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HEADS OF INCOME
In most tax systems, particularly in India, income is categorized into different "heads" or sources
to determine taxability. The Income Tax Act, 1961 of India defines five heads of income under
which income is classified for tax purposes. Here is a breakdown of each:
1. Income from Salary
 Description: This head includes all forms of remuneration received by an individual from
employment, whether in the form of wages, pension, gratuity, leave encashment, etc.
 Examples: Basic salary, allowances, perquisites, bonuses, and retirement benefits.
 Tax Treatment: It is taxed on a due or received basis, whichever is earlier.
2. Income from House Property
 Description: Income earned from owning a property (typically real estate) that is either
rented out or could be rented out (deemed rent).
 Examples: Rental income from a residential or commercial property.
 Tax Treatment: A standard deduction of 30% for repairs is allowed, and interest on home
loans is deductible (within prescribed limits).
3. Profits and Gains from Business or Profession
 Description: Income earned by individuals, firms, or companies from the operation of a
business or profession.
 Examples: Income from a sole proprietorship, consultancy, or partnership firm.
 Tax Treatment: Deduction of business expenses (like rent, salaries, etc.) from gross
receipts is allowed to compute net profit, which is then taxed.
4. Capital Gains
 Description: Income derived from the transfer or sale of a capital asset, such as
property, shares, bonds, etc.
 Examples: Sale of property, stocks, mutual funds.
 Tax Treatment:
o Short-term capital gains (STCG): Gains from assets held for a short period
(depending on the asset class) are taxed at higher rates.

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 o Long-term capital gains (LTCG): Gains from assets held for a longer period are
taxed at concessional rates, with indexation benefits in some cases.
5. Income from Other Sources
 Description: Any income that does not fall under the other four heads is taxed here.
 Examples: Dividends, lottery winnings, interest on savings, fixed deposits, gifts, etc.
 Tax Treatment: No standard deductions, but specific expenses related to earning such
income can be deducted (e.g., interest paid on loans taken for investment in securities).
Importance of Understanding the Heads:
Proper classification under the correct head of income is crucial because:
1. It determines the applicable deductions and exemptions.
2. The tax rates may differ for different heads (e.g., capital gains vs. salary).
3. It impacts how income tax returns are filed and processed.
INCOME FROM SALARY
Income from Salary is the amount earned by an individual from their employment, which
includes various components such as wages, allowances, perquisites, bonuses, and more. This
head of income is specific to individuals who are employed and receive remuneration for
services provided.
Key Components of Salary Income:
1. Basic Salary
o This is the fixed component of an employee's salary and forms the base of all
other components like allowances and bonuses.
o It is fully taxable.
2. Allowances
o Allowances are additional payments made by the employer to meet specific
needs. Some are taxable, while others are partially or fully exempt. Key types of
allowances include:
 House Rent Allowance (HRA): Partially exempt from tax, subject to
conditions like actual rent paid and location of residence.
 Transport Allowance: Exempt up to a certain limit (Rs. 1,600 per month
until FY 2018-19), now replaced by the Standard Deduction.

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  Leave Travel Allowance (LTA): Exempt for travel expenses incurred for self
and family, subject to specific conditions.
 Medical Allowance: Taxable; however, reimbursement for medical
expenses is exempt up to Rs. 15,000 until FY 2018-19.
3. Perquisites (Fringe Benefits)
o Perquisites are benefits received by the employee over and above their salary.
These could be monetary or non-monetary in nature and are generally taxable
unless exempted.
 Examples: Rent-free accommodation, use of a company car, concessional
loans, free meals.
 Some perquisites are fully taxable, while others, like medical
reimbursements or employer’s contribution to the provident fund, are
partially exempt.
4. Bonus, Commission, and Other Incentives
o These are additional forms of compensation based on performance, company
profits, or other criteria.
o Fully taxable as part of salary income.
5. Retirement Benefits
o Gratuity: Taxable for non-government employees if the amount exceeds
prescribed limits.
o Pension: Regular pension payments are taxable as salary, while commuted
pension (lump sum) may be partially or fully exempt.
o Leave Encashment: Amount received in lieu of unutilized leave is taxable for non-
government employees, with exemptions subject to limits.
o Provident Fund: Employer contributions to recognized provident funds are
exempt up to a limit, and withdrawals are exempt under specific conditions.
6. Standard Deduction
o A fixed deduction of Rs. 50,000 (as per current tax laws) is allowed from salary
income to reduce taxable income.
7. Deductions and Exemptions Related to Salary Income

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 o Section 80C: Deductions for investments like Life Insurance Premium, Employees
Provident Fund (EPF), Public Provident Fund (PPF), National Savings Certificates
(NSC), etc., up to a limit of Rs. 1.5 lakh.
o Section 80D: Deduction for medical insurance premiums.
o Section 80E: Deduction for interest on education loans.
o House Rent Allowance (HRA): Calculated as the minimum of the following:
 Actual HRA received,
 Rent paid in excess of 10% of salary,
 50% of salary if living in a metro city (40% if in a non-metro).
Taxability of Salary Income:
 Salary income is taxed on an accrual basis, meaning it is taxed when it is due or received,
whichever is earlier.
 Tax Slabs for Salary Income (for individual taxpayers in FY 2023-24):
o For Individuals Below 60 Years (Old Regime):
 Up to Rs. 2.5 lakh: Nil
 Rs. 2.5 lakh to Rs. 5 lakh: 5%
 Rs. 5 lakh to Rs. 10 lakh: 20%
 Above Rs. 10 lakh: 30%
o For Individuals Below 60 Years (New Regime):
 Slab rates vary depending on the income range, offering no exemptions or
deductions (except for a few like NPS or employer’s contribution to EPF).
Name of fully taxable, allowances exempt upto specified limit, and fully exempted allowances
In the context of Indian income tax, various allowances are provided to employees that can be
classified into three categories: fully taxable, partially exempt (allowances exempt up to
specified limits), and fully exempt allowances. Below is a detailed breakdown of each category:
1. Fully Taxable Allowances
These allowances are fully included in the taxable income of the employee:
 Dearness Allowance (DA): The portion of salary that compensates for inflation.

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  House Rent Allowance (HRA): If not exempted under specific conditions, it is fully
taxable.
 Special Allowance: Any allowance that is not specifically exempted under the Income
Tax Act.
 Overtime Allowance: Payment for extra hours worked beyond the regular schedule.
 Bonus: Any performance-based bonus or festival bonus is fully taxable.
 Commission: Payments made as a commission for sales or performance.
 Ex-gratia Payments: Any additional payments made by the employer outside of the
regular salary.
 Uniform Allowance: If the employee is not required to incur expenses on the uniform,
this allowance is fully taxable.
2. Allowances Exempt Up to Specified Limit
These allowances are exempt to a certain limit as defined under the Income Tax Act:
 House Rent Allowance (HRA): Exempt up to the least of the following:
o Actual HRA received.
o Rent paid in excess of 10% of salary.
o 50% of salary if residing in a metro city (Delhi, Mumbai, Kolkata, Chennai) or 40%
for other cities.
 Leave Travel Allowance (LTA): Exempt for travel expenses incurred for self and family
during leave, subject to certain conditions. The exemption is available for domestic travel
and only for actual expenses incurred, not exceeding two journeys in a block of four
years.
 Daily Allowance: Exempt for expenses incurred on travel for work (such as food and
lodging) as per the amount specified by the employer.
3. Fully Exempt Allowances
These allowances are completely exempt from income tax:
 Children Education Allowance: Exempt up to Rs. 100 per month per child (maximum for
two children).
 Hostel Expenditure Allowance: Exempt up to Rs. 300 per month per child (maximum for
two children).

