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LEAVE TRAVEL CONCESSION [Sec.

10(5)]:
Under Rule 2B, exemption will be available in respect of 2 journeys performed in a block of 4 calendar years
commencing from the calendar year 1986.

ALLOWANCES: I Fully Taxable Allowances II Fully Exempted Allowances


III Partly Taxable Allowances
FULLY TAXABLE ALLOWANCES: FULLY EXEMPTED ALLOWANCES:
1. D.A. 1. Allowances to High court judges
2. Dearness Pay. 2. Allowances to employees of UNO
3. Deputation Allowance 3. Foreign Allowance to Govt. servants [Sec. 10 (7)]
4. OT Allowance 4. Uniform Allowance [Sec. 10 (14)]
5. City Compensatory Allowance [CCA] 5. Conveyance Allowance for official duties [Sec. 10 (14)]
6. Hill Allowance 6. Academic or Research Allowances [Sec. 10 (14)]
7. Project Allowance 7. Daily Allowance [Sec. 10 (14)]
8. Tiffin Allowance 8. Helper Allowance for official work [Sec. 10 (14)]
9. Warden Allowance 9. Traveling Allowance/Transfer Allowance [Sec. 10 (14)]
10. Fixed Medical Allowance
11. Servant Allowance
PARTLY EXEMPTED ALLOWANCES:
1. HRA (House Rent Allowance) [u/s 10 (13A)] 2. EA (Entertainment Allowance) [u/s 16(ii)]
3. CEA (Children Education Allowance) [u/s 10(14)] 4. CHA (Children Hostel Allowance) [u/s 10(14)]
5. Transport Allowance [u/s 10(14)]
6. Tribal or Schedule Area Allowance [Exempt up to Rs.200 p.m.] [u/s 10(14)]
7. Underground Allowance to workers of coal mines [Exempt up to Rs.800 p.m.] [u/s 10(14)]
EA: It is exempt U/S 16 (ii) only for Govt. employees and the exemption is: [Actual amount spent be ignored]
Least of:
1. EA
received 2.
Rs. 5000
3. 1/5th of Basic Salary

RETIREMENT BENEFITS

(a) Pension (Sec 10 (10A))

Pension is a payment made by the employer after the retirement or death of employee as a reward for past
service. It is normally paid as a periodical payment on monthly basis but certain employers may allow an
employee to forgo a portion of pension in lieu of lump sum amount. This is known as commutation of pension.
The treatment of these two kinds of pension is as under:

(i) Periodical pension (or uncommuted pension)

It is fully taxable in the hands of all employee, whereas government or nongovernment.

(ii) Commuted pension

(a) For employees of government organisations, local authorities and statutory corporations, members of
defence services, it is fully exempted from tax, hence not included in gross salary.

(b) For other employees (if not receiving gratuity)

• commuted value of half of the total value of pension is exempted from tax. Any amount received
over and above this amount is taxable, so included in gross salary.
• (1/2 * commuted pension received * 100%)
Commutation %

(c) For other employees (if receiving gratuity)

• one third of the total value of pension is exempted from tax. Amount received in excess of this is
taxable, so included in gross salary.
• (1/3 * commuted pension received * 100%)
Commutation %
MODULE 2 – PART 2
Pension received by employee is taxable under the head “Salaries”. However, family pension received by legal
heirs after death of employee is taxable under ‘Income from other sources’.

(b) Gratuity Sec 10(10)

Gratuity is the payment made by the employer to an employee in appreciation of past services rendered by the
employee. It is received by the employee on his retirement. Gratuity is exempted up to certain limit depending
upon the category of employee. For the purpose of exemption, employees are divided into 3categories:

(i) Government employees, employees of local authority, members of defence services:


In case of such employees, the entire amount of gratuity received by them is exempted from tax. Nothing will be
added to gross salary.

(ii) Non Government employees covered under Payment of Gratuity Act, 1972.
In case of employees who are covered under Payment of Gratuity Act, the minimum of the following amounts are
exempted from tax:
• Amount of gratuity actually received
• 15 days of salary for every completed years of service or part thereof in excess of six months.
(15 / 26 x [basic salary + Dearness Allowance] x No. of years of service+1 [if fraction > 6 months]).
• Rs.20, 00,000 (amount specified by government).(on or after 29.03.18)

(iii) Other employees.


In case of employees not falling in the above two categories, gratuity received from the employers is exempt to
the extent of minimum of following amounts:
• Actual amount of gratuity received.
• Half month average salary for every completed year of service
(1/2 x average salary of last 10 months x completed years of service).
• Rs.10, 00,000 (amount specified by government).

NOTE:
1. Gratuity received during the period of service is fully taxable.
2. If gratuity is received from 2 or more employers in the same year then aggregate amount of gratuity exempt
from tax cannot exceed 20 lac Rs.
3. Where gratuity is received in any earlier year from former employer and again received from another
employer in a later year, limit of Rs.20 lacs will be reduced by the amount of gratuity exempt earlier.
4. Even if gratuity is received by the widow, children or dependents of deceased employee, exemption will still
be available.

