Treatment of Income from Different Sources Under Income Tax Act, 1961 As Amended By Finance Act 2017.
Each income has different source of earning and so the provisions for its taxability. Income-tax Act provides for five heads of incomes for computation of taxable income, viz., Salary, Income from House Property, Income from Business or Profession, Capital Gain and Residual Income. Provisions contained under each head of income for computation of taxable income have been discussed in this document.
j) Contribution by Central Government or any other employer to Employees Pension Account as referred in Sec. 80CCD
b) Existence of relationship of employer and employee is must between the payer and payee to tax the income under this head.
i. Salary due from employer (including former employer) to taxpayer during the previous year, whether paid or not;
ii. Salary paid by employer (including former employer) to taxpayer during the previous year before it became due;
iii. Arrear of salary paid by the employer (including former employer) to taxpayer during the previous year, if not charged to tax in any earlier year;
Exceptions - Remuneration, bonus or commission received by a partner from the firm is not taxable under the head Salaries rather it would be taxable under the head business or profession.
b) Salary paid by the Foreign Government to his employee serving in India is taxable under the head Salaries;
c) Leave salary paid abroad in respect of leave earned in India shall be deemed to accrue or arise in India.
Exceptions - If a Citizen of India render services outside India, and receives salary from Government of India, it would be taxable as salary deemed to have accrued in India.
1. Motor Car (taxable only in case of specified employees [See note 4] except when car owned by the employee is used by him or members of his household wholly for personal purposes and for which reimbursement is made by the employer)
Tax treatment in respect of contributions made to and payment from various provident funds are summarized in the table given below:
* Salary = Basic Pay + Dearness Allowance (to the extent it forms part of retirement benefits) + turnover based commission
Payment from recognized provident fund shall be exempt in the hands of employees in following circumstances:
a) If employee has rendered continue service with his employer (including previous employer, when PF account is transferred to current employer) for a period of 5 years or more
b) If employee has been terminated because of certain reasons which are beyond his control (ill health, discontinuation of business of employer, etc.)
2) An employee who has substantial interest (i.e. beneficial owner of equity shares carrying 20% or more voting power) in the employer-company
*Monetary Income means Income chargeable under the salary but excluding perquisite value of all non-monetary perquisites
c) The house property should not be used for the purpose of business or profession carried on by the taxpayer.
a) Expected rent, i.e., the sum for which the property might reasonably be expected to be let out from year to year. Expected rent shall be higher of municipal valuation or fair rent of the property, subject to maximum of standard rent;
b) Rent actually received or receivable after excluding unrealized rent but before deducting loss due to vacancy
Out of sum computed above, any loss incurred due to vacancy in the house property shall be deducted and the remaining sum so computed shall be deemed to the gross annual value.
* Any interest pertaining to the period prior to the year of acquisition/ construction of the house property shall be allowed as deduction in five equal installments, beginning with the year in which the property was acquired/ constructed.
* Deduction for interest on borrowed capital shall be limited to Rs. 30,000 in following circumstances:
a) If capital is borrowed before 01-04-1999 for the purpose of purchase or construction of a house property;
b) If capital is borrowed on or after 01-04-1999 for the purpose of re-construction, repairs or renewals of a house property;
c) If capital is borrowed on or after 01-04-1999 but construction of house property is not completed within five years from end of the previous year in which capital was borrowed.
Deduction of up to Rs 50,000 shall be allowed to an Individual for interest payable on loan taken for the purpose of acquisition of a house property subject to following conditions:
e) Where deduction has been allowed under this section, no deduction shall be allowed in respect of such interest under any other provision.
If letting out of building along with movable assets i.e., machinery, plan, furniture or fixtures, etc. forms part of a single transaction and are inseparable, the composite rent shall be taxable under the head “Profits and gains from business or profession” or “Income from other sources”, as the case may be. On the other hand, if the letting out of building is separable from letting of other assets, then income from letting out of building shall be taxable under the head “Income from house property” and income from letting out of other assets shall be taxable under the head “Profits and gains from business or profession” or “Income from other sources”, as the case may be.
