Income Tax Law of India

INCOME TAX LAW OF INDIA
by :
DR. T.K. JAIN
AFTERSCHO☺OL
centre for social entrepreneurship
sivakamu veterinary hospital road
bikaner 334001 rajasthan, india
FOR – PGPSE PARTICIPANTS
mobile : 91+9414430763
5 DECEMBER 09 www.afterschool.tk 1
My words ....
Ours is a great country with immense entrepreneurial potential.
However, our legal system and taxation system is so cumbersome
that our creativity and talent is wasted / unnecessarily diverted in
these sectors. I wish that these are simplified so that an ordinary
entrepreneur can understand these without help from any expert. I
wish that more people should become entrepreneurs, rather than
becoming an expert in avoiding taxation. Let us wish that some
likeminded person is able to reach policy making level and is able to
change these. I have tried to simplify Indian legal system and
taxation system for Indian entrepreneurs – but it is so complicated
that even if you simplify it, it will remain complicated. An ordinary
Indian entrepreneur wishes to remain an honest entrepreneur and
contribute to the development of nation, but our systems and
processes force him to adopt unfair means ..
For whom ? ? ?
Primarily for those who have basic

understanding of accounting, bookkeeping,
Indian legal system, and Income tax Act. We
believe that this document will help our future
entrepreeurs (PGPSE participants) to gain
basic understanding of Income tax law in India.
Links for basic understanding
http://www.scribd.com/doc/11629358/Income-Tax-L
http://www.scribd.com/doc/24555340/Basics-of-Ac
http://www.scribd.com/doc/11629083/Factories-Act
http://www.scribd.com/doc/11629283/Funds-Flow-S
http://www.scribd.com/doc/11953668/The-Employe
WHO IS A PERSON ?
Sec. 2 (31) : person includes individual, HUF,

local authority, firm, company, artificial person
etc.
For determining the tax liability, we have to
see its location / residential status
Who is assessee?
Sec. 2(7) : a person by whom any tax is

payable
What is year?
Assessment year as per sec. 2(9) : the year in

which inome is being assessed for tax – it is of
12 months.
Previous year as per sec. 3 : the year for which
inome is being assessed for tax – it is the year
just before assessment year.
What is income ?
Sec. 2(24) : any profit, dividend, salary, profit

in lieu of salary, perquisites, benefits,
voluntary contributions received by trusts, cash
benefits under various provisions of sec 28,
capital gain etc. (it is a very wide definition
and includes income from all the sources
including income from lottery, speculative
business etc. )
Income heads
There are 5 heads of income :

salary
house property
capital gain
business and profession
other income
Residential status of individual
There 3 possibilities :
resident and ordinary resident
resident and not ordinary resident
non-resident
2 basic Conditions for Residents
1. at least 182 days of stay in India during

previous year
OR
2. at least 60 days of stay in India during
previous year + 365 days of stay in 4 years
preceeding the previous year
2 additional conditions for
ordinary residents
1. resident in at least 2 out of previous 10 years

AND
2. stay of at least 730 days during last 7 years
before the previous year.
HOW TO DETERMINE
RESIDENTIAL STATUS OF
ARTIFICIAL PERSONS
For companies and other artificial persons, you

have to see where their management and
control is located. Residential status depends
on their management and control at the time of
income .
What is taxable out of the
following :
1. income acrued and received in India :
taxable for all
2. income earned and received out of India :
taxable only incase of ROR (resident and
ordinary resident)
3. Income acrued / received out of India from
a business controlled in India : not taxable for
NR only
Vivek has been in India as under :
2001 : 20 days
2002: 30 days
2003 : 40 days
2004 : 50 days and so on till 2009.
answer : he is a resident because he remained
for 100 days during 2009 and for >365 days
during past 4 years, but he will not be ROR as
he stayed for less than 730 days in 7 years.
Rohit has been in India as under :
2009 : 20 days
2008: 30 days
2007 : 40 days
2006 : 50 days and so on .
answer : he is a non-resident because he
remained for only 20 days during 2009
Special circumstances regarding
basic conditions
If an individual leaves India for employment or

as a member of crew - then instead of 60 we
have to take 182 days.
A person of Indian origin settled abroad and
comes to India for a visit only – in that case
also take 182 days instead of 60 days.
Rohit's friend Jenifer is from
Indian origin. She comes to visit
India from 1 March to 31 October,
determine her residential status
From 1/3 to 31/10 – we have : 245 days, thus

she is resident but not ordinary resident
Which of these are taxable ?
1. amount received under keyman insurance

policy and under Sec. 80 DD
2. Bonus received from notified govt.
Securities
3. educational scholarship
4. daily allowance received by MP
Solution
None is taxable
the are tax free under sec. 10D, 10(15), 10(16),
10(17) respectively
Vivek opens a trade union and has
lots of earning in that union. Is the
income taxable ?
No – it is tax free as per sec. 10(24)
Vivek sets up a new business on
May 15, 2008.What is the
previous year for the assessment
year 2009-10.
The previous year will be 15 May 2008 to 31

March 2009
What are included in salary ?
Salary include all pay, allowances, bonus,

perquisites (facilities provided to employees,
which can be evaluated in money),
commission, etc. By what ever name called. In
salary head, we add the following to salary :
employer's contribution to PF, taxable
perquisites under sec. 17(2) , ESOPs, DA,
other allowances
What is taxable HRA?
HRA is exempt to the extent of the least of the