(c) Leave Salary Sec (10(10AA))

Employees are entitled to various types of leave. The leave generally can be taken (casual leave/medical leave)
or it lapses. Earned leave is a kind of leave which an employee is said to have earned every year after working
for some time. This leave can either be availed every year, or get encashment for it. If leave is not availed or
encashed, it is allowed to be carried forward. This leave keeps getting accumulated and is encashed by
employee on his retirement. The tax treatment of leave encashment is as under:

(i) Encashment of leave while in service. This is fully taxable and so is added to gross salary.

(ii) Encashment of leave on retirement. For the purpose of exemption of accumulated leave encashment, the
employees are divided into two categories:

• State or Central Government employees.


Leave encashment received by government employees is fully exempted from tax. Nothing is to be included in
gross salary.

• Other employees

Leave encashment of accumulated leave at the time of retirement received by other employees is exempted to
the extent of minimum of four amounts.
- Amount specified by Central Government (3, 00,000).
- Leave encashment actually received.
- 10 months average salary (10 x average salary of 10 months preceeding retirement).
Cash equivalent of unavailed leave.
_ (Leave entitlement is calculated on the basis of maximum 30 days leave every year, cash equivalent is based
on average salary of last 10 months).

MODULE 2 – PART 2
NOTE:
1. Same as for gratuity
2. Salary = Basic + DA (if forms part of salary for retirement benefits) + commission based on fixed % of turnover

d. PROVISIONS RELATING TO
PROVIDENT FUND
PARTICULARS SPF RPF URPF PPF
Employer’s Exempt Taxable > 12% Exempt --‐--‐
Contribution Salary
Employee’s Deduction u/s 80C Deduction u/s 80C --‐--‐ Deduction u/s 80C
Contribution
Interest Exempt Exempt up to Not Exempt
9.5% Taxable
yearly
Lump Sum Received at Exempt Exempt if No. of Refer Note Exempt
the end years of service is below
5
years at least
NOTE: Employee’s own contribution is not taxable. Interest on employee’s contribution is taxable under the
head Income from Other Sources. Employer’s contribution and interest thereon is taxable under the head
Salaries.
Salary = Salary as per HRA

Perquisites Sec 17(2):


I. Taxable Perks in case of all employees:
Rent Free Accommodation or accommodation at concessional rate
Amount paid by an employer in respect of any obligation which otherwise would have been payable by the
employee
Legal expenses/ Life insurance premium/Loan etc., payable by the employee but paid by the employer.
The value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the
employer or former employer, free of cost or at concessional rate to the assessee.
The amount of any contribution to an approved superannuation fund by the employer in respect of the
assessee, to the extent it exceeds Rs. 1,50,000.

II. Tax free Perks in case of all employees


1. Free use of Telephone/mobile/computer/laptop/health club/sports facility/ Recreational facilities to
employee or any member of his household, health insurance premium
2. Educational Scholarship to the assessee's children [Sec. 10(16)]
3. Subsidised Lunch/dinner & Free refreshment during office hours in the office, traveling, gift, credit card etc
4. Contribution to pension fund or staff group insurance scheme
7. Amount spent on training of employees
8. Accommodation to High or Supreme court judges, an official of Parliament, a Union Minister, a Leader of
opposition.
9. Medical facilities provided in hospital maintained by the employer
10. Reimbursement of medical expenses: It is fully exempt if treatment is taken in a government hospital or
hospital maintained by the employer.
11. Interest free/concessional loans of an amount not exceeding Rs. 20,000. [valuation = Interest rate of SBI
as on 1st day of relevant Previous year – interest rate collected from assesse]. If loan is for specific medical
ailments, then it is taxfree irrespective of any loan amount.
12. Rent free accommodation in remote areas.
13. Perquisites allowed outside India by the Govt to a citizen of India for rendering services outside India;
14. Privilege passes and privilege ticket orders granted by Indian Railways to its employees

III. Taxable only in case of Specified Employees


The value of any benefit or amenity granted or provided free of cost or at concessional rate which have not
been included in Taxable Perks in case of all employees & Tax free Perks in case of all employees will be
taxable in the hands of specified employees:
Specified employees
Note: Specified Employee means:
1. Part--‐time or full time director of a company
2. An employee who gets more than Rs. 50,000 Taxable Salary p.a. in the cash form after allowing deduction
U/S 16.
MODULE 2 – PART 2
3. Any person who has Substantial interest in the company [i.e., holding 20% or more voting rights/shares].

VALUATION OF RENT FREE ACCOMMODATION:


I. Central & State Govt. employees: Valuation depends on license fee. Govt. rules will specify
it. II Other Employees:
City Population as Employer owns House Employer takes on
per Lease / Rent
2001 Census
> 25 lakh 15% of Salary for the period during which the
accommodation is occupied by the employee
Least of:
> 10 lakh ≤ 25 lakh 10% of Salary for the period during which the
(a) 15% of Salary
accommodation is occupied by the employee
(b) Lease Rent
Any Other City 7.5% of Salary for the period during which the
accommodation is occupied by the employee
ADD IN ALL CASES 10% OF COST OF FURNITURE OR ACTUAL HIRE CHARGES OF FURNITURE
Salary = [BS + D.P. + D.A. (if) + Com [may or may not fixed %] + Bonus + Taxable allowances + Accrued or
outstanding salary [but not advance salary or Arrears salary] + Taxable Leave Salary + Uncommuted
Pension] ACCOMMODATION AT CONCESSIONAL RATE OF RENT: Value as described above minus rent
recoverable out of salary from the employee/assesse.

Motor Car Valuation:


CC of the
1. Car owned or hired by Employer Car
Up to 1.6 liters > 1.6 liters
(a) Used wholly for official duties Nil Nil
Actual Exp + Actual Exp +
(b) Used wholly for private use
Driver salary Driver salary
(c) Used for both purposes
Rs. 1,800 p.m. + Rs. 2,400 p.m. +
(i) Expenses met by employer
Driver Rs. 900 Driver Rs. 900
p.m. p.m.
Rs. 600 p.m. + Rs. 900 p.m. +
(i) Expenses met by employee
Driver Rs. 900 Driver Rs. 900
p.m. p.m.
2. Car owned by Employee & Exp met or reimbursed by employer
(a) Used wholly for official duties Nil Nil
Actual Amount incurred by employer
(b) Used for both purposes
minus amount specified in 1 above

Problems:
22. Mr. Anand retires in September 2019 after 42 years and 4 months of service. His average sa lary for 10
months preceding September 2019 is Rs. 12,500 p.m. He got Rs .4,60,000 as gratuity.
Required:
(i) Find taxable gratuity assuming Mr. Anand is a private sector employee.
(ii) Find taxable gratuity assuming Mr. Anand is a government employee.

23. Mr. Ravi, an employee of ABC Limited, retired from service on 30 th September 2019 after completing 32
years and 10 months service. The company paid him a gratuity of Rs. 2,87,500.
Basic pay Rs. 13,500 p.m. up to 30--‐6--‐2019 and Rs. 14,000 p.m. from 1--‐7--‐2019. He was paid D.A. at 40% of
basic pay. He was entitled for a fixed commission @ 2% on annual sales of Rs. 6,00,000.
Required:
(i) Find the exempted amount of gratuity for Mr. Ravi
(ii) Find the taxable gratuity for Mr. Ravi

24. Ms Amulya retires in Jan 2020 after 20 years and 6 months of service. She comes under Payment of Gratuity
Act of 1972. She gets Rs. 5,00,000 gratuity. Her basic pay & DA (not forming part of salary) were 23,000 &
2,500 [per month] at the time of retirement, commission on sales Rs. 5,000.
Required:
(i) Find the exempted amount of gratuity for Ms Amulya
(ii) Find the taxable gratuity for Ms Amulya
MODULE 2 – PART 2
25. Mr. Nagesh is employed at a salary of Rs. 76,000 P.M. He is also getting D.A. of Rs. 12,000 p.m. He received
Rs. 50,000 as bonus. He retired from his service as on 30--‐9--‐2019. He had served for 24 years and 8 months. He
received Rs.14,00,000 as gratuity under the Payment of Gratuity Act.
Required:
(i) Find the exempted amount of gratuity for Mr. Nagesh
(ii) Find the taxable gratuity for Mr. Nagesh

26. Mr. Suresh works for a private company and receives Rs. 4,00,000 as leave salary at the time of retirement
on 31st January 2020. Other details: Basic pay Rs. 25,000 p.m. Years of service: 18 years and 4 months, Leave
to his credit at the time of retirement 16 months, He is entitled to 40 days of earned leave for every completed
year of service, Leave availed while in service 240 days.
Required: Determine the amount of taxable leave salary.

27. Mr. Akbar is getting a pension of Rs. 12,000 p.m. from the company. During the previous year he got his
2/3rd pension commuted and received Rs. 2,23,000.
Required:
(i) Compute the exempted amount if he receives gratuity
(ii) Compute the exempted amount if he did not receive gratuity
(iii) Compute the exempted amount if Mr. Akbar is a government employee
(iv) How do you treat the monthly pension

28. Mr. Ponting gets a basic pay of Rs. 30,000 p.m. from ABC Limited in Bengaluru. He gets the following
allowances: DA Rs. 6,000 p.m. (not forming part of salary), CCA Rs. 7,000 p.m. Uniform allowance Rs. 1,000 p.m.
ABC Limited has provided him a rent free accommodation. Rent paid by the company is Rs. 16,000 p.m.
Required: Find the taxable perquisite value of the rent free accommodation.

29. Mr. Javed provides you the following data: Basic Salary Rs. 15,000 p.m. Bonus 40,000, DA 5,000 p.m
(forming part of salary), EA 3,000 p.m., Employer’s contribution to RPF 10,000, Interest on RPF @ 12% R s.
2,400. He is provided with rent--‐f ree furnished house provided by the employer in Davangere (5 Lakh
population) & house is owned by the employer. The cost of furnishing is Rs. 1,80,000.
Required:
(i) Find the taxable perquisite value of the rent free accommodation.
(ii) What is your answer if the accommodation is provided at a concessional rate of rent of Rs. 3,000 p.m.

30. Ms. Ananya Das, a salaried employee, furnishes the following details for the financial year 2019--‐20:
Basic salary Rs. 50,000 p.m, DA (not forming part of salary) 65% of basic pay, Bonus Rs. 50,000, Fixed
Medical allowance Rs. 21,000, uniform allowance Rs. 7,000, rent free accommodation is provided by the
employer in Bengaluru. The employer pays a rent of Rs. 20,000 p.m. for the house. The cost of furnishing the
house is Rs. 2,00,000, Profession tax paid by Ms. Ananya Das Rs. 3,000, Life insurance premium of Ms.
Ananya Das paid by the employer Rs. 5,000, contribution to RPF by the employer 9% of the basic salary. Ms.
Ananya Das contributes the matching amount. Interest credited to RPF account during the year Rs. 7,000 at
14% p.a. Ms. Ananya Das is provided with 1.4 litre car for official purposes by the employer. The expenses
are borne by the employer.
Required: Compute income from salary of Ms. Ananya Das for your previous year.

31. Mr. Shankar Sharma joined State Bank of India as a probationary officer as on 1.1.2016 on a pay scale of
Rs. 25,000 – 2,000 – 29,000 – 3,000 – 44,000. He furnishes the following details for the financial year 2019--‐20:
DA (enters for retirement benefit) 45% of basic pay, Bonus Rs. 30,000, Fixed Medical allowance Rs. 25,000,
children education allowance Rs. 6,000 for the two children of Mr. Shankar Sharma, HRA Rs. 15,000 p.m.
Mr. Shankar Sharma pays a rent of Rs. 10,000 p.m. for the house. Profession tax paid by Mr. Shankar
Sharma Rs. 3,000, entertainment allowance Rs. 2,000 p.m., contribution to RPF by the employer 13% of the
basic salary and DA. Mr. Shankar Sharma contributes the matching amount. Interest credited to RPF account
during the year Rs. 6,500 at 13% p.a. Mr. Shankar Sharma is provided with 1.6 litre car for both the purposes
by the employer. The expenses are borne by the employer including the driver salary. Leave salary received
Rs. 5,000. Required: Compute income from salary of Mr. Shankar Sharma for your previous year.

MODULE 2 – PART 2
Income from House Property [Sections 22 to 27]
Under section 22, The annual value of any property comprising of building or land appurtenant thereto, of
which the assessee is the owner, is chargeable to tax under the head “Income from house property”.
Buildings include both residential and commercial premises. Land appurtenant means land connected with
the building like garden, garage etc.
It may be noted that Income from letting out of vacant land is, however, taxable under the head “Income from
other sources”.
Annual Value Section 23:
It is the annual value of the property which is the subject of taxation in income from house property. The net
annual value is subjected to tax.
Note: Net Annual value = Gross Annual Value (GAV) – Municipal taxes paid by the assesse.
Types of the house properties: (a) Let out property [LOP] (b) Self occupied property [SOP]
Note: If assesse has more than one SOP, then the house of the choice of the assesse is treated as SOP for tax
purpose and the other property or properties are treated as Deemed to be let out [DLOP] properties.
As per section 23(1), Gross Annual Value (GAV) is the higher of Expected rent and actual rent received.
Expected rent is higher of municipal value and fair rent but restricted to standard rent.
In simple, GAV = Higher of Step 1 & Step 2:
Step 1: Expected Rent (ER) = Higher of FR & MV, but restricted to
SR Step 2: Actual rent received or receivable during the year
Note:
FR means Fair Rent, i.e., rent which similar property in the same locality would fetch.
MV is the Municipal Value determined by the municipal authorities for levying municipal taxes
SR is Standard Rent fixed by the Rent Control Act.
Note: for LOP which is vacant for a part of the year:
If Actual rent is lower than ER owing to vacancy, then Actual rent is the
GAV. If Actual rent is lower than ER due to other reasons, then ER is the
GAV.
However, in spite of vacancy, if the actual rent is higher than the ER, then Actual rent is the GAV.
Particulars SOP LOP/DLOP
GAV NIL Higher of Step 1 & Step 2
LESS: Municipal Tax Nil - - ‐ Actual amount paid by
Net Annual Value [NAV] Nil assessee XXX
LESS: Standard Deduction u/s Nil (--‐) 30% of NAV
24(a) --‐ Not exceeding (--‐) Not exceeding 2,00,000
Interest on Loan u/s 24(b) 2,00,000
[Current year + 1/5th of pre [Repair/renewal/
construction period interest from the reconstruction
year of completion of construction] the limit is Rs. 30,000]

Income from house property XXXX [will be Nil or – XXXX [will be Nil, +ve or –ve]
ve]
Note: Interest allowable on accrual basis
Interest on unpaid interest is not deductible

In case of a house property, a portion let out and a portion self--‐occupied:


(a) Income from any portion or part of a property which is let out shall be computed separately under the let
out property category and the other portion or part which is self--‐occupied shall be computed as under the SOP.
(b) There is no need to treat the whole property as a single unit for computation of income from house property.

Treatment of unrealised rent [Explanation to section 23(1)]:


(1) The Actual rent received/receivable should not include any amount of rent which is not capable of being
realised.
(2) However the conditions prescribed in Rule 4 should be satisfied. They are:
(a) the tenancy is bona fide;
(b) the defaulting tenant has vacated, or steps have been taken to compel him to vacate the property;
(c) the defaulting tenant is not in occupation of any other property of the assessee;
(d) the assessee has taken all reasonable steps to institute legal proceedings for the recovery of the
unpaid rent or satisfies the Assessing Officer that legal proceedings would be useless.