Unrealized rent is that portion of rental income which the owner could not realize from the tenant. Unrealized rent is allowed to be deducted from actual rent received or receivable only if the following conditions are satisfied:
b) The defaulting tenant has vacated, or steps have been taken to compel him to vacate the property;
d) The taxpayer has taken all reasonable steps to institute legal proceedings for the recovery of the unpaid rent or satisfies the Assessing Officer that legal proceedings would be useless.
Amount received in respect of arrears of rent or any subsequent recovery of unrealized rent shall be deemed to be the income of taxpayer under the head "Income from house property" in the year in which such rent is realized or received (whether or not the assessee is the owner of that property in that year).
If house property is owned by co-owners and their share in house property is definite and ascertainable than the income of such house property will be assessed in the hands of each co-owner separately. For the purpose of computing income from house property, the annual value of the property will be taken in proportion to their share in the property. In such a case, each co-owner shall be entitled to claim benefit of self-occupied house property in respect of their share in the property (subject to prescribed conditions). However, where the shares of co-owners are not definite, the income of the property shall be assessed as that of an Association of persons.
Income from house property is taxable in the hands of its owner. However, in the following cases, legal owner is not considered as the real owner of the property and someone else is considered as the deemed owner of the property to pay tax on income earned from such house property:
1. An individual, who transfers otherwise than for adequate consideration any house property to his or her spouse, not being a transfer in connection with an agreement to live apart, or to a minor child not being a married daughter, shall be deemed to be the owner of the house property so transferred;
2. The holder of an impartible estate shall be deemed to be the individual owner of all the properties comprised in the estate;
3. A member of a co-operative society, company or other association of persons to whom a building or part thereof is allotted or leased under a house building scheme shall be deemed to be the owner of that building or part thereof;
4. A person who is allowed to take or retain possession of any building or part thereof in part performance of a contract of the nature referred to in Section 53A of the Transfer of Property Act, 1882 shall be deemed to be the owner of that building or part thereof;
5. A person who acquires any rights (excluding any rights by way of a lease from month to month or for a period not exceeding one year) in or with respect to any building or part thereof, by virtue of any such transaction as is referred to in section 269UA(f), shall be deemed to be the owner of that building or part thereof.
The following incomes are chargeable to tax under the head Profit and Gains from Business or Profession:
The following expenses shall be allowed as deduction if such expenditure are actually paid on or before the due date of filing of return of income:-
a) There should be a capital asset. In other words, the asset transferred should be a capital asset on the date of transfer;
a) Any kind of property held by an assessee, whether or not connected with business or profession of the assessee.
b) Any securities held by a FII which has invested in such securities in accordance with the regulations made under the SEBI Act, 1992.
b) Movable property held for personal use of taxpayer or for any member of his family dependent upon him. However, jewellery, costly stones, and ornaments made of silver, gold, platinum or any other precious metal, archaeological collections, drawings, paintings, sculptures or any work of art shall be considered as capital asset even if used for personal purposes;
a. Within jurisdiction of municipality, notified area committee, town area committee, cantonment board and which has a population not less than 10,000;
b. Within range of following distance measured aerially from the local limits of any municipality or cantonment board:
i. not being more than 2 KMs, if population of such area is more than 10,000 but not exceeding 1 lakh;
ii. not being more than 6 KMs , if population of such area is more than 1 lakh but not exceeding 10 lakhs; or
Capital asset held for not more than 36 months immediately prior to the date of transfer shall be deemed as short-term capital asset. However, following assets held for not more than 12 months shall be treated as short-term capital assets:
a) Equity or preference shares in a company which are listed in any recognized stock exchange in India;
Note: Unlisted shares held for not more than 24 months immediately prior to the date of transfer shall be treated as short-term capital asset.