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  Transport Allowance: Exempt for disabled employees (blindness, low vision, etc.) is Rs.
1,600 per month.
 Sumptuary Allowance: For official entertaining expenses of government employees (this
may vary based on government rules).
 Compensatory Allowances: Certain allowances given to employees in remote areas are
also exempted based on specific government notifications.
Summary Table

Category Examples

Dearness Allowance, Special Allowance, Overtime Allowance,

Fully Taxable Allowances
Bonus, Commission, Ex-gratia Payments

Allowances Exempt Up to House Rent Allowance (HRA), Leave Travel Allowance (LTA), Daily
Specified Limit Allowance

Children Education Allowance, Hostel Expenditure Allowance,

Fully Exempt Allowances
Transport Allowance (for disabled)

Pension in Income Tax

Pension refers to the payment received by an individual after retirement from an employer.
Under the Indian Income Tax Act, pensions are categorized based on the nature of the pension
received and the provisions for taxation. Here’s a detailed overview of how pensions are treated
under income tax:
1. Types of Pension
1. Statutory Pension: This is a pension paid by the government or other statutory bodies to
employees upon retirement. It is often covered under various government pension
schemes.
2. Recognized Pension: These are pensions received under a pension scheme that is
recognized by the Income Tax Department, usually related to retirement benefits from
private employers.
3. Unrecognized Pension: Pensions that do not qualify under recognized plans or schemes.
These are typically from unorganized sectors or employers that do not follow statutory
pension norms.
2. Tax Treatment of Pension
 Taxability: Pension is treated as salary income under the Income Tax Act. The amount
received as pension is added to the individual's total income and taxed according to the
applicable income tax slab.

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  Commuted and Uncommuted Pension:
o Uncommuted Pension: This is the regular monthly pension received. It is fully
taxable under the head "Salary."
o Commuted Pension: This refers to the lump-sum payment received at the time
of retirement. The tax treatment of a commuted pension depends on whether it
is received from a government job or a private job.
 For Government Employees: The entire commuted pension is exempt
from tax.
 For Non-Government Employees: Only one-third of the commuted
pension is exempt if the employee has rendered at least 5 years of
service; otherwise, it is fully taxable.
3. Deductions and Exemptions
 Standard Deduction: Taxpayers can claim a standard deduction of Rs. 50,000 from their
total income (including pension).
 Pension Fund Contributions: Contributions made to a recognized pension fund are
eligible for deduction under Section 80CCC, subject to a maximum limit of Rs. 1.5 lakh
under Section 80C.
 Tax-Free Gratuity: If the pension is received along with gratuity, certain limits for
exemption on gratuity are available. The exemption limits vary based on whether the
employee is from the private or public sector.
4. Example of Tax Calculation on Pension
Let’s assume Mr. X is a retired government employee receiving a monthly pension of Rs. 20,000
and commuted a portion of his pension for a lump sum payment of Rs. 12,00,000 at the time of
retirement.
 Uncommuted Pension:
o Monthly Pension = Rs. 20,000
o Annual Pension = Rs. 20,000 × 12 = Rs. 2,40,000 (Fully taxable)
 Commuted Pension:
o Total Commuted Pension = Rs. 12,00,000 (fully exempt for government
employees)
 Total Taxable Income:
o Total Income = Annual Pension + Commuted Pension

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 o Total Taxable Income = Rs. 2,40,000 + Rs. 0 = Rs. 2,40,000 (after exemption on
commuted pension)
Summary

Type of Pension Tax Treatment

Uncommuted Pension Fully taxable as salary income

Commuted Pension (Govt.) Fully exempt from tax

Commuted Pension (Non-Govt.) One-third exempt if service ≥ 5 years, otherwise fully taxable

Tax Treatment of Provident Fund

1. Employees' Provident Fund (EPF)
 Contributions:
o The employee contributes 12% of their basic salary and dearness allowance (if
any) to the EPF, and the employer matches this contribution (with 8.33% of the
employer's contribution going to the Employees' Pension Scheme).
o Contributions to the EPF are eligible for deduction under Section 80C of the
Income Tax Act, subject to the overall limit of Rs. 1.5 lakh.
 Interest Earned:
o The interest earned on EPF contributions is also tax-free. As of FY 2023-24, the
interest rate is set by the EPFO and is typically around 8.5% per annum.
 Withdrawals:
o Matured EPF: If the EPF balance is withdrawn after five years of continuous
service, it is completely tax-free.
o Partial Withdrawals: In certain circumstances (like purchasing a home, medical
emergencies, etc.), partial withdrawals can be made, and the taxability may
depend on the duration of service.
o If the EPF is withdrawn before five years of service, the amount is taxable as per
the individual's income tax slab.
2. Public Provident Fund (PPF)
 Contributions:
o Contributions to the PPF are eligible for deduction under Section 80C, subject to
a maximum limit of Rs. 1.5 lakh.

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  Interest Earned:
o The interest earned on PPF contributions is tax-free. The PPF has a tenure of 15
years.
 Withdrawals:
o Partial withdrawals are allowed after the completion of 6 years, and these
withdrawals are tax-free.
o The maturity amount at the end of the tenure is also fully exempt from tax.
3. Recognized Provident Fund (RPF)
 Similar tax benefits as EPF, but with some variations depending on the employer's fund
rules.
 Contributions to the RPF are eligible for deduction under Section 80C.
4. Unrecognized Provident Fund
 Contributions are not eligible for tax deductions.
 The employee's contribution is taxable as salary, and interest earned is taxable.
 At the time of withdrawal, it is subject to tax based on applicable provisions.

Summary Table

Type of Provident
Tax Treatment
Fund

Contributions deductible under Section 80C; interest earned tax-free; tax-

EPF
free on withdrawal after 5 years.

Contributions deductible under Section 80C; interest earned tax-free; tax-

PPF
free on withdrawals after 6 years.

Similar to EPF with some variations; contributions deductible under

RPF
Section 80C.

Unrecognized PF Contributions not deductible; taxed as salary; interest taxable.

Perquisites in Income Tax

Perquisites (often referred to as "perks") are benefits or amenities provided by an employer to
an employee, in addition to their salary. These benefits can be in cash or kind and are
considered part of the employee's taxable income under the Income Tax Act of India.

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Types of Perquisites
Perquisites can be classified into several categories, including:
1. Monetary Perquisites:
o Cash allowances provided to employees, which can include bonuses,
commissions, and other monetary benefits.
2. Non-Monetary Perquisites:
o Benefits provided in kind, such as housing, vehicles, stock options, or other
amenities.
Common Examples of Perquisites
1. Rent-Free Accommodation:
o If an employer provides free accommodation or pays rent on behalf of the
employee, it is considered a perquisite. The value of this perquisite is determined
based on the city's population and the type of accommodation provided.
2. Company Car:
o If an employee is provided with a car for personal use, the value of the perquisite
is calculated based on the engine capacity and the type of vehicle.
3. Medical Benefits:
o Medical treatment provided to employees and their families, including insurance
premiums, is treated as a perquisite.
4. Stock Options:
o Employees may receive stock options as part of their compensation, which is
considered a perquisite when exercised.
5. Leave Travel Allowance (LTA):
o While LTA is eligible for exemption under certain conditions, if it is provided in
excess of the exempt limit, the excess is considered a perquisite.
6. Free or Concessional Tickets:
o Any free or discounted travel provided to employees by the employer.
7. Educational Benefits:
o Expenses paid by the employer for the education of employees' children.
8. Interest-Free Loans:

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 o If an employer provides a loan at a lower interest rate than the market rate, the
difference is treated as a perquisite.
Valuation of Perquisites
The value of perquisites is determined based on the following principles:
1. Rent-Free Accommodation:
o For employer-provided accommodation, the value is determined based on the
market rent of the property or a percentage of the employee's salary, depending
on the city and type of accommodation.
2. Company Car:
o The perquisite value for a company car is calculated based on the engine
capacity:
 For cars with engine capacity up to 1,600 cc: Rs. 1,800 per month for
personal use and Rs. 900 per month for the employer's use.
 For cars with engine capacity above 1,600 cc: Rs. 2,400 per month for
personal use and Rs. 900 per month for the employer's use.
3. Medical Benefits:
o Medical treatment costs paid by the employer are valued at the actual expense
incurred.
Tax Treatment of Perquisites
 Perquisites are added to the employee’s total income and taxed according to the
applicable income tax slab rates.
 Employers are required to report the value of perquisites in the Form 16 issued to
employees at the end of the financial year.
Summary Table of Perquisites

Type of Perquisite Tax Treatment

Rent-Free Accommodation Taxable based on market rent or percentage of salary

Company Car Taxable based on engine capacity and personal use

Medical Benefits Taxable at actual expenses paid by the employer

Stock Options Taxable at the time of exercising the options

Leave Travel Allowance Taxable if it exceeds the exempt limit

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Type of Perquisite Tax Treatment

(LTA)

Educational Benefits Taxable as per the value incurred by the employer

Taxable based on the difference between market rate and actual

Interest-Free Loans
rate

Gratuity in Income Tax

Gratuity is a financial benefit given to employees as a token of appreciation for their services
upon leaving a job after a certain period. It is generally provided by employers in both the
private and public sectors. The Gratuity Act, 1972 governs the payment of gratuity in India.
Types of Gratuity
1. Statutory Gratuity: This is mandatory for employees working in establishments with 10
or more employees, and it is governed by the Payment of Gratuity Act, 1972.
2. Non-Statutory Gratuity: This is a voluntary payment made by employers as a part of
their employment policy. It may not necessarily follow the statutory rules.
Eligibility for Gratuity
 Employees become eligible for gratuity after completing a minimum of 5 years of
continuous service.
 In the case of termination due to death or disablement, the gratuity is payable even if
the employee has not completed 5 years of service.
Calculation of Gratuity
Gratuity is calculated using the following formula:
Gratuity=Last Drawn Salary×15×Number of Years of Service26\text{Gratuity} = \frac{\text{Last
Drawn Salary} \times 15 \times \text{Number of Years of Service}}
{26}Gratuity=26Last Drawn Salary×15×Number of Years of Service
Where:
 Last Drawn Salary = Basic salary + Dearness Allowance (DA)
 15 = The number of days of salary for each completed year of service
 26 = The number of working days in a month (to convert to monthly salary)
Tax Treatment of Gratuity
1. Statutory Gratuity:

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 o The maximum limit for tax exemption on statutory gratuity is Rs. 20 lakh. Any
amount received above this limit is subject to income tax.
o The exempt amount is calculated using the formula provided above.
2. Non-Statutory Gratuity:
o Non-statutory gratuity is fully taxable as per the individual's income tax slab
rates.
o However, if the non-statutory gratuity is paid on termination of service, the
employee can claim exemption under Section 10(10), subject to limits specified
in the rules.
3. Tax Exemption on Gratuity:
o The exempt portion is determined based on the employee's status:
 Government Employees: The entire amount received is exempt from tax.
 Non-Government Employees: The exemption is available up to Rs. 20
lakh, as mentioned above.
Example of Gratuity Calculation and Tax Treatment
Let’s say Mr. C worked with a company for 10 years and received a monthly basic salary of Rs.
50,000 and a dearness allowance of Rs. 10,000.
1. Last Drawn Salary:
o Basic Salary + DA = Rs. 50,000 + Rs. 10,000 = Rs. 60,000
2. Gratuity Calculation:
Gratuity=60,000×15×1026=90,00,00026=Rs.3,46,153.85
Tax Treatment:
o Since Mr. C is a non-government employee, the entire gratuity amount of Rs.
3,46,153.85 is less than the limit of Rs. 20 lakh, making it exempt from tax.
Summary Table of Gratuity

Type of Gratuity Tax Treatment

Statutory Gratuity Exempt up to Rs. 20 lakh; above this limit is taxable

Non-Statutory Gratuity Fully taxable unless exempt under Section 10(10)

Government Employees Entire amount is exempt from tax

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Profits in Lieu of Salary in Income Tax
Profits in lieu of salary refers to any payments or benefits received by an employee that are
considered substitutes for regular salary payments. This includes amounts paid by an employer
in specific circumstances when the employee's services are terminated, or when other types of
compensatory payments are made.
Nature of Profits in Lieu of Salary
The term "profits in lieu of salary" encompasses various payments that are not strictly classified
as salary but are treated similarly for tax purposes. Some examples include:
1. Compensation for Termination: Severance payments made to employees when their
employment is terminated.
2. Retirement Benefits: Payments made to employees upon retirement that do not fall
under gratuity.
3. Payments for Unused Leave: Compensation for accumulated leave days that are not
utilized before the employee leaves the organization.
4. Non-compete Payments: Payments made to employees for not joining competing firms
or for ceasing certain activities.
5. Bonus Payments: Special bonuses that may be paid in lieu of regular salary during a
transition period or termination.
6. Ex-gratia Payments: Payments made as a gesture of goodwill that do not form part of
the regular salary structure.
Tax Treatment of Profits in Lieu of Salary
1. Taxable Income: All payments classified as profits in lieu of salary are taxable under the
head "Salaries." They are added to the individual's total income and taxed according to
the applicable income tax slab.
2. Inclusion in Total Income: The total income for the year includes all forms of
remuneration received, including profits in lieu of salary.
3. Exemptions: There may be exemptions applicable to certain components, but in general,
profits in lieu of salary are fully taxable.
Voluntary Retirement Scheme (VRS) in Income Tax
A Voluntary Retirement Scheme (VRS) is a program offered by an employer to encourage
employees to voluntarily resign from their positions, typically to reduce workforce size or costs.
Employees who opt for VRS are generally given financial incentives, which may include a lump-
sum payment or additional benefits.

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Key Features of VRS
1. Eligibility:
o Employees who are typically above a certain age or have completed a specific
number of years in service may be eligible for VRS.
2. Incentives:
o The incentives may include a monetary package, which could be a multiple of
their monthly salary, benefits such as extended medical coverage, and other
retirement benefits.
3. Scheme Duration:
o VRS is usually available for a limited period, and employees are required to apply
within that timeframe.
4. Tax Benefits:
o Specific tax benefits are available for the compensation received under VRS.
Tax Treatment of VRS
1. Taxability:
o The amount received by employees under a VRS is considered a part of their
total income and is taxable. However, there are provisions under the Income Tax
Act that provide exemptions.
2. Exemption Under Section 10(10C):
o As per Section 10(10C) of the Income Tax Act, an employee can claim exemption
on the amount received under VRS, subject to certain limits:
 The maximum exemption limit is Rs. 5 lakh.
 The exemption applies only if the VRS is implemented as per the
guidelines specified in the Act.
3. Conditions for Exemption:
o The exemption under Section 10(10C) is available if:
 The employee is covered under a scheme approved by the government.
 The employee has not availed of this exemption for any other termination
benefits.
4. Inclusion in Total Income:

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 o Any amount received beyond the exempt limit will be included in the employee's
total income and taxed according to their applicable income tax slab.