MODULE 2 – PART 2
Problems:
32. Aishwarya owns five houses in Tumkur, all of which are let--‐out. The information for each of these houses
are provided below.
Particulars House 1 House 2 House 3 House 4 House 5
Municipal value (Rs.) 80,000 55,000 65,000 24,000 80,000
Fair rent (Rs.) 90,000 60,000 65,000 25,000 75,000
Standard rent (Rs.) NA 75,000 58,000 NA 78,000
Actual rent received/receivable (Rs.) 72,000 72,000 60,000 30,000 72,000
Required: Compute the GAV of each house.

33. Anirudh has a property whose municipal valuation is Rs.1,30,000 p.a. The fair rent is Rs.1,10,000 p.a.
and the standard rent fixed by the Rent Control Act is Rs.1,20,000 p.a. The property was let out for a rent
of Rs. 11,000
p.m. throughout the previous year. Unrealised rent was Rs. 11,000 and all conditions prescribed by Rule 4
are satisfied. He paid municipal taxes @10% of municipal valuation. Interest on borrowed capital was Rs.
40,000 for the year.
Required: Compute the income from house property of Anirudh for P.Y. 2019--‐20.

34. Ganesh has a property whose municipal valuation is Rs.2,50,000 p.a. The fair rent is Rs.2,00,000 p.a. and
the standard rent fixed by the Rent Control Act is Rs.2,10,000 p.a. The property was let out for a rent of
Rs. 20,000
p.m. However, the tenant vacated the property on 31.1.2020. Unrealised rent was Rs. 20,000 and all conditions
prescribed by Rule 4 are satisfied. He paid municipal taxes @8% of municipal valuation. Interest on borrowed
capital was Rs. 65,000 for the year.
Required: Compute the income from house property of Ganesh for P.Y. 2019--‐20.

35. Poorna has one house property at Indira Nagar in Bangalore. She stays with her family in the
house. The rent of similar property in the neighbourhood is Rs. 25,000 p.m. The municipal valuation is Rs.
23,000 p.m. Municipal taxes paid is Rs. 8,000. The house construction began in February 2013 with a loan
of Rs.20,00,000 taken from SBI Housing Finance Limited. The construction was completed on 30.11.2016.
The accumulated interest up to 31.3.2016 is Rs.1,50,000. During the previous year 2019--‐20, Poorna paid
Rs.2,40,000 which included Rs.1,80,000 as interest. Repairs to the house Rs. 10,000 spent during the
previous year.
Required: Compute Poorna’s income from house property for P.Y. 2019--‐20.

36. Ganesh has three houses, all of which are self--‐occupied. The particulars of the houses for the
P.Y. 2019--‐20 are as under:
House I House II House III
Particulars
Rs. Rs. Rs.
Municipal valuation p.a. 3,00,000 3,60,000 3,30,000
Fair rent p.a. 3,75,000 2,75,000 3,80,000
Standard rent p.a. 3,50,000 3,70,000 3,75,000
Date of completion/purchase 31.3.1999 31.3.2001 01.4.2014
Municipal taxes paid during the year 12% 8% 6%
Interest on money borrowed for repair of property during the PY Nil 55,000 Nil
Interest for current year on money borrowed in July 2013 for
1,75,000
purchase of property
Required:
Suggest which house should be opted by Ganesh to be assessed as self--‐occupied so that his tax liability is
minimum and then find Income from House Property

MODULE 2 – PART 2
Capital Gains [Section 45 to 55]
U/S 45 (1), any profit or gain arising from the transfer of capital asset is chargeable to tax under this head of
income.
Capital Asset [Sec. 2 (14)]
(a) Any property of any kind held by the assessee whether or not connected with his business or profession.
(b) any securities held by a Foreign Institutional Investor which has invested in such securities in accordance
with the SEBI regulations.
However, the following are not capital assets:
Stock in trade, Rural Agricultural land, Specified Gold Bonds: 6½% Gold Bonds, 1977, or 7% Gold Bonds,
1980, or National Defence Gold Bonds, 1980, issued by the Central Government; Special Bearer Bonds, 1991
issued by the Central Government; Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or
deposit certificates issued under the Gold Monetisation Scheme, 2015 notified by the Central Government.
Personal effects, that is to say, movable property (including wearing apparel and furniture) held for personal
use by the assessee or any member of his family dependent on him. Personal effects do not include jewellery,
archaeological collections, drawings, paintings, sculptures; or any work of art.
Types of Capital Assets:
1. STCA = Short Term Capital Asset Gain on sale of STCA is Short Term Capital Gain.
2. LTCA = Long Term Capital Asset. Gain on sale of LTCA is Long Term Capital
Gain. The STCA and LTCA would depend on period of holding as explained below:
Period of holding [Section 2(42A)]
Asset STCA u/s LTCA u/s
2(42A) 2(29A)
Listed Shares [Equity/Preference], listed debentures, bonds, Govt If held for ≤ 12 If held for > 12
securities, units of UTI & other Mutual funds, Zero Coupon Bond months months
Unlisted shares, Land or building or both If held for ≤ 24 If held for > 24
months months
Unit of debt oriented fund, Unlisted securities other than shares, If held for ≤ 36 If held for > 36
Other capital assets months months
Transfer [Sec.2 (41)]: It includes sale, exchange, and relinquishment of rights or extinguishment of right,
conversion of asset into stock, transfer as defined in Transfer of Property Act, 1881, maturity or redemption of
a zero coupon bond and compulsory acquisition by law.
Transactions not regarded as transfer [Sec 47]:
(1) Total or partial partition of a HUF: Any distribution of capital assets on the total or partial partition of a HUF
[Sec 47(i)];
(2) A gift or will or an irrevocable trust: Any transfer of a capital asset under a gift or will or an irrevocable trust
[Sec 47(iii)];
(3) Redemption of sovereign gold bonds by an Individual: Redemption by an individual of sovereign gold
bonds issued by RBI under the Sovereign Gold Bond Scheme, 2015 [Sec 47(viic)]
(4) Transfer on conversion of bonds or debentures etc. into shares or debentures [S ec 47(x)].
(5) Conversion of preference shares into equity shares [Sec 47(xb)].
(6) Transfer of unit/s by a unit holder under consolidating scheme of Mutual Fund [Sec
47(xviii)]. Cost Inflation Index (CII):
It is an index as the Central Govt. may notify in the official gazette. This is worked out having regard to 75%
average rise in the consumer price index (urban) for that previous year.
FY CII FY CII
2001--‐02 100 2011--‐12 184
2002--‐03 105 2012--‐13 200
2003--‐04 109 2013--‐14 220
2004--‐05 113 2014--‐15 240
2005--‐06 117 2015--‐16 254
2006--‐07 122 2016--‐17 264
2007--‐08 129 2017--‐18 272
2008--‐09 137 2018--‐19 280
2009--‐10 148 2019--‐20 289
2010--‐11 167