following :
1.Rent paid - 10% of salary
(basic+DA+commission)
2. 40% salary (50% in case of 4 Metros)
3. Actual allowance received
Is PF taxable ?
There are 3 types of PF : 1. statutory (govt.) 2.
recognised 3. unrecognised
statutory PF is fully exempt
employer's contribution in recognised PF is tax
free to the extent of 12%, rest are exempt.
Unrecognised PF is taxed only when the
employee collects payment (employee's
contribution is exempt, but interest is taken in
income from other sources)
Superannuation fund
Tax free under sec. 10(13)
Ravi works in a non-govt. Office. He retires
on 31 March after 15 years of service . His
salary in Jan – March was 24000 pm, but
before that it was 20000 pm. He gets Rs. 2
lakhs as leave encashment. How much is
taxfree?
1. average for 10 months : (24*3 + 20*7) = 21,200 for 10
months : 212000
2. for 1month for each year of service 15*21200= 318000
3. Rs. 3 lakhs.
4. actual amount 2 lakh
So the least of above Rs. 2 lakhs is taxfree.
Arun joined on 1/1/85, but fixation was done
on 1/7/06 @ 26600 in payscale of 25000-
800-33000. He retires on 1/12/6. He was paid
3.3 lakhs as gratuity. Determine taxability.
Average for 10 months : (5 * 25800 + 5*26600)/10 =26200
The least of following is taxfree :
1. 15/26* 22*26200 = 332538
2. Rs. 3.5 lakhs
3. actual amount : 3.3 lakhs
thus Rs. 3.3 is taxfree
(if gratuity act was not applicable – the 1st amount will be
1/2*21*26200 =275100, which will be taxfree – here we will take 21
years, as only completed years will be counted.)
Retrenchment compensation
It is paid at the time of retrenchment (leaving

the employee) following is tax free (least of
the following ) :
1. 5 lakhs
2. 15 days's wages for number of years worked
(round of to greater amount, if more than 6
months. )
V.R.S. PAYMENTS
LEAST OF THE FOLLOWING IS EXEMPT :

1. 5 LAKHS
2. Last salary * 3 * number of completed years
of service
(sec. 10(10c)
Earned Leave
As usual free for govt. Employees
for others least of the following :
1. 3 lakhs
2. 10 month's salary
3. :
\30 days credit for each year of service (salary
= average for the last 10 month – salary =
salary+DA+commission)
Pension
Uncommuted : monthly payments – it is
taxable for all
commuted : - lump sum payment
As usual free for govt. Employees
for others : commuted pension is taxfree to the
following levels :
rd
1/3 if gratuity is paid
½ if gratuity is not paid
Gratuity ?
It is a lumpsum payment at the time of

retirement and it is taxfree for govt. Employee.
For others it is taxfree to the least of the
following :
1. 3.5 lakhs (this has increase now, checkout)
2. 15/26 for each year of service
How to value furnished
accommodation ?
If it is owned by employer, - 10% of cost of

furnishing
if it is hired – the actual expenses paid by
employer as rental charges
How to value domestic servant
facility :?
If the employer has provided domestic servant

facility to employee, the actual amount spent
by employer is perquisite of employee.
How to value educational
facility ?
Actual money spent by employer is taken as

perquisite – when the employer is providing
education to the children of the employees. If
the educational instituiton is being managed by
employer, then it is taken as NIL (provided the
expenditure by employer is upto Rs. 1000 per
month per child ).
Interest free loans
When employer provides interest free loan –

the perquisite is taken at specified rates. If it is
concessional rate – the difference of rates is
taken as perquisite.
The rates are : personal loan : 12.75%, car
loan 7.5%, housing loan : 8% (these rates are
regularly updated – you have to know the latest
slabs).
Medical facility
Annaul reimbursement of medical bills upto

Rs. 15000 is tax free.
Free medical facility in employer's hospital is
tax free.
Treatment abroad for employee / his family is
taxfree upto Rs. 2 lakhs. (these limits are
revised by govt, so check the latest limits).
Free lunch ?
It is taxfree – provided the value of lunch is not

more than Rs. 50
similarly tea, refreshments etc. Provided free to
employee are tax free.
Money spent by employer on training of
employee is also tax free.
Professional tax ? ?
Money spent by employer as professional tax

is once added and then its deduction can be
claimed. So once add it as perquisite and then
claimits deduction under sec. 16 (iii)
Who is specified employee?
Who is director
or who has 20% voting power in company
or who gets salary (including perquisites ) of
Rs. 50000 or more per annum.
Car, gas, and other facilities are taxable only
on Specified Employees.
Deduction for : Entertainment
allowance (sec. 16(ii)
It is exempt for govt. Employees to the least of

following :
1. 5000
2. 1/5th of salary
3. actual allowance
Rohit opens a venture capital fund
to promote entrepreneurs and has
lots of earning in that fund. Is the
income taxable ?
No (sec. 10(23fb)
Gautam sets up a unit in Noida
export processing zone. Is the
income taxable?
No (sec. 10A )
Vivek launches a mutual fund and
get it registered with RBI and
AMFI. Is the income of mutual
fund taxable ?
No (sec. 10 (23D)
Bothra and Surana Carpets is a
100% export oriented unit. Is the
income taxable ?
No (subject to some conditions) Sec. 10 B
Rohit launches Bachao Political
Party and earns huge money by
way of donations from people and
by renting out office premises. Is
the income taxable ?
No (sec. 13A)
What is agriculture income?
As per sec. 2(1a) : any income from land used

for agriculture purpose including income from
farm house.
Calculate total income of a person including
agriculture income and then reduce the amount
of tax by the amount of tax which is worked
out only on agriculture income.
Example : Rohit's income from
agriculture is 2 lakhs and other
income is 360000, what is his tax
liability?
First add these : = 560000
Suppose Tax on this amount is Rs. 10000
now calculate tax on only agriculture income ( 2 lakh +
1,60,000 – as minimum base tax free income) : suppose
tax on this is Rs. 6000
so Rohit will have to pay : 10000-6000 = 4000
so Agriculture income is the best means to avoid tax.
Ashok retires from government
service. He gets following :
Gratuity
Pension
VRS compensation
HRA
Super annuation fund
LTC
which of these are taxable ?
Solution
All these are tax free subject to some

limitations – read sec. 105, 10(10), 10(10A,
and 10AA, 13A) for details.
What is a gratuity ?
When an employee retires, he receives gratuity from

