TYBMS SEM :5 Finance Direct Tax (Most IMP Short Notes with Solution)

  Paper/Subject Code: 46018/Finance: Direct Taxes

TYBMS SEM :5 

Finance 

Direct Tax

(Most IMP Short Notes with Solution)

 

N.B. 1) Q. I is compulsory.

2) Q.2 to Q.5 are compulsory with internal choice.

3) Figures to the right indicate full marks.

4) Workings should form part of your answer.

5) Use of simple calculator is allowed.

Q.5 Write Short notes on: (Any three)                    (15)

Q.1. Person

Under the Indian Income Tax Act, 1961, the term "person" is broadly defined in Section 2(31). It includes not just individuals but also various entities that can be assessed for tax purposes. The purpose of this inclusive definition is to bring a wide range of entities within the tax net.

The term "person" includes:

1. An individual – a single human being.

2. A Hindu Undivided Family (HUF) – a joint family structure prevalent in India.

3. A company – both Indian and foreign companies.

4. A firm – including partnerships and LLPs.

5. An Association of Persons (AOP) or Body of Individuals (BOI) – groups of individuals or entities.

6. A local authority – like municipalities or panchayats.

7. Every artificial juridical person – entities not covered above but recognized by law (e.g., deities, trusts).

Each "person" is treated as a separate entity for income tax purposes and is liable to pay tax based on their income and applicable rates.

Q.2. Capital assets

A capital asset broadly refers to any kind of property held by an assessee, whether or not it is connected with their business or profession. This definition is wide-ranging and includes:   

• Immovable property: Land, buildings, house property.   
• Movable property: Jewellery, vehicles, machinery, furniture.   
• Financial assets: Shares, debentures, mutual funds, bonds.   
• Intangible assets: Goodwill, patents, trademarks, copyrights.   
• Any rights in or related to an Indian company, including management or control rights.

However, the Income Tax Act, 1961 specifically excludes certain items from the definition of a capital asset:   

• Stock-in-trade, consumable stores, or raw materials held for business purposes (excluding certain securities held by Foreign Institutional Investors).   
• Personal effects, which are movable property held for personal use by the assessee or their dependent family members. However, this exclusion does not apply to jewellery, archaeological collections, drawings, paintings, sculptures, or any work of art.   
• Agricultural land in rural areas of India (subject to certain conditions based on population and distance from municipal limits).
• Certain specified government bonds.

For taxation purposes, capital assets are classified into short-term capital assets and long-term capital assets based on the period of holding. Generally:   

• Assets held for 36 months or less are considered short-term capital assets.
• Assets held for more than 36 months are considered long-term capital assets.

However, there are specific exceptions to this general rule. For instance, in the case of listed shares, certain securities, and units of specified mutual funds, the holding period for them to be considered long-term is more than 12 months. For unlisted shares and immovable property, the threshold is generally more than 24 months (this was reduced from 36 months in Financial Year 2017-18).

Profits or gains arising from the transfer of capital assets are subject to capital gains tax. The tax treatment differs based on whether the asset is a short-term capital asset or a long-term capital asset, and the type of asset being transferred. Short-term capital gains are generally taxed at the normal income tax slab rates applicable to the assessee, while long-term capital gains are usually taxed at specific rates (e.g., 10%, 12.5%, or 20%) and were previously eligible for indexation benefits to account for inflation (this benefit has been removed for transfers made on or after July 23, 2024, with some exceptions).

Q.3. Deductions u/s 16

Section 16 of the Income Tax Act, 1961, provides deductions from salary income to arrive at the taxable salary. These deductions are allowed to salaried individuals and help reduce their taxable income. The deductions under this section include:

1. Standard Deduction [Section 16(ia)]:
   A flat deduction of ₹50,000 (as of FY 2023-24) is available to all salaried individuals and pensioners, irrespective of actual expenses incurred.

2. Entertainment Allowance [Section 16(ii)]:
   This deduction is available only to government employees. The least of the following is allowed as a deduction:

   • ₹5,000,

   • 20% of basic salary,

   • Actual entertainment allowance received.

3. Tax on Employment/Professional Tax [Section 16(iii)]:
   The amount actually paid as professional tax during the year is allowed as a deduction.

These deductions help reduce the overall salary income that is subject to tax under the head "Income from Salaries."

Q.4. Gratuity

Gratuity is a lump-sum payment made by an employer to an employee in recognition of their past services to the organization. It's typically paid upon retirement, resignation (after completing at least five years of continuous service), death, or disablement.   