Capital Asset that held for more than 36 months or 12 months, as the case may be, immediately preceding the date of transfer is treated as long-term capital asset.
(vii) Any transaction which has the effect of transferring an (or enabling the enjoyment of) immovable property; or
(viii) Disposing of or parting with an asset or any interest therein or creating any interest in any asset in any manner whatsoever.
Following transactions shall not be regarded as transfer (subject to certain condition). Hence, following transaction shall not be charged to capital gains:
Computation of capital gain depends upon the nature of the capital asset transferred during the previous year, vis-à-vis, short-term capital asset, long-term capital asset or depreciable asset. Capital gain arising on transfer of short-term capital asset or depreciable asset is considered as short-term capital gain, whereas transfer of long-term capital asset gives rise to long-term capital gain.
* Short-term capital gain or loss from sale of depreciable asset will arise only in the following two situations:
a) In case of transfer of long-term capital assets, indexed cost of acquisition and indexed cost of improvement shall be deducted from the full value of consideration;
b) Indexed cost of acquisition and Indexed cost of improvement shall be computed with reference to Cost Inflation Index (‘CII’) in the following manner:
Note : The bare year for computation of capital gains has been shifted from 1981 to 2001 with effect from assessment year 2018-19. Thus, if any capital asset (acquired before April 1, 2001) is transfered then assessee has option to take its cost of acquisition either as fair market value as on April 1, 2001 or its actual cost.
CII in relation to a previous year means such index, as Central Government notifies on year to year basis.
4.8 Computation of capital gain in case of sale of shares or debentures of an Indian company purchased by a non-resident in foreign currency [ first proviso to section 48]
* Average exchange rate means the average of the telegraphic transfer buying rate and telegraphic transfer selling rate of the foreign currency initially utilised in the purchase of capital asset.
Full value of consideration is the consideration received or receivable by the transferor in lieu of assets, which he has transferred. Such consideration may be received in cash or in kind. If it is received in kind, then fair market value (‘FMV’) of such assets shall be taken as full value of consideration.
However, in the following cases “full value of the consideration” shall be determined on notional basis as per the relevant provisions of the Income-tax Act, 1961:
Cost of acquisition of an asset is the amount for which it was originally acquired by the assessee. It includes expenses of capital nature incurred in connection with such purchase or for completing the title of the property.
When a depreciable asset (which was subject to depreciation on straight line basis) of a power generating units is sold, discarded, demolished or destroyed then terminal depreciation shall be deductible from sale consideration while computing capital gains, or balancing charge is taxable in the relevant year, as the case may be.
Cost to the previous owner shall be deemed to be the cost of acquisition in the hands of the taxpayer in cases where a capital asset becomes the property of the assessee under any of the modes given below:
d) On any distribution of assets on dissolution of a firm, BOI or AOP (where such dissolution had taken place at any time before the 01-04-1987);
j) In a scheme of amalgamation, any transfer of shares held in a Indian company by a amalgamating foreign company to the amalgamated Foreign company;
k) Consequent to transfer of share(in a scheme of amalgamation as referred to in Section 47(viab) of a foreign company which derives, directly or indirectly, its value substantially from the share or shares of an Indian company held by amalgamating foreign company to the amalgamated foreign company.
l) Consequent to transfer of capital asset by the demerged company to the resulting Indian company. (in case of demerger)
m) Consequent to transfer of share (in case of demerger as referred to in Section 47(vic) of a foreign company which derives, directly or indirectly, its value substantially from the share or shares of an Indian company held by a demerged foreign company to resulting foreign company.
r) By HUF where one of its members has converted his self-acquired property into joint family property.
Where previous owner has also acquired the property in the aforesaid manner the ‘previous owner’ of the property shall be construed as the last previous owner who acquired the property by means other than those stated above.