his employer. If he has worked for minimum 5 years,
he may get gratuity. The amount of gratuity is exempt
to the least of the following :
1. Rs. 350000
2. 15/26 * number of years worked
3. actual gratuity
for government employee the gratuity is tax free.
What is Payment of Gratuity Act
1972
It is the main law regarding payment of

gratuity. If an employee is not working in govt.
Department, then payment of gratuity should
be as per this act. However, in some cases this
law is not applicable and in that case – the
calculation of tax free gratuity is little bit
different (instead of 15/26, we have to take half
month salary).
For the assessment year 2007-8, Vivek has
agriculture income of Rs. 58000 and non-agriculture
income of 120000 what is his tax liability?
First calculate income tax on (120+58) = 178000

first 1 lakhs = free
next 50000 = 10% so 5000, 28000 * 20% 5600
now calculate on 58000
add 1 lakh, (free limit) : 158000
tax on 50000= 5000, 20% on 8000 = 1600
net tax liability : (5000+5600-5000-1600)= 4000 answer
While retiring Man Mohan gets Rs. 4 lakhs as
earned leave. He worked for 25 years. His average
salary during last 10 month = 20000.
Tax free (sec. 10(10AA) : least of the

following :
1. 20000*10 = 2 lakhs (10 months)
2. 3 lakhs
3. 30 days for each year worked : 25*20000 =
5 lakh
the minimum is 2 lakh, so it will be taxfree.
Sharukh Khan retired from SBI on VRS. He got
Rs. 10 lakhs. His salary = 20000, DA = 20000. He
worked for 20 years with SBI He had 20 more years
of service left.
Min. Of the following is taxfree (sec. 10(10c))

1. 3months for number of years : 20*3*40 =
2400000
2. 5 lakhs
3. No. Of month's salary : 20 * 40000 = 8 lakh
4. actual amount = 10 lakh
thus only 5 lakh will be taxfree.
Nandan Nilekani gets HRA of 2 lakhs per month in
Delhi, his monthly salary is Rs. 20 lakhs. He pays Rs.
1 lakh as monthly house rent. Find taxability?
Least of the following is taxfree : (sec.

10(13A) rule 2A)
1. rent paid – 10% salary = 1 – 2 lakh = zero
2. 50% of salary = 10 Lakhs * 12
3. actual allowance : 2 Lakhs per month.
So Zero is tax free – all is taxable.
Income from House Property
Calculate the following in the same sequence :
1. Actual rent / receivable rent (A)
2. Municipal value (b)
3. fair rent (c)
4. standard rent (d),
compare b with c and take higher amount and let us call it E.
Now compare E with D, take the lower amount. This is
ERR (expected reasonable rent). Let us call it F. Compare it
with actual rent, take higher amount. Deduct municipal tax,
get gross annual value, deduct interest paid and other
deduction, get net annual value.
Municipal value 40, fair rent 40,
standard rent 40, rent received 80,
what is gross annual value.
Higher of municipal value and fair rent = 40
lower of standard rent and 40 = 40
compare 40 with actual rent and take higher =
80
this is the answer.
MV = 96, FR = 80, SR = 82, AR
= 79, WHAT IS GROSS VALUE
Higher of MV & FR = 96
Lower of this and SR = 82,
higher of this and AR = 82
answer = 82 answer
MV = 96, FR = 98, SR = 97, AR
= 97.5, WHAT IS GROSS
VALUE
Higher of MV & FR = 98, lower of this and SR

= 97, higher of this and AR = 97.5 answer
MV = 84, FR = 80, SR = 60, AR
= 79, WHAT IS GROSS VALUE
Higher of MV and FR = 84
lower of this and SR = 60
higher of this and AR = 79 answer
What are the deductions from
Gross value in house property?
First of all deduct municipal taxes, to find

NAV.
Then deduct statutory deduction @30%
interest on borrowed capital. Interest on prior
period (period before construction of property)
is also allowed in 5 instalments.
These deductions are given in sec. 24. (a & b)
Inadmissible deductions
Following deductions are not permitted :

1. unrealised rent – realised later. Suppose you
didnt realise rent of Rs. 5000 in year 2000,
now you realise it, this amount will be added
back this year in house income. (because it was
allowed as deduction earlier).
2.
Amitabh has 2 houses, one is SOH and the other is
rented. He gets Rs. 20000 p.m. As rent. MV = 2 lak,
FR =3 SR=4 municipal tax = 10000, He got AR for
10 months, interest paid : 50000, total
preconstruction interest Rs. 4 lakh.
Higher of MV & FR = 3, compare this with SR = 3, compare
with AR = 3
Less municipal tax = 10000
Annual value = 2,90,000
less statutory deduction (24a) 87000
interest deduction (24b) 50000+80000 =1.3
(this is allowed upto Rs. 1.5 lakhs)
net value = 73000 answer
Can housing income have
negative value ?
Yes, because exemption in interest is granted.

Suppose your House income is 20000, but
interest deduction allowed (sec. 24) is Rs.
40000, so it will be negative .
But it cant be negative due to statutory
deduction or deduction due to repairs of house
property.
BJP gives its building on rent.
Can congress ask BJP to give tax
on housing income?
No – it is exampt
for political parties, it is tax free.
Can an assessee claim rebate for
repairs, colouring of building?
No = Sec. 24 provides for rebates. This is an

exhaustive list – only two rebates are permitted
: 1. standard deduction (30%) 2. Interest for
loans
No other rebate is allowed – however, if the
government allows other rebate – it will be
permitted.
Rohit has 3 identical buildings. 1. for residence 2. for business 3. for
rent (residential). Total fair rent 60000, total rent received Rs.
30000Total municipal tax 18000 – but only 9000 paid. Total interest
on housing loan : 6000
FR = 20000 (only for let out building)