Summary Table of VRS Tax Treatment

Component Tax Treatment

Compensation under VRS Taxable; exemption available under Section 10(10C) up to Rs. 5 lakh

Taxable Amount Any amount received beyond Rs. 5 lakh is taxable

Eligibility for Exemption Must meet specified conditions as per Section 10(10C)

Casual Income in Income Tax

Casual Income refers to income that is not earned through regular business or professional
activities and is received sporadically or unexpectedly. This type of income is generally not
derived from a consistent source and does not form part of the taxpayer's normal income.
Characteristics of Casual Income
1. Irregular Nature:
o Casual income is typically received irregularly and is not part of a person’s regular
earnings. Examples include winnings from lotteries, games, or competitions.
2. Non-recurring:
o Unlike salary, business profits, or rental income, casual income does not recur
regularly.
3. Sources:
o Casual income can arise from various sources, including:
 Lottery winnings
 Betting or gambling winnings
 Gifts, inheritances, or windfalls
 Awards or prizes
 Sale of personal assets that were not part of a business
Tax Treatment of Casual Income
1. Taxable Under Other Sources:

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 o Casual income is generally taxed under the head "Income from Other Sources."
This includes all types of income not specifically covered under other income
categories.
2. Tax Rate:
o Casual income is taxed at the applicable income tax slab rates. There is no special
rate; it is treated as regular income for tax purposes.
3. No Deductions:
o Deductions typically available for business or professional income are not
applicable to casual income. Therefore, the full amount of casual income is
taxable.
4. Exemptions:
o Some casual income, such as gifts received from specified relatives or certain
small amounts, may have exemption limits under specific sections of the Income
Tax Act. However, this is not generally applicable to winnings from lotteries or
gambling.
Summary Table of Casual Income

Type of Casual Income Tax Treatment

Lottery Winnings Fully taxable under "Income from Other Sources"

Gambling Winnings Fully taxable under "Income from Other Sources"

Competition Prizes Fully taxable under "Income from Other Sources"

Gifts from Relatives May be exempt up to specified limits, but usually taxable otherwise

Sale of Personal Assets Taxable if it qualifies as casual income, typically at regular slab rates

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INCOME FROM HOUSE PROPERTY
Income from House Property
Income from house property refers to the income earned by an individual or entity from a
property that is either rented out or deemed to be let out (even if not actually rented). This
includes residential buildings, commercial properties, or land attached to a building. The
taxation of such income is governed by Sections 22 to 27 of the Income Tax Act, 1961.
Key Conditions for Taxing Income from House Property:
1. The property must consist of a building or land attached to it (e.g., a house, office
space, or shop).
2. The individual must be the owner of the property (ownership can be partial).
3. The property must be used for rental purposes or is deemed to be let out.

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 4. Property that is used for the owner's business or profession is not taxable under this
head. Instead, it is considered under the business or profession head.
Types of House Property:
1. Self-Occupied Property (SOP):
o This refers to a property that is used by the owner for residential purposes.
o If the owner has only one self-occupied property, the annual value is treated as
NIL, and there is no income tax.
o From the financial year 2019-20, an individual can claim two self-occupied
properties as tax-exempt, provided the annual value is considered NIL for both.
2. Let-Out Property (LOP):
o A property that is rented out to tenants is considered a let-out property.
o The rental income from such property is taxable under this head.
3. Deemed to be Let-Out Property:
o If a person owns more than two properties and uses both for self-occupation,
any additional properties will be considered as "deemed to be let out," even if
they are not rented, and their notional rent is taxable.
Calculation of Income from House Property:
The taxable income from house property is calculated in the following steps:
1. Gross Annual Value (GAV):
o This is the actual rent received or deemed rent (if the property is not rented but
could have been).
o In the case of self-occupied property, the GAV is considered NIL.
2. Less: Municipal Taxes Paid (if borne by the owner):
o Municipal taxes, such as property tax, can be deducted from the GAV, provided
they are paid during the financial year.

∗∗NetAnnualValue(NAV)=GAV−MunicipalTaxesPaid
3.Less: Deductions Under Section 24: Two deductions are available under Section 24:
a) Standard Deduction:
o A flat deduction of 30% of the NAV is allowed for repairs, maintenance, etc.,
regardless of the actual expenses incurred.

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b) Interest on Home Loan:
o Interest paid on loans taken for the purchase, construction, or renovation of the
house property is deductible as follows:
 For self-occupied property: Interest deduction is limited to Rs. 2 lakh per
annum (if construction is completed within 5 years). If not, the limit is Rs.
30,000.
 For let-out or deemed let-out property: The entire interest paid can be
claimed as a deduction, without any upper limit.
3. Taxable Income from House Property: The final taxable income is calculated as:
Income from House Property = Net Annual Value (NAV) - Standard Deduction (30%) - Interest on
Home Loan
Example of Income from House Property Calculation:
Let's assume the following scenario:
 Gross Annual Value (GAV): Rs. 5,00,000 (Rent received)
 Municipal Taxes Paid: Rs. 50,000
 Interest on Home Loan: Rs. 1,50,000 (let-out property)
1. Net Annual Value (NAV) = Rs. 5,00,000 - Rs. 50,000 = Rs. 4,50,000
2. Standard Deduction (30%) = 30% of Rs. 4,50,000 = Rs. 1,35,000
3. Interest on Home Loan = Rs. 1,50,000
So, the taxable income from house property would be:
TaxableIncome=Rs.4,50,000−Rs.1,35,000−Rs.1,50,000=Rs.1,65,000
Key Deductions Under Section 24:
1. Standard Deduction (30%):
o Always available for let-out or deemed let-out properties.
o Not applicable for self-occupied properties since the annual value is NIL.
2. Interest on Loan:
o Self-occupied property: Deduction up to Rs. 2 lakh.
o Let-out property: Full interest deduction allowed.
Special Considerations for Self-Occupied Property:

20
  If an individual has taken a loan for home construction or purchase, interest on the loan
is deductible.
 For pre-construction interest, the interest paid before the construction or acquisition of
the property can be claimed in five equal installments starting from the year in which
the property was acquired or constructed.
INCOME FROM PGBP
Income from Profits and Gains of Business or Profession (PGBP)
Income under the head "Profits and Gains of Business or Profession (PGBP)" refers to the
income earned by an individual, firm, or company from carrying out a business or practicing a
profession. The income can come from any trade, commerce, manufacturing activity, or
professional services, and it is taxable under Sections 28 to 44 of the Income Tax Act, 1961.
Key Elements of Business and Profession:
1. Business:
o Includes any trade, commerce, or manufacturing activity carried out with a profit
motive.
o This covers activities like retail trading, manufacturing, construction, providing
services, etc.
2. Profession:
o Refers to specialized activities that require a significant level of knowledge and
expertise in a specific field.
o Examples: Doctors, lawyers, chartered accountants, architects, consultants, etc.
Components of Income Under PGBP:
1. Profits from Business Activities:
o This includes income earned from manufacturing, trading, or providing services.
o Gross receipts or turnover from business operations minus allowable expenses
are considered the taxable profit.
2. Profits from Professional Services:
o Any income earned from a profession such as consultancy, medical services, legal
advice, etc.
o Similar to business income, profits are calculated by subtracting allowable
expenses from gross receipts.

21
 3. Other Income Included Under PGBP:
o Compensation received for loss of business contracts.
o Profit from sale of licenses or business rights.
o Interest earned on business deposits or loans given in the course of business.
o Export incentives, such as Duty Drawback, DEPB, etc.
Computation of Income from PGBP:
Income from PGBP is calculated as:
Net Profit from Business or Profession=Gross Receipts/Turnover−Allowable Business Expenses
Where:
 Gross Receipts/Turnover: The total income earned from the sale of goods, rendering
services, or carrying on a profession.
 Allowable Expenses: All expenses incurred wholly and exclusively for the business,
provided they are genuine and incurred during the financial year.
Allowable Expenses under PGBP (Section 30 to 37):
1. Rent, Rates, Taxes, Repairs, and Insurance for Building (Section 30):
o Expenses related to rent, repair, and maintenance of the business premises are
allowable.
2. Repairs and Insurance of Plant, Machinery, and Furniture (Section 31):
o Costs incurred for repairs or insurance of machinery, plant, or furniture used for
business purposes are deductible.
3. Depreciation (Section 32):
o Depreciation is allowed on assets such as buildings, machinery, plant, and
furniture.
o The depreciation rates are prescribed under the Income Tax Act, and an
additional depreciation allowance is available for certain categories like new
machinery.
o Depreciation can be claimed even if the asset is used for part of the year.
4. Expenditure on Scientific Research (Section 35):
o Deduction is allowed for expenditure incurred for scientific research related to
the business.

22
 o Contributions to approved research institutions and companies also qualify for
deductions.
5. General Business Expenses (Section 37):
o Any expense not specifically covered under Sections 30 to 36 but incurred wholly
and exclusively for the business or profession is deductible.
o This includes expenses like:
 Salaries and wages to employees.
 Rent, electricity, and telephone bills.
 Advertising and promotional expenses.
 Travelling expenses.
 Legal and professional fees.
6. Bad Debts (Section 36(1)(vii)):
o Any amount of bad debts that were previously included in the income of the
assessee and are now irrecoverable can be written off and claimed as a
deduction.
Non-Allowable Expenses (Disallowances):
1. Personal expenses: Expenses incurred for personal purposes are not deductible.
2. Capital Expenditure: Any expenditure incurred for acquiring a capital asset (like land,
buildings, etc.) is not deductible as an expense. However, the depreciation of such assets
can be claimed.
3. Income Tax Payments: Income tax paid on business income is not allowed as a business
expense.
4. Provisions for future expenses: Provisions for anticipated future expenses (like
provisions for repairs) are not deductible unless they represent actual expenses.
Presumptive Taxation Scheme (Section 44AD & 44ADA):
To simplify taxation for small businesses and professionals, the Income Tax Act offers
presumptive taxation schemes under Section 44AD and Section 44ADA.
1. Section 44AD (For Small Businesses):
o Applicable to resident individuals, Hindu Undivided Families (HUF), and
partnership firms (other than LLPs) with gross receipts or turnover up to Rs. 2
crore.

23
 o 8% of turnover (6% for digital receipts) is considered as deemed income, and no
further deductions are allowed.
2. Section 44ADA (For Professionals):
o Applicable to resident professionals (like doctors, lawyers, architects, etc.) with
gross receipts up to Rs. 50 lakh.
o 50% of gross receipts are deemed as income, and no further deductions are
allowed.
Tax Audit Requirement (Section 44AB):
A taxpayer is required to have their accounts audited by a Chartered Accountant if their
turnover exceeds a specified limit:
 For businesses: Turnover exceeding Rs. 1 crore.
 For professionals: Gross receipts exceeding Rs. 50 lakh.
Set-off and Carry Forward of Business Losses (Section 72):
 Business losses can be set off against any other income except for salary income in the
same financial year.
 If the losses cannot be fully set off, they can be carried forward for up to 8 assessment
years and set off against future business income.
INCOME FROM CAPITAL GAIN
Income from Capital Gains refers to the profit or gain arising from the transfer of a capital asset,
such as property, stocks, bonds, or other investments. These gains are taxed under the head of
"Capital Gains" in the Income Tax Act, 1961.
What is a Capital Asset?
A capital asset includes:
 Real estate (land, buildings, etc.).
 Securities (stocks, bonds, mutual funds, etc.).
 Gold, jewelry, and other valuable assets.
 Intellectual property rights like patents and trademarks.
It excludes items such as:
 Personal goods like furniture and clothing.
 Agricultural land in rural areas.

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Types of Capital Gains:
Capital gains are classified into two types based on the holding period of the asset:
1. Short-Term Capital Gain (STCG):
o Definition: Capital gain arising from the transfer of a capital asset held for a short
period.
o Holding Period:
 Equity shares, equity mutual funds: Held for less than 12 months.
 Other assets (like property, gold, debt mutual funds): Held for less than
36 months.
o Tax Rate:
 For equity shares or mutual funds, STCG is taxed at 15% (Section 111A).
 For other assets, STCG is added to the individual's income and taxed at
applicable slab rates.
2. Long-Term Capital Gain (LTCG):
o Definition: Capital gain arising from the transfer of a capital asset held for a
longer period.
o Holding Period:
 Equity shares, equity mutual funds: Held for 12 months or more.
 Other assets (like property, gold, debt mutual funds): Held for 36
months or more (except for immovable property, which is considered
long-term if held for 24 months or more).
o Tax Rate:
 For equity shares or mutual funds, LTCG exceeding Rs. 1 lakh is taxed at
10% without indexation (Section 112A).
 For other assets, LTCG is taxed at 20% with indexation benefits (Section
112).
Computation of Capital Gains:
The computation of capital gains depends on whether it is short-term or long-term.
1. Short-Term Capital Gains:

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Short-Term Capital Gain=Full Value of Consideration (Sale Price)−Cost of Acquisition−Cost of Imp
rovement−Expenses on Transfer
Long-Term Capital Gains:
LongTerm Capital Gain=Full Value of Consideration (Sale Price)−Indexed Cost of Acquisition−Inde
xed Cost of Improvement−Expenses on Transfer
Where:
 Full Value of Consideration (Sale Price): The total amount received or receivable from
the sale of the asset.
 Cost of Acquisition: The original purchase price of the asset.
 Cost of Improvement: Any expenditure incurred to make improvements or add value to
the asset.
 Expenses on Transfer: Costs related to the transfer, such as brokerage fees, legal
expenses, etc.
Indexation Benefit (For Long-Term Capital Gains):
For long-term capital assets, the cost of acquisition and cost of improvement are adjusted for
inflation using the Cost Inflation Index (CII). This allows the taxpayer to reduce the capital gains
tax burden by accounting for inflation.
Indexed Cost of Acquisition=(CII of the year of purchaseCost of Acquisition×CII of the year of s
ale)
Similarly, the cost of improvement is indexed using the CII of the year of improvement.
Exemptions on Capital Gains:
The Income Tax Act provides several exemptions to reduce capital gains tax, provided certain
conditions are met:
1. Section 54 (Sale of Residential Property):
o Exemption on LTCG arising from the sale of a residential house, if the taxpayer
reinvests the gain in the purchase or construction of another residential house.
o The new house must be purchased within 2 years or constructed within 3 years.
2. Section 54F (Sale of Any Capital Asset Other than Residential Property):
o Exemption on LTCG from the sale of any asset (other than residential property) if
the entire sale proceeds are invested in purchasing or constructing a residential
house within the specified period.

26
 o If only a part of the sale proceeds is reinvested, the exemption is allowed
proportionately.
3. Section 54EC (Investment in Specified Bonds):
o Exemption on LTCG if the amount is invested in specified bonds (such as those
issued by NHAI or REC) within 6 months of the sale.
o The maximum investment allowed under this section is Rs. 50 lakh.
4. Section 54B (Sale of Agricultural Land):
o Exemption on capital gains arising from the transfer of agricultural land if the
proceeds are used to purchase another agricultural land.
Set-off and Carry Forward of Capital Losses:
 Short-term capital losses (STCL) can be set off against both short-term and long-term
capital gains.
 Long-term capital losses (LTCL) can be set off only against long-term capital gains.
 If losses cannot be set off in the current year, they can be carried forward for up to 8
assessment years and set off against future capital gains.
INCOME FROM OTHER SOURCES
Income from Other Sources
Income from Other Sources is a residual category of income under the Income Tax Act, 1961. It
covers any income that does not fall under the other heads of income like Salary, House
Property, Business/Profession, or Capital Gains. It is taxed under Section 56 to 59 of the Act.
Key Components of Income from Other Sources:
1. Interest Income:
o Interest earned on savings bank accounts, fixed deposits (FDs), recurring deposits
(RDs), or any other interest-bearing securities like bonds and debentures.
2. Dividend Income:
o Dividend received from shares in companies (domestic or foreign).
o From domestic companies: Dividend is exempt up to Rs. 10 lakh; beyond this, it
is taxable under the individual's income.
o From foreign companies: Dividend income is fully taxable.
3. Gifts:

