All About Taxtion: AN INTRODUCTION TO TAXATION

Tax Payers Information Series 31

Taxation of

Salaried Employees,

Pensioners

and

Senior Citizens

INCOME TAX DEPARTMENT

Directorate of Income Tax (PR, PP & OL)

6th Floor, Mayur Bhawan, Connaught Circus

New Delhi-110001

This publication should not be construed as an

exhaustive statement of the Law. In case of doubt,

reference should always be made to the relevant

provisions of the Income Tax Act, 1961, Income Tax

Rules, 1962, Wealth Tax Act, 1957 and Wealth Tax

Rules, 1957 and wherever necessary, to Notifications

issued from time to time.

CONTENTS

Topic Page No.

Chapter 1 An Introduction to Taxation 1

Chapter 2 Salary Income, Perquisites & Allowances 16

Chapter 3 Overview of Income from House Property 30

Chapter 4 Overview of Capital Gains 33

Chapter 5 Deductions under Chapter VIA 39

Chapter 6 Tax Rebate & Relief 51

Chapter 7 Permanent Account Number 55

Chapter 8 Taxability of Retirement Benefits 57

Chapter 9 Pensioners & Senior Citizens 63

Chapter 10 Taxation of Expatriates 66

Chapter 11 Income tax on Fringe Benefits 72

Chapter 12 Some relevant Case laws 75

CHAPTER 1

AN INTRODUCTION TO TAXATION

1.1 INTRODUCTION

Income tax is an annual tax on income. The Indian Income

Tax Act (Section 4) provides that in respect of the total income of

the previous year of every person, income tax shall be charged for

the corresponding assessment year at the rates laid down by the

Finance Act for that assessment year. Section 14 of the Incometax

Act further provides that for the purpose of charge of income

tax and computation of total income all income shall be classified

under the following heads of income:

A. Salaries

B. Income from house property

C. Profits and gains of business or profession.

D. Capital gains

E. Income from other sources.

The total income from all the above heads of income is

calculated in accordance with the provisions of the Act as they

stand on the first day of April of any assessment year.

In this booklet an attempt is being made to discuss the various

provisions relevant to the salaried class of taxpayers as well as

pensioners and senior citizens.

1.2 FILING OF INCOME TAX RETURN

Section 139(1) of the Income-tax Act, 1961 provides that

every person whose total income during the previous year exceeded

the maximum amount not chargeable to tax shall furnish a return

of income. The Finance Act, 2003 has introduced Section 139(1B)

which provides for furnishing of return of income on computer

readable media, such as floppy, diskette, magnetic cartridge tape,

CD- ROM etc., in accordance with the e-filing scheme specified

by the Board in this regard.

The return of income can be submitted in the following manner:

(i) a paper form;

(ii) e-filing

(iii) a bar-coded paper return.

Where the return is furnished in paper format,

acknowledgement slip attached with the return should be duly filled

in. Returns in new forms are not required to be filed in duplicate.

Returns can be e-filed through the internet. E-filing of return

is mandatory for companies and firms requiring statutory audit u/s

44AB. From A.Y. 2011-12, it is now also mandatory for all business

entities (including individuals/HUF) liable to tax audit to e-file their

return of income. E-filing can be done with or without digital signaturea)

If the returns are filed using digital signature, then no

further action is required from the tax payers.

b) If the returns are filed without using digital signature,

then the tax payers have to file ITR-V with the

department within 15 days of e-filing.

c) The tax payer can e-file the returns through an

e-intermediary also who will e-file and assist him in filing

of ITR-V within 15 days.

e) e-Filing has been made compulsory for A.Y.2012-13

onwards for an individual and HUF having annual income

of more than Rs. 10 Lakhs. These persons will have to

electronically file return, for which digital signature are

not necessary.

Where the return of income is furnished by using bar coded

paper return, then the tax payers need to print two copies of Form

ITR-V. Both copies should be verified and submitted. The receiving

official shall return one copy after affixing the stamp and seal.

Vide notification dated 28.03. 2012, e-filing has been made

compulsory for A.Y. 2012-13 onwards for an individual/HUF if the

total income during the previous year exceeds Rs. 10 lakh. However

digital signature is not mandatory for these tax payers and they can

transmit the data electronically and there after submit the verification

of return in Form ITR-V. Filing of return electronically under digital

signatures is mandatory for any individual required to submit return

in ITR-4 and to whom provisions u/s 44AB are applicable.

Apart from faster refunds, through e-filing, one can also avail

of some value added services such as viewing tax credit status (Form

26AS), tracking of refunds emails/SMS alerts for processing status

etc. Vide notification dated 01.05.2013 e-filing has how been made

mandatory for individuals & including salaried taxpayers earning

more than Rs 5 lakh taxable income during the year.

The Finance Act, 2005 has provided that w.e.f. 01.04.2006

every person shall file a return of income on or before the relevant

due date even if his total income without giving effect to the

provisions of Chapter VI-A (please see Chapter 5 of this

booklet) exceeds the maximum amount not chargeable to tax.

The Central Board of Direct Taxes has notified the scheme

for exempting salaried taxpayers with total income up to Rs. 5

lakhs from filing income tax return for Assessment Year 2011-12,

which will be due on July 31, 2011. Individuals having total income

up to Rs. 5,00,000 for FY. 2010-11, after allowable deductions,

consisting of salary from a single employer and interest income

from deposits in saving bank account up to Rs. 10,000 are not

required to file their income tax return. Such individuals must report

their Permanent Account Number (PAN) and the entire income

from bank interest to their employer, pay the entire tax by way of

deduction of tax at source and obtain a certificate of tax deduction

in Form No. 16. Persons receiving salary from more than one

employer, having income from sources other than salary and interest

income from a saving bank account or having refund claims shall

not be covered under the scheme. The scheme shall also not be

applicable in cases where in notices are issued for filing the income

tax return under section 142(1) or Section 148 or Section 153A or

Section 153C of the Income Tax Act,1961.

It may be noted that CBDT has clarified that the above

exemption from filing of return was available only for A.Y.

2011-12 and 2012-13. Hence, this exemption for salaried tax payers

having total income upto Rs. 5 lakh is NOT extended for

A.Y. 2013-14.

1.3 DUE DATES FOR PAYMENT OF ADVANCE TAX &

FILING OF RETURN

Liability for payment of advance tax arises where the amount

of tax payable by the assessee for the year is Rs.10,000/- or more.

The due dates for various instalments of advance tax are given

below:

DUE DATE AMOUNT PAYABLE

(i) On or before 15th September Amount not less than 30%

of the previous year of such advance tax payable

(ii) On or before 15th December Amount not less than 60%

of the previous year of such advance tax payable

(iii) On or before 15th March of Entire balance amount of

the previous year such advance tax payable

Also, any amount paid by way of advance tax on or before

31st March is treated as advance tax paid during the Financial year.

The due date of filing of return of income in case of salaried

employees is 31st of July. If the return of income has not been

filed within the due date, a belated return may still be furnished

before the expiry of one year from the end of the assessment year

or completion of assessment, whichever is earlier.

1.4 FORMS TO BE USED:- The forms to be used for filing

the return of income from A.Y. 2012-13 onwards are mentioned

below:-

Form No. Form No. Heading

(A.Y. (A.Y.

2012-13) 2013-14)

ITR 1 ITR 1 For individuals

(SAHAJ) SAHAJ whose total income includes a)

income from salary/pension or b)

income from house property

(excluding cases whose loss is

brought forward from previous years)

or c) income from other sources

(excluding winning from lottery or

income from race horses).

ITR 2 ITR 2 For individuals and HUFs not having

income from Business or Profession.

ITR 3 ITR 3 For Individuals and HUFs being

partners in firms and not carrying out

business or profession under any

proprietorship.

ITR 4 ITR 4 For individuals & HUFs having

income from a proprietary business

or profession.

ITR 4S- For A.Y. 2011-12 and A.Y. 2012-13

SUGA M Presumptive business income tax

return for individual/HUF whose total

income includes

a) Business income computed in

accordance e-provisions in

S44AD or 44AE or

b) Income from salary/pension or

c) Income from one house property

excluding cases of b/f loss from

previous years or

d) Income from other sources

excluding winning from lottery

or horse race previous year or

ITR 5 ITR 5 For Firms, AOPs and BOIs

ITR 6 ITR 6 For Companies other than companies

claiming exemption under section 11

ITR 7 ITR 7 For persons including companies

required to furnish return under

Section 139 (4A) or Section 139 (4B)

or Section 139 (4C) or Section 139

(4D).

ITR V ITR V Where the date of the Return of

Income/Fringe Benefits in Form ITR-

1, ITR-2, ITR-3, ITR-4, ITR-5, ITR-

6 is transmitted electronically without

digital signature.

Acknow- Acknowl- Acknowledgement for e-Return and

ledgement ledgement non e-Return.

IMPORTANT FEATURES OF SAHAJ & SUGAM:

• These are the simplest technology enabled and taxpayer

friendly forms designed to facilitate faster digitalization and

speedy processing.

• These are coloured forms. Taxpayers can download forms

from website and print using a colour printer or A4 size white

paper. It is advisable for taxpayer to set the ‘properties’ in

printing options to ‘fit to page’ and print the forms on good

quality paper.

• The Acknowledgement copy (ITR-V) to be retained by

taxpayer may be printed in black & white.

CHALLAN FORMS:- The following are the new computerized

challan forms:-

Challan No. Nature of Payment

ITNS 280 (0020) Income Tax on Companies

(Corporation Tax)

(0021) Income Tax (Other than Companies)

ITNS 281 (0020) Tax Deducted/Collected at Source from

Company Deductees

(0021) Non-Company Deductees

ITNS 282 (0034) Securities Transaction Tax

(0023) Hotel Receipts Tax

(0024) Interest Tax

(0028) Expenditure/other Tax

(0031) Estate Duty

(0032) Wealth Tax

(0033) Gift Tax

ITNS 283 (0036) Banking Cash Transaction Tax

(0026) Fringe Benefits Tax

All the columns in the challan form should invariably be filled

in, details such as PAN, assessment year, Assessing Officer and

his code, status and full address of the assessee in capital letters,

the relevant columns of tax, interest etc., should also be filled in

properly.

1.5 RATES OF INCOME TAX :-

(A) The rates for charging income tax for F.Y. 2012-13 i.e.

A.Y. 2013-14 will be as follows :-

I. In case of an individual other than those covered under II

and III below:

(1) Where the total income Nil

does not exceed

Rs. 2,00,000

(2) Where the total income 10% of the amount by

exceeds Rs. 2,00,000 but which the total income

does not exceed exceeds Rs. 2,00,000/-.

Rs. 5,00,000

(3) Where the total income Rs. 30,000 plus 20% of

exceeds Rs. 5,00,000 but the amount by which the total

does not exceed income exceeds Rs. 5,00,000.

Rs. 10,00,000

(4) Where the total income Rs. 1,30,000 plus 30% of

exceeds Rs. 10,00,000 the amount by which the total

income exceeds Rs. 10,00,000.

Surcharge is nil education cess @ 3% of Income Tax will apply.

II. In the case of every individual, being resident in India, who is

of the age of sixty years or more but less than eighty years at any

time during the previous year:-

(1) Where the total income Nil

does not exceed

Rs. 2,50,000

(2) Where the total income 10% of the amount by

exceeds Rs. 2,50,000 which the total income

but does not exceed exceeds Rs. 2,50,000.

Rs. 5,00,000

(3) Where the total income Rs. 25,000 plus 20% of

exceeds Rs. 5,00,000 the amount by which the total

but does not exceed income exceeds Rs. 5,00,000.

