Direct and Indirect Taxation - I Notes | B.Com. (Accountancy) Semester 5 | Mumbai University | munotes

• including notices, assessment, reassessment, recomputation, rectification, penalty, reference, revision and appeals.

So the correct statement is not "the 1961 Act is gone". It is:

Section 536(2) also preserves anything already done under the old Act, and any right, privilege, obligation or liability already acquired, accrued or incurred under it.

The key highlights MU asks for

One time concept. The old Act ran on two: the previous year in which income arose and the assessment year in which it was taxed. The new Act has one, the tax year, defined in section 3. This is the single change a student will feel on every question. It has its own chapter.

Five heads, unchanged. Section 13 keeps the classification: Salaries, Income from house property, Profits and gains of business or profession, Capital gains, and Income from other sources.

Exemptions moved into Schedules. Under the old Act the exemptions were a single very long section. Here, section 11 provides that income enumerated in Schedules II to VI is not included in total income, section 11(3) exempts the persons in Schedule VII, and section 12 deals with Schedule VIII, political parties and electoral trusts.

A default regime. Section 202 sets out the new tax regime for individuals, Hindu undivided families and others, and it is the default. That section number exists only in this Act, and it is the quickest way to tell which Act a question is set on.

Tables instead of provisos. Much of what the old Act said in prose is now set out in tables inside the section, with a serial number, a description and a condition. A table is easier to read and easier to cite: a reference is given as the section, the table, and the serial number.

What this does NOT mean

It is not a new tax. No new charge was created. Section 4 charges income-tax on total income exactly as before.

It did not set the rates. Section 4(1) charges tax "where any Central Act enacts that income-tax shall be charged ... at any rate or rates". That Central Act is the annual Finance Act. The rates for a year are found there, never in the Income-tax Act itself. The text used throughout this book is the Income-tax Act, 2025 as amended by the Finance Act, 2026.

It does not make old learning useless. The reasoning transfers. The numbering does not. Read an older book for the technique of a computation if you must, but never copy a section number out of it.

Quick revision

• Income-tax Act, 2025, Act 30 of 2025, assented 21 August 2025.
• Section 1(3): in force 1 April 2026. Section 1(2): extends to the whole of India.
• Section 536(1) repeals the Income-tax Act, 1961 (43 of 1961).
• Section 536(2)(c): the old Act still governs any tax year beginning before 1 April 2026, including proceedings begun afterwards.
• It consolidates and amends: same substance in the main, new structure and new numbering.
• Rates come from the Finance Act, not from this Act (section 4(1)).

Test yourself

1. When did the Income-tax Act, 2025 come into force, and under which provision? On 1 April 2026, under section 1(3).

2. A notice for the year 2024-25 is issued in June 2026. Which Act applies? The Income-tax Act, 1961. Section 536(2)(c) preserves it for any tax year beginning before 1 April 2026, even where the proceeding is initiated after the new Act commenced.

3. Does the Income-tax Act, 2025 prescribe the rates of tax? No. Section 4(1) charges tax at the rate or rates enacted by a Central Act, which is the annual Finance Act.

4. What does the long title of the Act say it does? It is an Act to consolidate and amend the law relating to income-tax, so it both gathers the existing law and changes it.

Answer in one sentence

What is the Income-tax Act, 2025? It is Act 30 of 2025, an Act to consolidate and amend the law relating to income-tax, which extends to the whole of India, came into force on 1 April 2026 under section 1(3), and repealed the Income-tax Act, 1961 by section 536(1) while preserving that Act for tax years beginning before that date.

How to find a provision, in practice

1. Name the head. Salary, house property, business, capital gains, other sources. Section 13 lists them and nothing else.
2. Go to the head's own block of sections. Salaries is 15 to 19. House property is 20 to 25. Business or profession is 26 to 66. Capital gains is 67 to 91. Other sources is 92 to 95.
3. Within the block, the order is the order of the computation: the charge first, then what is included, then the deductions, then the definitions that the block uses.
4. If it is an exemption, it is in a Schedule, reached through section 11 or section 12.
5. If it is a deduction from total income rather than from a head, it is in the 122 to 158 range.

That ordering is worth memorising as five numbers: 15, 20, 26, 67, 92.

What it does NOT mean

A Schedule is not optional reading. It carries operative law.

A marginal note is not the section. The bold line above a section is its marginal note, printed for convenience. Quote the sub-section, not the note.

Section numbers do not carry over from the 1961 Act. There is no rule of thumb, no constant offset, and no reliable memory. Section 10 of the old Act was the exemptions; section 10 of this Act is about a married couple in Goa.

Quick revision

• 536 sections, 23 chapters, 16 Schedules.
• Heads and their blocks: Salaries 15-19; House property 20-25; Business 26-66; Capital gains 67-91; Other sources 92-95.
• Deductions from total income: 122-158. New tax regime: 202.
• Citation: section, sub-section (1), clause (a), sub-clause (i).
• Tables are cited as Sl. No. within the section or Schedule.
• Exemptions live in Schedules II to VIII, given effect by sections 11 and 12.

Test yourself

1. Where are the exemptions in this Act? In Schedules II to VIII. Section 11 gives effect to Schedules II to VII and section 12 to Schedule VIII.

2. What does "section 21(2)(b)" refer to? Section 21, sub-section (2), clause (b).

3. Which sections carry each of the five heads? Salaries 15 to 19; house property 20 to 25; profits and gains of business or profession 26 to 66; capital gains 67 to 91; income from other sources 92 to 95.

4. Why is a table's conditions column important? Because an exemption in this Act is conditional, and section 11(2) charges the income to tax in any year in which the conditions are not satisfied.

Answer in one sentence

How is the Income-tax Act, 2025 arranged? In 23 chapters holding 536 continuously numbered sections, followed by 16 Schedules which carry the exemptions and much of the operative detail, with provisions cited by sub-section and clause and tabular material cited by serial number.

Both are the tax year 2026-27. There is one tax year; sub-section (2) changes when it begins for that source, not what it is called.

Her total income for the tax year 2026-27 is the salary for twelve months plus the profits of the practice for six.

The distinction that carries marks

What it does NOT mean

There is no assessment year in this Act. Writing "assessment year 2027-28" in an answer on the 2025 Act is wrong, and it tells the examiner immediately that the candidate has studied from a superseded book.

The tax year is not the accounting year. A business may close its books on any date it likes for its own purposes. For income-tax it must compute for the period ending 31 March.

A short first year is not a concession. Nothing is reduced or apportioned because the year is short. The income of that period is simply the income of that tax year.

Quick revision

• Section 3(1): tax year means the twelve months period of the financial year commencing on 1 April.
• Section 3(2): a newly set up business or profession, or a newly arising source, has a tax year beginning on the date of setting up or arising and ending on 31 March.
• One period, not two. No assessment year.
• A tax year can be shorter than twelve months, never longer, and always ends 31 March.

Test yourself

1. Define "tax year". The twelve months period of the financial year commencing on the 1st April, under section 3(1).

2. A source of income comes into existence on 1 January 2027. What is its first tax year? 1 January 2027 to 31 March 2027, under section 3(2)(b): the tax year 2026-27, for that source, is a period of three months.

3. What replaced the previous year and the assessment year? The tax year. The Act now uses one period, in which income both arises and is charged.

4. Can a tax year exceed twelve months? No. Section 3(2) can only shorten the first period of a new source; every tax year ends on 31 March.

Answer in one sentence

What is a tax year? Under section 3(1) it is the twelve-month period of the financial year commencing on 1 April, and by section 3(2) it begins later for a newly set up business or profession or a newly arising source, ending in every case on 31 March.

"Any other sum of money", not only tax. Interest and penalty are sums payable under the Act, so a person who owes only interest is an assessee.

Income: section 2(49)

The definition is inclusive and runs to a long list. Its opening clauses give the shape:

(49) "income" includes - (a) profits and gains; (b) dividend; (c) voluntary contributions received by a registered non-profit organisation, an association referred to in Schedule III, a University or other educational institution or a hospital or other institution referred to in Schedule VII, or an electoral trust; (d) the value of any perquisite or profit in lieu of salary taxable under sections 17 and 18 ...

Three things to take from it.

It "includes". The list does not limit the word. A receipt not named in section 2(49) may still be income on ordinary principles.

Clause (d) is why perquisites are taxable at all. The value of a perquisite under section 17 and a profit in lieu of salary under section 18 are brought in here as income, and then charged under the head Salaries.

Voluntary contributions are income. A donation received by the bodies named is income in their hands, which is why their exemptions are conditional.

Total income: section 2(108)

(108) "total income" means the total amount of income referred to in section 5, computed in the manner as laid down in this Act.

This is the shortest of the four and the most often written badly. It has two limbs and both must appear in the answer:

1. The income referred to in section 5 - that is, the income the person's residential status brings into charge. A resident's world income; a non-resident's Indian income.
2. Computed in the manner laid down in this Act - through the five heads, after set-off, and after the deductions in Chapter VIII.

So total income is not "all income a person received". It is the result of a process, and the whole of this book is that process.

The distinction that carries marks

What it does NOT mean

Every person is not an assessee. A person becomes an assessee only when a sum is payable, a proceeding is taken, or the Act deems it.

An assessee is not always the earner. A representative assessee is assessed on income that is somebody else's.

Income is not confined to money. Section 2(49)(d) brings in the value of a perquisite, which is often not cash at all.

Quick revision

• Person, s.2(77): individual, HUF, company, firm, AOP or BOI, local authority, artificial juridical person. Inclusive, and profit motive is irrelevant.
• Assessee, s.2(11): a person by whom tax or any other sum is payable, and includes a person under proceeding, a representative assessee, and an assessee in default.
• Income, s.2(49): inclusive; expressly includes profits and gains, dividend, voluntary contributions, and the value of a perquisite or profit in lieu of salary under sections 17 and 18.
• Total income, s.2(108): the income referred to in section 5, computed as laid down in the Act.
• Tax year, s.3: the twelve months of the financial year from 1 April.

Test yourself

1. Is a partnership firm a person? Yes, expressly, under section 2(77)(d).

2. A person has a loss and owes no tax. Can he be an assessee? Yes. Section 2(11)(a)(i) includes a person in respect of whom a proceeding has been taken for the assessment of the loss sustained by him.

3. Define total income. The total amount of income referred to in section 5, computed in the manner laid down in the Act: section 2(108).

4. Why is the value of a rent-free house taxable? Because section 2(49)(d) includes the value of a perquisite taxable under section 17 within the meaning of income.

5. Does a club formed with no object of making profit escape being a person? No. Section 2(77) applies whether or not the body was formed with the object of deriving income, profits or gains.

Answer in one sentence

Distinguish person from assessee. A person under section 2(77) is any of the seven categories the Act can charge, whereas an assessee under section 2(11) is a person by whom tax or any other sum is payable under the Act, and includes a person under proceeding, a representative assessee and an assessee in default.

Worked example

Ravi is resident. For the tax year 2026-27 his income from salary is Rs 9,80,000, his income from house property is Rs 1,20,000, and he is entitled to deductions under Chapter VIII of Rs 70,000. State how section 4 applies.

Step 1, the heads aggregated.

Step 2, the deductions taken.

Section 4(2) charges income-tax on Rs 10,30,000, being the total income of the tax year 2026-27 of a person. Section 4(1) supplies the rate from the Finance Act, 2026. Section 4(5) requires that the tax be collected by deduction at source on the salary and by advance tax on the balance.

Note what section 4 does not do. It does not compute anything. Every figure in the statement above comes from another provision.

What it does NOT mean

Section 4 does not fix the rate. A candidate who writes "tax is charged under section 4 at the rates given in section 4" has misread it. The rates are in the Finance Act.

It is not confined to residents. "Every person" is every person. What residence changes is the scope of total income under section 5, not the fact of the charge.

The charge does not wait for an assessment. Liability arises under section 4; assessment quantifies it. That is why advance tax is payable before any assessment is made.

Quick revision

• Section 4(1): tax is charged at the rate enacted by a Central Act, that is the Finance Act, and subject to this Act.
• Section 4(2): charged on the total income of the tax year of every person.
• Section 4(3): includes additional income-tax by whatever name called.
• Section 4(4): a charge on a period other than the tax year, where the Act so provides.
• Section 4(5): collected by TDS, TCS or advance tax.

Test yourself

1. Which section charges income-tax, and on what? Section 4, on the total income of the tax year of every person.

2. Where are the rates of tax found? In the annual Finance Act, which is the Central Act referred to in section 4(1).

3. Does section 4 apply to a non-resident? Yes. It charges every person; residence affects the scope of total income under section 5, not the charge itself.

4. What is the relationship between section 4 and advance tax? Section 4(5) provides that tax on income chargeable under the section is to be deducted or collected at source or paid in advance as the Act provides; the charge is under section 4 and these are the modes of collection.

Answer in one sentence

State the basis of charge of income-tax. Under section 4, where a Central Act enacts that income-tax shall be charged for a tax year at any rate or rates, tax is charged at those rates on the total income of the tax year of every person, in accordance with and subject to the provisions of the Act, and is collected by deduction or collection at source or by advance tax.

Bringing a foreign profit into Indian books does not make it received in India. A non-resident with a foreign business who prepares accounts in India is not taxed on the foreign profit because of the accounts.

Section 5(4): income is taxed once, not twice

(4) If an income has been included in a person's total income on the basis that it has accrued or arisen, or is deemed to have accrued or arisen, to such person, it shall not again be included on the basis that it is received or deemed to be received by that person in India.

Income taxed on accrual is not taxed again on receipt. This matters whenever income accrues in one tax year and is received in another: it is taxed in the year of accrual and the later receipt is ignored.

Worked example

State whether each receipt is included in total income, for each status. The person is an individual and the tax year is 2026-27.

The fourth row is the question. A business controlled in India brings foreign income into charge for a resident but not ordinarily resident, and it is the only foreign income that does.

The fifth row is the second question. Bringing money to India afterwards is not receiving it in India. Income is received where it is first received. Money remitted later has already been received abroad.

What it does NOT mean

"Received in India" means first receipt. A remittance is not a receipt.

Accrual and receipt are alternatives, not cumulative. Section 5(4) puts that beyond doubt.

Section 5 does not charge anything. Section 4 charges; section 5 measures the scope of what is charged. An answer should cite both.

Citizenship is irrelevant. The section speaks of residence throughout. An Indian citizen who is a non-resident is taxed as a non-resident.

Quick revision

• Section 5(1): a resident is taxed on income received in India, accruing in India, and accruing outside India.
• Section 5(1)(c) proviso: a not ordinarily resident is taxed on foreign income only if derived from a business controlled in or a profession set up in India.
• Section 5(2): a non-resident is taxed only on income received in India or accruing in India.
• Section 5(3): entry in an Indian balance sheet is not receipt in India.
• Section 5(4): income taxed on accrual is not taxed again on receipt.
• The first two columns are the same for all three statuses; only foreign income differs.