Cost of improvement, in relation to the capital assets shall include all capital expenditure incurred in making addition or alteration to the capital assets by the assessee or the previous owner. However, cost of improvement does not include any expenditure incurred prior to 01-04-2001. Cost of improvement shall be computed in the following manner:
a) Short-term capital gains shall be included in the gross total income of the taxpayer and will be taxed at the normal rates;
b) Short-term capital gains arising from transfer of Equity Shares, Units of an Equity Oriented Funds or a unit of a business trust which is chargeable to securities transaction tax shall be taxed at 15% under Section 111A;
Now benefit of reduced rate of tax (i.e., 15%) shall be available w.e.f. 1-4-2016 even in respect of income arising from transfer of units of a business trust which were acquired by assessee in lieu of shares of special purpose vehicle as referred to in section 47(xvii).
b) Long-term capital gains arising from transfer of listed securities, units or a zero coupon bonds shall be taxable at lower of following:
c) Long-term capital gains arising to a non-residents or foreign company from transfer of unlisted securities shall be taxed at without giving benefit for indexation;
d) Long-term capital gains arising from transfer of listed securities, units of equity oriented or a unit of business trust which is chargeable to STT shall be exempt from tax under Section 10(38).
1. Now exemption from capital gains under Section 10(38) shall be available w.e.f. 1-4-2016 even in respect of long-term capital gains arising from transfer of units of a business trust which were acquired in lieu of shares of special purpose vehicle as referred to in section 47(xvii) and on which securities transaction tax has been paid.
2. Now exemption from long term capital gains under section 10(38) shall be available w.e.f April 1, 2017 even where STT is not paid, provided that -
- transaction is undertaken on a recognised stock exchange located in any International Financial Service Centre, and
3. Exemption from long term capital gains under section 10(38) shall not be available if the transaction of acquisition of equity share is entered into on or after the 1st day of October, 2004 and such transaction is not chargeable to securities transaction tax.
To protect the exemption in genuine cases like IPO, FPO, bonus or right issue, etc., the Government shall notify the acquisitions for which condition for chargeability of securities transaction tax shall not apply.
With a view to ascertaining the fair market value of a capital asset, the concerned Assessing Officer may refer the valuation of the capital asset to a Valuation Officer appointed by the Income-tax Department in the following cases:
1) Where the value of the asset as claimed by the assessee is in accordance with the estimate made by a registered valuer (who works in a private capacity under a licence issued by the Board and his valuation is not binding on the Assessing Officer), but the Assessing Officer is of opinion that the value so claimed is at variance with the fair market value of the asset;
2) Where the Assessing Officer is of opinion that the fair market value of the asset exceeds the value of the asset by more than Rs. 25,000 or 15 per cent of the value claimed by the assessee, whichever is less; or
3) Where the Assessing Officer is of opinion that, having regard to nature of an asset and relevant circumstances, it is necessary to make a reference to the Valuation Officer
a) The scheme is open to all taxpayers, who wish to claim exemption under Sections 54, 54B, 54D, 54F, 54G or 54GB.
b) If taxpayer could not invest the capital gains to acquire new asset before due date of furnishing of return, the capital gains can be deposited before due date for furnishing of return of income in deposit account in any branch of a nationalized bank in accordance with Capital Gain Account Scheme 1988.
Any income which is not chargeable to tax under any other heads of income and which is not to be excluded from the total income shall be chargeable to tax as residuary income under the head “Income from Other Sources”.
* ‘Movable property’ shall include shares, securities, jewellery, archaeological collection, drawings, paintings, sculptures, any work of art or bullion etc.
Any sum of money or property received by any person [on or after 01-04-2017] in the following circumstances shall not be chargeable to tax:
f) Gifts received from any fund, foundation, university, educational institution, hospital, medical institution, any trust or institution referred to in Section 10(23C);
h) Share received as a consequences of demerger or amalgamation of a company under clause (vid) or clause (vii) of section 47, respectively.
i) Share received as a consequences of business reorganization of a co-operative bank under section 47(vicb)
The following expenditures are allowed as deductions from income chargeable to tax under the head ‘Income from Other Sources’: