Income Tax Brief

Notes
For CA Inter May 2020 Exams

By CABlogIndia.com
© CABlogIndia.com
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 Contents of Brief Notes on Income Tax

Topic Page No.

Basic Concepts of Income Tax 1.1 - 1.2

Residential Status 2.1 - 2.3

Incomes which do not form Part of Total Income 3.1 - 3.3

Income under Head ‘Salaries’ 4.1 - 4.32

Income from House Property 5.1 - 5.5

Profits and Gains of Business or Profession 6.1 - 6.34

Capital Gains 7.1 - 7.24

Income from Other Sources 8.1 - 8.6

Clubbing of Income 9.1 - 9.3

Set-Off and Carry Forward of Losses 10.1 - 10.4

Deductions from Gross Total Income 11.1 - 11.11

Computation of Total Income and Tax liability of Individuals 12.1 - 12.4

Advance Tax, TDS And TCS 13.1 - 13.18

Provisions for Filing Return of Income and Self-Assessment 14.1 - 14.4

© www.CABlogIndia.com Basic Concepts of Income Tax

Basic Concepts of Income Tax

1. Tax is the financial charge imposed by the Government on income, commodity
or activity. Government imposes two types of taxes namely Direct taxes and
Indirect taxes. Direct tax is one where the burden of tax is directly on the
payer. While Indirect tax is paid by the person other than the person who
utilizes the product or service.
2. The Income tax Act contains the provisions for determination of taxable
income, determination of tax liability, procedure for assessment, appeal,
penalties and prosecutions.
3. Every year a Budget is presented before the parliament by the Finance
Minister. One of the important components of the Budget is the Finance Bill.
The Bill contains various amendments such as the rates of income tax and
other taxes. When the Finance Bill is approved by both the houses of
parliament and receives the assent of the President,it becomes the Finance
Act.
4. To levy income tax, one must have the understanding of the various concepts
related to the charge of tax like previous year, assessment year, Income, total
income, person etc.
5. Income: No precise definition of the word ‘Income’ is available under the
Income-tax Act, 1961. The definition of Income as given in Section 2(24) of
the Act starts with the word includes therefore the list is inclusive not
exhaustive.
6. Assessee: In common parlance every tax payer is an assessee. However, the
word assessee has been defined in Section 2(7) of the Act according to which
assessee means a person by whom any tax or any other sum of money (i.e.
interest, penalty etc.) is payable under the Act.
7. Person: Income-tax is charged in respect of the total income of the previous
year of every person. Hence, it is important to know the definition of the
word person.
8. Assessment year means the period of twelve months commencing on 1st April
every year.

1.1
Brief Notes on Income Tax
© www.CABlogIndia.com Basic Concepts of Income Tax

9. Previous year: Income earned in a year is taxable in the next year. The year
in which income is earned is known as the previous year.
10. Computation of income: Income tax is a charge on the assessee’s income.
Income Tax law lays down the provisions for computing the taxable income
on which tax is to be charged.

1.2
Brief Notes on Income Tax
© www.CABlogIndia.com Residential Status

Residential Status
1. Total income of an assessee cannot be computed unless the person’s
residential status in India during the previous year is known. According to the
residential status, the assessee can either be;
i. Resident in India or
ii. Non-resident in India
2. Section 6 of the Income-tax Act prescribes the tests to be applied to
determine the residential status of all taxpayers for purposes of income-tax.
There are three alternative tests to be applied for individuals, two for
companies and Hindu Undivided Families and firms, associations of persons,
bodies of individuals and artificial juridical persons

3. Residential status of Individual

The residential status of individual is determined on the basis of the following
conditions :
(i) Condition 1 : If an individual is in India in the previous year for a total
period of 182 days or more.
(ii) Condition 2 : If he has been in India for at least 365 days during the 4
years preceding the previous year and has been in India for at least 60 days
during the previous year. However, the clause of 60 days is not applicable if
a person is :
● Citizen of India, who leaves India in any previous year as a member of
the crew of an Indian ship, or for the purpose of employment outside
India. OR
● Citizens of India or of Indian origin engaged outside India (whether for
rendering service outside or not) and who comes on a visit to India in
any previous year.
(iii) Condition 3 : An individual who has been a non-resident in India in at
least nine out of the ten previous years preceding that year, and has during
the seven previous years preceding that year been in India for a period of, or
periods amounting in all to 729 days or less.