Test yourself

1. A non-resident earns interest on a fixed deposit with a bank in Chennai. Is it taxable in India? Yes. It accrues in India, so section 5(2)(b) includes it.

2. A resident but not ordinarily resident earns profit from a business in Nepal, controlled wholly from Nepal. Is it taxable? No. Section 5(1)(c) includes foreign income for such a person only when it is derived from a business controlled in, or a profession set up in, India.

3. Income accrued in India in 2025-26 and was received in India in 2026-27. In which year is it taxed? 2025-26, the year of accrual. Section 5(4) prevents its inclusion again on receipt.

4. Does remitting foreign income to India make it taxable? No. Receipt means first receipt; a later remittance of income already received abroad is not a receipt in India.

Answer in one sentence

State the scope of total income. Under section 5, a resident is charged on income received or deemed received in India, income accruing or deemed to accrue in India, and income accruing outside India; a resident but not ordinarily resident is charged on foreign income only where it is derived from a business controlled in or a profession set up in India; and a non-resident is charged only on income received or deemed received in India or accruing or deemed to accrue in India.

Step 3: deemed residence, section 6(7)

Irrespective of the provisions of sub-sections (2) to (6), an individual shall be deemed to be resident in India for a tax year, if he -

(a) is a citizen of India;

(b) is not liable to tax in any other country or territory due to his domicile, residence, or similar criteria; and

(c) has total income exceeding fifteen lakh rupees during such tax year (other than the income from foreign sources).

All three conditions together. This catches the "stateless for tax" Indian citizen: someone who has arranged his affairs so as to be taxable nowhere.

Section 6(8) provides that sub-section (7) does not apply to an individual who is already resident under sub-sections (2) to (6). It is a residual rule, not an additional one.

Step 4: ordinarily resident or not, section 6(13)

A resident is not ordinarily resident if he is -

(a) an individual who has been -

• a non-resident in India in nine out of the ten tax years preceding that year; or
• in India cumulatively for seven hundred and twenty-nine days or less in seven tax years preceding that year; or

(b) a citizen of India or a person of Indian origin whose total income excluding income from foreign sources exceeds fifteen lakh rupees and who has been in India cumulatively for 120 days or more but less than 182 days during the tax year; or

(c) a citizen of India deemed resident under sub-section (7).

The 120-to-182 band in clause (b) is the trap. A visiting person of Indian origin with income over fifteen lakh who is here for, say, 150 days is resident under the modified limb (b) of section 6(2), and then not ordinarily resident under section 6(13)(b). Both steps must be done.

Worked example

Arun, a citizen of India, left India for employment in Oman on 15 September 2026 and did not return during the tax year 2026-27. He had been in India throughout the four preceding years. Determine his residential status.

Arun is a non-resident for the tax year 2026-27.

Had he left for a holiday rather than for employment, section 6(3) would not apply, limb (b) would be available, and with 365 days in the preceding four years he would have been resident.

What it does NOT mean

Citizenship does not decide residence. It appears only inside the exceptions.

"Employment outside India" is not confined to a new job. Leaving to take up employment abroad is enough; the Act does not require that the employment be a first employment.

Not ordinarily resident is not a third kind of non-resident. He is a resident, taxed on all Indian income, and differs only on foreign income.

The four preceding years and the seven preceding years are different tests. The first is in the basic condition; the second is in section 6(13).

Quick revision

• s.6(2)(a): 182 days in the tax year. s.6(2)(b): 60 days in the year plus 365 days in the four preceding years.
• s.6(3): limb (b) off for a citizen leaving as crew of an Indian ship or for employment abroad.
• s.6(4): limb (b) off for a citizen or person of Indian origin visiting India.
• s.6(5): for such a visitor with income over fifteen lakh, sixty days becomes one hundred and twenty.
• s.6(7): a citizen liable to tax nowhere, with income over fifteen lakh, is deemed resident; s.6(8) makes it residual.
• s.6(13): not ordinarily resident if non-resident in 9 of 10 preceding years, or in India 729 days or less in 7 preceding years, or within the 120-to-182 band with income over fifteen lakh, or deemed resident under (7).

Test yourself

1. State the two basic conditions of residence for an individual. Presence in India for 182 days or more in the tax year; or 60 days or more in the year together with 365 days or more in the four preceding years: section 6(2).

2. When does the second condition not apply? Where a citizen leaves India as crew of an Indian ship or for employment outside India, section 6(3); and where a citizen or person of Indian origin comes on a visit to India, section 6(4).

3. What does section 6(5) change, and for whom? For a visiting citizen or person of Indian origin whose total income other than foreign-source income exceeds fifteen lakh rupees, the sixty-day figure in the second condition becomes one hundred and twenty days.

4. Who is deemed to be resident under section 6(7)? A citizen of India who is not liable to tax in any other country by reason of domicile, residence or similar criteria, and whose total income other than foreign-source income exceeds fifteen lakh rupees, provided he is not already resident under sub-sections (2) to (6).

5. Give either test that makes a resident "not ordinarily resident". He was a non-resident in nine out of the ten preceding tax years; or he was in India for 729 days or less in the seven preceding tax years: section 6(13)(a).

Answer in one sentence

How is the residential status of an individual determined? Under section 6(2) he is resident if in India for 182 days or more in the tax year, or for 60 days in that year with 365 days in the four preceding years, that second limb being disapplied for a citizen leaving as ship's crew or for employment abroad and for a visiting citizen or person of Indian origin whose sixty days becomes one hundred and twenty where his income exceeds fifteen lakh; a citizen taxable nowhere with income above that figure is deemed resident under section 6(7); and a resident is not ordinarily resident where he satisfies section 6(13).

• Key management and commercial decisions, not routine administration.
• As a whole, so a single Indian division does not decide the question.
• In substance, so the place where a board minute is signed does not settle it if the decisions were really made elsewhere.

A HUF that is resident: ordinarily resident or not

Section 6(13)(a) covers a Hindu undivided family expressly. A resident HUF is not ordinarily resident where its manager has been a non-resident in nine out of the ten preceding tax years, or has been in India for 729 days or less in the seven preceding tax years.

The test looks at the manager, not the family. A family cannot travel; its karta can, and the Act uses his record.

The distinctions that carry marks

Worked example

State the residential status for the tax year 2026-27.

What it does NOT mean

Control is not ownership. A firm owned entirely by non-residents is resident if it is managed from India.

Control is not the place of business. Where the business operates and where it is controlled are different questions, and section 6(9) asks only the second.

Place of effective management is not the registered office. Section 6(10)(b) says "in substance".

The 182-day test has no application here. A firm has no days.

Quick revision

• s.6(9): HUF, firm, association - resident unless control and management is wholly outside India.
• s.6(11): every other person, same test.
• s.6(10)(a)(i): an Indian company is always resident.
• s.6(10)(a)(ii): a foreign company is resident if its place of effective management is in India.
• s.6(10)(b): POEM is where key management and commercial decisions for the business as a whole are in substance made.
• s.6(13)(a): a resident HUF is not ordinarily resident by reference to its manager's record.

Test yourself

1. A firm's affairs are controlled partly from Delhi and partly from Colombo. Is it resident? Yes. Section 6(9) makes it resident unless control and management is situated wholly outside India, and here it is not.

2. Can an Indian company be a non-resident? No. Section 6(10)(a)(i) makes an Indian company resident without any further condition.

3. Define place of effective management. A place where key management and commercial decisions necessary for the conduct of business of the company as a whole are, in substance, made: section 6(10)(b).

4. Whose record decides whether a resident HUF is not ordinarily resident? Its manager's, under section 6(13)(a).

Answer in one sentence

How is the residence of a firm and of a company determined? A firm, Hindu undivided family or association is resident under section 6(9) unless the control and management of its affairs is situated wholly outside India during the tax year, while a company is resident under section 6(10) if it is an Indian company or if its place of effective management, being where key management and commercial decisions for the business as a whole are in substance made, is in India.

Rs 6,82,000 does not exceed fifteen lakh rupees, so section 6(5) does not apply and the sixty-day figure is not substituted.

Result: limb (b) remains disapplied by section 6(4), and limb (a) fails. Kavita is a NON-RESIDENT for the tax year 2026-27.

Section 6(7) is checked and does not apply, because she is liable to tax in Germany on her employment income, so condition (b) of that sub-section fails.

Step 3: the incidence

A non-resident is charged under section 5(2) on income received or deemed received in India, and income accruing or deemed to accrue in India.

The checks to run on your own answer

The day count must be shown month by month. Both the day of arrival and the day of departure count as days of presence.

The remittance row is the trap. Rs 1,18,000 of German interest was brought to India, and it is not taxable. Income is received where it is first received. Section 5(3) reinforces the point for accounts.

The consultancy row is the second trap. It is taxable because the profession was set up in India, so the income accrues in India. It would be taxable for a non-resident on that ground alone.

Section 6(5) has to be tested, not assumed. A student who applies the fifteen-lakh proviso without computing the figure will substitute 120 days for 60, and since she was here 119 days the answer would still be non-resident - but on the wrong reasoning, and the working is where the marks are.

What changes if the status changes

The same items, under the other two statuses:

Notice that the first two statuses give the same figure here, and that is deliberate: the consultancy is caught for a not ordinarily resident by the very words of section 5(1)(c), and it was already caught for a non-resident because it accrues in India. The difference between those two statuses appears only where there is foreign income from a business controlled in India.

In short

• Count the days as a working note, month by month, arrival and departure days included.
• Test limb (a), then limb (b), then ask whether an exception in section 6(3) or 6(4) removes limb (b).
• If section 6(4) applies, compute the fifteen-lakh figure before deciding whether section 6(5) substitutes 120 days.
• Check section 6(7) before concluding non-resident for a citizen of India.
• Then run each item through section 5, saying where it accrues and where it is received.
• A remittance is never a receipt.

Answer in one sentence

How is a residential status question answered? By computing the days of presence as a working note, applying the two limbs of section 6(2) and any exception in sections 6(3) to 6(5), checking the deeming rule in section 6(7) and the additional conditions in section 6(13), and then including each item of income according to where it accrues and where it is first received under section 5.

Notice the pattern. In each case the amount is credited but not paid, and in each case the Act taxes it now so that it is not taxed at withdrawal.

Broken down: the year of a dividend

Why interim dividends differ. A final dividend is declared by the company in general meeting, which is a public and dateable act. An interim dividend is resolved by the board and may be revoked before payment, so the Act waits until the money is unconditionally available.

Worked example

Salil is employed by a company. During the tax year 2026-27, the employer credited Rs 1,84,000 to his recognised provident fund account, of which Rs 47,000 exceeded the limit in paragraph 6 of Part A of Schedule XI. Interest of Rs 96,000 was credited, of which Rs 21,500 was above the permitted rate. The company also contributed Rs 62,000 to his pension account under section 124. He received a final dividend of Rs 18,000 from an Indian company, declared on 12 March 2027 and paid on 4 May 2027.

The dividend of Rs 18,000 is income of the tax year 2026-27, because it was declared on 12 March 2027. The payment date of 4 May 2027 is irrelevant: section 7(2)(a) fixes the year of declaration.

The Rs 1,37,000 of contribution within the limit and the Rs 74,500 of interest at or below the permitted rate are not deemed received. They are taxed, if at all, on withdrawal.

What it does NOT mean

It does not tax the whole provident fund contribution. Only the excess over the limits in Schedule XI.

It does not apply to an unrecognised fund's ordinary accretion. Section 7(1)(a) and (b) speak of a recognised provident fund; clause (b) deals with the transferred balance when a fund becomes recognised.

Deemed receipt is not deemed accrual. Section 7 is about receipt, section 9 about accrual. They are different deeming provisions and answer different questions.

A dividend is not taxed when banked. It is taxed when declared, distributed or paid, whichever the case may be.

Quick revision

• s.7(1)(a): annual accretion to a recognised provident fund, to the extent in Schedule XI, Part A, paragraph 6.
• s.7(1)(b): transferred balance, to the extent in paragraph 11(4) and (5).
• s.7(1)(c): employer's contribution to a section 124 pension scheme.
• s.7(2)(a): dividend is income of the year declared, distributed or paid.
• s.7(2)(b): interim dividend, the year it is unconditionally made available.

Test yourself

1. Name the three incomes deemed to be received under section 7(1). The annual accretion to a recognised provident fund, the transferred balance in such a fund, and the employer's contribution to a pension scheme mentioned in section 124.

2. A dividend is declared in March 2027 and paid in May 2027. In which tax year is it taxed? 2026-27, the year of declaration, under section 7(2)(a).

3. How does an interim dividend differ? It is deemed to be income of the year in which the amount is unconditionally made available to the member entitled to it: section 7(2)(b).

4. Is the whole of the employer's provident fund contribution deemed received? No, only the accretion to the extent provided in paragraph 6 of Part A of Schedule XI.

Answer in one sentence

What is deemed to be received under section 7? The annual accretion to an employee's recognised provident fund and the transferred balance in it, to the extent provided in Part A of Schedule XI, and the employer's contribution to a pension scheme mentioned in section 124, while section 7(2) fixes a dividend as income of the year in which it is declared, distributed or paid, and an interim dividend as income of the year in which it is unconditionally made available.

Clause (b) is confined to the Government and to a citizen. A private employer paying an Indian citizen for work abroad is not caught.

Sub-section (4): dividend

Any dividend paid by an Indian company outside India shall be deemed to accrue or arise in India.

The place of payment is irrelevant. An Indian company's dividend is Indian income.

Sub-sections (5), (6) and (7): interest, royalty and fees

These three share one structure. Income by way of interest, royalty, or fees for technical services is deemed to accrue in India where it is payable by -

Learn the exception, not the rule. The rule is that Indian-sourced payments are Indian income. The examinable part is the carve-out: a resident who borrows for a business he runs abroad pays interest that is not Indian income, because the money was not used in India.

The banking rule, section 9(5)(b). Interest paid by the Indian permanent establishment of a non-resident bank to its own head office abroad is deemed to accrue in India and is chargeable in addition to the income attributable to that establishment, which is deemed a separate and independent person for the purpose. "Permanent establishment" takes its meaning from section 173(c).

Worked example

State whether each is deemed to accrue in India for the tax year 2026-27.

What it does NOT mean

Section 9 does not charge tax. It deems income to accrue in India; section 5 then includes it and section 4 charges it. Cite the chain.

It does not matter where the contract was signed or the money paid. Every sub-section is drafted to defeat exactly that argument.

It is not confined to non-residents. The section is general. It is relevant mainly to non-residents, because a resident and ordinarily resident is taxed on world income anyway and does not need a deeming provision.