Rs. 10,00,000

(4) Where the total income Rs. 1,25,000 plus 30% of

exceeds Rs. 10,00,000 the amount by which the total

income exceeds Rs. 10,00,000

Surcharge -Nil Education cess as in I above :

III. In the case of every individual, being a resident in India, who

is of the age of eighty years or more at any time during the previous

year:

(1) Where the total income Nil

does not exceed

Rs. 5,00,000

(2) Where the total income 20% of the amount by

exceeds Rs. 5,00,000 which the total income

but does not exceed exceeds Rs. 5,00,000.

Rs. 10,00,000

(3) Where the total income Rs. 1,00,000 plus 30% of

exceeds Rs. 10,00,000 the amount by which the total

income exceeds Rs. 10,00,000

Surcharge -Nil Education cess as in I above :

(B) The rates for charging income tax for F.Y. 2013-14

i.e.A.Y. 2014-15 will be as follows :-

I. In case of individual other than those covered under II and

III below:

(1) Where the total income Nil

does not exceed

Rs.2,00,000/-

(2) Where the total income 10% of the amount by which the

exceeds Rs. 2,00,000/- toal income exceeds

but does not exceeds Rs. 2,00,000/-

Rs. 5,00,000/-

(3) Where the total income Rs. 30,000/- plus 20% of the

exceeds Rs. 5,00,000/- amount by which the total

but does not exceed income exceeds Rs.5,00,000/-

Rs. 10,00,000/-

(4) Where the total income Rs.1,30,000/- plus 30% of the

exceeds Rs.10,00,000/- amount by which the total

income exceeds Rs.10,00,000/-

a) Surcharge @10% of tax where total Income is more than Rs. 1 crore.

b) Education cess @3% fo Income tax and Surcharge.

II. In the case of every individual , being a resident in India, who

is of the age of sixty years or more but less than eighty years at

any time during the previous year:-

(1) Where the total income Nil

does not exceeds

Rs. 2,50,000/-

(2) Where the total 10% of the amount by which the

income exceeds total income exceeds

Rs. 2,50,000/- but does Rs. 2,50,000/-

not exceed 5,00,000/-

(3) Where the total income Rs. 25,000/- plus 20% of the

exceeds Rs. 5,00,000/- amount by which the total

but does not exceed income exceeds Rs. 5,00,000/-

Rs. 10,00,000/-

(4) Where the total income Rs. 1,25,000/- plus 30% of the

exceeds Rs. 10,00,000/- amount by which the total

income exceeds

Rs.10,00,000/-

Surcharge and Education Cess shall apply as in I above :

III In the case of every individual ,being a resident in india, who is

of the age of eighty years or more at any time during the previous

year:

(1) Where the total income Nil

does not exceed

Rs. 5,00,000/-

(2) Where the total income 20% of the amount by which the

exceeds Rs. 5,00,000/- total income exceeds

but does not exceed Rs. 5,00,000/-

Rs.10,00,000/-

(3) Where the total income Rs. 1,00,000/- plus 30% of the

exceeds Rs. 10,00,000/- amount by which the total

income exceeds

Rs. 10,00,000/-

Surcharge and Education Cess shall apply as in I above :

1.6 CALCULATION OF INTEREST

The Income Tax Act provides for charging of interest for

non- payment/short payment/deferment in payment of advance

tax which is calculated as below:

(i) INTEREST U/S 234A:

For late or non furnishing of return, simple interest @ 1% for

every month or part thereof from the due date of filing of return to

the date of furnishing of return, on the tax as determined u/s 143(1)

or on regular assessment as reduced by TDS/advance tax paid or

tax reliefs, if any, under Double Tax Avoidance Agreements with

foreign countries.

(ii) INTEREST U/S 234B:

For short fall in payment of advance tax by more than 10%,

simple interest @1% per month or part thereof is chargeable from

1st April of the assessment year to the date of processing

u/s 143(1) or to the date of completion of regular assessment, on

the tax as determined u/s 143(1) or on regular assessment less

advance tax paid/ TDS or tax reliefs, if any, under Double Tax

Avoidance Agreements with foreign countries.

(iii) INTEREST U/S 234C:

For deferment of advance tax. If advance tax paid by 15th

September is less than 30% of advance tax payable, simple interest

@ 1% is payable for three months on tax determined on returned

income as reduced by TDS/TCS/Amount of advance tax already

paid or tax relief, if any, under Double Tax Avoidance Agreement

with forgiving contribution. Similarly, if amount of tax paid on or

before 15th December is less than 60% of tax due on returned

income, interest @ 1% per month is to be charged for 3 months on

the amount stated as above. Again, if the advance tax paid

by 15th March is less than tax due on returned income, interest

@ 1% per month on the shortfall is to be charged for one month.

(iv) INTEREST U/S 234D:

Interest @ 0.5% is levied under this Section when any refund

is granted to the assessee u/s 143(1) and on regular assessment it

is found that either no refund is due or the amount already refunded

exceeds the refund determined on regular assessment. The said

interest is levied @ 0.5% on the whole or excess amount so refunded

for every month or part thereof from the date of grant of refund to

the date of such regular assessment.

1.7 IMPORTANT CONCEPTS & PROCEDURES

UNDER THE INCOME TAX ACT

1.7.1 Assessee (Section 2(7)): An assessee is a person

by whom any tax or any other sum of money is

payable under the Act.

1.7.2 Assessment Year (Section 2(9)): Assessment year

means the period of 12 months starting from 1st

April of every year and ending on 31st March of

the next year.

1.7.3 Previous year (Section 3): Income earned in a year

is taxable in the next year. The year in which

income is earned is known as the previous year

and the next year in which income is taxable is

known as the assessment year.

1.7.4 Receipt Vs. accrual of income: Income is said to

have been received by a person when payment

has been actually received whereas income is said

to have accrued to a person if there arises in the

person a fixed and unconditional right to receive

such income.

1.7.5 Belated Return: Section 139(4) provides that a

return which has not been furnished by the due

date may still be furnished as a belated return

before the expiry of one year from the end of the

assessment year or before the completion of

assessment, whichever is earlier. However, on any

return of income that has not been filed by the end

of the relevant assessment year, penalty of

Rs.5000/- u/s 271F shall be levied.

1.7.6 Revised Return: If a person having filed his return

within the due date, discovers any omission or

wrong statement therein, he may file a revised

return before the expiry of one year from the end

of the assessment year or completion of

assessment whichever is earlier.

1.7.7 Processing u/s 143(1): The Finance Act 2008 has

reintroduced provisions in respect of correcting

arithmetical mistakes or internal inconsistencies at

the stage of processing of returns. It has, thus

been provided that, during the stage of processing,

the total income shall be computed after making

adjustments in respect of any arithmetical error in

the return or any incorrect claim apparent from

information in the return and if on such computation,

any tax or interest or refund is found due on

adjustment of TDS or advance tax or self

assessment tax, then an intimation specifying the

amount payable shall be prepared/generated or

issued to the assessee. If any refund is found due,

it is to be sent along with an intimation to such

effect. If no demand or no refund arises, the

acknowledgement of the return is deemed to be

an intimation. Such intimation is to be sent within

one year from the end of the financial year in which

the return is filed.

1.7.8 Assessment u/s 143(3): If the Assessing Officer,

on the basis of the return filed by the assessee,

considers that it is necessary to ensure that the

assessee has not understated his income, he shall

serve on the assessee a notice u/s 143(2) and, after

obtaining such information as he may require,

complete the assessment ( commonly referred as

scrutiny assessment) u/s 143(3).

1.7.9 Rectification of mistake u/s 154: If any order passed

by an income tax authority suffers from a mistake

apparent from record, the assessee may make an

application for rectifying the same before the expiry

of four years from the end of the financial year in

which the above order was passed. The Finance

Act 2001 has provided that where an application

for rectification under this Section is made by the

assessee on or after 1.6.2001, the same shall have

to be acted upon by the income tax authority within

a period of six months from the end of the month

in which the application is received.

1.7.10 Interest on refunds u/s 244A: If the refund due to

the assessee is more than 10% of the tax payable

by him, he shall be entitled to receive simple interest

thereon at rate of 0.5% per month (substituted in

place of 0.67% per month w.e.f. 8.9.2003) or part

thereof, from 1st April of the assessment year to

the date on which the refund is granted.

1.7.11 Tax Return Preparers Scheme:- For enabling

specified classes of tax payers in preparing and

furnishing income tax returns, the Board has

notified the ‘Tax Return Preparer Scheme’ under

which specially trained and authorized Tax Return

Preparers will provide assistance to tax payers in

this regard. Details of the Scheme may be viewed

at www.incometaxindia.gov.in. Individuals or

HUFs may furnish his return of income through a

Tax Return Preparer who has been authorized and

certified for this purpose.

1.7.12 Set off of refund: It may be mentioned here that

the Income tax Act provides that in case there in

any demand payable by an assessee, any refund

arising to him in any other assessment year may

be set off after giving an intimation in writing to

such person of such proposed action.

1.7.13 The Finance Act 2013 has provided that if, any tax

or interest that is payable under the Act has not

been paid on or before the date of furnishing or

return, then such return will be a defective return

and, hence, invalid.

1.7.14 W.e.f. 1.4.2013 a new section 115JC has been

introduced which is applicable an individual or HUF

with ‘adjusted total income’ not below Rs. 20 lakh.

Adjusted total income is total income as increased

by deductions claimed under chaper VI A. In such

case, the tax payable shall be regular income tax

payable or 18.5% of the adjusted total income,

whichever is higher.

CHAPTER-2

SALARY INCOME, PERQUISITES

& ALLOWANCES

2.1 WHAT IS “SALARY”

Salary is the remuneration received by or accruing to an

individual, periodically, for service rendered as a result of an express

or implied contract. The actual receipt of salary in the previous

year is not material as far as its taxability is concerned. The

existence of employer-employee relationship is the sine-qua-non

for taxing a particular receipt under the head “salaries”. For

instance, the salary received by a partner from his partnership

firm carrying on a business is not chargeable as “Salaries” but as

“Profits & Gains from Business or Profession”. Similarly, salary

received by a person as MP or MLA is taxable as “ Income from

other sources”, but if a person received salary as Minister of State/

Central Government, the same shall be charged to tax under the

head “Salaries”. Pension received by an assessee from his former

employer is taxable as “Salaries” whereas pension received on his

death by members of his family (Family Pension) is taxed as

“Income from other sources”.

2.2 WHAT DOES “SALARY” INCLUDE

Section 17(1) of the Income tax Act gives an inclusive and

not exhaustive definition of “Salaries” including therein (i) Wages

(ii) Annuity or pension (iii) Gratuity (iv) Fees, Commission,

perquisites or profits in lieu of salary (v) Advance of Salary (vi)

Amount transferred from unrecognized provident fund to

recognized provident fund (vii) Contribution of employer to a

Recognised Provident Fund in excess of the prescribed limit (viii)

Leave Encashment (ix) Compensation as a result of variation in

Service contract etc. (x) Contribution made by the Central

Government to the account of an employee under a notified

pension scheme.

2.3 DEDUCTION FROM SALARY INCOME

The following deductions from salary income are admissible

as per Section 16 of the Income-tax Act.

(i) Professional/Employment tax levied by the State Govt.

(ii) Entertainment Allowance- Deduction in respect of this

is available to a government employee to the extent of Rs.

5000/- or 20% of his salary or actual amount received,

whichever is less.

It is to be noted that no standard deduction is available

from salary income w.e.f. 01.04.2006 i.e. A.Y.2006-07

onwards.