MODULE 2 – PART 2
Indexed cost of acquisition:
It means the amount which bears to the cost of acquisition, the same proportion as cost inflation index for the
year in which the asset is transferred bears to the cost inflation index for the year in which the asset was held
by the assessee or for the year beginning on 1st April 2001, whichever is later.
Indexed cost of improvement:
It is defined as an amount which bears to the cost of improvement, the same proportion as cost inflation index
for the year in which the asset is transferred bears to the cost inflation index for the year in which t he
improvement to the asset took place.

NOTE:
1. Asset is acquired prior to 1.4.2001: We should consider the highest of original cost or fair market value [FMV]
as on 1.4.2001 [in any case ignore cost of improvement spent before 1.4.2001]
2. Depreciable assets are taken to be short term capital assets. Take WDV but not cost.
3. Advance money received and forfeited should be deducted from the cost of acquisition [don’t deduct if
received & forfeited by previous owner]. Such sum shall be chargeable to income--‐t ax under the head ‘Income
from other sources’, if such sum is forfeited on or after 1st April, 2014 and the negotiations do not result in
transfer of such capital asset.
4. Self--‐generated assets: Cost of acquisition is NIL [Good will of business, tenancy rights, route permits, loom
hours, trade mark etc]. Self--‐generated goodwill of profession is not at all taxable
5. Bonus shares: Cost of acquisition is NIL but if they are acquired before 1.4.2001, then take FMV on 1.4.2001.
6. Long term debentures or bonds: Don’t apply index. However, indexation applies for (a) Capital indexed bonds
issued by the Government; or (b) Sovereign Gold Bond issued by the RBI under the Sovereign Gold Bond
Scheme, 2015.
7. Rights Shares:
(a) If rights are exercised: Take Amount actually paid for acquiring the right shares.
(b) Sale of Rights entitlement (which is renounced by the assessee in favour of a person), the cost in nil.
(c) Purchase of Rights Shares through getting rights entitlement from the person who got right entitlement:
Cost is equal to Purchase price paid to the renouncer of rights entitlement as well as the amount paid to the
company which has allotted the rights shares.
8. Long--‐t erm capital gains exceeding Rs. 1 lakh on sale of original shares through a recognized stock exchange
(STT paid at the time of acquisition and sale) is taxable u/s 112A at a concessional rate of 10%, without
indexation benefit.
9. Cost of acquisition of equity shares acquired before 1.2.2018 is higher of
(a) Cost of acquisition
(b) Lower of (i) Fair market value as on 31.1.2018 or (ii) Full value of Sale consideration
10. Securities transaction tax (STT) is not allowable as deduction.

EXEMPTED CAPITAL GAINS [Section 54 to 54F]


1. Section 54: Sale of residential House property [SOP/Let--‐out for residence/shop] (LTCA):
Conditions: i. Purchase of another residential house within one year before or two years after the sale
ii. Construction of another residential house within 3 years after the sale
Deduction: Least of: Amount invested or LTCG
Default: If the new house purchased or constructed is sold or transferred within 3 years from the date of
purchase or construction, such exempted gain will be reduced from the cost of new house while computing its
STCG. Unutilised CG Deposit amount is LTCG of the previous year in which 3 years from the date of transfer
of original asset expires.
Note: From Ay 2020--‐21 if the capital gains do not exceed Rs. 2 crore, assessee can invest in two houses.
2. Section 54B: Sale of Self--‐Cultivated Urban Agricultural land [STCA/LTCA]:
Conditions: i. Used for agriculture for at least 2 years prior to transfer
ii. Reinvest in purchase of another piece of land within 2 years after sale
Deduction: Least of: Amount invested or Capital Gain
Default: If the purchased land is sold or transferred within 3 years from the date of purchase, such exempted
gain will be reduced from the cost of land to be transferred while computing it’s STCG. Unutilised CG Deposit
amount is STCG/LTCG depending upon the original CG of the previous year in whi ch 2 years from the date
of transfer of original asset expires.