A business connection is not a permanent establishment. The two are different concepts; the Act uses the second only where it says so, as in section 9(5)(b).

Quick revision

• s.9(1): the income in sub-sections (2) to (8) is deemed to accrue in India.
• s.9(2): income from an asset or source in India, property in India, a business connection in India, or the transfer of a capital asset situated in India - directly or indirectly.
• s.9(12) with Schedule I: conditions on which an eligible investment fund's activities are not a business connection.
• s.9(3): salary earned in India, including sandwiched leave; and Government salary to an Indian citizen for services abroad.
• s.9(4): dividend paid by an Indian company anywhere.
• s.9(5) to (7): interest, royalty and fees for technical services - always if paid by Government; by a resident unless for a business abroad or a foreign source; by a non-resident only for a business in India.

Test yourself

1. Name the four connections in section 9(2). An asset or source of income in India, property in India, a business connection in India, and the transfer of a capital asset situated in India.

2. A resident borrows to finance his business in Sri Lanka and pays interest to a non-resident. Is the interest deemed to accrue in India? No. Section 9(5)(a)(ii)(A) excepts interest on money borrowed and used for a business or profession carried on by the resident outside India.

3. Is salary for a leave period taxable as earned in India? Yes, where the leave is preceded and succeeded by service rendered in India and forms part of the service contract: section 9(3)(a)(ii).

4. Where does Schedule I come into the basis of charge? Through section 9(12), which sets the conditions on which certain activities of an eligible investment fund do not constitute a business connection in India.

Answer in one sentence

What income is deemed to accrue or arise in India? Under section 9, income arising directly or indirectly from an asset or source of income in India, property in India, a business connection in India or the transfer of a capital asset situated in India; salary earned in India and Government salary paid to an Indian citizen for services abroad; dividend paid by an Indian company; and interest, royalty and fees for technical services payable by the Government, by a resident except where used for a business or source outside India, and by a non-resident where used for a business in India.

Worked example

Under which head does each fall?

Rows six and seven are the classic pair. The same shares, the same profit, and two different heads, decided by whether they were held as an investment or as stock-in-trade.

What it does NOT mean

Five heads is not five taxes. There is one tax, on total income; the heads are stages in computing it.

A head does not decide the rate. Rates come from the Finance Act and apply to total income, with special rates only where the Act says so.

Income with no head is not untaxed. Section 92 catches it.

Quick revision

• Section 13: five heads - Salaries; Income from house property; Profits and gains of business or profession; Capital gains; Income from other sources.
• Blocks to memorise: 15, 20, 26, 67, 92.
• The fifth head is residual, so classification is always possible.
• The head is decided by the character of the receipt, not by the assessee's choice.
• "Save as otherwise provided" lets a specific section override the natural head.

Test yourself

1. List the five heads of income in the order the Act gives them. Salaries; Income from house property; Profits and gains of business or profession; Capital gains; Income from other sources: section 13.

2. May an assessee choose the head under which income is taxed? No. The head follows from the character of the receipt as a matter of law.

3. A share dealer sells shares at a profit. Under which head? Profits and gains of business or profession, because the shares are stock-in-trade and not a capital asset.

4. What is the effect of the words "save as otherwise provided in this Act"? They allow a specific provision to place an item under a head other than the one it would naturally fall under.

Answer in one sentence

State the heads of income. Section 13 provides that, save as otherwise provided in the Act, all incomes shall for the purposes of charge and computation be classified under Salaries, Income from house property, Profits and gains of business or profession, Capital gains, and Income from other sources.

The rent is divided although the house stands in Rohit's name alone, because clause (b) divides income under the head, not property by its title.

The shop profit is divided although Anjali runs the shop, because business profit is not salary. Only clause (d) protects income from division, and it names salaries only.

What it does NOT mean

It is not a general rule for married couples. It applies only where the community of property system governs, and only in the State and Union territories named.

It is not clubbing. Clubbing provisions add another person's income to the assessee's. Section 10 does the opposite: it splits one income between two assessees.

Salary is not divided. This is the single most likely error, and clause (d) is express.

Quick revision

• Applies to a husband and wife governed by the community of property ("COMMUNIAO DOS BENS", Portuguese Civil Code of 1860) in Goa, Dadra and Nagar Haveli, and Daman and Diu.
• s.10(a): not assessed together as an AOP or BOI.
• s.10(b): income under every head except Salaries is divided equally.
• s.10(c): each half is included separately in each spouse's total income.
• s.10(d): salary goes to the spouse who earned it.

Test yourself

1. To whom does section 10 apply? A husband and wife governed by the community of property system under the Portuguese Civil Code of 1860, in force in Goa and the Union Territories of Dadra and Nagar Haveli and Daman and Diu.

2. How is business income of such a couple assessed? Divided equally between the husband and the wife and included separately in the total income of each: section 10(b) and (c).

3. Is salary divided? No. Section 10(d) includes salary in the total income of the spouse who actually earned it.

4. Can the community be assessed as an association of persons? No. Section 10(a) provides that the income shall not be assessed together as that of the community, whether treated as an association of persons or a body of individuals.

Answer in one sentence

How is the income of a couple governed by the community of property system assessed? Under section 10 it is not assessed together as an association of persons or body of individuals; income under every head other than Salaries is divided equally between the spouses and included separately in the total income of each, while salary is included in the total income of the spouse who actually earned it.

Worked example

A firm is reconstituted on 20 November 2026. A retiring partner receives a plot of land whose book value in the firm's accounts is Rs 14,60,000 and whose fair market value on that date is Rs 23,40,000.

The firm is charged on Rs 8,80,000 under the head Capital gains for the tax year 2026-27, the year in which the partner received the land.

The retiring partner is not charged under this section. Whether anything is chargeable in his hands is a separate question under other provisions.

What it does NOT mean

It does not tax the partner. The specified person receives; the specified entity is charged.

It does not depend on a sale. There is no buyer and no price. The section deems both.

Book value does not decide the profit. Fair market value on the date of receipt does.

It is not confined to dissolution. Reconstitution is expressly included, so a firm that continues after a partner retires is caught.

Quick revision

• s.8(1): a specified person receiving a capital asset or stock-in-trade from a specified entity on dissolution or reconstitution means the entity is deemed to have transferred it.
• s.8(2): the profit is income of the entity, in the year of receipt by the person, taxed as capital gains or as business profits according to what was received.
• s.8(3): fair market value on the date of receipt is the full value of consideration.
• s.8(4): Board guidelines may remove difficulties, with Central Government approval, for this section and section 67(10).

Test yourself

1. Who is charged to tax under section 8? The specified entity, that is the firm, and not the partner who receives the asset.

2. In which year is the profit charged? The tax year in which the specified person receives the capital asset or stock-in-trade.

3. What is taken as the consideration? The fair market value of the asset on the date of its receipt by the specified person: section 8(3).

4. Under which head is the profit taxed? Capital gains where a capital asset is received, and profits and gains of business or profession where stock-in-trade is received: section 8(2)(ii).

Answer in one sentence

What is the effect of section 8? Where a specified person receives a capital asset or stock-in-trade from a specified entity on its dissolution or reconstitution, the entity is deemed to have transferred it in the year of receipt, the fair market value on that date being the full value of consideration, and the resulting profit is charged as income of the entity under capital gains or business profits according to what was received.

Schedule I is not an exemption at all. It is reached through section 9(12) and belongs with deemed accrual, which is why MU's topic 3 says "read with Schedule I" while her topic 4 names Schedules I to VIII together.

The entries a B.Com. paper reaches

Schedule II opens with the two every student must know:

and continues with payments from provident and other funds, the accumulated balance of a recognised provident fund, interest on notified certificates and deposits, interest on Gold Deposit Bonds, and interest on notified bonds - seventeen entries in all.

Schedule III is where the allowances are, and it is the one a salary question needs:

Entry 11 is the house rent allowance, and the amount is fixed by rule 279 of the Income-tax Rules, 2026. The exemption is the least of three:

The 50 per cent list is now EIGHT cities. Hyderabad, Pune, Ahmedabad and Bengaluru sit beside the four old metros. An answer written from an older book will use 40 per cent for four of them and lose the marks.

"Relevant period" is the period the accommodation was occupied during the tax year, and "salary" for this rule means basic pay and dearness allowance where the terms of employment so provide, excluding all other allowances and perquisites (rule 279(2)).

Entry 11 also carries four conditions in the Schedule itself, of which the two that decide most questions are that the accommodation must not be owned by the assessee and that rent must actually have been paid.

Gratuity, commuted pension and leave encashment are NOT here. They are dealt with as deductions under section 19, and that is one of the real structural changes in this Act. See the chapter on deductions from salaries.

Worked example

State the position for the tax year 2026-27.

What it does NOT mean

Exempt is not the same as deductible. Exempt income is left out before total income is computed; a deduction under Chapter VIII is taken from gross total income afterwards.

An exemption is not permanent. Sections 11(2) and 11(4) charge the income in any year the conditions fail.

The section is not the law. Section 11 is a signpost. The exemption and its conditions are in the Schedule, and an answer that cites only section 11 has cited the signpost.

Exemption does not carry its costs. Section 14 disallows expenditure relating to income that does not form part of total income.

Quick revision

• s.11(1): income in Schedules II to VI is not included, subject to conditions.
• s.11(2): if conditions fail in a year, it is charged for that year.
• s.11(3): persons in Schedule VII are not chargeable; s.11(4) is the same sting.
• s.12: Schedule VIII, political parties and electoral trusts.
• Schedule I is not an exemption: it is conditions on business connection, under s.9(12).
• Agricultural income: Schedule II Sl. No. 1, conditions Nil.
• HRA: Schedule III Sl. No. 11 with rule 279 - least of actual allowance, rent less 10% of salary, and 50% of salary in eight named cities or 40% elsewhere; accommodation not owned and rent actually paid.
• Gratuity, commuted pension, leave encashment are in section 19, not here.

Test yourself

1. Which sections give effect to the exemption Schedules? Section 11 for Schedules II to VII and section 12 for Schedule VIII.

2. What happens if the conditions attached to an exemption are not satisfied in a year? The income is charged to tax for that tax year: section 11(2), and section 11(4) for a Schedule VII person.

3. Distinguish section 11(1) from section 11(3). Section 11(1) exempts particular income listed in Schedules II to VI, while section 11(3) makes the persons listed in Schedule VII not chargeable to tax on total income at all.

4. Where is the exemption for house rent allowance, and what fixes its amount? Schedule III, Table Sl. No. 11; the amount is such extent as may be prescribed, so it is fixed by the Rules and not by the Act.

5. Is agricultural income conditional? No. Schedule II, Table Sl. No. 1 states the conditions as Nil.

Answer in one sentence

How does the Act exempt income? Section 11 provides that income enumerated in Schedules II to VI is not included in total income and that persons enumerated in Schedule VII are not chargeable to tax, and section 12 does the same for the income of political parties and electoral trusts in Schedule VIII, every exemption being subject to the conditions stated in the Schedule and charged to tax in any year in which those conditions are not satisfied.

(3) No exempt income in the year is no answer. This is the sub-section students miss. The disallowance applies even where the exempt income has not accrued, arisen or been received during that tax year. Expenditure incurred on an exempt investment that yielded nothing this year is still disallowed.

Worked example

Nandini has taxable business income and also holds investments yielding income which does not form part of total income. For the tax year 2026-27 she paid interest of Rs 2,40,000 on money borrowed, of which Rs 90,000 relates to the exempt investments, and claimed the whole as a deduction. The exempt investments yielded nothing during the year.

Rs 90,000 is disallowed, and section 14(3) answers the obvious objection: it does not matter that the exempt investments produced no income in 2026-27.

Had she claimed that no expenditure at all related to the exempt investments, and had the Assessing Officer been unsatisfied with that claim having regard to her accounts, he would have determined the amount himself under section 14(2) by the prescribed method.

What it does NOT mean

It does not make the income taxable. The income stays exempt; only the expenditure is refused.

It is not confined to interest. Any expenditure in relation to the exempt income is caught.

A bare assertion is not enough. Section 14(2)(b) is aimed exactly at the claim that nothing was spent.

It does not need income in the year. Section 14(3) is express.

Quick revision

• s.14(1): no deduction for expenditure in relation to income that does not form part of total income; it overrides the rest of the Act.
• s.14(2): if the Assessing Officer is not satisfied with the claim, or with a claim that nothing was spent, he determines the amount by the prescribed method.
• s.14(3): applies even where the exempt income has not accrued, arisen or been received in that year.
• The principle: income out, expenditure out.

Test yourself

1. State the rule in section 14(1). No deduction is allowed for expenditure incurred in relation to income which does not form part of total income, irrespective of anything to the contrary in the Act.

2. An assessee says he spent nothing on his exempt investments. Is that the end of the matter? No. Under section 14(2)(b) the Assessing Officer, if not satisfied with that claim having regard to the accounts, shall determine the amount by the prescribed method.

3. No exempt income arose during the year. Does section 14 still apply? Yes. Section 14(3) applies the section even where the income has not accrued, arisen or been received during that tax year.

Answer in one sentence

What does section 14 provide? That no deduction shall be allowed in respect of expenditure incurred in relation to income which does not form part of total income, that the Assessing Officer may determine the amount by the prescribed method where he is not satisfied with the assessee's claim or with a claim that no expenditure was incurred, and that the disallowance applies even where no such income accrued, arose or was received in the tax year.

A partner's remuneration is not salary, section 15(4). Salary, bonus, commission or remuneration "by whatever name called" received by a partner from his firm is not salary. There is no employer and employee: a partner cannot employ himself. It is charged as profits and gains of business or profession.

Worked example

Ganesh's employment terms provide for a salary of Rs 96,000 a month, payable on the last day of each month. During the tax year 2026-27: the March 2027 salary was paid to him on 4 April 2027; he received two months' salary in advance in January 2027 for April and May 2027; and he received Rs 1,44,000 of arrears relating to 2024-25, which had never been taxed. Compute the salary chargeable for 2026-27.

The March 2027 salary is included although it was paid in April 2027. It became due on 31 March 2027, and section 15(1)(a) charges salary due whether paid or not.

The advance is charged now and not again later. In 2027-28, when the April and May salaries become due, section 15(3) keeps them out.

Relief is available on the arrears. The Rs 1,44,000 relates to an earlier year and is taxed now at today's rates. Section 157 gives relief for that, and it is taught in Module IV.

What it does NOT mean

Salary is not taxed on receipt alone. Limb (a) charges it when due, paid or not. A student who taxes only what was banked will understate the figure.

"Due" is fixed by the contract, not by convenience. If the terms say the last day of the month, that is the due date.

Arrears are not automatically taxable in the year received. Only if not charged earlier.

A partner's remuneration is never salary, however the firm labels it.