In India, the Payment of Gratuity Act, 1972 governs the payment of gratuity to employees working in establishments with 10 or more employees. The Act specifies the eligibility criteria, the formula for calculation, and the maximum amount payable.   

Key aspects of Gratuity:

• Eligibility: Generally, an employee who has completed at least five years of continuous service is eligible for gratuity. However, this condition is waived in case of death or disablement.   
• Calculation: The formula for calculating gratuity under the Act is:

  Gratuity = (Last Drawn Salary × 15 × Number of Completed Years of Service) / 26

Here, "Last Drawn Salary" includes basic pay and dearness allowance, and 26 represents the number of working days in a month. For employees not covered under the Act, a slightly different formula based on 15/30 is often used.   

• Maximum Limit: The maximum amount of gratuity payable under the Payment of Gratuity Act, 1972 is currently ₹20 lakh.
• Taxability: Gratuity received by government employees is fully exempt from income tax. For non-government employees, the tax exemption is subject to certain limits based on whether they are covered under the Gratuity Act or not. Generally, the least of the actual gratuity received, a specified formula-based amount, and ₹20 lakh is exempt.   

Gratuity serves as a significant social security benefit for employees, providing financial support upon cessation of employment and acknowledging their dedication to the organization over a sustained period.

Q.5. Annual value

In direct tax, specifically under the head "Income from House Property" in India, Annual Value (AV) serves as the primary basis for determining the taxable income from a property. As per Section 23(1) of the Income Tax Act, 1961, the Annual Value of a property is essentially the amount for which the property might reasonably be expected to be let out on a year-to-year basis. It represents the notional earning potential of the property, irrespective of whether it is actually rented out or not.   

Key aspects of Annual Value:

• Notional Rent: For self-occupied properties (up to two as per current rules), the Annual Value is generally considered to be nil. However, if an individual owns more than two properties and all are self-occupied, the Annual Value of the property(ies) not considered self-occupied is determined as if they were let out.   
• Determination for Let-Out Properties: For properties that are let out, the Annual Value is usually the higher of:
  • The actual rent received or receivable.   
  • The reasonable expected rent, which takes into account factors like the municipal value, fair rent in the locality, and standard rent (if applicable under rent control laws).   
• Gross Annual Value (GAV): The Annual Value determined as above is often referred to as the Gross Annual Value.   
• Net Annual Value (NAV): To arrive at the taxable income from house property, the Net Annual Value is calculated by deducting the municipal taxes actually paid by the owner during the previous year from the Gross Annual Value.   
• Significance: The Annual Value is crucial because it forms the starting point for calculating the income chargeable to tax under the head "Income from House Property." Subsequent deductions, such as the standard deduction (30% of NAV) and interest on home loans, are applied to the NAV to arrive at the final taxable income from the property.

Q.6. Residential Status of an Individual.

The residential status of an individual is a crucial factor in determining their tax liability in India. The Income Tax Act, 1961, categorizes individuals into three residential statuses:   

1. Resident and Ordinarily Resident (ROR): An individual is considered ROR if they satisfy two basic conditions and two additional conditions.

   • Basic Condition 1: They have been in India for 182 days or more during the relevant financial year.
   • Basic Condition 2: They have been in India for 60 days or more during the relevant financial year AND have been in India for 365 days or more during the four years immediately preceding the relevant financial year. (Note: This condition has exceptions for certain individuals like Indian citizens leaving India for employment abroad or as a crew member of an Indian ship, and Indian citizens or Persons of Indian Origin visiting India).   
   • Additional Condition 1: They have been a resident in India in at least 2 out of the 10 years immediately preceding the relevant financial year.   
   • Additional Condition 2: They have been present in India for 730 days or more during the 7 years immediately preceding the relevant financial year.   

   An individual satisfying both basic conditions and both additional conditions is an ROR.

2. Resident but Not Ordinarily Resident (RNOR): An individual is considered RNOR if they meet at least one of the basic conditions but fail to meet either or both of the additional conditions. Certain other categories of individuals, even if they meet both basic conditions, can still be RNOR, such as:

   • An individual who has been a non-resident in India in 9 out of the 10 previous years.
   • An individual who has, during the 7 previous years, been in India for a total period of 729 days or less.   
   • A citizen of India or a person of Indian origin who is deemed to be resident in India under clause (1) of Explanation 1 to clause (1) of section 6.

3. Non-Resident (NR): An individual is considered a non-resident if they fail to satisfy either of the two basic conditions mentioned above.

Significance: The residential status determines the scope of an individual's taxable income in India.   

• An ROR is taxed on their global income (income earned in India and outside India).   
• An RNOR is taxed on income earned in India and income earned outside India that is derived from a business controlled in or a profession set up in India.
• A Non-Resident is taxed only on income received or accrued in India.

