on employees contribution if provident fund is unrecognized.

s. Income from undisclosed sources ;
t. Gratuity paid to a director who is not an employee of the company ;
u. Income from racing establishments ;
v. Compensation received for use of business assets ;
w. Annuity payable to the lender of a trade mark.

General Provisions [ Sec. 56(2 ] :

The following 8 incomes are always taxable under the head Income from Other Sources
1.
Dividend:
if such income is not chargeable to income-tax under the head "Profits
and gains of business of profession.
2.
Winning from Lotteries, etc : it includes any winning from lotteries, crossword puzzle,
races including horse races, card games and other games of any sort or from gambling or betting
of any form or nature whatsoever.
3.

Employees contribution towards staff welfare scheme :

4.
Interest on securities : Interest on Debentures, Government securities / bonds is taxable
under the head Income from other sources
5.
Rental income of machinery, plant or furniture: Rental income from machinery, plant,
or furniture let on hire is taxable as income from other sources.
6.
Rental income of letting out of plant, machinery or furniture along with letting out of
building and the two meetings are not separable.
7.

Sum received under Key man Insurance Policy :

8.
Gift: if any sum of money is received during a previous year without consideration by
an individual or a HUF from any person or persons exceeds Rs. 50,000 the whole of such
amount is taxable in the hands of the recipient as income from other sources.

15.Commutation of income sec29

Financial Year 14-15 (Assessment Year 15-16)
The following income shall be chargeable to income-tax under the head
31

Profits and gains of business or profession, (i) the profits and gains of any
business or profession which was carried on by the assesses at any time
during the previous year;
(ii) Any compensation or other payment due to or received by, (a) Any
person, by whatever name called, managing the whole or substantially the
whole of the affairs of an Indian company, at or in connection with the
termination of his management or the modification of the terms and
conditions relating thereto;
(b) Any person, by whatever name called, managing the whole or
substantially the whole of the affairs in India of any other company, at or in
connection with the termination of his office or the modification of the terms
and conditions relating thereto;
(c) Any person, by whatever name called, holding an agency in India for any
part of the activities relating to the business of any other person, at or in
connection with the termination of the agency or the modification of the
terms and conditions relating thereto;
(d) Any person, for or in connection with the vesting in the Government, or
in any corporation owned or controlled by the Government, under any law for
the time being in force, of the management of any property or business;
(iii) Income derived by a trade, professional or similar association from
specific services performed for its members;
(iiia) Profits on sale of a license granted under the Imports (Control) Order,
1955, made under the Imports and Exports (Control) Act, 1947 (18 of 1947);
(iiib) Cash assistance (by whatever name called) received or receivable by
any person against exports under any scheme of the Government of India;
(iiic) Any duty of customs or excise re-paid or re-payable as drawback to any
person against exports under the Customs and Central Excise Duties
Drawback Rules, 1971;
(iv) The value of any benefit or perquisite, whether convertible into money
or not, arising from business or the exercise of a profession;
(v) Any interest, salary, bonus, commission or remuneration, by whatever
name called, due to, or received by, a partner of a firm from such firm:
Provided that where any interest, salary, bonus, commission or
remuneration, by whatever name called, or any part thereof has not been
allowed to be deducted under clause
32

(b) Of section 40, the income under this clause shall be adjusted to the
extent of the amount not so allowed to be deducted;
(vi) Any sum received under a Key man insurance policy including the sum
allocated by way of bonus on such policy.
Explanation: For the purposes of this clause, the expression Key man
insurance policy shall have the meaning assigned to it in clause (10D) of
section 10.
Explanation 1 : Where speculative transactions carried on by an assesses are
of such a nature as to constitute a business, the business (hereinafter
referred to as speculation business) shall be deemed to be distinct and
separate from any other business.

16.General expendtureus37 (1)

Financial Year 14-15 (Assessment Year 15-16)
Expenditure Expenditure means something which is gone irretrievably - Expenditure is what is paid out or
away and is something which is gone irretrievably - Indian Molasses Co. (P.) Ltd. v. CIT
[1959]37ITR 66 (SC).
Expenditure need not involve actual parting with money or property - A mere liability to satisfy
an obligation by an assesses is undoubtedly not expenditure; it is only when he satisfies the
obligation by delivery of cash or property or by settlement of accounts that there is expenditure.
But expenditure does not necessarily involve actual delivery of or parting with money or
property. A mere forbearance to realize a claim is not expenditure - CIT v. Neonatal Bank Ltd.
[1966] 62 ITR 638 (SC).
Liabilities
Provision for actuarial valued liabilities is allowable - If an amount is set apart for discharge of a
liability on actuarial valuation that has to be allowed as deduction - CIT v. Electric Lamp Mfrs.
(India) (P.) Ltd [1987] 165 ITR 115 (Cal.).
Liabilities can be spread over a period of years, where found necessary - The facts may justify
an assesses who has incurred expenditure in a particular year to spread and claim it over a period
of ensuing years. Issuing debentures at a discount is one such instance, where although the
assessee has incurred the liability to pay the discount in the year of issue of debentures, the
payment is to secure a benefit over number of years. There is a continuing benefit to the business
of the company over the entire period. The liability should, therefore, be spread over the period
of the debentures - Madras Industrial Investment Corpn. Ltd. v. CIT [1997] 91 Taxman 340/225
33

ITR 802 (SC).

Difficulty in estimation of value cannot convert accrued liability into conditional one - The
difficulty in the estimation thereof would not convert an accrued liability into a conditional one Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC).
Accrued but undercharged liability must be allowed under mercantile system - In the case of an
assesses maintaining his accounts on mercantile system, a liability already accrued, though to be
discharged at a future date, would be a proper deduction while working out the profits and gains
of his business, regard being had to the accepted principles of commercial practice and
accountancy. It is not as if such deduction is permissible only in case of amounts actually
expended or paid. Just as actual receipts as well as those accrued due are brought in for incometax assessment, so also liabilities accrued due would be taken into account while working out the
profits and gains of the business - Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR
53 (SC).
Liability of earlier year cannot be ignored straightaway - If any liability, though relating to the
earlier year, depends upon making a demand and its acceptance by the assesses and such liability
has been actually claimed and paid in the later previous years, it cannot be disallowed as
deduction merely on the basis of the accounts are maintained on mercantile basis and that it
related to a transaction of the earlier year - Saurashtra Cement & Chemical Industries Ltd. v.
CIT [1995] 80 Taxman 61/213 ITR 523 (Guj.).
Disputed liabilities are allowable in year of adjudication/settlement - Where a liability arising
out of a contractual obligation is disputed, the assesses is entitled, in the assessment year relevant
to the previous year in which the dispute is finally adjudicated upon or settled, to claim a
deduction in that behalf - CIT v. Phalton Sugar Works Ltd. [1986] 162 ITR 622 (Bom .).
Statutory liabilities can be claimed at any stage of proceedings - A statutory liability of an
assesses, following the mercantile system, is allowable in the year in which it arises
notwithstanding the fact that it is disputed by the assesses and no entries are made in the books
of account. The mere fact that such a deduction was not claimed before the ITO is not of much

15Capital Gain
BASIS OF CHARGE
Financial Year 14-15 (Assessment Year 15-16)
Any gain arising from the transfer of a capital asset during a previous year is chargeable to tax
under the head Capital Gain in the immediately following assessment year, if it is not eligible
for exemption under Sec. 54, 54B, 54D, 54EC, 54G, and 54 GA.
Capital Gain (u/s 48) means any profit or gain arising from the Sale / Transfer of a Capital
34

Asset.
Capital Asset means property of any kind held by an assesses. However, it does not include :
1. Stock, Stores, Raw Materials held in business
2. Gold Bonds
3. Rural Agricultural Land
4. Personal effect like Furniture, Motor Car, A/C, Refrigerator etc.
Jewellery held for personal use is treated as Capital Asset. Jewellery includes ornaments
made of Gold, Silver, Platinum or any other Precious Metal / Stone.
Capital Assets are of two types :
1. Long - Term Capital Assets
2. Short - Term Capital Assets
The nature of the Asset and the period of holding determine whether it is a Long-Term Asset or a
Short-Term one as given below :

LONG TERM
Capital Asset

Nature of Asset

SHORT TERM
Capital Asset

Shares of a Company, Units of When held for MORE than 12 When held for LESS than 12
UTI/ Mutual Fund
months
months

All other Assets

(other than above)

When held for MORE than 36 When held for LESS than 36
months
months

In other words, capital gains tax liability arises only when the following conditions are satisfied

Condition 1

There should be a capital asset

35

Condition 2

The Capital Asset is transferred by the assesses.

Condition 3

Such transfer takes place during the previous year

Condition 4

Any profit or gains arises as a result of transfer

Condition 5

Such profit or gains is not exempt from tax under section 54, 54B, 54D,
54EC, 54G, and 54 GA.

However, the following points should be considered : --1. In some cases Capital Gain is taxable in a year other than the year in which the capital
asset is transferred.
2. Income cases Capital Gain arises even if there is no Transfer or Capital Assets.

16.Definition of transfer
Under Section 2(47) of The Income Tax Act, 1961 transfer of capital assets is defined as:

Sale, exchange and relinquishment of assets

Extinguishment of any rights in capital assets

Acquisition of capital assets or rights

Conversion of capital asset by its owner as stock in trade of his business, it may also be a
term of transfer

Transfer of immovable property under Section 53A of Transfer of Property Act, 1882

Any transaction by which an assesses become enable to act as a member of cooperative

society

Any transaction by which an assessee acquire shares in cooperative society

36

18.Short Term Capital Gains

Financial Year 14-15 (Assessment Year 15-16)
Short Term Capital Gains is computed as below:
STCG=Full value of consideration - (Cost of acquisition + cost of improvement + cost of
transfer)
The following example illustrates the difference between STCG and LTCG.
'X' a resident individual sells a residential house on 12.4.09 for Rs. 25, 00,000/-. The house was
purchased by him on 5.7.2007 for Rs. 5, 00,000/- and he had spent Rs.1, 00,000/-on
improvement during May 2005. During the previous year 2010- 2011 his income under all other
heads (other than capital gains) was NIL
Since 'X' has held the capital asset for less than 36 months, (5.7.2006 to 12.4.2009) it is a short
term capital asset for him and its transfer gives rise to short term capital gains.

STCG on sale of house=25,00,000 - 5,00,000 - 1,00,000=19,00,000

Income under "Capital Gains"=19,00,000

Income under the heads other than Capital Gains=Nil

Income under "Capital Gains"=19,00,000

Gross Total Income=19,00,000

Total Income=19,00,000

Tax on total income=4,24,000

In case 'X' sells the same house on 12.3.2011 for the same consideration, the residential house
becomes a long term capital asset as the period of holding would be more than 36 months
(5.7.2007 to 12.3.2011) and its transfer gives rise to long term capital gains.

Sale consideration=25,00,000

Indexed cost of acquisition: 5,00,000 x 551/480=5,73,958

Add: Indexed cost of improvement: 1,00,000 x 551/497=1,10,865

Indexed cost of acquisition + Indexed cost of improvement=6,84,823

37

Income under the head "Capital Gains"=18,15,177

Income under the heads other than Capital Gains=Nil

Income under the head "Capital Gains"=18,15,177

Gross total income=18,15,177

TOTAL INCOME (rounded off)=18,15,180

Tax thereon:

Tax on income other than LTCG=Nil

Tax on LTCG @ 20% of (18,15,180-1,10,000)=3,43,036

*minimum slab for that assessment year

Total tax payable=3,43,036

18.Deemed cost of execution

Financial Year 14-15 (Assessment Year 15-16)

The deemed income will be computed on the basis of the stamp duty
value assessed or assessable in case of the immovable property and
on the basis of Fair Market Value (FMV) as on the date of receipt in case
of other specified assets. It covers in its ambit the purchase or receipt
of immovable property as also other specified movable assets at an
inadequate consideration.

Where an individual or HUF receives any immovable property resulting

in benefit exceeding Rs.50, 000 in a year, it would be chargeable to tax
as income. The value assessed or assessable by the stamp duty
valuation authority will be considered for the purposes of determining
value of such immovable property. Immovable property for this
purpose would mean land or building or both.

As per the wordings of the section all transactions of purchase of

immovable as well as specified properties would be covered under the
section and, therefore, the provision would authorize the A.O. to raise
issue in respect of every transaction of purchase of the specified
property.
38

19.Deduction Under Section .80 C

Financial Year 14-15 (Assessment Year 15-16)

Section 80C has been inserted from the assessment year 2006-2007 onwards. Section 80C
provides deduction i8n respect of specified qualifying amounts paid deposited by the assessee in
the previous year.
The following are the main provisions of the newly inserted Section 80C. :
1. Under Section 80 C, deduction would be available from Gross Total Income.
2. Deduction under section 80C is available only to individual or HUF.
3. Deduction is available on the basis of specified qualifying investments / contributions /
deposits / payments made
00000000000000000000000000000000000000000000000000000000000000000000000
0000000000000by the taxpayer during the previous year.
4. The maximum amount deduction under section 80 C , 80CCC, and 80CCD cannot
exceed Rs.1 lake.
The Deduction is calculated as per the following steps
Step-1: Gross qualifying Amount which is the aggregate of the following
1. Life Insurance Premium
2. Payment in respect of non-commutable deferred annuity.
3. Any sum deducted from salary payable to Govt. employee for the purpose of
securing him a deferred annuity.
4. Contribution towards Statutory Provident Fund and Recognized Provident Fund.
5. Contribution towards 15-year Public Provident Fund
6. Contribution towards an Approved Superannuation Fund.
7. Subscription to National Saving Certificates, VIII Issue.
8. Contribution for participating in the Unit-linked Insurance Plan (ULIP) of UTI.
9. Contribution for participating in the Unit-linked Insurance Plan (ULIP) of LIC
39

Mutual Fund.
10. Payment to notified annuity plan of LIC
11. Subscription towards notified Units of Mutual Fund or UTI.
12. Contribution to notified Pension Fund set up by Mutual Fund or UTI.
13. Any sum paid as subscription to Home Loan Account Scheme of the National
Housing Bank.
14. Any sum paid as Tuition Fees for full time education of any 2 children of an
individual.
15. Any payment towards the cost of purchase / construction of a residential Property.
16. Amount invested in approved Debenture of, and equity shares in, public company
engaged in infrastructure.
17. Amount deposited in as Term Deposit for a period of 5 years or more in
accordance with a scheme framed by the Government.
18. Subscription to any notified Bonds of National Bank for Agriculture and Rural
Development ( NABARD)
19. Amount deposited under Senior Citizens Saving Scheme.
20. Amount deposited in 5 Year Time Deposit in Post Office.
Step-2 : Net Qualifying Amount :
Deduction u/s 80C is available on the basis of Net Qualifying Amount which is determined as
under
1. Gross Qualifying Amount ; or
2. Rs. 1, 00, 00
which ever is LESS.
Step-3 : Amount of Deduction :
Amount Deduction u/s 80C is computed as under :
1. Net Qualifying Amount ; or