Quick revision

• s.15(1)(a): salary due in the year, whether paid or not.
• s.15(1)(b): salary paid before due, including advance salary.
• s.15(1)(c): arrears, only if not charged in an earlier year.
• Together: due or receipt, whichever is earlier.
• s.15(2): employer includes former employer.
• s.15(3): advance salary once taxed is not taxed again when due.
• s.15(4): a partner's salary, bonus, commission or remuneration from the firm is not salary.

Test yourself

1. On what basis is salary charged? On the basis of due or receipt, whichever is earlier: salary due in the year whether paid or not, salary paid before it became due, and arrears not charged in an earlier year, under section 15(1).

2. Salary for March 2027 is paid on 4 April 2027. In which year is it taxed? 2026-27, because it became due in that year: section 15(1)(a).

3. Is a partner's remuneration from his firm charged under Salaries? No. Section 15(4) provides that it is not regarded as salary; it is charged as profits and gains of business or profession.

4. Advance salary was taxed when paid. Is it taxed again when it falls due? No. Section 15(3) prevents its inclusion a second time.

5. Under which head is a pension from a former employer charged? Salaries, because section 15(2) provides that employer includes a former employer.

Answer in one sentence

State the basis of charge under the head Salaries. Under section 15(1) salary is chargeable on the earlier of due or receipt, being salary due in the tax year whether paid or not, salary paid or allowed before it became due, and arrears paid in the year if not charged to tax in an earlier year, with employer including a former employer and a partner's remuneration from his firm excluded by section 15(4).

1. Build gross salary using the twelve clauses of section 16, adding the value of perquisites computed under section 17 and profits in lieu under section 18.
2. Leave out what is exempt: allowances under Schedule III, read with section 11.
3. Take the deductions in section 19: professional tax, the standard deduction, and the tables that cover gratuity, commuted pension, retrenchment compensation, voluntary retirement and leave encashment.

Gratuity and leave encashment are in gross salary first. Clauses (c) and (h) put them in; section 19 takes out what is allowed. A student who omits them from gross salary and then also claims the deduction has counted the relief twice.

Worked example

Classify each receipt of an employee for the tax year 2026-27.

Those last three are the ones examiners set, and they are set as traps because the money looks like pay and comes from something that looks like an employer.

A Member of Parliament is not an employee of anybody. He holds an office under the Constitution, and there is no master and servant relationship, so section 15 cannot reach the remuneration and it falls to the residual head.

A teacher paid for examinership is a harder case and the answer is the same. He is an employee of his college for teaching; setting or assessing an examination paper for the University is a separate engagement, and the fee is not paid to him in his capacity as an employee. It is charged under other sources.

The principle behind all three: salary requires an employer-employee relationship and a payment made in that capacity. Take either away and the receipt leaves this head.

What it does NOT mean

Section 16 does not exempt anything. It only includes. Every exemption is in a Schedule and every deduction in section 19.

It is not a list of taxable amounts. Gratuity is in the list and is largely relieved by section 19; the clause puts it in charge, the deduction takes it out.

It is not confined to a current employer. Clause (b) and section 15(2) reach a former employer.

A receipt from someone who is not the employer is not salary merely because it relates to the work.

Quick revision

• s.16 clauses (a) to (l): wages; annuity or pension; gratuity; fees or commission; perquisites; profits in lieu; advance of salary; payment for leave not availed; provident fund accretion; transferred balance; employer's s.124 pension contribution; Government's Agniveer Corpus Fund contribution.
• The definition is inclusive.
• Three steps: gross salary (s.16 with s.17 and s.18), then exempt allowances (Schedule III), then deductions (s.19).
• Gratuity and leave encashment go in first, and come out through s.19.

Test yourself

1. Name any six items included in salary by section 16. Wages; any annuity or pension; any gratuity; any fees or commission; perquisites; profits in lieu of or in addition to salary. Others are advance of salary, payment for leave not availed, provident fund accretion and transferred balance, the employer's pension contribution under section 124, and the Government's contribution to the Agniveer Corpus Fund.

2. Is the definition of salary exhaustive? No. Section 16 says salary "includes", so it is inclusive.

3. Where is leave encashment dealt with? It is included in salary by section 16(h), and the deduction is given by the table in section 19(1) at serial numbers 13 and 14.

4. Is a perquisite part of salary? Yes, by section 16(e); its value is computed under section 17.

Answer in one sentence

What does salary include? Under section 16 it includes wages, any annuity or pension, any gratuity, any fees or commission, perquisites, profits in lieu of or in addition to salary, any advance of salary, payment for leave not availed of, the annual accretion and transferred balance in a recognised provident fund to the extent chargeable under Part A of Schedule XI, the employer's contribution to a pension scheme referred to in section 124, and the Central Government's contribution to the Agniveer Corpus Fund under the Agnipath Scheme.

Clause (f) is the widest and the most examinable. If the employer pays a bill the employee was liable for - his income-tax, his club subscription, his children's fees - the payment is a perquisite. The test is whose obligation it was.

Group 3: the fund ceiling, clauses (h) and (i).

(h) the aggregate amount of any contribution, in excess of Rs 7,50,000 in a tax year, made to the account of the assessee by the employer in (i) a recognised provident fund; (ii) the scheme referred to in section 124(1); and (iii) an approved superannuation fund;

(i) the annual accretion by way of interest, dividend or any other amount of similar nature during the tax year to the balance of the fund or scheme referred to in clause (h), computed in the prescribed manner, to the extent it relates to that contribution.

One combined ceiling of Rs 7,50,000 across all three funds. The excess is a perquisite, and clause (i) then taxes the return earned on that excess as well.

What is NOT a perquisite: section 17(2)

Section 17(2) takes several things out of sub-section (1), and the medical ones lead the list:

• the value of medical treatment provided in a hospital maintained by the employer; and
• any sum paid by the employer for expenditure actually incurred by the employee on medical treatment of himself or a family member in a hospital maintained by the Government or a local authority, or approved by the Government for its employees, or in respect of prescribed diseases or ailments in an approved hospital.

Where the figures live

This is the point at which a student most often goes wrong, so state it plainly in any answer:

Rs 7,50,000 is the only figure in the section itself. Every other value marked "prescribed" is in the Income-tax Rules, 2026, and an answer should cite the rule rather than a remembered rate.

Valuation of accommodation: rule 15(2), Table I

This is the perquisite an examiner is most likely to set, and it is arithmetic.

Where the accommodation is furnished, the value is determined under rule 15(2)(e), which adds the value of the furniture.

Fifteen days on transfer are free. Hotel accommodation for not more than fifteen days in aggregate on a transfer from one place to another is outside the table.

Site accommodation is outside it too, under rule 15(2)(b): temporary accommodation at a mining, on-shore oil, project execution, dam, power generation or off-shore site, where the plinth area does not exceed 1,000 square feet and it is at least eight kilometres from municipal limits, or which is in a remote area. A remote area is one outside, and more than thirty kilometres aerially from, the limits of a municipality or cantonment board of population one lakh or more on the 2011 census.

Two accommodations on a transfer: rule 15(2)(c) charges only the one with the lower value for up to ninety days, and both thereafter.

The word "salary" means two different things in these Rules

This is the trap, and it is worth a mark on its own.

So bonus and commission count when valuing a flat, and do not count when computing the house rent allowance exemption. Read which rule the question is about before building the salary figure.

Worked example

Deepa is employed by a company at a monthly monetary salary of Rs 1,10,000. She is not a director and has no substantial interest. During the tax year 2026-27 her employer paid her professional tax of Rs 2,500, paid her personal club bill of Rs 38,000, contributed Rs 4,20,000 to her recognised provident fund and Rs 3,90,000 to an approved superannuation fund, and provided treatment for her in a hospital the company itself maintains, worth Rs 61,000.

The working notes first.

Then the perquisite itself.

The hospital treatment of Rs 61,000 is not a perquisite, because section 17(2)(a) excludes medical treatment provided in a hospital maintained by the employer.

The professional tax paid by the employer is a perquisite, and is then deductible. It enters salary under section 17(1)(f) and comes out again under serial number 1 of the table in section 19(1), which allows the entire amount of employment tax. Both steps must be shown.

What it does NOT mean

Not every benefit is a perquisite for every employee. Clause (c) applies only to a director, a person with a substantial interest, or an employee over the prescribed monetary salary.

A concessional benefit is taxed only on the concession. Clause (b) taxes the excess over what the employee pays, not the whole value.

Reimbursing the employee's own expense is still a perquisite if the liability was his: clause (f) does not care whether the employer pays the supplier or the employee.

The Act does not carry the valuation rates; the Rules do. Cite rule 15(2) and its percentage, and never mix the two meanings of "salary" in rule 15(k) and rule 279(2)(b).

Quick revision

• s.17(1) is inclusive: accommodation free or concessional, benefits and amenities to specified employees, specified securities and sweat equity, other prescribed benefits, sums meeting the employee's own obligation, life assurance or annuity premiums, fund contributions over Rs 7,50,000, and the accretion on that excess.
• Specified employee, s.17(1)(c): a director, a person with substantial interest, or monetary salary above the prescribed amount.
• s.17(1)(f) is the widest clause: whose obligation was it?
• Rs 7,50,000 is the only figure in the section; the rest is in the Rules - accommodation rule 15(2), specified employee rule 17 (Rs 4,00,000), other benefits rule 15(5).
• s.17(2) excludes employer-hospital treatment and prescribed medical expenditure.

Test yourself

1. Define perquisite. Section 17(1) defines it inclusively as covering rent-free and concessional accommodation, benefits or amenities to specified employees, specified securities and sweat equity shares, other prescribed benefits, sums paid by the employer in respect of an obligation of the employee, life assurance and annuity premiums, employer fund contributions above Rs 7,50,000 and the accretion on that excess.

2. Who is a specified employee for the purposes of clause (c)? A director of the company, a person having a substantial interest in it, or an employee whose income under the head Salaries by way of monetary payment exceeds the prescribed amount.

3. The employer pays the employee's income-tax. Is it a perquisite? Yes, under section 17(1)(f), as a sum paid in respect of an obligation which but for the payment would have been payable by the assessee.

4. What is the ceiling on employer contributions before a perquisite arises? Rs 7,50,000 in a tax year in aggregate across a recognised provident fund, the section 124(1) scheme and an approved superannuation fund: section 17(1)(h).

5. Is medical treatment in the employer's own hospital taxable? No. Section 17(2)(a) takes it out of the definition.

Answer in one sentence

What is a perquisite? Section 17(1) inclusively defines it as the value of rent-free or concessional accommodation, benefits or amenities provided free or cheaply to a director, a person with a substantial interest or an employee above the prescribed monetary salary, specified securities and sweat equity shares, other prescribed benefits, any sum paid by the employer in discharge of the employee's own obligation, life assurance or annuity premiums, and employer contributions to specified funds exceeding Rs 7,50,000 a year together with the accretion on that excess, subject to the exclusions in section 17(2).

Section 18(2): what is taken out

The payments in sub-section (1)(c) do not include those referred to in -

So the exemption Schedules take priority. Where a payment is already covered by one of those entries, it is not brought back into charge as a profit in lieu of salary.

The distinction that carries marks

Both are salary. The distinction matters because the deductions in section 19 are drafted against particular payments, and naming the right one is part of the answer.

Worked example

State the position for each receipt in the tax year 2026-27.

What it does NOT mean

It is not confined to money paid by an employer. Clause (b) says "from any person", which is what makes a pre-joining payment taxable.

It does not tax the employee's own contributions back. Clause (c)(ii) is express.

It is not the same as a perquisite. A perquisite is a benefit during employment; a profit in lieu is usually a payment connected with its start, its change or its end.

Being caught by section 18 is not the end of the computation. Retrenchment compensation and voluntary retirement payments are brought in here and then relieved by serial numbers 10 to 12 of the table in section 19(1).

Quick revision

• s.18(1)(a): compensation on termination or on modification of terms.
• s.18(1)(b): amounts received before joining or after cessation, from any person.
• s.18(1)(c): payments from an employer or former employer; from a provident or other fund except the assessee's own contributions and interest on them; and Keyman insurance sums including bonus.
• s.18(2): excludes payments in Schedule II Sl. Nos. 3, 4 and 8, and Schedule III Sl. No. 11.
• Brought into salary by s.16(f); relief for retrenchment and voluntary retirement is in s.19.

Test yourself

1. Define profits in lieu of salary. Inclusively, under section 18(1): compensation from an employer or former employer in connection with termination of employment or modification of its terms; amounts due or received from any person before joining or after cessation of employment; and payments from an employer or a fund to the extent not consisting of the assessee's own contributions or interest on them, and sums under a Keyman insurance policy.

2. Is a payment made before employment begins taxable? Yes, under section 18(1)(b)(i), and it is received "from any person", not necessarily from an employer.

3. An employee withdraws from a fund. How much is a profit in lieu of salary? Only so much as does not consist of his own contributions or interest on them: section 18(1)(c)(ii).

4. Is compensation taxable where the employment continues? Yes, if it is paid in connection with a modification of the terms and conditions of the employment: section 18(1)(a)(ii).

Answer in one sentence

What are profits in lieu of salary? Under section 18 they include compensation from an employer or former employer in connection with the termination of employment or the modification of its terms, any amount received from any person before joining or after ceasing employment, and payments from an employer or from a provident or other fund to the extent they do not consist of the assessee's own contributions or interest on them, together with sums received under a Keyman insurance policy, excluding the payments identified in section 18(2).

Amount = one half of (A multiplied by B), where A = average salary for the ten months immediately preceding the month in which the event occurs, and B = the number of completed years of service.

Read the third limb carefully. The average is over ten months, and the years are completed years - a part year is not counted.

Group 3: commuted pension, serial numbers 7 to 9

Serial number 8 is the examinable one, and the test is gratuity. A private employee who also received gratuity gets one-third; one who did not gets one-half. The commuted value is determined having regard to the age of the recipient, the state of his health, the rate of interest and officially recognised tables of mortality.

Group 4: losing the job, serial numbers 10 to 14

Serial number 12 is a hard figure: Rs 5,00,000. It is in the Act and worth memorising.

Serial number 14 is the leave encashment computation, and the deduction is the least of:

1. the cash equivalent of the leave salary for earned leave at credit at retirement, the entitlement being taken at not more than thirty days for every year of actual service;
2. A = 10 multiplied by B, where B is the average monthly salary for the ten months immediately preceding retirement;
3. the amount the Central Government notifies, having regard to the limit for its own employees; and
4. the actual payment received.

Worked example

Sunita retired on 31 December 2026 after 24 years and 7 months of service with a private company. Her average salary for the ten months to November 2026 was Rs 64,000 a month. She received gratuity of Rs 12,80,000, not being under the Payment of Gratuity Act, 1972. The amount notified by the Central Government is Rs 20,00,000. Compute the deduction under serial number 6.