AR = 30000
higher of FR & AR = 30000
less municipal tax = 3000
less sec 24 ded. 8100
interest = 2000
net = 16900 answer
Income from business and
profession
4 conditions :
1. business must be carried out by assesee
2. business must be carried out during previous
year
3. profit has to be calculated as per accounting
system (mercantile or cash)
4. all the profits from all the units to be
combined to arrive at income from business
What is business ?
Very wide meaning – includes all professions,

trade, manufacture, services, vocation etc.
Is illegal business taxable here?
Yes - in the same way as a legal business
If business is not carried out in the
previous year then ....
It is essential condition that business should be

carried out during previous year – even if for 1
day.
Some exceptions are like : recovery of old bad
debts. Etc.
Which is not allowed
expenditure / deduction ?
Capital expenditure
payments out of India / consultancy fees /
interest / commission etc. – which has been
made without making TDS
expenditure not related to business
cash payments above Rs. 20000 (other than
banks and specified govt institutions)
read sec. 40 A and 43 B for details
You have to pay Rs. 5000 as
excise duty, but you have not yet
paid it, can you claim deduction?
No – for such expenses (govt. Dues etc. ) only

after payment you can claim it (even if you are
following mercantile system – based on
accruel)
You have paid Rs. 50 lakh for
buying a patent, can it be claimed
as deduction?
No – it is capital expenditure
you can claim depreciation on this.
You purchased a Van of Rs 3
lakhs to promote family welfare
of employees, is it allowed as
deduction?
It is again capital expenditure

as per sec. 36(1)ix) – it is allowed in 5
instalments – so 60000 each year is allowed
In order to pay income tax you
take loan and pay interest of Rs.
1000, is it allowed as deduction?
No
You spend Rs. 3000 for issue of
debentures, is it allowed ?
Yes – it is related to business
You spend Rs. 4 lakh as VRS
compensation to director, is it
allowed?
Yes - it is related to business

however as per sec. 35DD, it is allowed in 5
equal instalments
You sold out your import licence
in market, is this a income under
business ?
Yes
You take a building on rent and
for that pay stamp duty and
registration charges, is it allowed?
Yes - it is related to business
You pay huge amount of money
as entertainment expenditure and
travel expenditure – is it allowed?
Yes – if it is for business

there is no limit
You receive Rs. 3 lakhs as duty
drawback – when you export, is it
taxable ?
Yes – it is revenue receipt as per Income tax

act.
A manager died. The company
received Rs. 5 lakh under keyman
insurance policy. Is it a revenue of
company?
Yes – it is treated as revenue.
You spend Rs. 2 lakhs to defend a
case relating to protection of your
trademark. Is it allowed?
Yes
A cashier embezzles Rs. 5 lakhs.
Is it allowed as deduction?
Yes – it is a business related loss
A CA firm pays Rs. 40000 as
professional tax. Is it allowed as
deduction?
Yes
You make a provision of Rs. 5
lakh for gratuity payment (it is
non-recognised gratuity fund)
No – it will not be allowed as deduction
You pay Diwali bonus to
employees, is it allowed?
Yes
You pay bonus as per payment of
bonus act, is it allowed?
Yes
You give Rs. 5 lakhs as
advertisement for pamplets
published by a political party. Is it
allowed?
No
but if you give your own advertisements, it is
allowed without limit.
Your company maintains a guest
house for VIPs. The expenditure
of Rs. 5 lakhs have been made. Is
it allowed?
Yes – without limit.
You make cash payment of 7
lakhs – in a village – where there
is no bank. Is it allowed?
Generally cash payments above Rs. 20000 are

not allowed. But exceptions are provided – as
per rule 6DD, cash payment is allowed if there
is no bank in that place or banks are closed due
to strikes etc.
You pay Rs. 3 lakhs for breach of
contract. Is it allowed ?
No if it is related to capital assets / building

etc.
If it is related to goods that you buy or day to
day business, it is allowed
You pay Rs. 4000 for legal fees
when you dismiss a worker, is it
allowed?
Yes
You shift your business place and
pay Rs. 10 lakhs. Is it allowed
It is a capital expenditure - not a revenue

expenditure – so not allowed
Expenses in new issue of share /
rights issue / bonus issue of
shares?
These are all capital expenses – hence not

allowed
Expenses on preparation of
project report for a new product
launch?
Not – capital expenses – unless it is just an

extension of your existing product
You increase authorised capital
and for that pay rs. 5 lakhs as fees
etc.
Not allowed – as it is capital expenditure

You spend Rs. 4 lakhs on personal
travel. Is it allowed?
No – not related to business

You spend Rs. 10 lakhs 5 years
back but claim for that now?
Not allowed – as expenditure should have been

incurred in the previous year (subject to some
exceptions)

You pay Rs. 3000 as municipal
taxes on your office building?
Yes

You pay insurance premium on
goods, is it allowed?
Yes

You provide for Depreciation of
Rs. 10 lakhs, is it allowed
Yes – but depreciation has to be calculated as

per the provisions in Sec. 32 of Income tax act.
So the amount allowed may differ – the
depreciation rates have to be the same as
provided in income tax act.

Can you charge depreciation on
straight line method ?
No – as per Income tax act – only WDV is

allowed

What are the blocks of assets?
As per sec. 2(11) there are 4 blocks :
1. buildings
2. plant
3. furniture
4. intangible assets.
Again each of these can be of various sub-
blocks – for example rate of depreciation is
different for residential building from office
building
Buildings : ?
There are 5 types of buildings :

a. residence 5%
b office 10%
c. hotels : 20%
d New office buildings et.c 40%
e temporary : 100%
Plants
It is of 6 types :
general 25%
cars 20%
bus 40%
containers 50%
computer 60%
pollution control : 100%
Furniture
It is of 2 types :
office 15%
others 10%

Intangile assets
Rate of depreciation : 25%

You pay Rs. 20000 penalty due to
your failure to deduct TDS from
salary of employee?
It is also not allowed

You spend Rs. 5000 on litigation
expenses – for an outstanding loan
– which is not related to your
regular business?
No – not allowed