27
 o Gifts received from relatives (as defined under the Act) are not taxable.
o Gifts received from non-relatives are taxable if the total amount exceeds Rs.
50,000 in a financial year. This applies to cash, immovable property
(land/buildings), or movable property (jewelry, shares, etc.).
o Exemptions: Gifts received during weddings, under a will or inheritance, or from
local authorities/charitable trusts are not taxable.
4. Rental Income from Machinery, Plant, or Furniture:
o Income from renting out machinery, plant, or furniture is taxed under this head if
it is not connected to the taxpayer's business.
5. Family Pension:
o Pension received by the legal heirs of a deceased employee is termed as family
pension.
o The deduction allowed is the lower of:
 Rs. 15,000, or
 33 1/3% of the family pension received.
6. Lottery, Gambling, Betting, and Horse Racing:
o Income from lotteries, crossword puzzles, betting, gambling, horse racing, etc., is
fully taxable.
o This income is taxed at a flat rate of 30% (plus cess and surcharge), and no
deductions are allowed under Section 80C to 80U.
7. Winnings from Game Shows:
o Income earned from game shows such as TV quiz shows, competitions, and
reality shows is taxed at a flat rate of 30% (Section 115BB).
8. Income from Sub-letting of Property:
o If a tenant sub-lets the property to another tenant, the rental income received
from sub-letting is taxed under this head.
9. Income from Royalties:
o Income from royalties, including those on patents, copyrights, trademarks, etc., is
taxed under this head if it is not related to business/profession.
10. Interest on Income Tax Refund:

28
 o If an individual receives an interest on an income tax refund, this interest is
taxable as income under this head.
11. Commission or Brokerage:
o Any commission or brokerage received by a person, which is not part of their
salary or business, is taxed as income from other sources.
12. Gifts of Property (Movable/Immovable):
o If an immovable property (like land or buildings) is received as a gift without
consideration (i.e., for free) and its stamp duty value exceeds Rs. 50,000, it is
taxable as income from other sources.
o Movable property (like jewelry, shares, or art) is similarly taxable if its fair market
value exceeds Rs. 50,000.
Deductions Allowed (Section 57):
Certain deductions can be claimed against income from other sources:
1. Interest Expense:
o Interest paid on loans taken to earn interest income (e.g., a loan to purchase a
fixed deposit or bonds) can be deducted.
o This deduction is restricted to a maximum of Rs. 10,000 for interest earned from
a savings bank account (Section 80TTA).
2. Expenses for Collecting Dividend or Interest:
o Any expenses incurred in earning dividends or interest, like commission or fees
paid, can be deducted.
3. Family Pension:
o A standard deduction of 33.33% of family pension or Rs. 15,000, whichever is
lower, is allowed.
4. Repairs, Depreciation, and Insurance Premium:
o If machinery, plant, or furniture is rented out, expenses for repairs, insurance
premiums, and depreciation can be claimed as deductions.
Non-Allowable Deductions (Section 58):
1. Personal Expenses: Personal or unrelated expenses cannot be deducted.
2. Interest Paid on Unpaid Taxes: Interest paid on income tax or other taxes is not
deductible.

29
 3. Gambling or Lottery: No deductions are allowed for expenses related to earning income
from lottery, gambling, or betting.
CLUBBING OF INCOMES
Clubbing of Income
Clubbing of Income refers to the inclusion of another person's income into the taxpayer’s total
income, typically when certain conditions are met. This is done to prevent tax evasion by
transferring assets or income-generating sources (like investments) to family members. The
provisions for clubbing of income are governed by Sections 60 to 64 of the Income Tax Act,
1961.
Key Provisions for Clubbing of Income:
1. Transfer of Income Without Transfer of Asset (Section 60):
o If a person transfers the income from an asset to another person while retaining
ownership of the asset, the income is clubbed with the transferor’s income.
o Example: Mr. A owns a property but transfers its rental income to his wife
without transferring ownership of the property. The rental income will be
clubbed with Mr. A's income.
2. Revocable Transfer of Assets (Section 61):
o If a person transfers an asset under a revocable agreement (an agreement that
can be revoked at any time), the income from the asset is clubbed with the
transferor's income.
o Example: Mr. B transfers his fixed deposit to his brother under a revocable
agreement. The interest from the deposit will be clubbed with Mr. B's income.
3. Income of Spouse (Section 64(1)(ii)):
o Salary or Remuneration to Spouse: If an individual’s spouse receives a salary,
commission, fees, or remuneration from a concern in which the individual has a
substantial interest, the income is clubbed with the individual’s income unless
the spouse has professional or technical qualifications and the income is solely
attributable to those qualifications.
o Substantial Interest: A person has substantial interest if they hold at least 20% of
equity or voting power in a company, or 20% of profits in any other business.
o Example: Mr. C’s wife works for a company where Mr. C holds 25% of the shares.
Her salary from the company (if not based on her professional qualifications) will
be clubbed with Mr. C's income.

30
4. Income from Assets Transferred to Spouse (Section 64(1)(iv)):
o If an individual transfers an asset (other than in connection with an agreement to
live apart) to their spouse without adequate consideration, the income from such
an asset is clubbed with the individual’s income.
o Example: Mr. D gifts shares to his wife. Any dividend or capital gains earned from
those shares will be clubbed with Mr. D's income.
5. Income of Minor Children (Section 64(1A)):
o The income of a minor child is clubbed with the income of the parent whose
total income (before including the child’s income) is higher. However, the
following exceptions apply:
 Income earned by the minor through manual work, skill, or talent is not
clubbed.
 Income of a disabled child (under Section 80U) is not clubbed.
o A deduction of Rs. 1,500 per child is allowed when the income of a minor child is
clubbed.
o Example: If Mr. E’s minor child earns interest from a fixed deposit, this interest
income will be added to Mr. E’s income.
6. Income from Assets Transferred to a Person for the Benefit of Spouse (Section 64(1)
(vii)):
o If an individual transfers an asset to a person or association of persons for the
benefit of their spouse without adequate consideration, the income arising from
the asset is clubbed with the individual’s income.
o Example: Mr. F transfers a house to a trust for the benefit of his wife. The rental
income from the house will be clubbed with Mr. F's income.
7. Income from Assets Transferred to a Person for the Benefit of Minor Child (Section
64(1)(viii)):
o If an individual transfers an asset to a person or association of persons for the
benefit of their minor child without adequate consideration, the income arising
from the asset is clubbed with the individual’s income.
o Example: Mrs. G transfers her shares to a trust for the benefit of her minor child.
The dividend income from the shares will be clubbed with Mrs. G's income.
8. Income from a Partnership Firm Involving Spouse (Section 64(1)(iii)):

31
 o If both spouses are partners in the same firm, the income from the firm will be
clubbed with the spouse who has a higher income, unless both have made equal
contributions.
Exceptions to Clubbing:
1. Income of Spouse in Case of Divorce or Legal Separation:
o If a transfer is made to a spouse under a legal agreement to live apart, clubbing
provisions do not apply.
2. Income of a Minor Child with a Disability:
o Income earned by a minor child suffering from a specified disability under
Section 80U is not clubbed with the parent's income.
3. Income from Independent Earnings:
o Income earned through the personal effort or expertise of a spouse or minor
child (e.g., professional fees, personal skills, etc.) will not be clubbed.
Example of Clubbing of Income:
Let’s assume:
 Mr. H gifts Rs. 10 lakh worth of shares to his wife.
 His wife receives Rs. 1 lakh in dividends from these shares during the financial year.
Since the shares were transferred without consideration, the Rs. 1 lakh of dividend income will
be clubbed with Mr. H’s income and taxed in his hands.
CALCULATION OF TAXABLE INCOME
Calculation of Taxable Income
The calculation of taxable income involves determining an individual's total income from all
sources, applying deductions and exemptions allowed under the Income Tax Act, 1961, and
then computing the taxable income on which income tax is levied.
Here is a step-by-step guide to calculating taxable income:

Step 1: Determine Gross Total Income (GTI)

An individual’s gross total income is the sum of income from the following five heads:
1. Income from Salary:

32
 o Basic salary, dearness allowance (DA), allowances (HRA, LTA, etc.), and
perquisites.
o Deduct exempt components like House Rent Allowance (HRA) under Section
10(13A) or Leave Travel Allowance (LTA), if applicable.
2. Income from House Property:
o Income from rental property.
o Deduct 30% standard deduction for repairs and maintenance and any home loan
interest under Section 24.
3. Profits and Gains from Business or Profession (PGBP):
o Income from business or profession (net profit after deducting expenses).
o Self-employed professionals, freelancers, or business owners calculate this based
on net income after allowable expenses.
4. Income from Capital Gains:
o Short-term or long-term gains from the sale of capital assets (e.g., property,
shares).
o Deduct cost of acquisition, improvement, and exemptions under Sections 54,
54F, etc.
5. Income from Other Sources:
o Interest from savings accounts, FDs, bonds, dividend income, gifts, winnings from
lotteries, etc.