The deduction is Rs 7,68,000, being the minimum of the three.

24 years, not 24 years and 7 months. Serial number 6 counts completed years, and the seven months are ignored.

Rs 12,80,000 goes into gross salary under section 16(c) and Rs 7,68,000 comes out under section 19. The net Rs 5,12,000 is charged.

What it does NOT mean

These are not exemptions. The receipt enters gross salary and the relief is a deduction. Omitting the receipt and also claiming the deduction counts the relief twice.

Column C is a ceiling. "Not exceeding" in section 19(1) is express.

The standard deduction is not the same for everybody. It is Rs 75,000 under section 202(1) and Rs 50,000 in any other case, and it is capped at the salary itself where salary is smaller.

Professional tax is deductible only when paid. It is not deductible on the accrual of a liability that has not been discharged.

Quick revision

• s.19(1): deductions from column B, not exceeding column C.
• Sl. 1: employment tax under article 276(2) - entire amount.
• Sl. 2: standard deduction - Rs 75,000 under s.202(1), else Rs 50,000, capped at salary.
• Sl. 3 to 6: gratuity. Sl. 6 is the minimum of actual, notified, and half a month's average salary of ten months for each completed year.
• Sl. 7 to 9: commuted pension. Sl. 8: one-third if gratuity was also received, one-half if not.
• Sl. 10 to 12: retrenchment (minimum of three, the notified figure not less than Rs 50,000) and voluntary retirement (minimum of actual and Rs 5,00,000).
• Sl. 13 and 14: leave encashment - entire amount for a Government employee; for others the minimum of four, with 30 days a year and 10 months' average salary.

Test yourself

1. What is the standard deduction, and on what does it depend? Rs 75,000 or the salary, whichever is less, where income-tax is computed under section 202(1); Rs 50,000 or the salary, whichever is less, in any other case: section 19(1), Table serial number 2.

2. State the three limbs of the gratuity deduction at serial number 6. The minimum of the actual gratuity received; the amount notified by the Central Government; and half a month's salary for each completed year of service, computed as one half of A multiplied by B, where A is the average salary of the ten months immediately preceding the month of the event and B the number of completed years.

3. How much of a commuted pension is deducted for a private employee? The commuted value of one-third of the pension if he has also received gratuity, and of one-half if he has not: serial number 8.

4. What is the ceiling on the voluntary retirement deduction? Rs 5,00,000, the deduction being the minimum of that and the compensation received: serial number 12.

5. Is leave encashment on retirement fully deducted? Only for an employee of the Central or a State Government, at serial number 13. For any other employee serial number 14 gives the minimum of four figures.

Answer in one sentence

What deductions are allowed from salary? Section 19(1) allows, not exceeding the amounts in column C of its table, the employment tax paid by the assessee, a standard deduction of Rs 75,000 where tax is computed under section 202(1) and Rs 50,000 otherwise, and reliefs for death-cum-retirement and other gratuity, commuted pension, retrenchment compensation, voluntary retirement compensation up to Rs 5,00,000, and leave encashment on retirement.

Statement 1: gross salary

Statement 2: income from salary

The checks to run on your own answer

Salary for rule 279 is basic plus dearness allowance only. Rs 12,00,000, not Rs 14,41,400. Rule 279(2)(b) says salary "includes dearness allowance, if provided for in the terms of employment, but excludes all other allowances and perquisites", so the bonus and the commission stay out. Putting them in would raise limb (c) to Rs 7,20,800 and limb (b) to Rs 2,27,860, changing the exemption and the answer.

Mumbai is fifty per cent. So are Kolkata, Delhi, Chennai, Hyderabad, Pune, Ahmedabad and Bengaluru. Everywhere else is forty. An older textbook lists only four cities at fifty per cent and is wrong on the other four.

The standard deduction is Rs 75,000, not Rs 50,000. Her tax is computed under section 202(1), and serial number 2 of the section 19 table gives Rs 75,000 in that case. Rs 50,000 applies "in any other case".

Professional tax appears TWICE, and both entries are right. The employer paid it, so it is a perquisite under section 17(1)(f) and enters gross salary; and it is a sum paid as a tax on employment, so it is deducted under serial number 1. The two cancel in amount but not in method, and a marker looks for both.

The house rent allowance is not deducted; only the taxable part is added. An exemption keeps income out of gross salary altogether. It is not a section 19 deduction, and putting it there will make the gross salary figure wrong even though the final answer happens to come out the same.

One ceiling, not two, on the funds. Adding Rs 7,50,000 against each fund separately would leave nothing taxable and lose the Rs 70,000.

The order of the three statements

Nothing else comes out here. Deductions under Chapter VIII - life insurance, health insurance, and the rest - are taken from gross total income in Module IV, not from salary.

In short

• Build gross salary from s.16, valuing perquisites under s.17 with rule 15.
• House rent allowance: rule 279, the least of the allowance, rent less one-tenth of salary, and 50 per cent in the eight named cities or 40 per cent elsewhere.
• Salary for rule 279 is basic plus dearness allowance only, where the terms so provide.
• An exempt allowance never enters gross salary; a deduction comes out after it.
• Standard deduction: Rs 75,000 under s.202(1), Rs 50,000 otherwise, capped at salary.
• Professional tax paid by the employer is both a perquisite and a deduction.
• One Rs 7,50,000 ceiling across provident fund, s.124(1) scheme and superannuation.

Answer in one sentence

How is income from salary computed? By building gross salary from the twelve clauses of section 16, adding the value of perquisites computed under section 17 with rule 15 and any profits in lieu of salary under section 18, leaving out allowances exempt under Schedule III read with section 11 and the rules made for them, and then deducting the sums allowed by the table in section 19(1), not exceeding the amounts stated in column C.

Limb (a), section 6(2)(a), is satisfied: he was in India for 225 days, which is 182 days or more.

He is therefore RESIDENT.

Section 6(3) does not save him, and this is the point of the question. That sub-section provides that the provisions of sub-section (2)(b) shall not apply to a citizen who leaves India for the purposes of employment outside India. It disapplies the second limb only. The first limb is untouched, and he meets it.

Step 3: ordinarily resident or not, section 6(13). He had lived in India all his life, so he was not a non-resident in nine of the ten preceding tax years, and he was in India for far more than 729 days in the seven preceding years. Neither test in section 6(13)(a) is met.

He is RESIDENT AND ORDINARILY RESIDENT for the tax year 2026-27.

Step 4: the incidence. A resident and ordinarily resident is charged under section 5(1) on income received in India, income accruing in India, and income accruing outside India.

All of it is taxable. For a resident and ordinarily resident, the question of where a business is controlled does not arise: that condition qualifies foreign income only for a not ordinarily resident under section 5(1)(c).

The mark most often lost. A student who answers "non-resident, only Rs 3,45,000 taxable" has read section 6(3) as though it removed both limbs. It removes one.

Question 2

Working notes.

Gross salary.

Income from salary.

Three things to check in your own answer.

The life assurance premium is a perquisite under section 17(1)(g), which covers any sum payable by the employer to effect an assurance on the life of the assessee, other than through a recognised provident fund, an approved superannuation fund or a Deposit-linked Insurance Fund. The question rules those out expressly.

One ceiling across both funds. Section 17(1)(h) takes the aggregate of the recognised provident fund and the section 124(1) scheme, so Rs 7,90,000 less Rs 7,50,000 gives Rs 40,000. Applying Rs 7,50,000 to each fund would give nothing and lose the entry.

The standard deduction is Rs 75,000, because his tax is computed under section 202(1). Rs 50,000 is "in any other case".

Question 3

(a) In the tax year 2026-27. Section 15(1)(a) charges salary due in the tax year whether paid or not, and it became due on 31 March 2027. The April payment date is irrelevant.

(b) As a profit in lieu of salary, under section 18(1)(b)(i), which covers any amount due to or received by an assessee from any person before his joining any employment with that person. It is brought into salary by section 16(f), and is charged in the year of receipt.

(c) No. Section 17(2)(a) excludes from perquisite the value of any medical treatment provided to an employee or a member of his family in any hospital maintained by the employer.

(d) No. Section 15(4) provides that any salary, bonus, commission or remuneration by whatever name called, due to or received by a partner of a firm from the firm, is not regarded as salary. It is charged as profits and gains of business or profession.

In short

• Section 6(3) disapplies only the second limb of section 6(2). Test limb (a) first, always.
• Count the days as a working note, arrival and departure days included.
• For a resident and ordinarily resident, everything is taxable; where the business is controlled matters only for a not ordinarily resident.
• Build gross salary before taking a single deduction.
• One Rs 7,50,000 ceiling across all three funds in section 17(1)(h).
• Rs 75,000 standard deduction under section 202(1); Rs 50,000 otherwise.

Note the words "such portions". The exclusion is applied to the part actually so occupied, not to the whole building.

The consequence students find hardest

The owner is charged even if he receives nothing. The head charges annual value, not receipts. A second house lying empty is charged on what it might reasonably be expected to fetch, subject to the relief in section 21(6) for a house the owner occupies for his own residence or cannot occupy.

And a person who receives rent is not always charged under this head. A tenant who sub-lets receives rent and is charged under a different head, because he is not the owner.

Worked example

Under which head, and on whom?

What it does NOT mean

Receiving rent is not the test; owning is.

It is not confined to residential property. A let shop, office or godown is charged under this head as much as a house.

Section 20(2) does not exempt anything. It moves a portion to the business head, where its expenses are deducted instead.

Vacant land is not within the head at all, however valuable.

Quick revision

• s.20(1): the annual value of buildings or land appurtenant thereto, owned by the assessee, is charged under Income from house property.
• s.20(2): portions the owner occupies for his own business or profession, the profits being chargeable, are outside the head.
• Owner, not occupier and not recipient of rent. Widened by s.25.
• The head charges annual value, so an owner can be charged without receiving anything.
• Vacant land alone and a composite letting with plant are outside the head.

Test yourself

1. State the conditions for charging income under the head house property. The property must consist of buildings or lands appurtenant thereto; the assessee must be its owner; and it must not be a portion occupied by him for his own business or profession whose profits are chargeable to tax: section 20.

2. A tenant sub-lets part of the premises. Under which head is his receipt charged? Not house property, since he is not the owner; it falls under income from other sources or business, according to the facts.

3. Is rent from open land charged under this head? No. The head requires a building, or land appurtenant to a building.

4. An owner uses the ground floor for his own shop and lets the upper floor. What is charged? Only the upper floor, under house property. Section 20(2) excludes such portions as are occupied for his own business.

Answer in one sentence

What is chargeable under the head Income from house property? Under section 20, the annual value of property consisting of any buildings or lands appurtenant thereto owned by the assessee, other than such portions of it as he occupies for the purposes of a business or profession carried on by him the profits of which are chargeable to income-tax.

So unrealised rent is excluded from limb (b) at the outset, subject to the conditions the Rules impose. When it is recovered later, section 23 charges it.

Step 5: stock-in-trade, section 21(5)

Where a property is held as stock-in-trade and is not let wholly or partly at any time during the tax year, the annual value shall be nil up to two years from the end of the financial year in which the certificate for completion of construction is obtained from the competent authority.

This is the builder's relief: unsold completed flats are not charged for two years. It fails the moment any part is let.

Step 6: self-occupation, section 21(6) and (7)

(6) The annual value ... shall be taken as nil, if the owner occupies it for his own residence or cannot actually occupy it due to any reason. (7) The provisions of sub-section (6) -

(a) shall apply only in respect of two of such houses as specified by the assessee;

(b) shall not apply if the house or any part is actually let during any time of the tax year, or if the owner derives any other benefit from it.

Two houses, and the assessee chooses which. Where he owns more, the rest are charged on their expected rent.

"Or cannot actually occupy it due to any reason" is wide, and it covers the owner posted elsewhere for employment who keeps a house he cannot live in.

Let for any part of the year, and the relief is gone for that house for that year.

Worked example

Bhavana owns a house in Nashik. It might reasonably be expected to let for Rs 3,60,000 a year. She let it for Rs 34,000 a month, and it was vacant for two months during the tax year 2026-27 because the tenant left. Municipal tax on the property is Rs 28,000 a year, of which she paid Rs 28,000 in the year together with Rs 9,000 of arrears for an earlier year. Compute the annual value.

The vacancy rule applies. The property was let, it was vacant for two months, and the actual rent of Rs 3,40,000 is less than the expected rent of Rs 3,60,000 owing to that vacancy. So section 21(2) makes the annual value the amount received or receivable.

Without the vacancy the answer would have been different. The higher of Rs 3,60,000 and the actual rent would have been taken.

The Rs 9,000 of arrears is deducted because section 21(3) allows tax actually paid in the year "irrespective of when such taxes became payable".

What it does NOT mean

The higher-of rule is not absolute. Section 21(2) reverses it for a genuine vacancy.

Municipal tax is not deducted on accrual. Only what was paid, and only by the owner.

The self-occupied relief is not one house. It is two, chosen by the assessee.

The third house, and the words the older books use

A person who occupies three houses gets the nil annual value for two of them, and the third is not relieved at all. Section 21(7)(a) confines section 21(6) to "two of such houses as specified by the assessee in this behalf", so for the third the relief simply does not apply and the annual value falls back to section 21(1): the higher of the sum for which it might reasonably be expected to let and the actual rent, and since nothing is let, the expected rent.

So the third house is taxed as though it were let, on a rent nobody paid.

The assessee chooses which two. Nothing requires him to pick the first two or the ones he uses most, and he should pick the two with the highest expected rent, since those are the ones on which the relief is worth most.

The older books call the third house "deemed to be let out", and MU's past papers use that phrase. The Income-tax Act 2025 does not use it anywhere. The result is the same and it is reached differently: not by a deeming provision, but by section 21(6) running out and section 21(1) taking over. Write the reasoning, not the label, and if the question uses the phrase, say what it means before computing.

Two consequences follow, and both are examined. The municipal taxes on that third house are deductible under section 21(3) only if the owner actually paid them, exactly as for a let house; and the interest ceiling in section 22 for a self-occupied house does not apply to it, because it is not being treated as self-occupied at all.

Nil annual value is not an exemption. The property remains within the head; its value is nil, and the interest deduction under section 22 is still available within its own ceiling.

Quick revision

• s.21(1): annual value is the higher of expected rent and actual rent.
• s.21(2): where a let property was vacant and the rent fell short owing to the vacancy, the actual rent is the annual value.
• s.21(3): less local authority taxes actually paid by the owner in the year, whenever they became payable.
• s.21(4): unrealised rent is excluded from actual rent, subject to the Rules.
• s.21(5): stock-in-trade not let: nil up to two years from the end of the year of the completion certificate.
• s.21(6) and (7): nil for a house occupied for own residence or that cannot be occupied, for two houses of the assessee's choosing, and not if let at any time or if any other benefit is derived.