You spend Rs. 2000 to defend
employee in a criminal case
related to your business?
Yes it is allowed

You spend interest for borrowing
money to buy shares in another
company ?
Yes it is allowed

You delay tax payment and pay
interest on the payment, is it
allowed?
Yes

You pay Rs. 3000 as income tax
penalty, is it allowed?
Not allowed

What is the rate of depreciation on
the following :
Computers used in office
Bus for employees
office furniture
Factory Machine
House of MD
Guest House
Patent
Solution
Computers used in office 60%

Bus for employees 20%
office furniture 10%
Factory Machine 15%
House of MD 5%
Guest House 10%
Patent 25%
Capital gain
Appreciation in value of assets come as capital

gain. Sec. 45 : it is of 2 types : short term
and long term
short term : upto 3 years
long term : - more than 3 years (except shares,
securities etc. - where it is 12 months)

What is capital assets?
All assets, excluding the following :

1. stock
2. movable property excluding jewellery
3. agriculture land not located in municipality
4. gold bond / special bearer bond / gold
deposit scheme

How to compute capital gain?
1. find sale price (transfer price) date of

transfer and date of acquisition (date will be
the date of registration / delivery / possession
as per Transfer of property act / relevant law)
2. find cost of acquisition, cost of improvement
and cost of transfer, undertake necessary
indexation
3. find net benefit
What is notional cost of
acquisition ?
If someone has gifted you a car, what is your

cost of acquisition, (nil) – but we will take here
notional cost of acquisition. The cost incurred
by the person who gifted you will become your
cost of acquisition.

What is indexed cost of
acquisition ?
Rohit bought a house in 1984 in 1 lakhs and

sold it in 2004 in 5 lakhs, what is the capital
gain?
Index in 1984 was 125 and in 2004 it was 480
so use the following formula to find indexed
cost : 480/125 * 1lakh= 3.8 lakh,
capital gain = 5-3.8 = 1.2 lakhs.
How to find index factor ?
It is called cost of inflation index. Its base is

1981-82 you can find it :
http://incometax.indlaw.com/display.aspx?791408D
so find it out for the year of purchase and for
the year of sale.
Formula : index in year of sale / index in year
of purchase
Deductions from capital gain ?
Sec. 54 : if you sale a residential house and

have capital gain, your capital gain will be
taxfree if you buy anothe residential house
within 2 years after or 1 year before the sale or
construct a new house in 3 years after date of
sale of equivalent amount (otherwise it will be
proportionately).
What is capital gains account
scheme 1988?
If you have yet to decide about which house to

buy, then you can deposit your sale proceeds in
a capital gains account scheme so that you may
avoid payment of capital gain.

Agriculture land Sec. 54B
If you sale an agriculture land and buy another

agriculture land in a period of 2 years, your
capital gain is taxfree. (available only to
individual)

Sec. 54EC : invest inspecified
bonds
If you buy specified investments – you can
avoid capital gain.
It is for long term capital gain
the investments must be made for a minimum
period of 3 years.
The list of securities / investments are
prescribed (for example bonds issued by
NABARD) .
A constructed house in 31December 2006. he took
loan of Rs. 3 lakh @ 12% on 1/6/5 and Rs. 2 lakh on
1/4/6 @ 14%. Municipal value of house 1 lakh. M.
Tax. 12000. he resides in that house
Value of the house : Nil (it is self occupied)
deduction (for interest )
preconstruction period :
(19 month interest on 3 @12%: =57000
9 month interest on 2 @14% =21000) = 78000 * 1/5=
15600
Now : 36000+28000 = 64000
total : 79600 this will be adjusted with income from
other head or with income of this head next years.
Explanation
Pre construction period interest is divided in 5

instalments and spread out in 5 years. The
preconstruction interest in the previous case
was 78000 which we will allow in 5 years
eqully.
The income in the head income from house
property is negative here.
Std. Rent 36, Fair rent 45,
municipal value 30, actual rent 20
what will you take a Gross annual
value ?
Higher of MV and FR = 45
lower of this and SR = 36
Higher of this and AR = 36
so Gross annual value = 36 answer

Ravi Borrowed Rs. 5 lakh @ 10% on 1/4/99 and
construction of house was done on 1/4/1. what is
the interest deduction allowable now?
Preconstruction period : 2 years : interest is

10000, which would be allowed from 2001-2
to 2005-6 (Rs. 20000 each year) So now it will
not be allowed.
Interest for 2008-9 : 50000 per annum will be
available.

What are the popular deductions ?
Investment 80C
Medican insurance sec 80D
PF / Pension funds Sec. 80 CCC
Medical payments : 80DD & DDB
repayment of loan 80E
donation 80G
Rent paid 80GG
Scientific research association 80GGA
What is 80C
If you invest in LIC premium / approved
insurance premiums / mutual funds /
infrastructure bonds etc. You get deductions
upto Rs. 1 lakhs (in some cases more than Rs.
1 lakhs also for example infrastructure bonds).
See the list of specified securities / investments
for this. The primary purpose is to encourage
individual / HUF to save money and invest.

How much can you claim on
medical expenses as deduction?
If you spend money on a person dpeendent on

you and that person has disability : from Rs.
50000 to 75000 is available depending on
diability (sec. 80DD)
if you spend on your own treatment upto Rs.
60000 is available as deduction (sec. 80DDB)

Can loan for higher education
help you in tax deduction?
Yes : Sec. 80E : upto 40000 is allowed or loan

for higher education in 8 instalments.

How does 80C help in
encouraging people to invest?
As per this section, you can claim upto Rs. 1

lakh (in some cases more than Rs. 1 lakh) if
you invest in LIC premium / insurance
premium, mutual funds / fresh issues /
specified securities – thus this section is
primarily to encourage people to invest.