2.1
Brief Notes on Income Tax
© www.CABlogIndia.com Residential Status

Resident and Ordinarily Resident - Satisfies either condition 1 or 2; But does

not satisfies condition 3
Not ordinarily resident - Satisfies any one condition from 1 & 2 and condition
3
Non-resident - Does not satisfy any condition from 1 and 2

4. Residential status of HUF

The test to be applied to determine the residential status of a HUF, Firm or
other Association of Persons is based upon the control and management of
the affairs of the assessee concerned. A HUF, firm or other association of
persons is said to be resident in India within the meaning of Section 6(2) in
any previous year, if during that year the control and management of its
affairs is situated wholly or partly in India during the relevant previous year.
If the control and management of its affairs is situated wholly outside India
during the relevant previous year, it is considered non resident.
A HUF can be “Not Ordinarily resident” - If manager/karta has been a not
ordinarily resident in India in the previous year in accordance with the tests
applicable to individuals.
5. Firms, association of persons, local authorities and other artificial juridical
persons can be either resident (ordinarily resident) or non-resident in India
but they cannot be not ordinarily resident in India.

6. Residential status of Companies

All Indian companies within the meaning of Section 2(26) of the Act are always
resident in India regardless of the place of effective management.
In the case of a foreign company the place of effective management (POEM)
of the affairs is the basis on which the company’s residential status is
determinable.

7. Basis of charge
Section 4 of the Act is the charging section which imposes a charge and
provides rules for working out the charge so imposed

2.2
Brief Notes on Income Tax
© www.CABlogIndia.com Residential Status

Section 4 of the Act imposes a charge of tax on the total or taxable income
of the assessee. The meaning and scope of the expression of total income is
contained in Section 5. The total income of an assessee cannot be determined
unless we know the residential status in India during the previous year. The
scope of total income and consequently the liability to income-tax also
depends upon the following facts :
● whether the income accrues or is received in India or outside,
● the exact place and point of time at which the accrual or receipt of
income takes place, and
● the residential status of the assessee

2.3
Brief Notes on Income Tax
© www.CABlogIndia.com Incomes which do not form Part of Total Income

Incomes which do not form Part of

Total Income
1. This section discusses the general exempted incomes enumerated under
section 10 and other specific exempted income dealt under section 10A,
10AA.
2. Agricultural income is exempt.
However, agricultural income has to be aggregated with non- agricultural
income for determining the rate at which non-agricultural income would be
subject to tax, in case of individuals, HUF, AOPs & BOIs etc., where the –
● agricultural income exceeds Rs. 5,000 p.a. And
● non-agricultural income exceeds basic exemption limit.
The following are the steps to be followed in computation of tax -
Step 1: Tax on non-agricultural income plus agricultural income
Step 2: Tax on agricultural income plus basic exemption limit
Step 3: Tax payable by the assessee = Step 1 – Step 2
Step 4: Add Surcharge/Deduct Rebate u/s 87A, if applicable.
Step 5: Add Health and Education Cess@4%.
3. Since the HUF is taxed in respect of its income, the share income is exempt
from tax in the hands of the member.
4. The partner’s share in the total income of the firm or LLP is exempt from tax.
5. Income by way of interest on moneys standing to his credit in a Non-resident
(External) Account (NRE A/c), is exempt in the hands of an individual, being
a person resident outside India as per the FEMA, 1999 or in the hands of an
individual who has been permitted by the RBI to maintain such account.
6. Remuneration received by an individual, who is not a citizen of India, as an
official of an embassy, high commission, legation, consulate or the trade
representation of a foreign State or as a member of the staff of any of these
officials would be exempt, subject to satisfaction of certain conditions:
(i) such members of staff are subjects of the country represented and not
engaged in any business or profession or employment in India otherwise than
as members of such staff.

3.1
Brief Notes on Income Tax
© www.CABlogIndia.com Incomes which do not form Part of Total Income

(ii) remuneration of corresponding officials of the Government or members of

the staff resident for similar purposes enjoy similar exemption in the other
Country.
7. Income arising to non-corporate non-resident and foreign companies, by way
of royalty from or fees from technical services rendered in or outside India
to, the National Technical Research Organisation (NTRO) is exempt.
8. Payment to Bhopal Gas Victims is exempt.
9. Compensation received or receivable from the Central Government, State
Government or local authority by an individual or his legal heir on account of
any disaster is exempt except to the extent of loss or damage allowed as
deduction under the Act.
10. Any payment from Sukanya Samriddhi Account
11. The value of scholarship granted to meet the cost of education would be
exempt from tax in the hands of the recipient irrespective of the amount or
source of scholarship.
12. Daily allowance received by any Member of Parliament or of State Legislatures
or any Committee thereof are exempt.
13. Awards for literary, scientific and artistic works and other awards by the
Government are exempt.
14. Pension received by an individual who has been in service of Central or State
Government and has been awarded “ParamVir Chakra” or “MahaVir Chakra”
or “Vir Chakra” such other gallantry award as the Central Government notifies
is exempt from tax.
15. Income from any source in the specified areas or States in which member of
a Scheduled Tribe is residing or income by way of dividend or interest on
securities is exempt in the hands of member of the Scheduled Tribe.
16. Income from any source in the state of Sikkim, dividend income and interest
on securities is exempt in the hands of a Sikkimese individual. This exemption
is not available to a Sikkimese woman who, on or after 1st April, 2008, marries
a non-Sikkimese individual.
17. The amount of any subsidy received by any assessee engaged in the business
of growing and manufacturing tea in India through or from the Tea Board will
be wholly exempt from tax.

3.2
Brief Notes on Income Tax
© www.CABlogIndia.com Incomes which do not form Part of Total Income

18. The amount of any subsidy received by an assessee engaged in the business
of growing and manufacturing rubber, coffee, cardamom or other specified
commodity in India from or through the Rubber Board, Coffee Board, Spices
Board or any other will be exempt.
19. Any income received in respect of units from the Administrator of the
specified undertaking/ specified company/ Mutual Fund shall be exempt.
However, income arising from transfer of such units would not be exempt.
20. Tax holiday for unit established in Special Economic Zones (SEZs), which
begins to manufacture or produce articles or things or provide any service on
or after 1.4.2005 in any SEZ for 15 consecutive assessment years in respect of
its profits derived from exports of such articles or things or export of services
(including computer software).
Amount of exemption = Profits of Unit in SEZ x (Export turnover of Unit SEZ/
Total turnover of Unit SEZ)
100% of such profits would be exempt in the first five years, 50% in the next
five years and in the last five years, 50% subject to transfer to SEZ
Reinvestment Reserve Account.
Note - Only some of the exemptions are discussed. The remaining
exemptions are being discussed in the respective heads of Income.

3.3
Brief Notes on Income Tax
© www.CABlogIndia.com Income under Head ‘Salaries’

Income under Head ‘Salaries’

1. Basis of Charge: As per section 15, salary is taxable on due or receipt
basis whichever is earlier. Under Section 15 the income chargeable to income
tax under the head salaries would include any salary due to an employee from
an employer or a former employer during the previous year irrespective of
the fact whether it is paid or not.

2. Different forms of salary

● Basic Salary: Basic salary is taxable in the hands of an employee.
● Allowance: An allowance is defined as a fixed amount of money given
periodically in addition to the salary for the purpose of meeting some
specific requirements connected with the service rendered by the
employee or by way of compensation for some unusual conditions of
employment. It is taxable on due/accrued basis whether it is paid in
addition to the salary or in lieu thereon
● Perquisites: The term “perquisites” includes all benefits and amenities
provided by the employer to the employee in addition to salary and
wages either in cash or in kind which are convertible into money. These
benefits or amenities may be provided either voluntarily or under
service contract. For income-tax purposes, the perquisites are of three
types:
(i) Tax-free perquisites
(ii) Taxable perquisites
(iii) Perquisites taxable under specified cases.

3. Exemption of Certain Allowances

House Rent Least of the following is exempt:

Allowance (a) Actual HRA Received
(b) 40% of Salary (50%, if house situated in
Mumbai, Calcutta, Delhi or Madras)
(c) Rent paid minus 10% of salary

4.1
Brief Notes on Income Tax
© www.CABlogIndia.com Income under Head ‘Salaries’

* Salary= Basic + DA (if part of retirement benefit)

+ Turnover based Commission

Note:

- Fully Taxable, if HRA is received by an

employee who is living in his own house or if
he does not pay any rent
- It is mandatory for employees to report PAN
of the landlord to the employer if rent paid
is more than Rs. 1,00,000 [Circular No. 08
/2013 dated 10th October, 2013].

Children Education
Up to Rs. 100 per month per child up to a maximum
Allowance
of 2 children is exempt.

Hostel Expenditure Up to Rs. 300 per month per child up to a maximum

Allowance of 2 children is exempt.

Transport Allowance The exemption for various types of transport

allowance is as follows-
● Transport Allowance granted to an
employee to meet expenditure for the
purpose of commuting between place of
residence and place of duty is exempt up to
Rs. 3,200 per month granted to an
employee, who is blind or deaf and dumb or
orthopedically handicapped with disability
of lower extremities
● Transport Allowance to an employee
working in any transport business to meet
his personal expenditure during his duty
performed in the course of running of such

4.2
Brief Notes on Income Tax
© www.CABlogIndia.com Income under Head ‘Salaries’

transport from one place to another place

provided employee is not in receipt of daily
allowance.
Amount of exemption shall be lower of
following:
(a) 70% of such allowance; or
(b) Rs. 10,000 per month.

Conveyance Conveyance Allowance granted to meet the

Allowance expenditure on conveyance in performance of
duties of an office is exempt to the extent of
expenditure incurred.

Daily Allowance
Daily Allowance to meet the ordinary daily charges
incurred by an employee on account of absence
from his normal place of duty is exempt to the
extent of expenditure incurred.

Helper/Assistant
Exempt to the extent of expenditure incurred.
Allowance

Research Allowance
Research Allowance granted for encouraging
academic research and other professional pursuits
is exempt to the extent of expenditure incurred.

Uniform Allowance
Exempt to the extent of expenditure incurred.

Foreign Allowances
Foreign allowances or perquisites paid or allowed
or Perquisites
by Government to its employees (an Indian citizen)
posted outside India are Fully Exempt.

4.3
Brief Notes on Income Tax
© www.CABlogIndia.com Income under Head ‘Salaries’

4. Taxable Value of Certain Perquisites

Rent free
License Fees determined in accordance with rules
unfurnished
framed by the Government for allotment of houses
accommodation
shall be deemed to be the taxable value of
provided to
perquisites.
Government
employees

Unfurnished rent- Taxable value of perquisites shall be:

free accommodation A. If House Property is owned by the employer:
provided to other
i. 15% of salary, if population of city where
employees
accommodation is provided exceeds 25
lakhs as per 2001 census

ii. 10% of salary, if population of city where

accommodation is provided exceeds 10
lakhs but does not exceed 25 lakhs as per
2001 census

iii. 7.5% of salary, if accommodation is

provided in any other city

B. If House Property is taken on lease or rent

by the employer, the perquisite value shall
be:

Lease rent paid or payable by the employer

or 15% of the salary, whichever is lower

*Salary includes:

a. Basic Pay
b. Dearness Allowance (only to the extent it
forms part of retirement benefit salary)
c. Bonus
d. Commission

4.4
Brief Notes on Income Tax
© www.CABlogIndia.com Income under Head ‘Salaries’

e. All other allowances (only taxable portion)

f. Any monetary payment which is chargeable
to tax

But does not include

i. Value of any perquisite [under section

17(2)]

ii. Employer’s contribution to PF

iii. Benefits received at the time of

retirement like gratuity, pension etc.

Note:

1) Rent free accommodation is not chargeable

to tax if provided to an employee working at
mining site or an on-shore oil exploration
site, etc., —

i. which is being of temporary nature

(subject to conditions)

ii. which is located in a remote area.

2) Rent free accommodation if provided to

High Court or Supreme Court Judges, Union
Ministers, Leader of Opposition in
Parliament, an official in Parliament and
Serving Chairman and members of UPSC is
Tax Free Perquisites.
3) The value so determined shall be reduced by
the amount of rent, if any, paid by the
employee.
4) If an employee is transferred and retains
property at both the places, the taxable
value of perquisites for the initial period of
90 days shall be determined with reference
to only one accommodation (at the option

4.5
Brief Notes on Income Tax
© www.CABlogIndia.com Income under Head ‘Salaries’

of the assessee). The other one will be tax

free. However, after 90 days, taxable value
of perquisites shall be charged with
reference to both the accommodations.

Rent free furnished Taxable value of perquisites

accommodation a) Find out taxable value of perquisite
assuming accommodation to be provided to
the employee is unfurnished
b) Add: 10% of original cost of furniture and
fixtures (if these are owned by the
employer) or actual higher charges paid or
payable (if these are taken on rent by the
employer).
Note: The value so determined shall be reduced by
the amount of rent, if any, paid by the employee.

Accommodation in a Taxable value of perquisites

Hotel Value of perquisite shall be lower of following:
a) Actual charges paid or payable by the
employer to such hotel
b) 24% of salary
Note: Hotel accommodation will not be chargeable
to tax if:
a) It is provided for a total period not
exceeding in aggregate 15 days in the
financial year; and
b) Such accommodation in hotel is provided on
employee’s transfer from one place to
another place.

Domestic servant Taxable value of perquisite shall be salary paid or

including sweeper, payable by the employer for such services less any
gardener, watchmen amount recovered from the employee.

4.6
Brief Notes on Income Tax
© www.CABlogIndia.com Income under Head ‘Salaries’

or personal
attendant

Taxable value of perquisites:

Supply of gas,
1. Manufacturing cost per unit incurred by the
electricity or water
employer., if provided from resources
for household
owned by the employer;
purposes
2. Amount paid by the employer, if purchased
by the employer from outside agency
Note: - Any amount recovered from the employee
shall be deducted from the taxable value of
perquisite.

ESOP/ Sweat Equity Taxable value of perquisites

Shares Fair Market value of shares or securities on the
date of exercise of option by the assessee less
amount recovered from the employee in respect of
such shares shall be the taxable value of
perquisites.
Fair Market Value shall be determined as follows:
a) In case of listed Shares: Average of opening
and closing price as on date of exercise of
option.
b) In case of unlisted shares/ security other
than equity shares: Value determined by a
Merchant Banker as on date of exercise of
option or an earlier date, not being a date,
which is more than 180 days earlier than the
date of exercise of the option.

Interest Free Loan Interest free loan or loan at concessional rate of

or Loan at interest given by an employer to the employee (or
Concessional Rate of any member of his household) is a perquisite
Interest chargeable to tax in the hands of all employees on

4.7
Brief Notes on Income Tax
© www.CABlogIndia.com Income under Head ‘Salaries’

following basis:
1) Find out the ‘maximum outstanding monthly
balance’ (i.e. the aggregate outstanding
balance for each loan as on the last day of
each month);
2) Find out rate of interest charged by the SBI
as on the first day of relevant previous year
in respect of loan for the same purpose
advanced by it;
3) Calculate interest for each month of the
previous year on the outstanding amount
(mentioned in point 1) at the rate of interest
(given in point 2)
4) Interest actually recovered, if any, from
employee
5) The balance amount (point 3-point 4) is
taxable value of perquisite
Nothing is taxable if:
a) Loan in aggregate does not exceed Rs 20,000
b) Loan is provided for treatment of specified
diseases (Rule 3A) like neurological
diseases, Cancer, AIDS, Chronic renal
failure, Hemophilia (specified diseases).
However, exemption is not applicable to so
much of the loan as has been reimbursed to
the employee under any medical insurance
scheme.

Facility of travelling, a) Perquisite value taxable in the hands of

touring and employees shall be expenditure incurred by
accommodation the employer less amount recovered from
availed of by the employee.
employee or any b) Where such facilities are maintained by the

4.8
Brief Notes on Income Tax
© www.CABlogIndia.com Income under Head ‘Salaries’

member of his employer, and is not available uniformly to

household for any all employees, the value of benefit shall be
holiday taken to be the value at which such facilities
are offered by other agencies to the public
less amount recovered from employee.

Free food and 1. Fully Taxable: Free meals in excess of Rs. 50

beverages provided per meal less amount paid by the employee
to the employee shall be a taxable perquisite
2. Exempt from tax: Following free meals shall
be exempt from tax
a) Food and non-alcoholic beverages provided
during working hours in remote area or in an
offshore installation;
b) Tea, Coffee or Non-Alcoholic beverages and
Snacks during working hours are tax free
perquisites;
c) Food in office premises or through non-
transferable paid vouchers usable only at
eating joints provided by an employer is not
taxable, if cost to the employer is Rs. 50(or
less) per meal.

Gift or Voucher or a) Gifts in cash or convertible into money (like

Coupon on gift cheque) are fully taxable
ceremonial b) Gift in kind up to Rs.5,000 in aggregate per
occasions or annum would be exempt, beyond which it
otherwise provided would be taxable.
to the employee

Credit Card a) Expenditure incurred by the employer in

respect of credit card used by the employee
or any member of his household less amount
recovered from the employee is a taxable

4.9
Brief Notes on Income Tax