Test yourself

1. How is annual value determined? As the higher of the sum for which the property might reasonably be expected to let from year to year and the actual rent received or receivable if it is let, reduced by local authority taxes actually paid by the owner during the year: section 21(1) and (3).

2. When is the actual rent taken even though it is lower? Where the property is let, was vacant for the whole or part of the year, and the actual rent is less than the expected rent owing to that vacancy: section 21(2).

3. Municipal tax of Rs 20,000 was payable but only Rs 12,000 was paid, and the tenant paid it. How much is deducted? Nothing. Section 21(3) allows only taxes actually paid during the year by the owner.

4. How many houses may have a nil annual value as self-occupied? Two, as specified by the assessee: section 21(7)(a).

5. A builder holds completed unsold flats. For how long is the annual value nil? Up to two years from the end of the financial year in which the completion certificate was obtained, provided no part is let at any time: section 21(5).

Answer in one sentence

How is the annual value of a property determined? Under section 21 it is the higher of the sum for which the property might reasonably be expected to let from year to year and the actual rent received or receivable where it is let, taken at the actual rent where a let property was vacant and the shortfall was owing to that vacancy, reduced by local authority taxes actually paid by the owner during the tax year, and taken as nil for up to two houses occupied for the owner's own residence or which he cannot occupy.

He is charged although he sold the shop in June 2026. Section 23(2) is express: the sum is included whether or not he is the owner in that tax year.

It is charged in 2026-27, not in 2024-25. Section 23(1) fixes the year of receipt.

The Rs 84,000 is the only deduction. There is nothing else to set against it.

What it does NOT mean

It is not reopened in the earlier year. No revision of 2024-25 is needed. The Act charges the recovery when it happens.

It is not charged under other sources. Section 23(1) deems it income from house property, which is why it appears in that computation even for a person with no property.

The 30 per cent is not the section 22 deduction. That is computed on the annual value; this is computed on the arrears.

Arrears already charged are not charged again. Sub-section (1) speaks of arrears received and unrealised rent realised - rent already brought to tax on the receivable basis is not within it.

Quick revision

• s.23(1): arrears of rent and unrealised rent realised later are income of the year of receipt or realisation.
• s.23(2): charged whether or not the assessee owns the property in that year.
• s.23(3): deduction of 30 per cent of that amount, and nothing else.
• Charged under the head Income from house property.

Test yourself

1. In which year is unrealised rent charged when it is later recovered? In the tax year in which it is received or realised: section 23(1).

2. The assessee sold the property before recovering the arrears. Is he still charged? Yes. Section 23(2) includes the amount whether or not he is the owner in that tax year.

3. What deduction is allowed against arrears of rent? Thirty per cent of the arrears or unrealised rent: section 23(3).

4. Under which head is the recovery charged? Income from house property, because section 23(1) deems it to be income under that head.

Answer in one sentence

How are arrears of rent and unrealised rent taxed? Under section 23 they are deemed to be income from house property of the tax year in which they are received or realised, are included whether or not the assessee owns the property in that year, and are allowed a deduction of thirty per cent of the amount.

The ceilings, and where they apply

(2) In case of property or properties referred to in section 21(6), the aggregate amount of deduction under sub-section (1)(b) and (c) shall not exceed -

(a) Rs 2,00,000, subject to the following conditions:

(i) the property has been acquired or constructed with borrowed capital and such acquisition or construction is completed within five years from the end of the tax year in which the capital was borrowed;

(ii) the assessee furnishes a certificate from the person to whom interest is payable; and

(b) Rs 30,000 in any other case. (5) The aggregate of the amounts of deduction under sub-section (2) in respect of properties of the nature referred to in section 21(6) shall not exceed Rs 2,00,000.

Read the opening words. The ceilings apply only to a section 21(6) property

• one occupied for the owner's own residence, or which he cannot occupy. For a let property there is no ceiling at all, and the whole of the interest is allowed.

Rs 2,00,000 needs two conditions, and a candidate should name them: completion within five years from the end of the tax year of borrowing, and a certificate from the lender. Fail either and the ceiling drops to Rs 30,000.

Section 22(5) caps the total across both self-occupied houses at Rs 2,00,000. Since section 21(7) allows two such houses, this stops the ceiling being claimed twice.

What the certificate must say, section 22(4): the amount of interest payable on the capital borrowed, and the interest payable on any new loan taken to repay the original capital.

Interest payable outside India, section 22(6)

Interest payable outside India is not deductible if tax has not been paid or deducted on it under Chapter XIX-B and there is no agent in India under section 306. Both limbs must fail before the deduction is refused.

Worked example

Nikhil owns two houses. House A is let and its annual value after municipal taxes is Rs 5,40,000; interest payable on the loan taken to construct it is Rs 4,10,000. House B he occupies for his own residence; interest payable on the loan taken to acquire it is Rs 2,46,000, the construction was completed within five years of the end of the year of borrowing, and he has the lender's certificate. Compute income from house property.

House A, let.

House B, self-occupied.

House A has no ceiling. It is let, so section 22(2) does not reach it and the whole Rs 4,10,000 is allowed.

House B is capped at Rs 2,00,000, and only because both conditions in section 22(2)(a) are satisfied. Without the certificate it would have been Rs 30,000.

The thirty per cent gives nothing on House B, because the annual value is nil.

What it does NOT mean

Actual repairs are not deductible. Nor insurance, ground rent or collection charges. The 30 per cent replaces them all.

The ceiling is not general. It applies only to a section 21(6) property.

Pre-construction interest is not lost, and not allowed at once. Five equal instalments from the year of acquisition or construction.

Municipal tax is not a section 22 deduction. It reduces the annual value under section 21(3), one step earlier.

Quick revision

• s.22(1)(a): 30 per cent of the annual value as determined under s.21.
• s.22(1)(b): interest payable on capital borrowed to acquire, construct, repair, renew or reconstruct.
• s.22(1)(c): pre-construction interest in five equal instalments from the year of acquisition or construction.
• s.22(2): for a s.21(6) property only - Rs 2,00,000 on the two conditions (completion within five years; lender's certificate), else Rs 30,000.
• s.22(5): the aggregate across such properties cannot exceed Rs 2,00,000.
• A let property has NO interest ceiling.
• s.22(6): interest payable outside India is refused where no tax was paid or deducted and there is no agent in India.

Test yourself

1. What deductions are allowed under the head house property? Only two: thirty per cent of the annual value, and interest payable on capital borrowed to acquire, construct, repair, renew or reconstruct the property, with pre-construction interest in five equal instalments: section 22(1).

2. Are actual repairs deductible? No. The thirty per cent standard deduction stands in their place.

3. What is the ceiling on interest for a self-occupied house, and on what conditions? Rs 2,00,000, where the acquisition or construction was completed within five years from the end of the tax year in which the capital was borrowed and the assessee furnishes a certificate from the lender; otherwise Rs 30,000: section 22(2).

4. Is there a ceiling on interest for a let property? No. Section 22(2) applies only to property referred to in section 21(6).

5. How is pre-construction interest allowed? In five equal instalments, for the tax year of acquisition or construction and each of the four immediately succeeding tax years: section 22(1)(c).

Answer in one sentence

What are the deductions from income from house property? Section 22(1) allows thirty per cent of the annual value determined under section 21 and the interest payable on capital borrowed to acquire, construct, repair, renew or reconstruct the property, pre-construction interest being allowed in five equal instalments, the interest being limited for a section 21(6) property to Rs 2,00,000 where completion occurred within five years of the end of the year of borrowing and a lender's certificate is furnished, and to Rs 30,000 otherwise.

(e) A person who acquires rights in a building -

(i) by transfer by way of sale or exchange or an original or extendible lease for a term of not less than twelve years; or

(ii) accruing from any transaction (by becoming a member of, or acquiring shares in, a co-operative society, company or other association, or by any agreement or arrangement) not being a sale, exchange or lease, which has the effect of enabling the enjoyment of the property, excluding any rights by way of a lease from month to month or for a period not exceeding one year.

Twelve years is the line for a lease. A long lease of twelve years or more makes the lessee the owner for this head; a monthly tenancy or a lease of a year or less does not.

The reason section 25 exists

Ownership at general law can be separated from the enjoyment of a property in many ways - by a gift within the family, by a housing society structure, by a contract performed but not conveyed, by a very long lease. In each of those the person who really has the property is not the person on the title.

Section 25 attaches the charge to the person who has the property in substance. It is a definition, not an anti-avoidance rule, but it does the work of one.

Worked example

Who is charged?

What it does NOT mean

Co-ownership is not an association of persons where the shares are definite. Section 24(1) says so expressly.

The section 21(6) relief is not shared out. Each co-owner has it in full.

A gift does not shift the charge within a marriage. Section 25(a) keeps it with the transferor unless the transfer was for adequate consideration or under an agreement to live apart.

A short tenancy does not make a tenant an owner. Twelve years is the threshold, and a monthly or one-year tenancy is expressly excluded.

Quick revision

• s.24(1): co-owners with definite and ascertainable shares are assessed separately, never as an association of persons.
• s.24(2): the s.21(6) relief is given to each co-owner individually.
• s.25 widens owner to include: the transferor to a spouse or minor child without adequate consideration (not a married daughter, not an agreement to live apart); the holder of an impartible estate; a member of a co-operative society allotted a flat; a person in possession under s.53A of the Transfer of Property Act, 1882; and a person with rights under a lease of twelve years or more, but not a lease of a year or less.

Test yourself

1. How are co-owners assessed? Where their shares are definite and ascertainable, they are not assessed as an association of persons; the income is computed separately according to each share and included in his total income: section 24(1).

2. Two co-owners live in a jointly owned house. Do they share one nil annual value? No. Section 24(2) gives the section 21(6) relief as if each co-owner were individually entitled to it.

3. A man transfers a house to his wife for no consideration. Who is charged on its income? He is. Section 25(a) includes within "owner" an individual who transfers property without adequate consideration to his spouse, except under an agreement to live apart.

4. Is a lessee ever the owner for this head? Yes, where he acquires rights under an original or extendible lease for a term of not less than twelve years; a lease from month to month or for a year or less is excluded: section 25(e).

Answer in one sentence

Who is the owner for the purposes of the house property head? Besides the legal owner, section 25 includes an individual who transferred property without adequate consideration to a spouse otherwise than under an agreement to live apart or to a minor child other than a married daughter, the holder of an impartible estate, a member of a co-operative society or company allotted a building under a house building scheme, a person in possession in part performance under section 53A of the Transfer of Property Act, 1882, and a person acquiring rights under a lease of not less than twelve years.

Statement 2: House B, self-occupied

The ceiling in section 22(2)(a) is Rs 2,00,000, and both its conditions are met: the construction was completed in August 2024, within five years from the end of the tax year in which the capital was borrowed, and he holds the lender's certificate. The deduction is therefore restricted to Rs 2,00,000.

Statement 3: income from house property

The five checks to run on your own answer

Did you apply section 21(2)? House A's actual rent is lower than its expected rent, and the reason is the vacancy. Taking the higher figure of Rs 4,80,000 would overstate the annual value by Rs 1,02,000 and is the commonest error on this question.

Did you deduct only the tax actually paid? Rs 31,000, not Rs 46,000.

Did you apply the ceiling to House B only? House A is let, so section 22(2) does not reach it and the whole Rs 3,15,000 stands. Applying Rs 2,00,000 to both houses is the second commonest error.

Did you take one instalment of pre-construction interest, not the whole? Rs 52,000, being one of five.

Did you take thirty per cent on House B? You should not have: the annual value is nil, and thirty per cent of nil is nil. It is not an error to show the line, but it must be zero.

In short

• One statement per property. Aggregate at the end.
• Annual value: higher of expected and actual, unless a vacancy makes section 21(2) apply.
• Municipal tax: actually paid, by the owner, in the year.
• Thirty per cent on the annual value after tax.
• No interest ceiling on a let property. Rs 2,00,000 or Rs 30,000 only on a section 21(6) house.
• Pre-construction interest: one fifth a year for five years.
• A loss under this head is normal, and it is what makes the head worth computing.

Answer in one sentence

How is income from house property computed? By determining the annual value under section 21 as the higher of expected and actual rent, or the actual rent where a let property was vacant, reduced by local taxes actually paid by the owner during the year, and then deducting under section 22 thirty per cent of that value and the interest payable on capital borrowed, limited for a self-occupied property to Rs 2,00,000 or Rs 30,000 as the conditions are met.

"Insurer" takes its meaning from section 2(9) of the Insurance Act, 1938.

Why the year moves. A destroyed asset is not transferred at all in the ordinary sense, and the owner may be paid years later. The Act deems a transfer and fixes the year of receipt.

Conversion into stock-in-trade, section 67(6)

Where the owner converts a capital asset into, or treats it as, stock-in-trade of his business, the gain is charged in the year the stock-in-trade is sold or otherwise transferred - not in the year of conversion. The fair market value on the date of conversion is the full value of consideration for section 72.

Two heads on one asset. The accretion up to conversion is a capital gain; the profit from the conversion value to the eventual sale price is business income. Both are charged in the year of sale.

Beneficial interest in securities, section 67(7)

Where a person had a beneficial interest in securities and a transfer is made by the depository or participant, the charge is on the beneficial owner. The section is the answer to a question about who is taxed when securities are held in a demat account.

Worked example

State the year of charge.

What it does NOT mean

The year of receipt of the price is not the year of charge. For an ordinary transfer it is the year of transfer, whenever the money arrives.

Not every destruction is within section 67(2). The cause must be one of the four in section 67(3), and there must be an insurance receipt.

Conversion into stock-in-trade is not tax-free. It is deferred to the year of sale, and it is then split between two heads.

Section 67 does not compute anything. It charges and fixes the year; section 72 computes.

Quick revision

• s.67(1): profits from the transfer of a capital asset are charged under Capital gains in the year of transfer, save as provided in ss.82 to 89.
• s.67(2) and (3): insurance money for damage or destruction by flood or other convulsion of nature, riot or civil disturbance, accidental fire or explosion, or enemy action is charged in the year of receipt, the money or fair market value being the full value of consideration.
• s.67(5): a unit linked insurance policy outside the Schedule II Sl. No. 2 exemption is charged in the year of receipt, computed as prescribed.
• s.67(6): conversion into stock-in-trade is charged in the year the stock is sold, the fair market value at conversion being the consideration.
• s.67(7): where a depository transfers, the beneficial owner is charged.

Test yourself

1. State the charge under the head Capital gains. Any profits or gains arising from the transfer of a capital asset effected in a tax year are chargeable under that head and deemed to be the income of the tax year in which the transfer took place, save as otherwise provided in sections 82 to 89: section 67(1).