How does income tax encourage
people to go for medical
insurance?
In India most people dont go for medical

insurance (unlike west), so in order to
encourage people to go for it, there is 80D,
which gives deduction of Rs. 10000/15000 for
medical insurance premiums.

private pension schemes?
There is no pension scheme in private sector

and govt. Is also now withdrawing pension
schemes. Thus in order to encourage people to
plan for future / old age, there is 80ccc - if you
invest in pension plan of any insurance
company, you get deduction upto Rs. 10000.

people to contribute to national
relief and rehabilitation?
There is sec. 80G, which gives a list of
institutions where you can donate and avail
upto 100% deductions. In this list National
defence fund and PM's national relief fund are
also there, thus if you donate money there, you
can claim upto100% deductions for the
donated amount.
Can you claim deduction for
house rent paid ?
Yes – sec. 80GG -

the minimum of the following is deductible :
1. rent paid – 10% total income
2. 25% of adjusted total income
3. Rs. 2000 per month.

you to go for rural development /
science?
If you set up a rural development organisation /

science research organisation, then all the
donations given to your organisation will be
eligible as deductions in the hand of donor as
per Sec. 80GGA

units to go for sustainable
development
If you set up a unit to process biodegradable

wastes – this unit will be able to enjoy 100%
income tax benefits as per sec. 80JJA.
So 100% profits are tax free.

Income tax as encouraging
employments?
Companies can claim 30% deductions for

wages paid for new employees hired during the
year. Sec. 80JJAA

Support to physically challenged
Deduction upto Rs. 75000 is available to

physically challenged persons (sec. 80U)

How does income tax act
encourage infrastructure sector?
100% tax free profits for 10 years – if you set

up an infrastructure development unit – like for
power generation, telecom, industrial park etc.

How does sec. 80IB help
entrepreneurs ?
There are special deductions available for various units :

100% tax free profit for 5 years in backward area – any unit
(additional deductions also available).
Tax free 30% profit for ship operation company for 10 years
taxfree 50%/30% for hotels for 10 years
50% profit for multiplex/ convention centres for 5 years
100% profit for housing projects etc.

How does income tax promote
health care ?
There are many deductions / facilities availalbe

:
Sec. 80IB : 100% taxfree profit for 5 years if
you set up a 100 bed (or more) hospital in rural
areas.

food processing industry?
100% taxfree profit for 5 years and 25/30 %

taxfree profit for next 5 years if you set up
food processing / fruit packing unit (sec. 80IB)

Rajiv's salary is Rs. 1.8 lakhs. He deposits Rs.
30000 in medical insurance, and takes LIC
jeewan suraksha policy for Rs. 10000.
Discuss his tax liability. He also spends Rs.
30000 on medical treatment of his wife?
He will get deductions for all these :

10000 for medical insurance (sec. 80D)
30000 for medical expenses (sec. 80DD)
10000 for lic Jewan suraksha (Sec. 80CCC)

What are rules regarding TDS?
It is the responsibility of every company / firm
to collect TDS. Following payments can be
made only after TDS:
1 salary
2. interest
3 insurance commission
4. professional fees
5. income of lottery / games etc.
Salary payment
As per sec. 192 – employer has to collect TDS

before payment of salary. If the employee
gives form no. 13 – then salary can be paid
without TDS.
If salary payment is less than the maximum
amount not chargeable to tax, then no TDS is
required.
Rules regarding HRA
Employer should collect hourse rent receipts if

house rent is more than Rs. 3000 (check out
the latest rules).

Donations by employees...
If employee has made donations to approved

funds under 80G (like PM's national relief
fund), then the employer has to keep that in
mind while making deductions.

Rouding off of salary
The total salary need to be rounded off to

multiple of 10. for example 233222 will be
233220

Other income of employee
As per sec. 192 (2b) employee may be asked to

give details of his other income, which shall
also be taken into account while collecting
TDS. (rule 26B)

Income from interest
Every bank / company / instutitons will collect

TDS at specified rates while making payment
of interest (sec. 193)
TDS rate is 10% for listed debentures
20% for non-listed debentures etc.
Or collect form no 13 (for nil TDS)
When can you make payment
without TDS?
If the other person submits the following :

form no. 13
form No. 15G

Interest payment limits without
TDS
As per sec. 194A, interest payment by any

person above Rs. 5000 and Rs. 10000 (in case
of banks) annually will require TDS / form no.
13/ form no. 15G

Is TDS required on govt. Bonds
also?
This is where our law is lopsided. No TDS is

required in case of National Defence bonds ,
NSC, Gold Bonds etc. (most of the govt.
Securities).

TDS on insurance premium ?
Sec. 194D requires TDS @ 10% / 20% or form

no. 13 if there is insurance premium payment
above Rs. 5000.
20% incase of companies

TDS for rent..
As per sec. 194I – if rent payment annually is

more than Rs. 1.2 lakhs, then TDS @15% is
required (check out the latest rates). In case of
companies, the rate is 20%.
or form. NO. 13 is required

TDS on brokerage
Any amount of brokerage above 2500 requires

TDS @ 10% (sec. 194H)

TDS on mutual funds
If investor sells back his units, there is TDS

(sec. 194f)

National savings scheme
If payment in NSS is more than 2500, TDS

@20% has to be collected

Payment to sports associations
etc. Requires TDS
Sec. 194E : you have to collect TDS while

making payments to non-resident sports
associations etc.

What is penalty if TDS is not
collected?
Interest @1% per month + tax as required.

(sec. 201 )

Forms to be filled up
Form no. 24 / 26 has to be filled as online tax

accounting system – giving details of TDS
collected. This has to be done quarterly.
Penalty for delay : Rs. 100 per day.