2.4 PERQUISITES

“Perquisite” may be defined as any casual emolument or

benefit attached to an office or position in addition to salary or

wages.

“Perquisite” is defined in the section17(2) of the Income tax

Act as including:

(i) Value of rent-free/concessional rent accommodation provided

by the employer.

(ii) Any sum paid by employer in respect of an obligation which

was actually payable by the assessee.

(iii) Value of any benefit/amenity granted free or at concessional

rate to specified employees etc.

(iv) 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 assesssee.

(v) The amount of any contribution to an approved superannuation

fund by the employer in respect of the assessee, to the extent

it exceeds one lakh rupees; and

(vi) the value of any other fringe benefit or amenity as may be

prescribed.

2.5 VALUATION OF PERQUISITES

As a general rule, the taxable value of perquisites in the hands

of the employees is its cost to the employer. However, specific

rules for valuation of certain perquisites have been laid down in

Rule 3 of the I.T. Rules. These are briefly given below.

2.5.1 Valuation of residential accommodation provided

by the employer:-

(a) Union or State Government Employees- The

value of perquisite is the license fee as determined

by the Govt. as reduced by the rent actually paid

by the employee.

(b) Non-Govt. Employees- The value of perquisite

is an amount equal to 15% of the salary in cities

having population more than 25 lakhs, (10% of

salary in cities where population as per 2001 census

is exceeding 10 lakhs but not exceeding 25 lakhs

and 7.5% of salary in areas where population as

per 2001 census is 10 lakhs or below). In case the

accommodation provided is not owned by the

employer, but is taken on lease or rent, then the

value of the perquisite would be the actual amount

of lease rent paid/payable by the employer or

15% of salary, whichever is lower. In both of

above cases, the value of the perquisite would be

reduced by the rent, if any, actually paid by the

employee.

2.5.2 Value of Furnished Accommodation- The value

would be the value of unfurnished accommodation

as computed above, increased by 10% per annum

of the cost of furniture (including TV/radio/

refrigerator/AC/other gadgets). In case such

furniture is hired from a third party, the value of

unfurnished accommodation would be increased

by the hire charges paid/payable by the employer.

However, any payment recovered from the

employee towards the above would be reduced

from this amount.

2.5.3 Value of hotel accommodation provided by the

employer- The value of perquisite arising out of

the above would be 24% of salary or the actual

charges paid or payable to the hotel, whichever is

lower. The above would be reduced by any rent

actually paid or payable by the employee. It may

be noted that no perquisite would arise, if the

employee is provided such accommodation on

transfer from one place to another for a period of

15 days or less.

2.5.4 Perquisite of motor car provided by the

employer- W.e.f. 1-4-2008, if an employer

providing such facility to his employee is not liable

to pay fringe benefit tax, the value of such perquisite

shall be :

a) Nil, if the motor car is used by the employee

wholly and exclusively in the performance of

his official duties.

b) Actual expenditure incurred by the employer

on the running and maintenance of motor car,

including remuneration to chauffeur as

increased by the amount representing normal

wear and tear of the motor car and as reduced

by any amount charged from the employee

for such use (in case the motor car is

exclusively for private or personal purposes

of the employee or any member of his

household).

c) Rs. 1800- (plus Rs. 900-, if chauffeur is also

provided) per month (in case the motor car is

used partly in performance of duties and partly

for private or personal purposes of the

employee or any member of his household if

the expenses on maintenance and running of

motor car are met or reimbursed by the

employer). However, the value of perquisite

will be Rs. 2400- (plus Rs. 900-, if chauffeur

is also provided) per month if the cubic

capacity of engine of the motor car exceeds

1.6 litres.

d) Rs. 600- (plus Rs. 900-, if chauffeur is also

provided) per month (in case the motor car is

used partly in performance of duties and partly

for private or personal purposes of the

employee or any member of his household if

the expenses on maintenance and running of

motor car for such private or personal use

are fully met by the employee). However, the

value of perquisite will be Rs. 900- (plus

Rs. 900-, if chauffeur is also provided) per

month if the cubic capacity of engine of the

motor car exceeds 1.6 litres.

If the motor car or any other automotive conveyance is owned

by the employee but the actual running and maintenance charges

are met or reimbursed by the employer, the method of valuation of

perquisite value is different. (See Rule 3(2)).

2.5.5 Perquisite arising out of supply of gas, electric

energy or water: This shall be determined as the

amount paid by the employer to the agency

supplying the same. If the supply is from the

employer’s own resources, the value of the

perquisite would be the manufacturing cost per unit

incurred by the employer. However, any payment

received from the employee towards the above

would be reduced from the amount [Rule 3(4)]

2.5.6 Free/Concessional Educational Facility: Value of

the perquisite would be the expenditure incurred

by the employer. If the education institution is

maintained & owned by the employer, the value

would be nil if the value of the benefit per child is

below Rs. 1000/- P.M. or else the reasonable cost

of such education in a similar institution in or near

the locality. [Rule 3(5)].

2.5.7 Free/Concessional journeys provided by an

undertaking engaged in carriage of passengers or

goods: Value of perquisite would be the value at

which such amenity is offered to general public as

reduced by any amount, if recovered from the

employee. However, these provisions are not

applicable to the employees of an airline or the

railways.

2.5.8 Provision for sweeper, gardener, watchman or

personal attendant: The value of benefit resulting

from provision of any of these shall be the actual

cost borne by the employer in this respect as

reduced by any amount paid by the employee for

such services. (Cost to the employer in respect

to the above will be salary paid/payable).

[Rule 3(3)].

2.5.9 Value of certain other fringe benefits:

(a) Interest free/concessional loans- The value of the

perquisite shall be the excess of interest payable

at the prescribed interest rate over, interest, if any,

actually paid by the employee or any member of

his household. The prescribed interest rate would

be the rate charged by State Bank of India as on

the 1st Day of the relevant Previous Year in respect

of loans of the same type and for same purpose

advanced by it to general public. Perquisite to be

calculated on the basis of the maximum outstanding

monthly balance method. However, loans upto Rs.

20,000/-, loans for medical treatment specified in

Rule 3A are exempt provided the same are not

reimbursed under medical insurance.

(b) Value of free meals- The perquisite value in respect

of free food and non-alcoholic beverages provided

by the employer, not liable to pay fringe benefit

tax, to an employee shall be the expenditure

incurred by the employer as reduced by the amount

paid or recovered from the employee for such

benefit or amenity. However, no perquisite value

will be taken if food and non-alcoholic beverages

are provided during working hours and certain

conditions specified under Rule 3(7)(iii) are

satisfied.

value in respect of any gift, or voucher, or taken in

lieu of which such gift may be received by the

employee or member of his household from the

employer, not liable to pay fringe benefit tax, shall

be the sum equal to the amount of such gift, voucher

or token. However, no perquisite value will be taken

if the value of such gift, voucher or taken is below

Rs. 5000/- in the aggregate during the previous

years.

(d) Credit card provided by the employer- The

perquisite value in respect of expenses incurred

by the employee or any of his household members,

which are charged to a credit card provided by the

employer, not liable to pay fringe benefit tax, which

are paid or reimbursed by such employer to an

employee shall be taken to be such amount paid or

reimbursed by the employer. However, no

perquisite value will be taken if the expenses are

incurred wholly and exclusively for official purposes

and certain conditions mentioned in Rule 3(7)(v)

are satisfied.

(e) Club membership provided by the employer- The

perquisite value in respect of amount paid or

reimbursed to an employee by an employer, not

liable to pay fringe benefit tax, against the expenses

incurred in a club by such employee or any of his

household members shall be taken to be such

amount incurred or reimbursed by the employer as

reduced by any amount paid or recovered from

the employee on such account. However, no

perquisite value will be taken if the expenditure is

incurred wholly any exclusively for business

purposes and certain conditions mentioned in Rule

3(7)(vi) are satisfied.

2.5.10 The value of any other benefit or amenity provided

by the employer shall be determined on the basis

of cost to the employer under an arms’ length

transaction as reduced by the employee’s

contribution.

2.5.11 The fair market value of any specified security or

sweat equity share, being an equity share in a

company, on the date on which the option is

exercised by the employee, shall be determined

as follows:-

(a) In a case where,on the date of exercising of the

option, the share in the company is listed on a

recognized stock exchange, the fair market value

shall be the average of the opening price and closing

price of the share on the date on the said stock

exchange.

(b) In a case where, on the date of exercising of the

option, the share in the company is not listed on a

recognized stock exchange, the fair market value

shall be such value of the share in the company as

determined by a merchant banker on the specified

date.

not being an equity share in a company, on the date

on which the option is exercised by the employee,

shall be such value as determined by a merchant

banker on the specified date.

2.6 PERQUISITES EXEMPT FROM INCOME TAX

Some instances of perquisites exempt from tax are given

below:

Provision of medical facilities (Proviso to Sec. 17(2)): Value

of medical treatment in any hospital maintained by the Government

or any local authority or approved by the Chief Commissioner of

Income-tax. Besides, any sum paid by the employer towards

medical reimbursement other than as discussed above is exempt

upto Rs.15,000/-.

Perquisites allowed outside India by the Government to a

citizen of India for rendering services outside India (Sec. 10(7)).

Rent free official residence provided to a Judge of High Court

or Supreme Court or an Official of Parliament, Union Minister or

Leader of Opposition in Parliament.

No perquisite shall arise if interest free/concessional loans

are made available for medical treatment of specified diseases in

Rule 3A or where the loan is petty not exceeding in the aggregate

Rs.20,000/-

No perquisite shall arise in relation to expenses on telephones

including a mobile phone incurred on behalf of the employee by

the employer.

2.7 ALLOWANCES

Allowance is defined as a fixed quantity of money or other

substance given regularly in addition to salary for meeting specific

requirements of the employees. As a general rule, all allowances

are to be included in the total income unless specifically exempted.

Exemption in respect of following allowances is allowable to the

exent mentioned against each :-

2.7.1 House Rent Allowance:- Provided that expenditure

on rent is actually incurred, exemption available

shall be the least of the following :

(i) HRA received.

(ii) Rent paid less 10% of salary.

(iii) 40% of Salary (50% in case of Mumbai, Chennai,

Kolkata, Delhi) Salary here means Basic +

Dearness Allowance, if dearness allowance is

provided by the terms of employment.

2.7.2 Leave Travel Allowance: The amount actually

incurred on performance of travel on leave to any

place in India by the shortest route to that place is

exempt. This is subject to a maximum of the air

economy fare or AC 1st Class fare (if journey is

performed by mode other than air) by such route,

provided that the exemption shall be available only

in respect of two journeys performed in a block of

4 calendar years.

2.7.3 Certain allowances given by the employer to the

employee are exempt u/s 10(14). All these exempt

allowance are detailed in Rule 2BB of Incometax

Rules and are briefly given below:

For the purpose of Section 10(14)(i), following allowances

are exempt, subject to actual expenses incurred:

(i) Allowance granted to meet cost of travel on tour or on transfer.

(ii) Allowance granted on tour or journey in connection with

transfer to meet the daily charges incurred by the employee.

(iii) Allowance granted to meet conveyance expenses incurred

in performance of duty, provided no free conveyance is

provided.

(iv) Allowance granted to meet expenses incurred on a helper

engaged for performance of official duty.

(v) Academic, research or training allowance granted in

educational or research institutions.

(vi) Allowance granted to meet expenditure on purchase/

maintenance of uniform for performance of official duty.

Under Section 10(14)(ii), the following allowances have been

prescribed as exempt.

Type of Allowance

(i) Special Compensatory

Allowance for hilly

areas or high altitude

allowance or climate

allowance.

(ii) Border area allowance

or remote area

allowance or a difficult

area allowance or

disturbed area

allowance.

(iii) Tribal area/Schedule

area/Agency area

allowance available in

M.P., Assam, U.P.,

Karnataka, West

Bengal, Bihar, Orissa,

Tamilnadu, Tripura

(iv) Any allowance granted

to an employee working

in any transport system

to meet his personal

expenditure during duty

performed in the course

of running of such

transport from one

place to another place.

Amount exempt

Rs.800 common for various

areas of North East, Hilly areas

of U.P., H.P. & J&K and Rs.

7000 per month for Siachen area

of J&K and Rs.300 common

for all places at a height of 1000

mts or more other than the

above places.

Various amounts ranging from

Rs.200 per month to Rs.1,300

per month are exempt for

various areas specified in

Rule 2BB.

Rs.200 per month.

70% of such allowance upto a

maximum of Rs. 10,000 per

month.

(v) Children education

allowance.

(vi) Allowance granted to

meet hostel expenditure

on employee’s child.

(vii) Compensatory field

area allowance

available in various

areas of Arunachal

Pradesh, Manipur

Sikkim, Nagaland,

H.P., U.P. & J&K.

(viii) Compensatory modified

field area allowance

available in specified

areas of Punjab,

Rajsthan, Haryana,

U.P., J&K, H.P., West

Bengal & North East.

(ix) Counter insurgency

allowance to members

of Armed Forces.

(x) Transport Allowance

granted to an employee

to meet his expenditure

for the purpose of

commuting between the

place of residence &

duty.

(xi) Transport allowance

granted to physically

disabled employee for

the purpose of

Rs.100 per month per child upto

a maximum 2 children.

Rs.300 per month per child upto

a maximum two children.

Rs.2,600 per month.

Rs.1,000 per month

Rs.3,900 Per month

Rs.800 per month.

Rs.1,600 per month.

commuting between

place of duty and

residence.

(xii) Underground allowance

granted to an employee

working in under ground

mines.

(xiii) Special allowance in the

nature of high altitude

allowance granted to

members of the armed

forces.

(xiv) Any special allowance

granted to the members

of the armed forces in

the nature of special

compensatory highly

active field area

allowance

(xv) Special allowance

granted to members of

armed forces in the

nature of island duty

allowance.

(in Andaman & Nicobar

& Lakshadweep Group

of Islands)

Rs.800 per month.

Rs.1,060 p.m. (for altitude of

9000-15000 ft.) Rs.1,600 p.m.

(for altitude above 15000 ft.)

Rs. 4,200/- p.m.

Rs. 3,250/- p.m.

CHAPTER-3

OVERVIEW OF INCOME FROM

HOUSE PROPERTY

3.1 INTRODUCTION

Under the Income Tax Act what is taxed under the head

‘Income from House Property’ is the inherent capacity of the

property to earn income called the Annual Value of the property.

The above is taxed in the hands of the owner of the property.

3.2 COMPUTATION OF ANNUAL VALUE

(i) GROSS ANNUAL VALUE(G.A.V.) is the highest of

(a) Rent received or receivable

(b) Fair Market Value.

(If however, the Rent Control Act is applicable, the G.A.V. is

the standard rent or rent received, whichever is higher).

It may be noted that if the let out property was vacant for

whole or any part of the previous year and owing to such vacancy

the actual rent received or receivable is less than the sum referred

to in clause(a) above, then the amount actually received/receivable

shall be taken into account while computing the G.A.V. If any

portion of the rent is unrealisable, (condition of unrealisability of

rent are laid down in Rule 4 of I.T. Rules) then the same shall not

be included in the actual rent received/receivable while computing

the G.A.V.

(ii) NET VALUE (N.A.V.) is the GAV less the municipal taxes

paid by the owner.

Provided that the taxes were paid during the year.

(iii) ANNUAL VALUE is the N.A.V. less the deductions available

u/s 24.

3.3 DEDUCTIONS U/S 24:- Are exhaustive and no other

deductions are available:-

(i) A sum equal to 30% of the annual value as computed above.

(ii) Interest on money borrowed for acquisition/construction/

repair/renovation of property is deductible on accrual basis.

Interest paid during the pre construction/acquisition period

will be allowed in five successive financial years starting with

the financial year in which construction/acquisition is

completed. This deduction is also available in respect of a

self occupied property and can be claimed up to maximum of

Rs.30,000/-. The Finance Act, 2001 had provided that w.e.f.

A.Y. 2002-03 the amount of deduction available under this

clause would be available up to Rs.1,50,000/- in case the

property is acquired or constructed with capital borrowed on

or after 1.4.99 and such acquisition or construction is

completed before 1.4.2003. The Finance Act 2002 has further

removed the requirement of acquisition/ construction being

completed before 1.4.2003 and has simply provided that

the acquisition/construction of the property must be completed

within three years from the end of the financial year in which

the capital was borrowed.

3.4 SOME NOTABLE POINTS

In case of one self occupied property, the annual value is

taken as nil. Deduction u/s 24 for interest paid may still be claimed

therefrom. The resulting loss may be set off against income under

other heads but can not be carried forward.

If more than one property is owned and all are used for self

occupation purposes only, then any one can be opted as self

occupied, the others are deemed to be let out.

Annual value of one house away from workplace which is

not let out can be taken as NIL provided that it is the only house

owned and it is not let out.

If a let out property is partly self occupied or is self occupied

for a part of the year, then the value in proportion to the portion of

self occupied property or period of self occupation, as the case

may be is to be excluded from the annual value.

From Assessment year 1999-2000 onwards, an assessee who

apart from his salary income has loss under the head “Income

from house property”, may furnish the particulars of the same in

the prescribed form to his Drawing and Disbursing Officer who

shall then take the above loss also into account for the purpose of

TDS from salary.

A new section 25B has been inserted with effect from

assessment year 2001-2002 which provides that where the

assessee, being the owner of any property consisting of any

buildings or lands appurtenant thereto which may have been let to

a tenant, receives any arrears of rent not charged to income tax

for any previous year, then such arrears shall be taxed as the

income of the previous year in which the same is received after

deducting therefrom a sum equal to 30% of the amount of arrears

in respect of repairs/collection charges. It may be noted that the

above provision shall apply whether or not the assessee remains

the owner of the property in the year of receipt of such arrears.

3.5 PROPERTY INCOME EXEMPT FROM TAX

Income from farm house (Sec.2(1A)(c) read with sec. 10(1)).

Annual value of any one palace of an ex-ruler (Sec.10(19A)).

Property income of a local authority (Sec.10(20)), university/

educational institution (Sec.10(23C)), approved scientific research

association (Sec.10(21)), political party (Sec.13A). Property used

for own business or profession (Sec.22). One self occupied property

(Sec.23(2)). House property held for charitable purposes (Sec.11).

CHAPTER-4

OVERVIEW OF CAPITAL GAINS

4.1 CAPITAL GAINS

Profits or gains arising from the transfer of a capital asset

during the previous year are taxable as “Capital Gains” under section

45(1) of the Income Tax Act. The taxability of capital gains is in

the year of transfer of the capital asset.

4.2 CAPITAL ASSET

As defined in section 2(14) of the Income Tax Act, it means

property of any kind held by the assessee except:

(a) Stock in trade, consumable stores or raw materials held for

the purpose of business or profession.

(b) Personal effects, being moveable property (excluding

Jewellery, archaeological collections, drawings, paintings,

sculptures or any other work of art) held for personal use.

8 kms, from a municipality, municipal corporation, notified

area committee, town committee or a cantonment board with

population of at least 10,000.

(d) Six and half percent Gold Bonds, National Defence Gold

Bonds and Special Bearer Bonds.

4.3 TYPES OF CAPITAL GAINS

When a capital asset is transferred by an assessee after having

held it for at least 36 months, the Capital Gains arising from this

transfer are known as Long Term Capital Gains. In case of shares

of a company or units of UTI or units of a Mutual Fund, the

minimum period of holding for long term capital gains to arise is 12

months. If the period of holding is less than above, the capital

gains arising therefrom are known as Short Term Capital Gains.

4.4 COMPUTATION OF CAPITAL GAINS (Sec.48)

Capital gain is computed by deducting from the full value of

consideration, for the transfer of a capital asset, the following:-

(a) Cost of acquisition of the asset(COA):- In case of Long Term

Capital Gains, the cost of acquisition is indexed by a factor

which is equal to the ratio of the cost inflation index of the

year of transfer to the cost inflation index of the year of

acquisition of the asset. Normally, the cost of acquisition is

the cost that a person has incurred to acquire the capital asset.

However, in certain cases, it is taken as following:

(i) When the capital asset becomes a property of an

assessee under a gift or will or by succession or

inheritance or on partition of Hindu Undivided Family or

on distribution of assets, or dissolution of a firm, or

liquidation of a company, the COA shall be the cost for

which the previous owner acquired it, as increased by

the cost of improvement till the date of acquisition of

the asset by the assessee.

(ii) When shares in an amalgamated Indian company had

become the property of the assessee in a scheme of

amalgamation, the COA shall be the cost of acquisition

of shares in the amalgamating company.

(iii) Where the capital asset is goodwill of a business, tenancy

right, stage carriage permits or loom hours the COA is

the purchase price paid, if any or else nil.

(iv) The COA of rights shares is the amount which is paid

by the subscriber to get them. In case of bonus shares,

the COA is nil.

(v) If a capital asset has become the property of the

assessee before 1.4.81, the assessee may choose either

the fair market value as on 1.4.81 or the actual cost of

acquisition of the asset as the COA.

(b) Cost of improvement, if any such cost was incurred. In case

of long term capital assets, the indexed cost of improvement

will be taken.

brokerage etc.

4.5 SOME IMPORTANT EXEMPTIONS FROM LONG

TERM CAPITAL GAINS

(a) Section 54: In case the asset transferred is a long term capital

asset being a residential house, and if out of the capital gains,

a new residential house is constructed within 3 years, or

purchased 1 year before or 2 years after the date of transfer,

then exemption on the LTCG is available on the amount of

investment in the new asset to the extent of the capital gains.

It may be noted that the amount of capital gains not

appropriated towards purchase or construction may be

deposited in the Capital Gains Account Scheme of a public

sector bank before the due date of filing of Income Tax Return.

This amount should subsequently be used for purchase or

construction of a new house within 3 years.

(b) Section 54F: When the asset transferred is a long term capital

asset other than a residential house, and if out of the

consideration, investment in purchase or construction of a

residential house is made within the specified time as in

Sec. 54, then exemption from the capital gains will be available

as:

(i) If cost of new asset is greater than the net consideration

received, the entire capital gain is exempt.

(ii) Otherwise, exemption = Capital Gains x Cost of new

asset/Net consideration.

It may be noted that this exemption is not available, if on the

date of transfer, the assessee owns any house other than the new

asset. It may be noted that the Finance Act, 2000 has provided

that with effect from assessment year 2001-2002, the above

exemption shall not be available if assessee owns more than one

residential house, other than new asset, on the date of transfer.

Investment in the Capital Gains Account Scheme may be made as

in Sec.54.

before 1.4.2000 and out of the consideration, investment in

specified bonds/debentures/shares is made within 6 months

of the date of transfer, then exemption from capital gains is

available as computed in Section 54F.

(d) Section 54EB: If any long term capital asset is transferred

before 1.4.2000 and investment in specified assets is made

within a period of 6 months from the date of transfer, then

exemption from capital gains will be available as :-

(i) If cost of new assets is not less than the Capital Gain, the

entire Capital Gain is exempt.

(ii) Otherwise exemption = Capital Gains x Cost of New asset

Capital Gains

(e) Section 54EC: This section has been introduced from

assessment year 2001-2002 onwards. It provides that if any

long term capital asset is transferred and out of the

consideration, investment in specified assets (any bond issued

by National Highway Authority of India or by Rural

Electrification Corporation redeemable after 3 years), is made

within 6 months from the date of transfer, then exemption

would be available as computed in Sec. 54EB.

The Finance Act, 2007 has laid an annual ceiling of Rs. 50

lakh on the investment made under this section w.e.f. 1.4.2007.

(f) Section 54ED: This section has been introduced from

assessment year 2002-03 onwards. It provides that if a long

term capital asset, being listed securities or units, is transferred

and out of the consideration, investment in acquiring equity

shares forming part of an eligible issue of capital is made

within six months from the date of transfer, then exemption

would be available as computed in Sec. 54EB. As per the

Finance Act, 2006 it has been provided that with effect from

assessment year 2007-08, no exemption under this Section

shall be available.

4.6 LOSS UNDER CAPITAL GAINS

Can not be set off against any income under any other head

but can be carried forward for 8 assessment years and be set off

against capital gains in those assessment years.

4.7 EXEMPT INCOME

The Finance Act, 2003 has introduced S.10(33) w.e.f.

01.04.2003 which provides that income arising from certain types

of transfer of capital assets shall be treated as exempt income.

S.10(33) provides for exemption of income arising from transfer

of units of the US 64 (Unit Scheme 1964). S.10(36) inserted by

the Finance Act, 2003 w.e.f. 1.4.2004 provides that income arising

from transfer of eligible equity shares held for a period of 12 months

or more shall be exempt.

The Finance Act, 2004 has introduced Section 10(38) of the

I.T. Act which provides that no capital gains shall arise in case of

transfer of equity shares held as a long term capital asset by an

individual or HUF w.e.f. 01.04.2005 provided such transaction is

chargeable to ‘securities transaction tax’.

COST INFLATION INDEX:

The Central Government has notified the Cost Inflation

Index for the purpose of long term Capital Gain as follows:

Financial Year Cost Inflation Index

1981-82 100

1982-83 109

1983-84 116

1984-85 125

1985-86 133

1986-87 140

1987-88 150

1988-89 161

1989-90 172

1990-91 182

1991-92 199

1992-93 223

1993-94 244

1994-95 259

1995-96 281

1996-97 305

1997-98 331

1998-99 351

1999-2000 389

2000-2001 406

2001-2002 426

2002-2003 447

2003-2004 463

2004-2005 480

2005-2006 497

2006-2007 519

2007-2008 551

2008-2009 582

2009-2010 632

2010-2011 711

2011-2012 785

2012-2013 852

2013-2014 939

CHAPTER-5

DEDUCTIONS UNDER CHAPTER- VIA

5.1 INTRODUCTION

The Income Tax Act provides that on determination of the

gross total income of an assessee after considering income from

all the heads, certain deductions therefrom may be allowed. These

deductions detailed in chapter VIA of the Income Tax Act must

be distinguished from the exemptions provides in Section 10 of the

Act. While the former are to be reduced from the gross total income,

the latter do not form part of the income at all.

5.2 The chart given below describes the deductions allowable

under chapter VIA of the I.T. Act from the gross total income of

the assessees having income from salaries.

SECTION

80CCC

NATURE OF

DEDUCTION

Payment of premium for

annunity plan of LIC or

any other insurer.

Deduction is available

upto a maximum of

Rs.10,000/-

REMARKS

The premium must be

deposited to keep in

force a contract for an

annuity plan of the LIC

or any other insurer for

receiving pension from

the fund.The Finance

Act, 2006 has enhanced

the ceiling of deduction

under Section 80CCC

from Rs.10,000 to

Rs.1,00,000 with effect

from 1.4.2007.

80CCD

80CCF

80CCG

Deposit made by an

employee in his pension

account to the extent of

10% of his salary.

Subscription to long term

infrastructure bonds

Investment made under

an Equity savings

scheme/ Equity oriented

fund.

Where the Central

Government makes any

contribution to the

pension account,

deduction of such

contribution to the

extent of 10% of salary

shall be allowed.

Further, in any year

where any amount is

received from the

pension account such

amount shall be charged

to tax as income of that

previous year. The

Finance Act, 2009 has

extended benefit to any

individual assesse, not

being a Central

Government employee.

Subscription made by

individual or HUF to the

extent of Rs. 20,000 to

notified long term

infrastructure bonds is

exempt from A.Y. 2011-

12 onwards.

Investment in such

notified schemes is

eligible for deduction to

the extent of 50%

subject to an overall cap

of Rs. 25,000. This is

available only to retail

investors having gross

total income less than or

equal to Rs. 10 lakh.

The premium is to be

paid by any mode of

payment other than cash

and the insurance

scheme should be

framed by the General

Insurance Corporation

of India & approved by

the Central Govt. or

Scheme framed by any

other insurer and

approved by the

Insurance Regulatory &

Development Authority.

The premium should be

paid in respect of health

insurance of the

assessee or his family

members. The Finance

Act, 2008 has also

provided deduction upto

Rs. 15,000/- in respect of

health insurance

premium paid by the

assessee towards his

parent/parents. W.e.f.

01.04.2011, contributions

made to the Central

Government Health

Scheme is also covered

under this section.

80D Payment of medical

insurance premium.

Deduction is available

upto Rs.15,000/- for self/

family and also upto Rs.

15,000/- for insurance in

respect of parent/

parents of the assessee.

Deduction of Rs.40,000/-

in respect of (a)

expenditure incurred on

medical treatment,

(including nursing),

training and

rehabilitation of

handicapped dependant

relative. (b) Payment

or deposit to specified

scheme for maintenance

of dependant

handicapped relative.

W.e.f. 01.04.2004 the

deduction under this

section has been

enhanced to Rs.50,000/-

Further, if the

Further, contribution

made to other such

schemes notified by the

Central Govt. in this

behalf is also eligible for

this deduction.

The above includes any

payment made on

account of preventive

health check up of the

parent’s of the assessee.

In case of latter,

deduction will be

allowed in the aggregate

upto Rs.5000/-

The handicapped

dependant should be a

dependant relative

suffering from a

permanent disability

(including blindness) or

mentally retarded, as

certified by a specified

physician or psychiatrist.

Note: A person with

severe disability means

a person with 80% or

more of one or more

disabilities as outlined

in section 56(4) of the

“Persons with

Disabilities (Equal

opportunities,

Protection of Rights

80DD

and Full Participation)

Act.”

Expenditure must be

actually incurred by

resident assessee on

himself or dependent

relative for medical

treatment of specified

disease or ailment. The

diseases have been

specified in Rule 11DD.

A certificate in form 10

I is to be furnished by the

assessee from a

specialist working in a

Government hospital.

Senior citizen for the

purpose of this section

means an individual

resident in India who is

of age 65 years or more

at any time during

relevant previous year.

This provision has been

introduced to provide

relief to students taking

loans for higher studies.

The payment of the

dependant is a person

with severe disability a

deduction of

Rs.1,00,000/- shall be

available under this

section.

Deduction in respect of

medical expenditure

incurred is available to

the extent of Rs.40,000/-

or the amount actually

paid, whichever is less.

In case of senior

citizens, a deduction upto

Rs.60,000/- shall be

available under this

Section.

Deduction in respect of

payment in the previous

year of interest on loan

taken from a financial

institution or approved

80DDB

80E

80EE

80G

charitable institution for

higher studies.

Deduction in respect of

interest on loan taken

for residential house

property is available for

AY 14-15

Donation to certain

funds, charitable

institutions etc.

interest thereon will be

allowed as deduction

over a period of upto 8

years. Further, by

Finance Act, 2007

deduction under this

section shall be available

not only in respect of

loan for pursuing higher

education by self but

also by spouse or

children of the assessee.

W.e.f.01.04.2010 higher

education means any

course of study pursued

after passing the senior

secondary examination

or its equivalent from

any recognized school,

board or university.

The total available

deduction under this

section is Rs 1 lakh. The

amount of loan must be

not in excess of Rs 25 lakh

and this must be the

only resdential property

owned by assessee.

The various donations

specified in Sec. 80G

are eligible for

deduction upto either

100% or 50% with or

80GG

80U

Deduction available is

the least of

(i) Rent paid less 10%

of total income.

(ii) Rs.2000 per month.

(iii) 25% of total

income.

Deduction of

Rs.50,000/- to an

individual who suffers

from a physical

disability (including

blindness) or mental

retardation. Further, if

the individual is a

person with severe

disability, deduction of

Rs.75,000/- shall be

without restriction as

provided in Sec. 80G.

W.e.f 01.04.2013 no

deduction u/s. 80G

shall be allowed in

respect of donation

exceeding Rs.10,000

paid by way of cash.

(1) Assessee or his

spouse or minor

child should not

own residential

accommodation at the

place of employment.

(2) He should not be in

receipt of house rent

allowance.

(3) He should not have

a self occupied

residential premises in

any other place.

Certificate should be

obtained on prescribed

format from a notified

‘Medical authority’.

80RRB

80QQB

80C

available u/s 80U. W.e.f.

01.04.2010 this limit has

been raised to Rs. 1 lakh.

Deduction in respect of

any income by way of

royalty in respect of a

patent registered on or

after 01.04.2003 under

the Patents Act, 1970

shall be available as :-Rs.

3 lacs or the income

received, whichever is

less.

Deduction in respect of

royalty or copyright

income received in

consideration for

authoring any book of

literary, artistic or

scientific nature other

than text book shall be

available to the extent of

Rs. 3 lacs or income

received, whichever is

less.

This section has been

introduced by the

Finance Act, 2005.

Broadly speaking, this

section provides

deduction from total

income in respect of

various investments/

The assessee who is a

patentee must be an

individual resident in

India. The assessee

must furnish a certificate

in the prescribed form

duly signed by the

prescribed authority

alongwith the return of

income.

The assessee must be an

individual resident in

India who receives such

income in exercise of his

profession. To avail of

this deduction, the

assessee must furnish a

certificate in the

prescribed form along

with the return of

income.

expenditures/payments

in respect of which tax

rebate u/s 88 was

earlier available. The

total deduction under

this section is limited to

Rs.1 lakh only.

The following investments/payments are inter alia

eligible for deduction u/s 80C:-

NATURE OF

INVESTMENT

Life Insurance Premium

Sum paid under contract for

deferred annuity

Sum deducted from salary

payable to Govt. Servant for

securing deferred annuity for

self, spouse or child

Contribution made under

Employee’s Provident Fund

Scheme

Contribution to PPF

Contribution by employee to a

Recognised Provident Fund.

Subscription to any notified

securities/notified deposits

scheme.

REMARKS

For individual, policy must be in

the name of self or spouse or

any child’s name. For HUF, it

may be on life of any member

of HUF.

For individual, on life of self,

spouse or any child of such

individual.

Payment limited to 20% of

salary.

—

For individual, can be in the

name of self/spouse, any child

& for HUF, it can be in the

name of any member of the

family.

—

Subscription to any notified

savings certificates.

Contribution to Unit Linked

Insurance Plan of LIC Mutual

Fund

Contribution to notified deposit

scheme/Pension fund set up by

the National Housing Bank.

Certain payment made by way

of instalment or part payment

of loan taken for purchase/

construction of residential

house property.

Subscription to units of a

Mutual Fund notified u/s

10(23D)

Subscription to deposit scheme

of a public sector company

engaged in providing housing

finance.

Subscription to equity shares/

debentures forming part of any

approved eligible issue of

capital made by a public

company or public financial

institutions.

e.g. NSC VIII issue.

e.g. Dhanrakhsa 1989

—

Condition has been laid that in

case the property is transferred

before the expiry of 5 years

from the end of the financial

year in which possession of

such property is obtained by him,

the aggregate amount of

deduction of income so allowed

for various years shall be liable

to tax in that year.

—

Tuition fees paid at the time of

admission or otherwise to any

school, college, university or

other educational institution

situated within India for the

purpose of full time education.

Any term deposit for a fixed

period of not less than five years

with the scheduled bank.

Subscription to notified bonds

issued by NABARD

Payment made into an account

under the Senior Citizens

Savings Scheme Rules, 2004

Payment made as five year

time deposit in an account under

the Post Office Time Deposit

Rules, 1981

Available in respect of any two

children.

This has been included in

Section 80C by the Finance Act,

2006.

This has been included in

Section 80C by the Finance Act,

2007 and has come into effect

from 1.4.2008.

This has been introduced by

Finance Act, 2008 and shall

come into effect from 1.4.2009.

This has been introduced by

Finance Act, 2008 and shall

come into effect from 1.4.2009.

It may be noted that the aggregate amount of deductions under

Sections 80C, 80CCC and 80CCD are subject to an overall ceiling

of Rs.1 lakh.

CHAPTER-6

TAX REBATE & RELIEF

6.1 INTRODUCTION

The total income of an assessee is determined after deductions

from the gross total income are made as discussed in the previous

chapter. It is on this total income that the tax payable is computed

at the rates in force. The Income Tax Act further provides for

rebate from the tax payable as computed above, if certain

investments or payments are made. Rebate provided u/s 88 of the

Act must be distinguished from deductions provided in Chapter

VIA of the Act. While the latter reduces the gross total income,

rebate is a reduction from the tax payable.

The Finance Act, 2002 introduced some changes in the above

which came into effect from A.Y. 2003-2004. The rate of rebate

has been kept at 20% in case the gross total income, before giving

effect to the deductions under chapter VIA, is below Rs. 1.5 lacs

while the rate would be 15% if gross total income is higher than

Rs. 1.5 lacs but lower than Rs. 5 lacs. On the other hand, if the

gross total income exceeds Rs. 5 lacs, no rebate under this chapter

would be available. It has also been provided that an individual

whose income under the head ‘Salaries’ is below Rs. 1 lakh during

the previous year and constitutes at least 90% of his gross total

income, shall be entitled to rebate @ 30% on the investments/

payments specified in Section 88. The maximum amount of

investment qualifying for rebate u/s 88 has been enhanced to

Rs.70,000, however, additional rebate on investment upto Rs. 30,000

is available in respect of subscription to specified infrastructure

equity share/debentures.

Investment qualifying for rebate u/s 88 must be out of income

chargeable to tax in the relevant previous year. The above

NATURE OF

INVESTMENT

Life Insurance Premium

Sum paid under contract for

deferred annuity

Sum deducted from salary

payable to Govt. Servant for

securing deferred annuity for

self, spouse or children

Contribution made under

Employee’s Provident Fund

Scheme

Contribution to PPF

REMARKS

For individual, policy must be in

self or spouse’s or any child’s

name. For HUF, it may be on

life of any member of HUF.

For individual, on life of self,

spouse or any child

Payment limited to 20% of

salary.

—

For individual, can be in the

name of self/spouse, any child

& for HUF, it can be in the

name of any member of the

family.

requirement has, however, been deleted by the Finance Act, 2002

w.e.f. A.Y. 2003-2004.

With effect from assessment year 2001-2002 onwards a new

section 88C has been inserted. It provides that in case of assessee

being a woman resident in India and below 65 years of age, tax

rebate of an amount of Rs. 5,000 or 100% of tax, whichever is

less, shall be available. The above rebate is to be allowed from the

amount of Income Tax computed before allowing for tax rebate

u/s 88 in respect of various investments expenditures, important

among which are discussed below in paragraph 6.2.

6.2

Contribution by employee to a

Recognised Provident Fund.

Sum deposited in 10 year/15year

account of Post Office Savings

Bank.

Subscription to any notified

securities/notified deposits

scheme.

Subscription to any notified

savings certificates.

Contribution to Unit Linked

Insurance Plan of LIC Mutual

Fund.

Contribution to notified deposit

scheme/Pension fund set up by

the National Housing Bank.

Certain payment made by way

of instalment or part payment of

loan taken for purchase/

construction of residential house

property.

Contribution to notified annuity

Plan of LIC(e.g. Jeevan Dhara)

or Units of UTI/notified Mutual

Fund.

Subscription to units of a Mutual

Fund notified u/s 10(23D)

—

e.g. NSC VIII issue.

e.g. Dhanrakhsa 1989

—

Qualifying amount limited to

Rs.10,000. The limit has

been raised to Rs.20,000

w.e.f. assessment year

2001-2002.

If in respect of such

contribution, deduction u/s

80CCC has been availed of,

rebate u/s 88 would not be

allowable.

—

Subscription to deposit scheme

of a Public Sector Company/

Authorised Authority providing

long term house financing.

Subscription to equity shares/

debentures forming part of any

approved eligible issue of

capital made by a public

company or public financial

institutions.

(w.e.f. 01.04.2004) Tuition

fees paid at the time of

admission or otherwise to any

school, college, university or

other educational institution

situated within India for the

purpose of full time education

of any two children.

—

In respect of it, a higher limit of

qualifying investment of

Rs.70,000/- (Rs.80,000/- w.e.f.

A.Y. 2001-2002) is available as

against Rs.60,000/- in case of

other investments.

The qualifying amount limited to

Rs.12,000/- in respect of each

child.

It is important to note that no tax rebate u/s 88 shall be

available from A.Y.2006-07 onwards. Similarly, sections 88B

and 88C providing special rebates to senior citizens and ladies,

stand omitted w.e.f. 01.04.2006.

6.3 RELIEF UNDER SECTION 89 (1):-

It is available to an employee when he receives salary in

advance or in arrear or when in one financial year, he receives

salary of more than 12 months or receives ‘profits in lieu of salary’.

W.e.f. 1.6.89, relief u/s 89(1) can be granted at the time of TDS

from employees of all companies, co-operative societies,

universities or institutions as well as govt./public sector undertakings,

the relief should be claimed by the employee in Form No. 10E and

should be worked out as explained in Rule 21A of the Income Tax

Rules.

CHAPTER-7

PERMANENT ACCOUNT NUMBER

7.1 WHAT IS P.A.N.

P.A.N. or Permanent Account Number is a number allotted

to a person by the Assessing Officer for the purpose of

identification. P.A.N. of the new series has 10 alphanumeric

characters and is issued in the form of laminated card.

7.2 WHO SHALL APPLY FOR P.A.N.

Section 139A of the Income Tax Act provides that every

person whose total income exceeds the maximum amount not

chargeable to tax or every person who carries on any business or

profession whose total turnover or gross receipts exceed Rs.5 lakhs

in any previous year or any person required to file a return of

income u/s 139(4A) shall apply for PAN. Besides, any person not

fulfilling the above conditions may also apply for allotment of PAN.

With effect from 01.06.2000, the Central Government may by

notification specify any class/classes of person including importers

and exporters, whether or not any tax is payable by them, and

such persons shall also then apply to the Assessing Officer for

allotment of PAN.

W.e.f. 01.04.2006 a person liable to furnish a return of fringe

benefits under the newly introduced section 115WD of the I.T.

Act is also required to apply for allotment of PAN. Of course, if

such a person already has been allotted a PAN he shall not be

required to obtain another PAN.

The Finance Act, 2006 has provided that for the purpose of

collecting any information, the Central Govt. may by way of

notification specify any class or classes of persons for allotment

of PAN and such persons shall apply to the Assessing Officer

within the prescribed time. Provision for Suo moto allotment of

PAN has also been introduced w.e.f.1.6.2006 as per which the

assessing officer may allot a Permanent Account No. to any person

whether or not any tax is payable by him having regard to the

nature of transactions.

7.3 TRANSACTIONS IN WHICH QUOTING OF PAN IS

MANDATORY

_ Purchase and sale of immovable property.

_ Purchase and sale of motor vehicles.

_ Transaction in shares exceeding Rs.50,000.

_ Opening of new bank accounts.

_ Fixed deposits of more than Rs.50,000.

_ Application for allotment of telephone connections.

_ Payment to hotels exceeding Rs.25,000.

_ Provided that till such time PAN is allotted to a person, he

may quote his General Index register Number or GIR No.

7.4 HOW TO APPLY FOR PAN

_ Application for allotment of PAN is to be made in Form 49A.

_ Following points must be noted while filling the above form:-

i) Application Form must be typewritten or handwritten in black

ink in BLOCK LETTERS.

ii) Two black & white photographs are to be annexed.

iii) While selecting the “Address for Communication”, due care

should be exercised as all communications thereafter would

be sent at indicated address.

iv) In the space given for “Father’s Name”, only the father’s

name should be given. Married ladies may note that husband’s

name is not required and should not be given.

v) Due care should be exercised to fill the correct date of birth.

vi) The form should be signed in English or any of the Indian

Languages in the 2 specified places. In case of thumb

impressions attestation by a Gazetted Officer is necessary.

CHAPTER-8

TAXABILITY OF

RETIREMENT BENEFITS

8.1 INTRODUCTION

On retirement, an employee normally receives certain

retirement benefits. Such benefits are taxable under the head

‘Salaries’ as “profits in lieu of Salaries” as provided in Section

17(3). However, in respect of some of them, exemption from

taxation is granted u/s 10 of the Income Tax Act, either wholly or

partly. These exemptions are described below:-

8.2 GRATUITY (Sec. 10(10)):

(i) Any death cum retirement gratuity received by Central and

State Govt. employees, Defence employees and employees

in Local authority shall be exempt.

(ii) Any gratuity received by persons covered under the Payment

of Gratuity Act, 1972 shall be exempt subject to following

limits:-

(a) For every completed year of service or part thereof,

gratuity shall be exempt to the extent of fifteen days

Salary based on the rate of Salary last drawn by the

concerned employee.

(b) The amount of gratuity as calculated above shall not

exceed Rs.3,50,000(w.e.f.24.9.97).

(iii) In case of any other employee, gratuity received shall be

exempt subject to the following limits:-

(a) Exemption shall be limited to half month salary (based

on last 10 months average) for each completed year of

service.

(b) Rs.3.5 Lakhs whichever is less.

Where the gratuity was received in any one or more earlier

previous years also and any exemption was allowed for the same,

then the exemption to be allowed during the year gets reduced to

the extent of exemption already allowed, the overall limit being

Rs. 3.5 Lakhs.

As per Board’s letter F.No. 194/6/73-IT(A-1) dated 19.6.73,

exemption in respect of gratuity is permissible even in cases of

termination of employment due to resignation. The taxable portion

of gratuity will quality for relief u/s 89(1).

Gratuity payment to a widow or other legal heirs of any

employee who dies in active service shall be exempt from income

tax(Circular No. 573 dated 21.8.90). Payment of Gratuity

(Amendment) Bill, 2010 has proposed to increase the limit to

Rs. 10,00,000.

8.3 COMMUTATION OF PENSION (SECTION 10(10A)):

(i) In case of employees of Central & State Govt. Local

Authority, Defence Services and Corporation established

under Central or State Acts, the entire commuted value of

pension is exempt.

(ii) In case of any other employee, if the employee receives

gratuity, the commuted value of 1/3 of the pension is

exempt, otherwise, the commuted value of ½ of the pension

is exempt.

Judges of S.C. & H.C. shall be entitled to exemption of

commuted value upto ½ of the pension (Circular No. 623 dated

6.1.1992).

8.4 LEAVE ENCASHMENT (Section 10(10AA)):

(i) Leave Encashment during service is fully taxable in all

cases, relief u/s 89(1) if applicable may be claimed for

the same.

(ii) Any payment by way of leave encashment received by Central

& State Govt. employees at the time of retirement in respect

of the period of earned leave at credit is fully exempt.

(iii) In case of other employees, the exemption is to be limited to

the least of following: (a) Cash equivalent of unutilized earned

leave (earned leave entitlement can not exceed 30 days for

every year of actual service) (b) 10 months average salary.

subject to a limit of Rs.3,00,000 for retirements after

02.04.1998.

(iv) Leave salary paid to legal heirs of a deceased employee in

respect of privilege leave standing to the credit of such

employee at the time of death is not taxable.

For the purpose of Section 10(10AA), the term

‘Superannuation or otherwise’ covers resignation (CIT Vs. R.V.

Shahney 159 ITR 160(Madras).

8.5 RETRENCHMENT COMPENSATION (Sec.

10(10B)):

Retrenchment compensation received by a workman under

the Industrial Disputes Act, 1947 or any other Act or Rules is

exempt subject to following limits:-

(i) Compensation calculated @ fifteen days average pay for

every completed year of continuous service or part thereof

in excess of 6 months.

(ii) The above is further subject to an overall limit of Rs.5,00,000

for retrenchment on or after 1.1.1997 (Notification No. 10969

dated 25.6.99).

8.6 COMPENSATION ON VOLUNTARY RETIREMENT

OR ‘GOLDEN HANDSHAKE’(Sec. 10(10C)):

(i) Payment received by an employee of the following at the

time of voluntary retirement, or termination of service is exempt

to the extent of Rs. 5 Lakh:

(a) Public Sector Company.

(b) Any other company.

Act.

(d) Local Authority.

(e) Co-operative Societies, Universities, IITs and Notified

Institutes of Management.

(f) Any State Government or the Central Government.

(ii) The voluntary retirement Scheme under which the payment

is being made must be framed in accordance with the

guidelines prescribed in Rule 2BA of Income Tax Rules. In

case of a company other than a public sector company and a

co-operative society, such scheme must be approved by the

Chief Commissioner/Director General of Income-tax.

However, such approval is not necessary from A.Y. 2001-

2002 onwards.

(iii) Where exemption has been allowed under above section for

any Assessment year, no exemption shall be allowed in relation

to any other Assessment year. Further, where any relief u/s

89 for any Assessment year in respect of any amount received

or receivable or voluntary retirement or termination of service

has been allowed, no exemption under this clause shall be

allowed for any Assessment year.

8.7 PAYMENT FROM PROVIDENT FUND (Sec. 10(11),

Sec. 10(12)):

Any payment received from a Provident Fund, (i.e. to which

the Provident Fund Act, 1925 applies) is exempt. Any payment

from any other provident fund notified by the Central Govt. is also

exempt. The Public Provident Fund(PPF) established under the

PPF Scheme, 1968 has been notified for this purpose. Besides the

above, the accumulated balance due and becoming payable to an

employee participating in a Recognised Provident Fund is also

exempt to the extent provided in Rule 8 of Part A of the Fourth

Schedule of the Income Tax Act.

8.8 PAYMENT FROM APPROVED SUPERANNUATION

FUND (Sec.10(13)):

Payment from an Approved Superannuation Fund will be

exempt provided the payment is made in the circumstances

specified in the section viz. death, retirement and incapacitation.

8.9 DEPOSIT SCHEME FOR RETIRED GOVT/PUBLIC

SECTOR COMPANY EMPLOYEES:

Section 10(15) of the Income Tax Act incorporates a number

of investments, the interest from which is totally exempt from

taxation. These investments may be considered as one of the

options for investing various benefits received on retirement. One

among them, notified u/s 10(15)(iv)(i), is the DEPOSIT SCHEME

FOR RETIRED GOVT/PUBLIC SECTOR COMPANY

EMPLOYEES which is a particularly attractive option for retiring

employees of Govt. and Public Sector Companies. W.e.f.

assessment year 1990-91, the interest on deposits made under this

scheme by an employee of Central/State Govt. out of the various

retirement benefits received is exempt from Income-tax. This

exemption was subsequently extended to employees of Public Sector

companies from assessment year 1991-92 vide notification No. 2/

19/89-NS-II dated 12.12.1990. Salient features of the scheme are

discussed below:

Rate of Return Tax free interest @ 9% P.A. payable

half

yearly on 30th June and 31st December

Limit of Investment Minimum Rs.1000.

Maximum not exceeding the total

retirement benefits.

Liquidity Entire balance can be withdrawn after

expiry of 3 years from the date of

deposit. Premature encashment can be,

made after one year from the date of

deposit in which case interest on amount

withdrawn will be payable @ 4% from

the date of deposit to the date of

withdrawal.

Other considerations: Only 1 account can be opened in own

name or jointly with spouse. Account is

to be opened within 3 months of

receiving retirement benefits. Scheme is

operated through branches of SBI and

its subsidiaries and selected branches of

nationalised banks.

[This scheme has been discontinued w.e.f. 10.07.2004 vide

notification F. No.15-01/2004-NS-2, dated 09.07.2004.]

CHAPTER-9

PENSIONERS & SENIOR CITIZENS

9.1 PENSION

Pension is described in section 60 of the CPC and section 11

of the Pension Act as a periodical allowance or stipend granted on

account of past service, particular merits etc. Thus monthly

allowance to the younger brother of a ruler was treated as a

maintenance allowance and not pension (Raj Kumar Bikram

Bahadur Singh Vs. CIT 75 ITR 227(MP)). There are three

important features of ‘pension’. Firstly, pension is a compensation

for past service. Secondly, it owes its origin to a past employeremployee

or master-servant relationship. Thirdly, it is paid on the

basis of earlier relationship of an agreement of service as opposed

to an agreement for service. This relationship terminates only on

the death of the concerned employee.

Pension received from a former employer is taxable as

‘Salary’. Hence, the various deductions available on salary income,

including relief u/s 89(1) for the arrears of pension received would

be granted to pensioners who received their pension from, a

nationalised bank and in other cases their present Drawing &

Disbursing Officers. Similarly, deductions from the amount of

pension of standard deduction and adjustment of tax rebate u/s 88

and 88B shall be done by the concerned bank, at the time of

deduction of tax at source from the pension, on furnishing of

relevant details by the pensioner. Instructions in above regard were

issued by R.B.I.’s Pension Circular (Central Service No. 7/C D.R./

1992(Ref. No. DGBA:GA(NBS) No. 60/GA64-(II CVL-91-92

dated 27.4.92).

Pension to officials of UNO is exempt from taxation. Section

2 of the UN (Privilege & Immunities) Act, 1947 grants tax

exemption to salaries/emoluments paid by U.N. The Karnataka

High Court had held that u/s 17 of the Income Tax Act, salary has

been defined as including pension, therefore, if salary received

from U.N. is exempt, so shall be the pension. This decision was

accepted by the CBDT vide circular No. 293 dated 10.02.1981.

9.2 FAMILY PENSION

Family pension is defined in Section 57 as a regular monthly

amount payable by the employer to a person belonging to the family

of an employee in the event of death. Pension and family pension

are qualitatively different. The former is paid during the lifetime of

the employee while the latter is paid on his death to surviving family

members. However, in case of family pension, since there is no

employer-employee relationship between the payer and the payee,

therefore, it is taxed as ‘Income from Other Sources’ in the hands

of the nominee(s). In respect of family pension, deduction u/s 57(iia)

of Rs.15,000 or 1/3rd of the amount received, whichever is less, is

available.

9.3 SENIOR CITIZEN

Under the Income Tax Act, a senior citizen is a person who

at any time during the previous year has attained the age of 65

years or more. There are certain benefits available to senior citizen

under the Income Tax Act:-

(i) Special rates of Income tax for senior citizens : As elaborated

in chapter 1 (para 1.5) special rates of Income tax are

available for senior and very senior citizens.

(ii) Benefits provided by Finance Act, 2007: The deduction

available u/s 80D for medical insurance premium paid is to

be increased to Rs.20,000 for senior citizens. Secondly, the

deduction available u/s 80DDB in respect of expenditure

incurred on treatment of specified diseases is to be increased

to Rs.60,000 for senior citizens. Deduction u/s 80D is also

available w.e.f. 01.04.2013 (A.Y.2013-14) onwards in respect

of payment made towards preventive health of the parents

of the assessee.

(iii) In order to resolve the tax issues arising out of the

reverse mortgage scheme introduced by the National

Housing Bank (NHB), the Finance Act 2008 has added

a new clause (xvi) in Section 47 of the I.T. Act which

provides that any transfer of a capital asset in a

transaction of reverse mortgage under a notified

scheme shall not be regarded as a transfer and shall,

therefore, not attract capital gains tax. This ensures

that the intention of a reverse mortgage which is to

secure a stream of cash flow against the mortgage is

not contradicted by treating the same as transfer.

The second issue is whether the loan, either in lump

sum or in instalments, received under a reverse mortgage

scheme amounts to income. Receipt of such loan is in the

nature of a capital receipt. However, with a view to providing

certainty in the tax regime pertaining to the senior citizens,

the Finance Act, 2008 has amended section 10 of the Income

Tax Act to provide that such loan amounts will be exempt

from income tax.

Consequent to these amendments, a borrower, under

a reverse mortgage scheme, will be liable to income tax (in

the nature of tax on capital gains) only at the point of

alienation of the mortgaged property by the mortgagee for

the purposes of recovering the loan.

These amendments will take effect from the 1st day of

April, 2008 and will accordingly apply in relation to

Assessment year 2008-09 and subsequent Assessment

years.

CHAPTER-10

TAXATION OF EXPATRIATES

10.1 INTRODUCTION

With the globalisation of the world trade and liberalisation of

the Indian economy, the number of persons moving in or out of

India in the exercise of their business, profession or employment is

on the increase. A brief discussion of the taxation of these

expatriates is being attempted below:

10.2 RESIDENTIAL STATUS

As in most of the countries, the liability under the Indian

Income tax law is also co-related to the residential status of the

concerned tax payer. Section 6 of the Indian Income-Tax Act

creates 3 categories as far as residential status is concerned.

10.2.1 Resident An Individual is said to be resident in

India in any previous year if he is in India

for at least 182 days in that year or during

that year he is in India for a period of at

least 60 days & has been in India for at

least 365 days during the 4 years

preceding that year. However, the period

of 60 days referred to above is increased

to 182 days in case of Indian citizens

who leave India as members of the crew

of an Indian Ship or for Indian citizens

or persons of Indian origin who, being

outside India, come to visit India in any

previous year.

10.2.2 Non- Resident A person who is not a resident in terms

of the above provisions is a non-resident.

10.2.3 Resident but A person who is otherwise resident as

Not Ordinarily defined in para 10.2.1 would be RNOR

Resident (RNOR) if he satisfies any of the following two

conditions:

(i) He has not been resident in India in 9

out of 10 preceding previous years.

(ii) He has not been in India for an aggregate

period of 730 days or more in the

preceding 7 previous years.

W.e.f. 01.04.2004, the status ‘RNOR’

has been redefined as follows:-

An individual shall be said to be RNOR

if he has been a non-resident in India in

9 out of 10 previous years preceding or

period amounting to 729 days or less

during the 7 previous years preceding

that year.

10.3 SCOPE OF TAXATION:

Based on the residential status of payer, his tax liability will

be as follows:-

Residential status Taxability of Income

(i) Resident All income of the previous year wherever

accruing or arising or received by him

including incomes deemed to have accrued

or arisen.

(ii) Non-Resident All income accruing, arising to or deemed

to have accrued or arisen or received in

India.

(iii) Resident but All Income accruing or arising or deemed

not ordinary to have accrued or arisen or received in

Resident India. Moreover, all income earned outside

India will also be included if the same is

derived from a business or profession

controlled or set up in India.

10.4 EXPATRIATES WORKING IN INDIA

In case of foreign expatriate working in India, the

remuneration received by him, assessable under the head ‘Salaries’,

is deemed to be earned in India if it is payable to him for service

rendered in India as provided in Section 9(1)(ii) of the Income Tax

Act. The explanation to the aforesaid law clarifies that income in

the nature of salaries payable for services rendered in India shall

be regarded as income earned in India. Further, from assessment

year 2000-2001 onwards income payable for the leave period which

is preceded and succeeded by services rendered in India and forms

part of the service contract shall also be regarded as income earned

in India. Thus, irrespective of the residential status of the expatriate

employee, the amount received by him as salary for services

rendered in India shall be liable to tax in India being income accruing

or arising in India, regardless of the place where the salary is actually

received. However, there are certain exceptions to the rule which

are briefly discussed below:-

10.4.1 Remuneration of an employee of a foreign enterprise is

exempt from tax if his stay in India is less than 90 days

in aggregate during the financial year [Sec.10(6)(vi)].

This is subject to further relaxation under the provisions

of Double Taxation Avoidance Agreement entered into

by India with the respective country.

10.4.2 Remuneration received by a foreign expatriate as an

official of an embassy or high commission or consulate

or trade representative of a foreign state is exempt on

reciprocal basis [Sec.10(6)(ii)].

10.4.3 Remuneration from employment on a foreign ship

provided the stay of the employee does not exceed 90

days in the financial year [Sec. 10(6)(viii)].

10.4.4 Training stipends received from foreign government

(Sec.10(6)(xi)).

10.4.5 Remuneration under co-operative technical assistance

programme or technical assistance grants agreements

(Sec. 10(8) & (10(8B)).

10.5 SPECIAL PROVISIONS RELATING TO NONRESIDENTS

Chapter XIIA of the Income Tax Act deals with special

provisions relating to certain incomes of non-residents. Sec. 115D

deals with special provisions regarding computation of investment

income of NRIs. Section 115E relates to investments income and

long term capital gains of NRIs, such income being taxed at

concessional flat rates. As per section 115F, capital gain is not

chargeable on transfer of foreign exchange assets under certain

circumstances. The NRIs need not file their return of income if

their total income consist only of investment income or long term

capital gains or both and proper tax has been deducted from this

income(Sec. 115G). Benefits under this chapter are available even

after the assessee becomes a resident (Sec.115H). The provisions

of this chapter would not apply if the assessee so chooses (Sec.

115I).

10.6 DOUBLE TAXATION AVOIDANCE AGREEMENT

(DTAA)

The Central Government acting under the authority of Law

(Sec. 90) has entered into DTAAs with more than 85 countries.

Such treaties serve the purpose of providing protection to the tax

payers from double taxation. As per section 90(2), in relation to an

assessee to whom any DTAA applies, the provisions of the Act

shall apply only to the extent they are more beneficial to the

assessee. The provisions of these DTAAs thus prevail over the

statutory provisions.

10.7 INDIAN RESIDENTS POSTED ABROAD

Indian residents who have taken up employment in countries

with which India has got DTAA are entitled to the benefit of the

DTAA entered into by India with the country of employment.

Accordingly, their tax liability is decided.

Indian expatriates working abroad have been granted several

special tax concessions under the Act. Professors, teachers and

research workers working abroad in any university or any

educational institutions are entitled to deduction of 75% of their

foreign remuneration provided the same is brought into India in

convertible foreign exchange within a period of 6 months from the

end of the previous year or such extended time as may be

allowed(Sec. 80-R). Similarly, in case of an Indian Citizen having

received remuneration for services rendered outside India, 75%

of his foreign remuneration is deductible from his taxable income

provided such remuneration is brought to India in convertible foreign

exchange within the time specified above (Sec. 80 RRA).

From assessment year 2001-2002 onwards, there has been a

change in the amount of deduction available under sections 80R/

80RRA. For details, reference may be made to the sections

concerned of the Income Tax Act. No deduction u/s 80R/80RRA

shall be allowed in respect of A.Y. 2005-06 onwards.

It may also be mentioned here that as per section 9(1)(iii)

income chargeable under the head ‘Salary’ payable by the

Government to a citizen of India for services rendered outside

India is deemed to accrue or arise in India. However, allowances

or perquisites paid or allowed outside India by the Govt. to a citizen

of India for rendering services abroad is exempt from taxation

u/s 10(7).

10.8 INCOME TAX CLEARANCE CERTIFICATE

An expatriate before leaving the territory of India is required

to obtain a tax clearance certificate from a competent authority

stating that he does not have any outstanding tax liability. Such a

certificate is necessary in case the continuous presence in India

exceeds 120 days. An application is to be made in a prescribed

form to the Income Tax Authority having jurisdiction for assessment

of the expatriate to grant a tax clearance certificate. This is to be

exchanged for final tax clearance certificate from the foreign section

of the Income Tax Department. Tax Clearance certificate is valid

for a period of 1 month from the date of issue and is necessary to

get a confirmed booking from an airline or travel agency and may

be required to be produced before the customs authorities at the

airport.

CHAPTER- 11

INCOME TAX ON

‘FRINGE BENEFITS’

11.1 INTRODUCTION :-

The Finance Act, 2005 has introduced a new tax called

‘Income-tax on fringe benefits’ w.e.f. 01.04.2006. This shall be in

the form of additional income tax levied on fringe benefits provided

or deemed to have been provided by an employer to his employees

during the previous year.

11.2 RATE OF TAX :-

The tax on fringe benefits shall be levied at the rate of 30%

on the value of fringe benefits provided.

11.3 LIABILITY TO PAY :-

The liability to pay this tax is to be borne by the employer

including:-

i) a company

ii) a firm

iii) an association of persons or body of individuals excluding

any fund or trust or institution eligible for exemption u/s

10(23C) or 12AA.

iv) a local authority

v) an artificial juridical person

11.4 WHAT IS INCLUDED IN ‘FRINGE BENEFITS’ :-

Fringe benefits have been defined as including any

consideration for employment provided by way of

a) any privilege, service, facility or amenity provided by an

employer directly or indirectly including reimbursements.

b) any free or concessional ticket provided by the employer for

private journeys of his employees or their family members.

c) any contribution by the employer to an approved

superannuation fund for employees.

d) any specified security or sweat equity shares allotted/

transferred, directly or indirectly by the employers free of

cost or at concessional rate to his employees. The detailed

provisions in respect of this are included in Chapter XII H of

the I.T. Act.

Further, fringe benefits shall be deemed to have been provided

if the employer has incurred any expenses or made any payments

for various purposes namely, entertainment, provision of hospitality,

conference, sales promotion including publicity, employees welfare,

conveyance, tour & travel, use of hotel, boarding & lodging etc.

Various provisions relating to income tax on ‘fringe benefits’

have been modified by the Finance Act, 2006. Exceptions in respect

of certain expenditures have been introduced including expenditure

incurred on distribution of free/concessional samples and payments

to any person of repute for promoting the sale of goods or services

of the business of the employer. Similarly, it has been proposed

that expenditure incurred on providing free or subsidized transport

or any such allowance provided by the employer to his employees

for journeys from residence to the place of work shall not be part

of fringe benefits. Another significant amendment is regarding the

contribution by an employer to an approved superannuation fund

to the extent of Rs.1 lakh per employee which shall not be liable to

fringe benefit tax. Further, in the case of some other expenses

incurred such as expenses incurred on tour and travel, lower rates

for valuation of fringe benefits @ 5% have been provided for.

The Finance Act, 2008 has introduced further exemption in respect

of certain expenditures from the purview of Fringe Benefit Tax.

These include payments through non-transferable electronic meal

cards, provision of crèche facility, organizing sports events or

sponsoring a sportsman being an employee. These provisions shall

come into effect from A.Y. 2009-10 onwards.

The Finance act, 2009 has withdrawn the Fringe Benefit Tax.

Thus, the FBT stands abolished w.e.f. A.Y. 2010-11 and now such

perquisites are taxable in hands of employees.

CHAPTER- 12

SOME RELEVANT CASE-LAWS

12.1 EMPLOYER-EMPLOYEE RELATIONSHIP:

The nature and extent of control which is the basic requisite

to establish employer- employee relationship would vary from

business to business. The test which is uniformly applied in order

to determine the relationship is the existence of a “right to control”

in respect of the manner in which the work is to be done.

(Dharangadhra Commercial Works v State of Saurashtra 1957

SCR 152)

12.2 LEAVE ENCASHMENT (S.10(10AA)):

“Retirement” includes resignation. What is relevant is

retirement: how it took place is immaterial for the purpose of this

clause. Therefore, even on resignation, if an employee gets any

amount by way of leave encashment, S.10(10AA) would

apply.(CIT v D.P. Malhotra (1997) 142 CTR 325(Bom)).

(CIT v R.J. Shahney(1986) 159 ITR 160(Mad.))

12.3 HOUSE RENT ALLOWANCE (S.10(13A)):

When commission is paid to a person based upon fixed

percentage of turnover achieved by the employee it would amount

to “Salary” for the purpose of Rule 2 (h) of part A of IV Schedule

(Gestetner Duplicators v CIT 117 ITR 1 (SC)).

12.4 PERQUISITE (S. 17):

12.4.1 One can not be said to allow a perquisite to an

employee if the employee has no vested right to

the same.

(CIT v L.W. Russel (1964) 531 ITR 91 (SC)).

12.4.2 Reimbursement of expenses incurred by the

employee has been intended to be roped in the

definition of “ Salary” by bringing it as part of “Profit

in lieu of salary.”

(I.E. I Ltd. v CIT (1993) 204 ITR 386(Cal.)

12.5 RENT FREE ACCOMMODATION:

A rent free accommodation was provided to the assessee by

his employer but he never occupied it. Held that, unless the employee

expressly forgoes his right to occupying it, the perk value would be

taxable even though he never occupies it.

(CIT v B.S. Chauhan 150 ITR 8(Del)).

12.6 DEDUCTION UNDER S.80G:

By the very nature of calculation required to be made u/s

80G(4) it is necessary that all deduction under chapter VIA be

first ascertained and deducted before granting deduction u/s 80G.

(Scindia Steam Navigation Co v CIT (1994) 75 Taxman

495(Bom.)).

12.7 DEDUCTION U/S 80RRA:

Fees received by a consultant or technical for rendering

services abroad would also come within the purview of S. 80RRA

(CBDT v Aditya V. Birla (1988) 170 ITR 137(SC)).

12.8 RELIEF U/S 89:

Where arrears of salary are paid under orders of court, the

employee would be entitled to relief u/s 89.

(K.C. Joshi v Union of India (1987) 163 ITR 597(SC).

12.9 REVISED RETURN:

A belated return filed u/s 139(4) can not be revised u/s 139(5).

(Kumar J.C. Sinha v CIT (1996) (86 Taxman 122(SC)).

12.10 Return showing income below taxable limit is a valid return.

All About Taxtion

Monday, 18 May 2015

AN INTRODUCTION TO TAXATION

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