2. A capital asset is destroyed by an accidental fire and the insurer pays two years later. When is the gain charged, and on what consideration? In the tax year of receipt, the value of the money or the fair market value of any other asset on the date of receipt being deemed the full value of consideration: section 67(2).

3. Name any three of the circumstances in section 67(3). Flood, typhoon, hurricane, cyclone, earthquake or any other convulsion of nature; riot or civil disturbance; accidental fire or explosion; and action by an enemy or in combating an enemy.

4. When is the gain on conversion of a capital asset into stock-in-trade charged? In the tax year in which the stock-in-trade is sold or otherwise transferred, the fair market value on the date of conversion being the full value of consideration: section 67(6).

Answer in one sentence

What is chargeable under the head Capital gains? Under section 67(1) any profits or gains arising from the transfer of a capital asset effected in a tax year, chargeable as income of the year in which the transfer took place save as otherwise provided in sections 82 to 89, with the year shifted to that of receipt for insurance money on destruction of an asset and for certain unit linked policies, and to the year of sale where a capital asset is converted into stock-in-trade.

Agricultural land outside all of that is not a capital asset at all, and its sale gives rise to no capital gain.

(iv) The remaining exclusions in the Act's list continue the same pattern of specified instruments.

"Property" is defined for these purposes to include any rights in or in relation to an Indian company, including rights of management or control.

Transfer: section 2(109)

In relation to a capital asset, "transfer" includes -

(a) the sale, exchange or relinquishment of the asset; or

(b) the extinguishment of any rights therein; or

(c) the compulsory acquisition thereof under any law in force; or

(d) where the asset is converted by the owner into, or treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment; or

(e) the maturity or redemption of a zero coupon bond; or

(f) any transaction (whether by becoming a member of, or acquiring shares in, a co-operative society, company or other association, or by any agreement or arrangement or in any other manner) which has the effect of transferring, or enabling the enjoyment of, any immovable property; or

(g) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract ...

Six things to take from the list.

Relinquishment and extinguishment are transfers, so giving up a right is a transfer although nothing passes to anybody.

Compulsory acquisition is a transfer, although the owner did not consent. That is why sections 84 and 89 exist to relieve it.

Conversion into stock-in-trade is a transfer, which is what section 67(6) then times.

Redemption of a zero coupon bond is a transfer, so the accretion is a capital gain and not interest.

Clauses (f) and (g) reach arrangements over immovable property that do not convey title at all: the society-share route, and possession given in part performance. They match section 25(c) and (d) in the house property head.

The definition "includes", so it is not exhaustive.

The distinction that carries marks

Worked example

Is it a capital asset?

What it does NOT mean

"Property of any kind" is not confined to what can be touched. A right, a licence, a leasehold interest and goodwill are all property.

A personal effect is not everything used personally. Jewellery, drawings, paintings, sculptures, archaeological collections and works of art are expressly kept in.

Not all agricultural land is excluded. Only land outside the municipal areas and the aerial distances the table specifies.

A transfer does not require a buyer. Relinquishment, extinguishment and compulsory acquisition are all transfers.

Quick revision

• s.2(22): capital asset is property of any kind held by an assessee, connected with business or not, plus FII and specified-fund securities and certain unit linked insurance policies.
• Excluded: stock-in-trade, consumable stores and raw materials; personal effects; rural agricultural land in India; and certain specified instruments.
• Personal effects do NOT include jewellery, archaeological collections, drawings, paintings, sculptures or any work of art.
• Agricultural land is a capital asset if within a municipality or cantonment board of population 10,000 or more, or within the aerial distance the table gives for the relevant population.
• s.2(109): transfer includes sale, exchange, relinquishment, extinguishment of rights, compulsory acquisition, conversion into stock-in-trade, redemption of a zero coupon bond, society or share arrangements over immovable property, and possession in part performance.

Test yourself

1. Define capital asset. Property of any kind held by an assessee, whether or not connected with his business or profession, together with securities held by a Foreign Institutional Investor or specified investment fund and certain unit linked insurance policies, but excluding stock-in-trade, consumable stores and raw materials, personal effects, and agricultural land in India outside the specified areas: section 2(22).

2. Is a personal motor car a capital asset? Is a personal necklace? The car is not, being a personal effect. The necklace is, because jewellery is excluded from the meaning of personal effects.

3. When is agricultural land in India a capital asset? When it is situated within the jurisdiction of a municipality or cantonment board having a population of not less than ten thousand, or within the aerial distance specified in the table for the relevant population.

4. Name any four transactions that amount to a transfer. Sale, exchange or relinquishment of the asset; extinguishment of any rights in it; compulsory acquisition under any law; conversion by the owner into stock-in-trade; maturity or redemption of a zero coupon bond; and allowing possession to be taken or retained in part performance of a contract.

Answer in one sentence

What is a capital asset and what is a transfer? A capital asset under section 2(22) is property of any kind held by an assessee whether or not connected with his business, excluding stock-in-trade, personal effects other than jewellery and works of art, and rural agricultural land in India; and a transfer under section 2(109) includes sale, exchange, relinquishment, extinguishment of rights, compulsory acquisition, conversion into stock-in-trade, redemption of a zero coupon bond, and possession given in part performance of a contract.

The clauses beyond a B.Com. paper

Clauses (g) and (h) onwards deal with cross-border amalgamations: shares of an Indian company passing between two foreign companies, where at least 25 per cent of the shareholders of the amalgamating foreign company continue as shareholders of the amalgamated foreign company and the transfer does not attract capital gains tax in the country of incorporation; and shares of a foreign company deriving its value substantially from an Indian company. The list continues through demergers, business reorganisations and specified fund arrangements.

Name them; do not work them. A Semester V paper on individual taxation does not set a cross-border amalgamation.

The organising idea, as a table

Worked example

Is section 67 excluded?

What it does NOT mean

The gain is not forgiven, only deferred. Section 73 carries the previous owner's cost across, so the whole accretion is charged when the asset is really sold.

A gift by a company is not within clause (b). That clause is confined to an individual or a Hindu undivided family.

Stock-in-trade is outside clauses (c) and (d). Both say so expressly.

And the relief can be withdrawn. Section 71 takes back clauses (c) and (d) where the group relationship or the character of the asset changes within eight years.

Quick revision

• s.70(1)(a): total or partial partition of a HUF.
• s.70(1)(b): will, gift or irrevocable trust by an individual or HUF.
• s.70(1)(c) and (d): between a holding company and its wholly owned Indian subsidiary, either way, not stock-in-trade, and the whole share capital must be held.
• s.70(1)(e): amalgamating to amalgamated Indian company.
• s.70(1)(f): a shareholder whose shares are exchanged for shares in the Indian amalgamated company.
• Cross-border amalgamation clauses need 25 per cent shareholder continuity and no capital gains charge in the home country.
• Relief under (c) and (d) can be withdrawn by s.71.

Test yourself

1. Name any four transactions not regarded as transfer. Distribution of capital assets on the total or partial partition of a Hindu undivided family; transfer by an individual or HUF under a will, gift or irrevocable trust; transfer of a capital asset by a company to its wholly owned Indian subsidiary; and transfer by an amalgamating company to an Indian amalgamated company: section 70(1).

2. A parent holding 90 per cent of a subsidiary transfers land to it. Is the gain charged? Yes. Clause (c) requires the parent or its nominees to hold the whole of the share capital.

3. On an amalgamation a shareholder receives cash for his shares. Is he charged? Yes. Clause (f) applies only where the consideration is the allotment of shares in the amalgamated company.

4. Is the exemption permanent? No. The cost carries over under section 73 so the gain is charged on the eventual sale, and section 71 withdraws the relief in clauses (c) and (d) in the circumstances it states.

Answer in one sentence

Which transactions are not regarded as transfer? Under section 70 the provisions of section 67 do not apply to distribution on the total or partial partition of a Hindu undivided family, to a transfer by an individual or HUF under a will, gift or irrevocable trust, to a transfer of a capital asset other than stock-in-trade between a holding company and its wholly owned Indian subsidiary in either direction, to a transfer by an amalgamating company to an Indian amalgamated company, and to a shareholder's exchange of shares for shares in such a company, among the further cases the section lists.

Worked example

A Ltd. holds the whole of the share capital of B Ltd., an Indian company. In October 2022, A Ltd. transferred land to B Ltd. The gain of Rs 46,00,000 was not charged, by virtue of section 70(1)(c). State the position if -

Note the second row. Selling ten per cent is enough: the holding company has ceased to hold the whole of the share capital.

What it does NOT mean

It does not charge the transferee. The gain is that of the transferor, and it is charged to the transferor.

It does not charge in the year the condition failed. Section 71(1) fixes the year of the original transfer.

It does not reach the gift, will, partition or amalgamation reliefs under sub-section (1); those stand on their own conditions.

Eight years is measured from the date of the transfer, not from the end of that tax year.

Quick revision

• s.71(1): relief under s.70(1)(c) or (d) is withdrawn if, within eight years of the transfer, the transferee converts the asset into stock-in-trade or the transferor ceases to hold the whole share capital of the subsidiary.
• The gain is charged in the tax year of the original transfer.
• s.71(2): the same for the business reorganisation and intangible asset conditions in s.70.

Test yourself

1. When is the exemption under section 70(1)(c) withdrawn? Where, at any time before the expiry of eight years from the date of the transfer, the transferee company converts the capital asset into or treats it as stock-in-trade, or the parent or holding company ceases to hold the whole of the share capital of the subsidiary: section 71(1).

2. In which year is the gain then charged? In the tax year in which the original transfer took place.

3. The holding company sells five per cent of the subsidiary six years after the transfer. Is the relief withdrawn? Yes. It has ceased to hold the whole of the share capital, and eight years have not expired.

4. Does section 71(1) apply to a transfer by gift under section 70(1)(b)? No. It applies only to the reliefs given by section 70(1)(c) and (d).

Answer in one sentence

What is the effect of section 71? Where a gain was not charged because of the holding-and-wholly-owned-subsidiary relief in section 70(1)(c) or (d), and within eight years of the transfer the transferee converts the asset into stock-in-trade or the transferor ceases to hold the whole of the subsidiary's share capital, the gain is deemed to be income chargeable under the head Capital gains of the tax year in which the original transfer took place.

What may NOT be deducted: section 72(3)

(a) the interest claimed as a deduction under section 22(1)(b) or under Chapter VIII;

(b) any sum paid as securities transaction tax under Chapter VII of the Finance (No. 2) Act, 2004.

Clause (a) prevents double counting. Interest on a housing loan already deducted against house property income under section 22(1)(b), or under a Chapter VIII deduction, cannot be added to the cost of the house when it is sold.

Clause (b) is absolute. Securities transaction tax paid on the purchase or sale of shares is never deductible, although it is undoubtedly an expense of the transfer. It would otherwise fall squarely within section 72(1)(a), which is why the Act had to say so.

Section 72(4): amounts received from a business trust

Where a unit holder receives an amount from a business trust that is neither income under Schedule V (Table: Sl. No. 3 or 4) nor chargeable under section 92(2)(k) or 223(2), that amount is reduced from the cost of acquisition of the unit; and where the transfer of the unit was not a transfer under section 70 and the cost was determined under section 73, amounts received before as well as after that transaction are so reduced.

Worked example

Meenakshi sold a plot in November 2026 for Rs 62,00,000. She paid brokerage of Rs 93,000 and legal charges of Rs 41,000 on the sale. She had bought the plot for Rs 18,40,000 and had spent Rs 4,26,000 on constructing a boundary wall and levelling it. She also paid Rs 1,15,000 during her ownership on annual maintenance. Compute the capital gain, indexation not being applicable.

The Rs 1,15,000 of annual maintenance is not deducted. It is neither an expenditure in connection with the transfer nor a cost of improvement. Maintenance preserves an asset; improvement adds to it.

Brokerage and legal charges are deducted because they were incurred on the sale. Had the brokerage been paid on the original purchase, it would have been part of the cost of acquisition instead - deducted either way, but on a different line, and a marker looks at the line.

What it does NOT mean

Market value is not the consideration, except where a section says so.

Maintenance is not improvement.

Interest is not always addable to cost. Section 72(3)(a) bars interest already deducted under section 22(1)(b) or Chapter VIII.

Securities transaction tax is never deductible, however clearly it is an expense of the transfer.

Indexation is not automatic. It operates through section 197(3).

Quick revision

• s.72(1): capital gain = full value of consideration less (a) expenditure wholly and exclusively in connection with the transfer and (b) cost of acquisition and cost of improvement.
• s.72(2): where s.197(3) applies, read indexed cost of acquisition and improvement.
• s.72(3): not deductible - interest already claimed under s.22(1)(b) or Chapter VIII, and securities transaction tax.
• s.72(4): certain business trust receipts reduce the cost of acquisition.

Test yourself

1. State the mode of computation of capital gains. By deducting from the full value of the consideration received or accruing as a result of the transfer the expenditure incurred wholly and exclusively in connection with the transfer, and the cost of acquisition and the cost of any improvement: section 72(1).

2. Is securities transaction tax deductible? No. Section 72(3)(b) expressly disallows it.

3. Interest on a housing loan was deducted under section 22(1)(b). May it be added to the cost when the house is sold? No. Section 72(3)(a) disallows interest claimed as a deduction under section 22(1)(b) or under Chapter VIII.

4. Are annual maintenance charges a cost of improvement? No. Improvement is capital expenditure that adds to the asset; maintenance preserves it and is not deductible under this head.

Answer in one sentence

How is a capital gain computed? Under section 72(1) by deducting from the full value of the consideration received or accruing as a result of the transfer the expenditure incurred wholly and exclusively in connection with the transfer and the cost of acquisition together with the cost of any improvement, indexed where section 197(3) applies, and without any deduction for interest already claimed under section 22(1)(b) or Chapter VIII or for securities transaction tax.

Worked example

Anil's father bought a plot in June 2009 for Rs 6,80,000 and spent Rs 1,40,000 in 2013 on levelling it. He died in March 2024 and the plot passed to Anil by inheritance. Anil spent a further Rs 2,10,000 in 2025 on a compound wall, and sold the plot in December 2026 for Rs 74,00,000, paying brokerage of Rs 1,11,000. Compute the capital gain, indexation not being applicable.

The holding period runs from June 2009, not from March 2024. The plot was held for more than seventeen years on that basis, so the gain is long-term. Counting only Anil's own two and a half years would have made it short-term, taxed differently, and would have shut out the exemptions.

Anil's cost is not nil. He paid nothing, and section 73 still gives him Rs 6,80,000.

Both improvements are allowed. Column C says "incurred or borne by the previous owner or the assessee", so the 2013 levelling and the 2025 wall are both deducted.

What it does NOT mean

It is not confined to gifts. Succession, inheritance, devolution, liquidation distributions, trusts and the section 70 transfers are all in the Table.