MODULE 2 – PART 2
3. Section 54D: Compulsory acquisition of L&B forming the part of industrial undertaking [STCA/LTCA]:
Conditions: i. Used for industrial purpose for at least 2 years prior to tr ansfer
ii: Purchase L&B or construct building within 3 years and should be used for shifting or setting up
new industry.
Deduction: Least of: Amount invested or Capital Gain
Default: If the purchased/constructed L&B is transferred within 3 years from the date of purchase/construction,
such exempted gain will be reduced from the cost of L&B to be transferred while computing its STCG. Unutilised
CG Deposit amount is STCG/LTCG depending upon the original CG of the previous year in which 3 years
from the date of transfer of original asset expires.
4. Section 54EC: Sale of LTCA being land/building/both. Any asset can also be a depreciable asset held for
more than 36 months and invested in specified long--‐t erm specified assets:
Conditions: Invest within 6 months in specified long--‐t erm bonds [redeemable after 5 years] National High Way
Authorities(NHAI)/ Rural Electrification Corporation Limited(RECL)]
Deduction: Least of: Amount invested (not more than Rs. 50 lakhs) or LTCG
Default: The invested bonds must not be transferred/loan taken on its security within 5 years from the date of
acquisition. Violation in this regard will attract long--‐t erm gain tax to the extent of LTCG exempted earlier.
5. Section 54EE: Exemption of LTCG invested in units of specified fund:
For incentivising the start--‐up ecosystem in India, the ‘start--‐up India Action Plan’ envisages establishment of a
Fund of Funds which intends to raise Rs. 2,500 crores annually for four years to finance the start--‐ups.
The long--‐t erm capital gains proceeds are invested by an assessee in units issued before 1st April, 2019 of
such fund, as may be notified by the Central Government in this behalf. The investment has to be made within 6
months after the date of transfer.
Deduction: Least of: Amount invested (not more than Rs. 50 lkhs) or LTCG
Default: Where the units are transferred at any time within a period of three years from its acquisition, the
capital gains, to the extent exempt earlier, would be chargeable as long term capital gains in the year of
transfer.
6. Section 54F: Sale of LTCA other than Residential house:
Conditions: i. Purchase of house within one year before or two years after the sale
ii. Construction of house within 3 years after the sale
iii. Should not own more than one residential house on the date of transfer
Deduction: Entire LTCG if whole of net consideration [i.e., Sale consideration – Cost of transfer] is invested.
If a part of net consideration [NC] is invested, then, Deduction = [(Investment x LTCG)/NC]
Default: If the house purchased or constructed is sold within 3 years from the date of purchase or construction
OR violation of condition (iii), such exempted gain will be taxed as LTCG. Unutilised CG Deposit to the extent
of [(unutilised amount x amount of original CG)/NC] is LTCG.

Capital Gains Account Scheme, 1988 (CGAS)


Amount deposited in this is allowed as deduction for the purpose of sections 54, 54B, 54D & 54F
Under sections 54, 54B, 54Dand 54F, capital gains is exempt to the extent of investment of such gains/ net
consideration (in the case of section 54F) in specified assets within the specified time. If such investment is not
made before the date of filing of return of income, then the capital gain or net consideration (in case of
exemption under section 54F) has to be deposited under the CGAS.
Time limit
Such deposit in CGAS should be made before filing the return of income or on or before the due date of filing
the return of income, whichever is earlier. Proof of such deposit should be attached with the return. The deposit
can be withdrawn for utilization for the specified purposes in accordance with the scheme.
Consequences if the amount deposited in CGAS is not utilized within the stipulated time of 2 years / 3 years
If the amount deposited is not utilized for the specified purpose within the stipulated period, then the unutilized
amount shall be charged as capital gain of the previous year in which the specified period expires. In the case
of section 54F, proportionate amount will be taxable.

NOTE: Gain on compulsory acquisition [Section 54H]: In case compensation on compulsory acquisition is not
received after the date of transfer the period available for investment shall be counted from the date of receipt
of such compensation

MODULE 2 – PART 2
Computation of capital gain
Particulars STCA LTCA
Sale Consideration XXXXX XXXXX
Less: Cost of Transfer (--‐) XXX (--‐) XXX
Net Sale Consideration XXXX XXXX
Less (--‐) Cost of Acquisition (--‐) Indexed Cost of Acquisition
:
Less (--‐) Cost of Improvement (--‐) Indexed Cost of Improvement
:
Capital Gain: STCG LTCG
Less: Exemptions: 54B/54D 54/54B/54F/54EC/54EE/54F
Taxable CG Taxable STCG Taxable LTCG
37. Consider the following transactions:
(i) Mr. Anil purchased gold in 1968 for Rs. 10,000. In the P.Y. 2019--‐20, he gifted it to his daughter at the time of
marriage. Fair market value (FMV) of the gold on the day the gift was made was Rs. 2,10,000.
(ii) A house property is purchased by a Hindu undivided family in 1937 for Rs. 15,000. It is given to one of the family
members in the P.Y. 2019--‐20 at the time of partition of the family. FMV on the day of partition was Rs. 22,00,000.
(iii) Mr. Bimal purchased 100 convertible debentures for Rs. 30,000 in 1986 which are converted in to 500 shares
worth Rs. 1,20,000 in December 2019 by the company.
(iv) Mr Abhijith Sold Zero Coupon bonds after holding them for 13 months.
Required: Discuss the capital gains taxability of the above transactions.

38. Mr. Roy, aged 55 years owned a Residential House in Ghaziabad. It was acquired by Mr.Roy on 10--‐10--‐
2006 for Rs. 24,00,000. He sold it for Rs. 65,00,000 on 4--‐11--‐2019. The stamp valuation authority of the State
fixed value of the property at Rs. 72,00,000. The assessee paid 2% of the sale consideration as brokerage on
the sale of the said property.
Mr. Roy acquired a residential house property at Kolkata on 10--‐12--‐2019 for Rs. 7,00,000 and deposited
Rs. 3,00,000 on 9--‐4--‐2020 and Rs. 5,00,000 on 11--‐6--‐2020 in the capital gains bonds of Rural
Electrification Corporation Limited. He deposited Rs. 4,00,000 on 6--‐7--‐2020 and Rs. 9,00,000 on 1--‐11--‐2020 in
the capital gain deposit scheme in a Nationalized Bank for construction of an additional floor on the residential
house property in Kolkata.
Cost Inflation Index:
FY CII
2006--‐07 122
2019--‐20 289
Required: Compute the Capital Gain chargeable to tax for the Previous Year 2019--‐20.

MODULE 2 – PART 2
39. Mr. Piyush has sold the following assets during 2019--‐20.
Residential Rural Machinery Goodwill Shares
House Agricultural of
Land TCS
Acquired in June 2006 July 1985 Aug 2015 Self Oct 2019
generated
Sale consideration Rs. 1,60,00,000 Rs. Rs. 50,000 Rs. 90,000 Rs.
40,00,000 3,15,000
Date of sale 07.10.2019 05.10.2019 12.12.2019 13.01.2020 15.1.2020
WDV on 1.4.2019 NA NA Rs. 55,000 NA NA
Expenses of transfer Rs. 1,00,000 Rs. 40,000 Rs. 1,000 Nil Rs. 500
Cost of acquisition Rs. 11,00,000 Rs. 10,000 Rs. 98,000 NA Rs.
2,89,000
Mr. Piyush spent Rs. 2,00,000 for the renovation of the above residential house during 2011--‐12. On 5th April
2020 he bought another house for Rs. 20,00,000 & deposited Rs. 4,00,000 in Capital Gains Accounts Scheme on
9th May 2020.The last date for filling returns of income is 31st July 2020.
Note:
FY CII
2006--‐07 122
2011--‐12 184
2015--‐16 254
2019--‐20 289

Required: Compute Income from Capital Gains for your previous year.

P4. 40. Mr. Ghosh has sold the following assets during 2018--‐19:
(a) Residential House: It was built during 1956--‐57 by his father at the cost of Rs. 39,000. The fair market
value as on 1.4.2001 was Rs. 35,00,000. Mr. Ghosh inherited this property in 1999. Mr. Ghosh invested Rs.
3,00,000 for the renovation of the house during 2011--‐12. He spent 2 % brokerage on the sale. He sold this
house on 1.1.2020 for Rs. 2,85,00,000. He bought two houses on 31.1.2020 for Rs. 20,00,000 and Rs.
45,00,000.
(b) Shares of Infosys: Mr. Ghosh bought 200 shares of Infosys at Rs. 800 per share in September 2018.
He got bonus shares at 1:1 ratio in December 2018. He sold all the shares at Rs. 1,100 on 14th Jan 2020.
The brokerage was 0.5%.
(c) Shares in Havells: Mr. Ghosh bought 300 shares of Havells at Rs. 700 per share in February 2017. He
got right entitlement at 1:3 ratio in January 2018 at a price of Rs. 350 per share and he fully subscribed for
the right shares. He sold all the shares at Rs. 1,100 on 14 th Jan 2020.
(d) Furniture: It was acquired at a cost of Rs. 3,00,000 during 2010--‐11. He sold the furniture for Rs. 1,20,000
in June 2018. The WDV of the furniture as on 1.4.2018 was Rs. 86,000.
Note on cost inflation index:
FY CII
2001--‐02 100
2011--‐12 184
2019--‐20 289
Required: Compute income from capital gains for your previous year.

41. Mr. Jain purchased 100 equity shares of TCS on 01--‐02--‐2018 at rate of Rs. 1,000 per share by paying securities
transaction tax at 0.02%.
The Company allotted bonus shares in the ratio of 1:1 on 01.12.2019. He has also received dividend of Rs.
10 per share on 01.05.2018.
He has sold all the shares on 01.03.2020 at the rate of Rs. 4,000 per share through a recognized stock
exchange and paid brokerage of 1% and securities transaction tax of 0.02%.

Required: Compute his taxable income from capital gains for the PY 2019--‐20.

MODULE 2 – PART 2