Penalties ... relating to TDS
Imprisonment upto 7 years + fine (sec. 276B)

100 per day fine (Sec. 272A (2))
Rs. 10000 – if TAN is not obtained (sec.
272BB)
100 per day if TDS certificate is not issued
(sec. 272A(2))
Service tax..
Service tax was introduced in 1994 on the

recommendation of Dr. Raja C. Chelliah
committee report.
Initially the rate was 5%, but now it is more
than 10%
more and more services are put in the ambit of
service tax every year.
Excise Department administers this tax.
ADVANCE TAX - companies
Upto 15% - 15 june

upto 45% - 15 september
upto 75% - 15 Dec.
Upto 100% - 15 March

Advance tax-non-corporates
Nil - 15 june
upto 30% - 15 september
upto 60% - 15 Dec.
Upto 100% - 15 March

Failure to pay advance tax
If assessee doesnt pay advance tax or the

advance tax paid is less than 90% of assessed
tax, the assessee will have to pay interest as per
Sec. 234A,B,C. - which is 1% per month.

What happens if there is excess
payment of advance tax?
There will be refund.

If there is excess refund, there is a provision of
interest @.5% p.m. on this excess amoount.
Read sec. 234D and 143(1) for details

Which are the important tax
authorities?
Sec. 116 :
CBDT
Directors / commissioners of Income tax
additional director / joint directors/ deputy

directior / asst. Director
ITO
recovery officers
Powers of income tax officers
As per section 132, they can search documents

and seize them for a period upto 30 days
(sometimes even more than 30 days). They can
call for additional information (sec. 133) they
can carry out detailed investigation and these
will be equal to judicial proceedings (sec. 136)

What is the last date for filing
income tax return ?
For companies / partners of a firm / an

individual whose accounts have to be audited –
30 October
for others (individuals) : 31 July .

Who should sign the income tax
return ?
In case of individual – himself

in case of companies – MD
in case of other bodies : the principal officer
responsible for this.

What is assessment
The income tax department can undertake

assessment after examination of documents /
enquiry as per sec. 142 or they can make
assessment as per sec. 143 or they can make
best judgement assesment as per sec. 144 – if
assesee has failed to furnish return.

What is the rate of tax on
partnership?
30% + surcharge as applicable

for capital gain : 20% +surcharge
there must be a partnership deed and the
partnership should actually be there to get the
status of partnership in income tax act.

What are rules regarding
partnership taxation?
You have to follow partnership rules, which

are little bit different from partnership act. For
example : there is a maximum limit to the
remuneration that you can pay to a partner as
per Income tax act. This amount is specifiedin
Sec. 44A. There is also a maximum rate of
interest on capital that can be paid to partners.
(12%)
What is maximum remuneration
for partnership in profession?
For first 1 lakh of profit – Rs. 50000 or 90%

of profit (whichever is more)
for next 1 lakh: 60%
for remaining profit : 40%.

What is maximum remuneration
for partnership in business – other
than profession?
For first 75000 of profit – Rs. 50000 or 90%

of profit (whichever is more)
for next 75000 lakh: 60%
for remaining profit : 40%.

Taxation of companies ....
Company (sec. 2(17) has wide meaning here

and includes foreign companies (sec. 2(23A)
and public companies (2(18) also.

What is a publicly held company
It is defined in sec. 2(18) :; at least 50% capital

is distributed to common public or it is
registered under sec. 25 of companies act.

What is amalgamation and
demerger ?
Amalgamation (sec. 2(1b) is merger of two

companies – after merger, at least 75%
shareholders should become holder of new
company
demerger is the situation when a company
splits into two.(sec. 2(19AA)

What is MAT
Minimum alternate tax – when a company is

not liable to pay tax, it has to pay MAT at least
as per rules
rate of MAT is 7.5%
sec. 115Jb : when 7.5% of book profit exceeds
tax, then tax will be 7.5% of these book profits.

How to compute book profit
Adjust the following in profit :
add these back
1. income tax 2. dividend 3. reserves 4.
provision for loss of subsidiary
reduce these :
1. losses brought forward
2. amount withdrawn from reserves and
provisions
Is foreign company also liable to
pay MAT ?
Yes – they have to maintain accounts as per

sec. 594 (Indian company has to maintain as
per sec. 209) .
only companies from Netherlands dont have to
pay MAT.

WHAT ABOUT EXCESS MAT?
If excess MAT is paid, the company gets credit

for this and it can carry forward such credit for
5 years.

Which losses cannot be adjusted
with other heads of income?
Loss from speculation business / race horses

long term capital loss

What is limitation regarding
interhead loss adjustment (sec.
71)?
Loss from business and profession cant be

adjusted with salary
these cant be adjusted with other head : Loss
from speculation business / race horses
long term capital loss

What loss can you carry forward
infinitely ?
Loss of banking company (72aa) or of a firm

succeeded by a company (sec. 72A6) and of
demerged company or of unabsorbed
depreciation of amalgamated company
other losses can generally be carry forward for

8 years.
Loss from speculation business
and race horses
These losses cant be adjusted with other profits

they can be carried forward for 4 years only.

What are deemed income?
Cash credits (sec. 68)

unexplained investments (sec. 69)
unexplained jewellery, expenditure, money,
etc.
Investment not fully disclosed
amount borrowed / repaid on hundi.
Presumptive income
If the business is small, income tax department takes

presumptive income (it assumes that business has
some % of total receipt as profit). For example :
civil construction work (sec 44AD) : 8% income from
total receipt
Transport vehicles for rent (sec 44AE) : 3500 Per
month per heavy vehicle / 3150 for light vechicle
retail store (sec 44AF) : 5% from total receipt

How to carry forward losses from
house property
You can carry forward it for 8 years and adjust

it with income in this head. (71b)

Loss from speculation business –
carry forward
Carry forward it and adjust with income from

this head in 8 years.