It does not step the cost up to market value. The previous owner's actual cost is taken, however long ago and however low.

Only capital improvement is added. Maintenance is not improvement, whoever paid it.

The previous owner's holding period is not optional. It is what makes the gain long-term in almost every inherited-asset question.

Quick revision

• s.73(1) Table Sl. No. 1: where the asset came by gift or will; succession, inheritance or devolution; distribution on liquidation; a revocable or irrevocable trust; the s.99(3) HUF mode after 31 December 1969; or a s.70 transfer, the cost is the previous owner's cost.
• Increased by improvement incurred or borne by the previous owner OR the assessee.
• The holding period of the previous owner counts, which usually makes the gain long-term.
• s.70 defers the charge; s.73 carries the cost. They are one scheme.

Test yourself

1. An assessee inherits a house. What is his cost of acquisition? The cost for which the previous owner acquired it, increased by the cost of any improvement incurred or borne by the previous owner or by the assessee: section 73(1), Table serial number 1(b).

2. From when is the holding period counted in such a case? From the previous owner's acquisition, which is what makes the gain long-term in most inherited-asset questions.

3. Name any four modes in serial number 1 of the Table. Gift or will; succession, inheritance or devolution; distribution of assets on the liquidation of a company; and transfer to a revocable or irrevocable trust.

4. Is improvement spending by the previous owner allowed? Yes. Column C allows improvement incurred or borne by the previous owner or by the assessee.

Answer in one sentence

How is the cost of acquisition determined where the assessee did not buy the asset? Under section 73(1) it is deemed to be the cost for which the previous owner acquired the property, increased by the cost of any improvement incurred or borne by the previous owner or the assessee, wherever the asset became the assessee's under a gift or will, by succession, inheritance or devolution, on the liquidation of a company, under a trust, by the Hindu undivided family mode in section 99(3) after 31 December 1969, or under a transfer not regarded as a transfer by section 70.

Here a loss is possible. Because sub-section (3) gives the block a cost of acquisition, the ordinary section 72 computation runs, and if the consideration is less than that cost the result is a short-term capital loss. Under sub-section (2) there is no loss, only an excess or nothing.

That is the distinction to state in an answer.

Section 75: an asset depreciated outside a block

75. If depreciation has been obtained under section 33(2) for a capital asset in any tax year, sections 72 and 73 shall apply subject to the modification that the written down value, as defined in section 41, of the asset, as adjusted, shall be taken as the cost of acquisition.

So where depreciation was obtained on the asset itself under section 33(2) rather than through a block, its adjusted written down value replaces the cost of acquisition in the ordinary computation. The gain is then computed under section 72 in the usual way.

Section 41 is where written down value is defined, and it is taught in Module III. The two modules meet here.

Worked example

Girija carries on a manufacturing business. The written down value of her plant and machinery block on 1 April 2026 was Rs 18,60,000. During the tax year 2026-27 she bought a new machine for Rs 4,40,000 and sold two old machines for Rs 27,00,000, paying Rs 38,000 of commission on the sale. The block did not cease to exist. Compute the capital gain.

It is short-term although the machines were held for years. Section 74(2) deems it so.

Had the consideration been Rs 20,00,000, it would have been less than Rs 23,38,000 and nothing would have been charged; the block would have carried forward at a reduced written down value and continued to be depreciated.

The new machine's cost is deducted although it was not sold. Sub-section (2)(c) brings the year's additions into the comparison, because they are part of the same block.

What it does NOT mean

The holding period is irrelevant. The gain is short-term by force of the section.

You do not compare asset with asset. The comparison is against the block.

A loss does not arise under sub-section (2). Only under sub-section (3), when the block ceases to exist.

Section 75 is not the same rule. It replaces the cost of acquisition with the adjusted written down value for an asset depreciated under section 33(2); it does not deem the gain short-term.

Quick revision

• s.74(1): applies to an asset in a block on which depreciation has been allowed, and overrides s.2(101).
• s.74(2): consideration less transfer expenses, opening written down value and the year's additions; any excess is a short-term capital gain.
• s.74(3): where the block ceases to exist, the opening WDV plus additions is the cost of acquisition, and the result is a short-term gain or loss.
• s.75: where depreciation was obtained under s.33(2), the adjusted written down value defined in s.41 is the cost of acquisition.
• Always short-term, whatever the holding period.

Test yourself

1. Is the gain on a depreciable asset short-term or long-term? Short-term, whatever the period of holding: section 74(2) and (3) deem it so, irrespective of section 2(101).

2. What three amounts are deducted from the consideration under section 74(2)? The expenditure incurred wholly and exclusively in connection with the transfer; the written down value of the block at the start of the tax year; and the actual cost of any asset in that block acquired during the year.

3. When can a loss arise? Only under section 74(3), where the block ceases to exist because all its assets were transferred during the year, that sub-section supplying a cost of acquisition.

4. What does section 75 provide? That where depreciation has been obtained under section 33(2) for a capital asset, its written down value as defined in section 41, as adjusted, is taken as the cost of acquisition for sections 72 and 73.

Answer in one sentence

How are capital gains on depreciable assets computed? Under section 74(2) the excess of the full value of consideration over the transfer expenses, the written down value of the block at the start of the tax year and the actual cost of assets in that block acquired during the year is deemed to be a short-term capital gain, and under section 74(3), where the block ceases to exist, that written down value plus additions is the cost of acquisition so that a short-term gain or loss results, while section 75 substitutes the adjusted written down value defined in section 41 as the cost of acquisition where depreciation was obtained under section 33(2).

Sub-section (2) allows the Rules to exempt a class of persons on prescribed conditions.

There is no 110 per cent safe harbour here. The comparison is direct.

Consideration that cannot be determined: section 80

80. If the consideration ... is not ascertainable or cannot be determined, its fair market value on the date of transfer shall be deemed to be the full value of consideration.

This catches an exchange for something unpriced, or a transfer for a consideration that cannot be quantified. Without it the computation would have no starting figure at all.

The three side by side

Worked example

Three sales of land. In each, state the full value of consideration.

The third row is the question. Both conditions in clause (a) are satisfied, so the earlier value governs, and because that value is below the price, section 78(1) is not engaged at all.

What it does NOT mean

It does not tax what was not received. It computes the gain on a substituted figure; the seller still receives the price.

The safe harbour is not a general rule. It is in section 78 only, not in section 79 or 80.

Cash at the agreement stage will not buy the date-of-agreement option. The payment must be in a specified banking or online mode under section 66(32).

A thinly traded share is not a quoted share. Section 79(3) requires regularity and current transactions in the ordinary course of business.

Quick revision

• s.78(1): land or building sold below stamp duty value - that value is the consideration.
• s.78(1)(a): the date of agreement value may be used where the dates differ and part or full consideration was received then in a specified banking or online mode (s.66(32)).
• s.78(1)(b): no substitution where the stamp duty value does not exceed 110 per cent of the consideration.
• s.79: an unquoted share below prescribed fair market value takes that value; quoted means regularly quoted on current transactions, s.79(3).
• s.80: consideration not ascertainable - fair market value on the date of transfer.

Test yourself

1. Land sells for Rs 40,00,000 and its stamp duty value is Rs 43,00,000. What is the full value of consideration? Rs 40,00,000. The stamp duty value is 107.5 per cent of the price and so does not exceed 110 per cent: section 78(1)(b).

2. On what two conditions may the stamp duty value at the date of agreement be taken? That the date of the agreement fixing the consideration and the date of registration are not the same, and that part or full consideration was received on or before the date of the agreement in a specified banking or online mode as defined in section 66(32).

3. What is a quoted share? A share quoted on a recognised stock exchange with regularity from time to time, the quotation being based on current transactions made in the ordinary course of business: section 79(3).

4. What happens where the consideration cannot be determined? The fair market value of the asset on the date of transfer is deemed to be the full value of the consideration: section 80.

Answer in one sentence

When does the Act substitute the consideration? Under section 78, where land or a building is transferred for less than its stamp duty value and that value exceeds 110 per cent of the consideration, the stamp duty value is taken, with an option for the value at the date of the agreement where the dates differ and part consideration was then received in a specified banking or online mode; under section 79 an unquoted share transferred below its prescribed fair market value takes that value; and under section 80 fair market value on the date of transfer is taken where the consideration is not ascertainable.

The two deeming rules side by side

What it does NOT mean

A slump sale is not the sale of a list of assets. If values are assigned to individual assets it is an itemised sale and section 77 does not apply.

Net worth is not book value chosen by the seller. It is computed as the Act and the Rules require.

Section 76 is not confined to debentures. Specified Mutual Fund units acquired on or after 1 April 2023, and unlisted bonds and debentures transferred on or after 23 July 2024, are within it.

Quick revision

• s.77(1) and (2): slump sale gives long-term gains, or short-term where the undertaking was held thirty-six months or less.
• s.77(3): net worth is the cost of acquisition and improvement; fair market value, as prescribed, is the full value of consideration.
• s.76: a Specified Mutual Fund unit acquired on or after 1 April 2023, a Market Linked Debenture, or an unlisted bond or debenture transferred on or after 23 July 2024, gives short-term gains, computed as X = A - B - C, irrespective of s.2(101) and s.72.

Test yourself

1. What is deemed to be the cost of acquisition in a slump sale? The net worth of the undertaking or division, which is deemed to be both the cost of acquisition and the cost of improvement: section 77(3)(a).

2. When is a slump sale gain short-term? Where the undertaking or division was owned and held by the assessee for thirty-six months or less immediately before the date of transfer: section 77(2).

3. Is the gain on a Market Linked Debenture ever long-term? No. Section 76(1) treats it as short-term irrespective of section 2(101).

4. What is deemed to be the consideration in a slump sale? The fair market value of the capital assets on the date of transfer, calculated in the prescribed manner: section 77(3)(b).

Answer in one sentence

How is a slump sale taxed? Under section 77 the gain is long-term, or short-term where the undertaking was held for thirty-six months or less, and is computed by taking the net worth of the undertaking as the cost of acquisition and improvement and the prescribed fair market value of its capital assets as the full value of the consideration.

Now assume instead that the Rs 1,50,000 had been included in Sanjay's total income in 2016-17.

The difference of Rs 1,50,000 is exactly the forfeited advance. It is taxed once: either then, as income, or now, through a reduced cost. Never twice, and never not at all.

What it does NOT mean

It is not confined to money from the eventual buyer. Any earlier negotiation counts.

Money refunded is not caught. It must have been retained.

It is not a deduction from the consideration. It reduces the cost, which increases the gain.

It does not apply where the money was already taxed. Clause (b) is express, and in the ordinary modern case that is what applies.

Quick revision

• s.81(a): advance or other money received and retained on an earlier negotiation is deducted from the cost of acquisition, the written down value or the fair market value, as the case may be.
• s.81(b): not deducted where the money has been included in total income for any tax year.
• The point is that the money is taxed once: as income then, or through a lower cost now.

Test yourself

1. What is the effect of advance money forfeited on an earlier negotiation? It is deducted from the cost for which the asset was acquired, or the written down value or fair market value as the case may be, in computing the cost of acquisition: section 81(a).

2. When is it not deducted? Where the advance or other money has been included in the total income of the assessee for any tax year: section 81(b).

3. Must the advance have come from the eventual buyer? No. The section applies where the asset was on any previous occasion the subject of negotiations for its transfer.

4. Is money returned to the intending buyer within the section? No. The section requires the money to have been received and retained.

Answer in one sentence

How is forfeited advance money treated? Under section 81 any advance or other money received and retained by the assessee in respect of earlier negotiations for the transfer of the asset is deducted from the cost of acquisition, the written down value or the fair market value as the case may be, but is not so deducted where it has already been included in the assessee's total income for any tax year.

This is the practical trap. A seller who intends to build has three years, but he cannot simply hold the money: if it is not spent by the time the return is due, it must be in the deposit account, or the relief is lost on that part.

Worked example

Rohini, an individual, sold a residential house in Nagpur in August 2026 for Rs 92,00,000. Her indexation not being applicable, the cost of acquisition was Rs 21,00,000 and she paid brokerage of Rs 1,38,000. The gain is long-term. In January 2027 she bought another residential house in Nashik for Rs 55,00,000. Compute the amount chargeable.

The purchase is within time. January 2027 is within two years after August 2026.

Rs 14,62,000 is charged; Rs 55,00,000 is relieved. The gain exceeded the cost of the new house, so limb (i) applies.

The new house's cost becomes NIL for three years. If Rohini sells the Nashik house before January 2030, its cost of acquisition for that computation is nil, and the whole of the sale price will be the gain.

Had she bought a house for Rs 75,00,000, the gain of Rs 69,62,000 would have been less than the cost, nothing would have been charged under limb (ii), and the new house's cost would have been Rs 75,00,000 less Rs 69,62,000, being Rs 5,38,000, for a sale within three years.

What it does NOT mean

It is not an exemption of the gain. It defers it into the new asset's cost, and charges any excess at once.

It is not available to a company or a firm. Individual or Hindu undivided family only.

A plot is not a residential house. The original asset must be buildings or land appurtenant, being a residential house whose income is chargeable under the house property head.

A short-term gain gets nothing. Section 82(1)(a) requires long-term capital gains.

Holding the money is not enough. Section 82(2) requires a deposit before the return is filed where the gain is not yet spent.

Quick revision

• Who: an individual or HUF. What: a long-term gain on a residential house chargeable under house property.
• New asset: one residential house in India.
• Time: purchase one year before or two years after; construction three years after.
• Limb (i): gain more than the cost - the excess is charged, and the new asset's cost is nil on a sale within three years.
• Limb (ii): gain not more than the cost - nothing charged, and the new asset's cost is reduced by the gain on a sale within three years.
• s.82(2): unutilised gain must be deposited before the return is filed under s.263.

Test yourself

1. Who may claim relief under section 82? An individual or a Hindu undivided family, on a long-term capital gain arising from the transfer of a residential house the income of which is chargeable under the head Income from house property.

2. What are the time limits for the new asset? Purchase within one year before or two years after the date of transfer, or construction within three years after that date.

3. The gain exceeds the cost of the new house. What happens? The excess is charged under section 67, and for computing gains on a transfer of the new asset within three years of its purchase or construction its cost is taken as nil: section 82(1)(i).

4. What must be done with a gain not yet spent when the return falls due? It must be deposited in a specified bank or institution under the notified scheme, before the filing of the return and not later than the due date: section 82(2).

Answer in one sentence

State the relief in section 82. Where an individual or Hindu undivided family has a long-term capital gain on a residential house and purchases one residential house in India within one year before or two years after the transfer, or constructs one within three years, the gain is charged only to the extent it exceeds the cost of that new asset, and for a transfer of the new asset within three years its cost is taken as nil or reduced by the gain as the case may be, any unutilised amount having to be deposited under the notified scheme before the return is filed.