Step 2: Apply Deductions Under Chapter VI-A (Section 80)

Once the gross total income (GTI) is calculated, deductions under various sections of Chapter VI-
A can be claimed to reduce taxable income:
1. Section 80C (Maximum limit: Rs. 1.5 lakh):
o Investments like ELSS, PPF, NSC, Sukanya Samriddhi Yojana, Senior Citizens Saving
Scheme, and premiums for life insurance policies.
o Principal repayment of home loan, tuition fees, 5-year fixed deposits.
2. Section 80D:
o Deduction for health insurance premiums.

33
  Self, spouse, children: Up to Rs. 25,000.
 For senior citizens: Up to Rs. 50,000.
o Preventive health checkup: Rs. 5,000 (within the overall limit).
3. Section 80TTA/80TTB:
o Interest from savings accounts: Up to Rs. 10,000 (Section 80TTA).
o For senior citizens, interest from deposits: Up to Rs. 50,000 (Section 80TTB).
4. Section 80E:
o Deduction for interest on loans taken for higher education.
5. Section 80G:
o Donations to charitable institutions, certain government relief funds (like PM
CARES) qualify for either 50% or 100% deduction of the donated amount.
6. Section 80EEA:
o Deduction on interest paid on home loans taken for affordable housing (up to Rs.
1.5 lakh over and above the deduction allowed under Section 24).
7. Section 80GGC:
o Contributions made to political parties (100% deduction).

Step 3: Calculate Taxable Income

Now, the Gross Total Income is reduced by the deductions under Chapter VI-A to arrive at the
Taxable Income.
Taxable Income=Gross Total Income−Deductions under Chapter VI-A

Step 4: Apply the Income Tax Slabs

Once the taxable income is determined, apply the income tax rates based on the applicable tax
slab. Taxpayers can choose between the old tax regime (with deductions) and the new tax
regime (with lower rates but no deductions).
Old Tax Regime (with Deductions) – FY 2023-24:

Income Slabs (Rs.) Tax Rate

0 - 2,50,000 NIL

34
Income Slabs (Rs.) Tax Rate

2,50,001 - 5,00,000 5%

5,00,001 - 10,00,000 20%

Above 10,00,000 30%

 Rebate under Section 87A: For individuals with taxable income of up to Rs. 5 lakh, a
rebate of up to Rs. 12,500 is available, resulting in no tax liability.
New Tax Regime (without Deductions) – FY 2023-24:

Income Slabs (Rs.) Tax Rate

0 - 2,50,000 NIL

2,50,001 - 5,00,000 5%

5,00,001 - 7,50,000 10%

7,50,001 - 10,00,000 15%

10,00,001 - 12,50,000 20%

12,50,001 - 15,00,000 25%

Above 15,00,000 30%

Step 5: Add Cess and Surcharge (if applicable)

After calculating the tax based on the applicable tax slab, additional charges may apply:
1. Health and Education Cess:
o A flat 4% of the total tax liability is charged as health and education cess.
2. Surcharge (applicable for higher income groups):
o 10% surcharge on income between Rs. 50 lakh and Rs. 1 crore.
o 15% surcharge on income between Rs. 1 crore and Rs. 2 crore.
o 25% surcharge on income between Rs. 2 crore and Rs. 5 crore.
o 37% surcharge on income above Rs. 5 crore.

35
Example of Taxable Income Calculation:
Let’s consider the following scenario for Mr. X (age 35, opting for the old regime):
 Salary Income: Rs. 10,00,000.
 Rental Income from House Property: Rs. 2,40,000.
 Interest from FDs: Rs. 50,000.
 Deductions:
o Section 80C (PPF and LIC): Rs. 1,50,000.
o Section 80D (Health Insurance): Rs. 25,000.
Step 1: Calculate Gross Total Income:
Gross Total Income=10,00,000(Salary)+2,40,000(House Property)+50,000(FD Interest)=Rs.12,90,
000
Step 2: Apply Deductions:
Deductions=Rs.1,50,000(80C)+Rs.25,000(80D)=Rs.1,75,000
Step 3: Calculate Taxable Income:
Taxable Income=Rs.12,90,000−Rs.1,75,000=Rs.11,15,000
Step 4: Apply Tax Slab (Old Regime):
 Income up to Rs. 2,50,000: NIL
 Rs. 2,50,001 to Rs. 5,00,000: 5% of Rs. 2,50,000 = Rs. 12,500
 Rs. 5,00,001 to Rs. 10,00,000: 20% of Rs. 5,00,000 = Rs. 1,00,000
 Above Rs. 10,00,000: 30% of Rs. 1,15,000 = Rs. 34,500
Total Tax=Rs.12,500+Rs.1,00,000+Rs.34,500=Rs.1,47,000
Step 5: Add Cess:
Cess=4\textbf{Cess} = 4% of Rs. 1,47,000 = Rs. 5,880Cess=4
Step 6: Total Tax Liability:
Total Tax Payable=Rs.1,47,000+Rs.5,880=Rs.1,52,880
Marginal Relief
Marginal Relief is a provision under the Income Tax Act designed to provide relief to taxpayers
when their income slightly exceeds the threshold limit for higher tax rates, resulting in

36
disproportionately higher taxes, especially due to surcharge. The idea is to ensure that
taxpayers are not excessively penalized due to a marginal increase in their income that would
push them into a higher surcharge bracket.
Marginal relief ensures that the additional tax payable (due to surcharge) on income just above
the threshold is limited to the amount by which the income exceeds the threshold. In simpler
terms, the tax including surcharge should not be more than the income that exceeds the
surcharge threshold.
Key Concepts:
 Surcharge is an additional tax on individuals whose income exceeds a specified
threshold.
 Marginal Relief reduces the impact of the surcharge, ensuring that the tax does not
spike unreasonably due to a small increase in income above the threshold.
 Marginal relief applies only on surcharge, not on basic income tax or cess.
Surcharge Rates for FY 2023-24:

Income Level Surcharge Rate

Above Rs. 50 lakh to Rs. 1 crore 10%

Above Rs. 1 crore to Rs. 2 crore 15%

Above Rs. 2 crore to Rs. 5 crore 25%

Above Rs. 5 crore 37%

Formula for Marginal Relief:

If a person’s income exceeds the surcharge threshold, the marginal relief is calculated as
follows:
1. Calculate total tax including surcharge based on the income.
2. Compare the difference between the total tax (including surcharge) and the tax payable
if there were no surcharge.
3. The marginal relief is the amount by which the tax exceeds the surcharge threshold.
The relief is provided so that the total tax liability including surcharge does not exceed the
income exceeding the threshold amount.