40

2. Rs. 1,00,000
Whichever is LESS?

20.
Sec.80D
Financial Year 13-14 (Assessment Year 14-15)
If you pay Medical Insurance Premium, you will get deduction under this
section. For the purpose, insurance policy may be in the name of spouse,
children or dependent parents. Overall limit is Rs. 15,000/-, but the limit is
increased to Rs. 20,000/-, if either of the parents is a senior citizen.
But care should be taken that the premium should not be paid in Cash; it must
be either by cheque or bank draft.
Sec 80DD
If you have incurred any expenditure, on medical treatment of a disabled
dependent or paid for the premium of Insurance Policy for the same person,
you will get a deduction of Rs. 50,000/-. The deduction will be extended to Rs.
75,000/\, if the disability is severe. For the purpose, a medical certificate
(about disability) by medical authority along with return of income should be
furnished.

21.
Sec.80U

Financial Year 14-15 (Assessment Year 15-16)

If you are disabled & certified by medical authority to be a person with
disability, you will be allowed a deduction of Rs. 50,000/-. If the disability is
severe, the limit is extended to Rs. 75,000/Sections applicable to NRI

22.Sec.8
0E
If you have taken any loan for your Higher Education, interest portion paid is
deductible under this section. The deduction is available for eight years or full
repayment of loan whichever is earlier. Higher education means full time
graduate or post graduate courses.

41

23.Income Tax Slab & Deductions FY 2015-16.

Proposed Tax Slab* for Financial Year 14-15 (Assessment Year 1516).

For Men below 60

years of age
Income Level

For Senior Citizens (Age 60 years

or more but less than 80 years)

Tax
Income Level
Rate
Nil
Upto Rs. 2,50,000

Rs. 2,00,000
Rs. 2,00,001 - Rs.
10%
500,000
Rs. 500,001 - Rs.
20%
10,00,000
Above Rs.
30%
10,00,000

Rs. 2,50,001 - Rs. 500,000

Tax Rate Income Level

Nil
10%

Rs. 500,001 - Rs. 10,00,000 20%

Above Rs. 10,00,000

For Senior
Citizens (Age 80
years or more)
Upto Rs. 5,00,000
Rs. 5,00,001 - Rs.
10,00,000
Above Rs. 10,00,000

30%

Income Tax Deductions and Exemptions

Income
Gross
How Much Tax Can You
Tax
Annual
Save?
Section
Salary
Sec. 80C Across all Upto Rs. 30,900/- saved on
42

HDFC Standard Life Plans

All our Life Insurance Plans

income
investment of Rs. 1,00,000/slabs
Across all
Sec.
Upto Rs. 30,900/- saved on
income
80CCC
Investment of Rs.1,00,000/slabs
Upto Rs. 10,815/- saved on
investment of Rs.35,000/Across all
(Inclusive of Rs. 20,000/Sec. 80 D* income
towards health insurance of
slabs
parents who are senior
citizens)
Rs. 41,715/Total
Savings
Possible **

All our Pension Plans

All our Health Insurance

Plans
All the health insurance
riders available with our
Conventional Plans

Rs. 30,900/- under Sec. 80C and Sec. 80CCC and

Rs. 10,815/- under Sec. 80D
Above figures calculated for a male with gross annual income
exceeding Rs. 10,00,000/Sec. 10
Under Sec. 10(10D), the benefits received by you are completely tax(10)D
free, subject to conditions specified there in
Applicable to premiums paid for all Health Insurance Plans, Critical Illness
Benefit, Accelerated Sum Assured and Waiver of Premium Benefit.
** These calculations are illustrative and based on our understanding of
current tax legislations.
The above-mentioned tax benefits are subject to changes in the tax laws.
Please contact your tax consultant for an exact calculation of your tax
liabilities.
* Calculations are based on highest tax benefits.

Note: These tax calculations are based on present tax legislations, which are
subject to change.
The aggregate deductions from income under Sections 80C, 80CCC and
80CCD (applicable in case of central government employees only) should not
exceed Rs 1 lakh.

BIOBLOGRAPHY

*www.direct tax.com.in

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