Loss from ordinary business
Unabsorbed depreciation – it can be carried

forward infinitely - there is no time limit
other business loss – 8 years

Loss from capital gain - carry
forward
Carry forward it for 8years

short term can be adjusted with short term /
long term
but : long term capital loss can be adjusted
only with long term capital gain

Loss from race horses
Sec. 74A : carry forward and adjust in next 4

years with gain from this head

FORM NO 3A,3B,3D
These are forms of audit statements to be

subimtted
audit by a Chartered Accountant
failure – penalty Rs. 1 lakh / .5% of turnover
audit form has to be submitted by 31 october

What are specified professions ?
Medicine (doctor), lawyer, chartered

accountants etc. Are specified professions.
They alsohave to maintain accounts as per sec.
44AA
some of the essential documents required are :
cash book, ledger, journal, vouchers, bills,
receipts,
What can be method of
accounting as per Income tax
law ?
Either cash system or mercantile (accruel)

system
Sec. 145 clause 11

How to value : closing stock
Add all excise and other govt. Dues that have

been paid.

Depreciation ....
Charge depreciation as per income tax rules.

Give proper disclosures
clause : 14

Credits in P & L accounts...
Business and profession income includes

following credits :
1. duty drawback
2. sale of import licence
3. cash assistance received from govt.
All these incomes are chargeable to tax. They
have to be added to income from business and
profession (sec. 28, clause 13 )
Tea / coffee / rubber
Read sec.33AB : - there is a tea / coffee / rubber

development account – to be opened with
NABARD.
40% turover or actual amount deposited in that
account is allowed as deduction (whichever is less).
Your tea turnover is 30 cr you deposit Rs. 3 lakh in
deposit account, how much deduction under 33AB :
Rs. 3 lakhs (lower of 3 lakh / 12 crore).

Petroleum / natural gas
exploration
Sec. 33ABA : 20% of turnover / money

deposited in development account (as per
scheme of government of India) – is allowed as
deduction.

Promotion of scientific research
Sec. 35 : money spent on research as per this

section – 150% is allowed as deduction.
It is for both capital and revenue expenditure
if instead of carrying out research, the assessee
gives donation to a national research
organisation / laboratory – 125% of
expenditure is allowed as deduction.
Social / rural development
promotion by income tax law...
Sec. 35AC : money spent through PSU for

public development allowed as deduction
Sec. 35CCA : money spent through national
fund for rural development / poverty removal-
allowed as deduction

Preliminary expenses ...
When you start a new project, you have to

prepare feasibility report and carry out market
research / survey. You also have to prepare
MOA and AOA and other documents to start
the company. These come in preliminary
expenses. They are allowed in 5 instalment. It
can be upto 5% of the project cost / capital
employed – whichever is higher (sec. 35D)
Exploration of minerals
Money spent on exploration of minerals (upto

4 years before commercial operations) is
allowed – in 10 equal instalments as per sec.
35E.

EXPENSES NOT
ALLOWED ......(from business
and profession)
Personal expeses
capital expenses
expenses on pamplets / brochures etc.
Penalties / fine
expenses on clubs (see details)

Expenses allowed ONLY if
actually spent (even if acruel
system followed)
Leave encashment
gratuity / superannuation fund contribution
bonus / commission paid
interest on loan taken from financial
institutions
any tax / duty / cess / charge / govt. Levy
etc. (sec. 43B clause 21)
Auditor to give details of
following :
Brought forward losses (cl. 25)
TDS (cl. 27)
cost audit report (sec. 233 B of company act,
cl.30)
GP / NP to turnover ratios , stock turonver
ratio, material consumed / finished goods
(cl.32)

Global reach ...
Open offices in all important cities and spread

social entrepreneurship across the country ...
spread love for humanity and organise
voluntary groups all over the country with our
support. Join us, we can change the world
through our constructive efforts.

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Income Tax Law of India

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Income Tax Law of India

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INCOME TAX LAW OF INDIA

Primarily for those who have basic

Sec. 2 (31) : person includes individual, HUF,

Sec. 2(7) : a person by whom any tax is

Assessment year as per sec. 2(9) : the year in

Sec. 2(24) : any profit, dividend, salary, profit

There are 5 heads of income :

1. at least 182 days of stay in India during

1. resident in at least 2 out of previous 10 years

For companies and other artificial persons, you

If an individual leaves India for employment or

From 1/3 to 31/10 – we have : 245 days, thus

1. amount received under keyman insurance

No – it is tax free as per sec. 10(24)

The previous year will be 15 May 2008 to 31

Salary include all pay, allowances, bonus,

HRA is exempt to the extent of the least of the

Tax free under sec. 10(13)

It is paid at the time of retrenchment (leaving

LEAST OF THE FOLLOWING IS EXEMPT :

It is a lumpsum payment at the time of

If it is owned by employer, - 10% of cost of

If the employer has provided domestic servant

Actual money spent by employer is taken as

When employer provides interest free loan –

Annaul reimbursement of medical bills upto

It is taxfree – provided the value of lunch is not

Money spent by employer as professional tax

It is exempt for govt. Employees to the least of

No (subject to some conditions) Sec. 10 B

As per sec. 2(1a) : any income from land used

All these are tax free subject to some

When an employee retires, he receives gratuity from

It is the main law regarding payment of

First calculate income tax on (120+58) = 178000

Tax free (sec. 10(10AA) : least of the

Min. Of the following is taxfree (sec. 10(10c))

Least of the following is taxfree : (sec.

Higher of MV & FR = 98, lower of this and SR

First of all deduct municipal taxes, to find

Following deductions are not permitted :

Yes, because exemption in interest is granted.

No = Sec. 24 provides for rebates. This is an

FR = 20000 (only for let out building)

Very wide meaning – includes all professions,

Yes - in the same way as a legal business

It is essential condition that business should be

No – for such expenses (govt. Dues etc. ) only

It is again capital expenditure

Yes – it is related to business

Yes - it is related to business

Yes - it is related to business

Yes – if it is for business

Yes – it is revenue receipt as per Income tax

Yes – it is treated as revenue.

Yes – it is a business related loss

No – it will not be allowed as deduction

Yes – without limit.

Generally cash payments above Rs. 20000 are

No if it is related to capital assets / building

It is a capital expenditure - not a revenue

These are all capital expenses – hence not

Not – capital expenses – unless it is just an

Not allowed – as it is capital expenditure