Example of Marginal Relief:

37
Let’s say Mr. X has an income of Rs. 1,01,00,000 for FY 2023-24, and the surcharge threshold is
Rs. 1 crore (with a 15% surcharge beyond this threshold).
1. Calculate Tax Without Surcharge:
o For an income of Rs. 1,01,00,000, tax is calculated as per the old tax regime:
 Tax on Rs. 10,00,000 to Rs. 50,00,000 = Rs. 12,500 + Rs. 1,00,000 + Rs.
30,00,000 = Rs.
Rebate and Relief under Income Tax
In the context of Indian income tax, rebate and relief are provisions designed to reduce the tax
burden on specific categories of taxpayers. Both terms help lower the effective tax liability, but
they apply in different situations and for different reasons.

1. Rebate (Section 87A)

Rebate under Section 87A is a tax benefit for individuals with lower incomes. It allows eligible
taxpayers to reduce their tax liability by up to a specified limit. The rebate is particularly
beneficial for those with income up to a certain threshold, making them effectively exempt from
paying income tax.
Key Points:
 Eligibility: Only available to resident individuals with a taxable income of up to Rs. 5
lakh (after deductions).
 Rebate Amount: The rebate is up to Rs. 12,500 or the actual tax payable, whichever is
lower.
 Application: The rebate is applied after calculating the total tax on income but before
adding cess.
This means that if the calculated tax on a resident individual’s income is Rs. 12,500 or less, they
don’t pay any tax if their taxable income is up to Rs. 5 lakh.
Example of Rebate:
If Mr. A has a taxable income of Rs. 4,90,000, his tax would be 5% of Rs. 2,40,000 = Rs. 12,500.
With the Section 87A rebate, he gets a rebate of Rs. 12,500, reducing his tax liability to zero.

2. Relief under Section 89

Relief under Section 89 provides tax relief to individuals who receive a large portion of their
income in arrears or advance, which could increase their tax liability by pushing them into a

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higher tax bracket. This relief ensures fair taxation, accounting for the fact that income was due
in previous years.
Key Points:
 Applicability: Primarily applies to salaried individuals or pensioners who receive salary
arrears, gratuity, commuted pension, leave encashment, or compensation.
 Calculation Method:
o Calculate tax liability for the current year, including the arrears or advance.
o Recalculate tax liability as if the arrears had been paid in the respective previous
years.
o The difference in tax liabilities between these calculations determines the relief
amount under Section 89.
Example of Relief under Section 89:
Suppose Ms. B receives Rs. 2,00,000 as salary arrears in FY 2023-24 for work done in FY 2021-
22. By recalculating her tax liability as if the arrears were added to her income for FY 2021-22,
Ms. B would receive a relief amount under Section 89 to reduce her current year’s tax impact.

3. Marginal Relief
Marginal Relief applies to individuals who exceed specific surcharge thresholds, ensuring that
the additional tax due to the surcharge does not exceed the income over the threshold.
Key Points:
 Primarily impacts individuals whose income is marginally above the surcharge
thresholds:
o Rs. 50 lakh (10% surcharge),
o Rs. 1 crore (15% surcharge),
o Rs. 2 crore (25% surcharge),
Set Off and Carry Forward of Losses
In the context of Indian income tax, set off and carry forward of losses refer to provisions that
allow taxpayers to adjust their losses against income earned in the current or future assessment
years. This helps reduce the overall tax liability.
1. Set Off of Losses

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Set off means adjusting losses against income from the same or different heads. This can occur
in the same financial year.
Types of Set Off:
1. Intra-Head Set Off:
o Losses from one source of income can be set off against profits from another
source within the same head of income.
o Example: If an individual has a loss of Rs. 50,000 from a rental property and Rs.
1,00,000 from another rental property, they can set off the loss against the profit
from the other property.
2. Inter-Head Set Off:
o Losses from one head can be set off against income from another head.
o Example: If an individual has a business loss of Rs. 1,00,000 and salary income of
Rs. 3,00,000, they can set off the business loss against the salary income,
reducing taxable income to Rs. 2,00,000.
2. Carry Forward of Losses
If a loss cannot be completely set off in the same financial year, it can be carried forward to
subsequent years to offset against future income.
Key Points for Carry Forward:
 Eligibility: Losses can be carried forward only if they are declared in the return of income
filed within the due date.
 Time Limit:
o Losses from Business or Profession: Can be carried forward for 8 assessment
years.
o Capital Losses: Short-term capital losses can be set off against both short-term
and long-term capital gains, while long-term capital losses can only be set off
against long-term capital gains. Both can be carried forward for 8 assessment
years.
 Limitations:
o Losses from a speculative business can be set off only against speculative
income.
o Losses under the head Income from Other Sources can generally not be carried
forward, except for specific cases like losses from the transfer of a capital asset.

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 Summary of Set Off and Carry Forward Rules

Type Set Off Against Carry Forward Duration

Business Losses Against income from any head 8 assessment years

Short-term: against any capital gains

Capital Losses Long-term: against long-term capital 8 assessment years
gains only

Loss from House Against income from any head (except Can be carried forward for 8
Property salary) years

Speculative Loss Against speculative income only 4 assessment years

Example of Set Off and Carry Forward:

Let’s say Mr. Y has the following income and losses in FY 2023-24:
 Salary Income: Rs. 4,00,000
 Business Loss: Rs. 1,50,000
 Short-term Capital Gain: Rs. 1,00,000
 Long-term Capital Loss: Rs. 50,000
Step 1: Set Off
 Mr. Y can set off the business loss of Rs. 1,50,000 against his salary income.
o Adjusted Salary Income: Rs. 4,00,000 - Rs. 1,50,000 = Rs. 2,50,000
 The remaining income is Rs. 2,50,000, which can be set off with the short-term capital
gain:
o Total taxable income now: Rs. 2,50,000 - Rs. 1,00,000 = Rs. 1,50,000
Step 2: Carry Forward
 The long-term capital loss of Rs. 50,000 cannot be set off this year as there are no long-
term capital gains.
 Mr. Y can carry forward this loss to the next assessment years to set it off against any
future long-term capital gains.

SET- OFF AND CARRY FORWARD OF LOSSES

S.NO SET- OFF AND CARRY
. FORWARD OF LOSSES SET OFF CARRY FORWARD AND SET-OFF

DURING THE YEAR NEXT YEAR(S)

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 SEAM ANOTHER AGAINST C/ YEARS AGAINST
E HEAD F PROFITS FROM
HEAD
HOUSE PROPERTY YES YES - YE 8 SAME HEAD
1
S
SPECULATION BUSINESS YES NO SPECULATIO YE 4 SAME/ANOTHER
N PROFIT S SPECULATION
BUSINESS
UNABSORBED YES YES ANY INCOME YE NO ANY INCOME
DEPRICIATION- CAP. S LIMIT (OTHER THAN
2
EXPENDITURE SCIENTIFIC SALARY)
RESEARCH FAMILY
PLANNING
NON-SPECULATIVE YES YES(EXCEP BUSINESS YE 8 SAME HEAD
BUSINESS OR PROFESSION T SALARY) PROFITS S
LONG TERM CAPITAL LOSSES YES NO LTCG YE 8 LTCG
S
3
SHORT TERM CAPITAL GAIN YES NO STCG/LTCG YE 8 STCG/LTCG
S
OWNING/MAINTAINING YES NO SAME ITEM YE 4 SAME ITEM
4
RACE HORSES S
INCOME FROM OTHER YES YES NA NO NA NA
5 SOURCES (EXCEPT IF
EXEMPT)
SPECIFIED BUSINESS U/S YES NO SPECIFIED YE NO ANY SPECIFIED
6 35AD BUSINESS S LIMIT BUSINESS
PROFIT

Conclusion
The provisions for set off and carry forward of losses ensure that taxpayers are not unduly
penalized for losses incurred, allowing them to balance out future incomes

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