Q.7. Pension

A pension is a regular income stream that a person receives after retirement. It's essentially a way to replace the salary earned during one's working years, providing financial security in later life. Pensions can be funded through contributions made by an employer, the employee, or both, often accumulated in a pension fund over the course of employment.   

There are various types of pension schemes available in India, including:

• Defined Benefit Plans: These plans guarantee a specific pension amount based on factors like salary and years of service.   
• Defined Contribution Plans: Here, the retirement benefit depends on the contributions made and the investment returns earned. Examples include the National Pension Scheme (NPS) and Employee Provident Fund (EPF).   
• Annuity Plans: These plans involve a lump-sum investment that provides a regular income stream, either immediately or at a future date.   
• Government-backed Schemes: Schemes like the Atal Pension Yojana (APY) aim to provide a minimum guaranteed pension to workers in the unorganized sector.   

Pension income is generally taxable under the Income Tax Act, considered as 'Income from Salaries' or 'Income from Other Sources' depending on the type of pension. However, there are certain exemptions and deductions available, particularly for commuted pensions (received as a lump sum) and for senior citizens. Investing in pension schemes can also provide tax benefits on the contributions made.

Q.8. Gross Annual Value

The Gross Annual Value (GAV) is a crucial concept under the head "Income from House Property" in the Income Tax Act, 1961 in India. It essentially represents the notional annual rent that a property is expected to generate, even if it's not actually rented out. It serves as the starting point for calculating the taxable income from house property.   

• Determination: The GAV is generally the higher of the following:

  • The actual rent received or receivable (if the property is let out).   
  • The reasonable expected rent. This is determined by considering factors like:
    • Municipal Value: The value assessed by the local authorities for property tax.
    • Fair Rent: The rent a similar property in the same locality would fetch.   
    • Standard Rent: The maximum rent chargeable under the Rent Control Act (if applicable). The expected rent cannot exceed the standard rent.
       

• Self-Occupied Property: For a self-occupied property (up to two properties in some cases), the Gross Annual Value is usually taken as nil.   

• Deemed Let-Out Property: If an individual owns more than the permissible number of self-occupied properties, the excess properties are considered "deemed to be let out." In such cases, the GAV is the amount for which the property might reasonably be expected to be let out.   

• Significance: The GAV is the basis upon which further deductions are allowed to arrive at the Net Annual Value (NAV). Municipal taxes paid by the owner during the year are deducted from the GAV to arrive at the NAV. Subsequently, a standard deduction of 30% of the NAV and deduction for interest paid on housing loans can be claimed.

Q.9. Long term capital gain

Long-Term Capital Gain (LTCG) arises from the sale of a capital asset held for a specific period, which is generally more than 12 months for listed shares and equity-oriented mutual funds, and more than 24 months for other assets like immovable property and unlisted shares.   

The profit or gain realized from such a sale is termed LTCG and is subject to taxation under the Income Tax Act, 1961, under the head "Capital Gains." The tax rates for LTCG vary depending on the type of asset.   

Key points to note:

• Holding Period: The duration for which the asset is held is crucial in determining whether the gain is long-term or short-term.   
• Tax Rates: LTCG is generally taxed at 12.5% (plus applicable surcharge and cess) on listed equity shares and equity-oriented mutual funds for gains exceeding ₹1 lakh in a financial year. For other long-term capital assets, the tax rate is also 12.5% without indexation, with an option for individuals and HUFs to choose 20% with indexation for land and buildings acquired before July 23, 2024.
• Indexation: Previously, for certain assets like immovable property and debt mutual funds, the cost of acquisition could be adjusted for inflation using the Cost Inflation Index (CII) to arrive at the indexed cost of acquisition, thereby reducing the taxable gain. However, the indexation benefit has been removed for most assets transferred on or after July 23, 2024.   
• Exemptions: The Income Tax Act provides certain exemptions under sections like 54, 54EC, and 54F, which allow taxpayers to save tax on LTCG if the proceeds are reinvested in specified assets within a stipulated time.   
• Tax Planning: Understanding the rules related to LTCG, including holding periods, tax rates, and available exemptions, is essential for effective tax planning and optimizing investment returns.

Q.10. Deemed to be let out property

Under the Income Tax Act, 1961, a property is considered "deemed to be let out" under specific circumstances, even if it is not actually rented out. This concept primarily applies when an individual owns more than one residential property for self-occupation.

According to the rules, a taxpayer can choose up to two properties to be treated as self-occupied. Any additional residential properties owned by the individual are deemed to be let out, regardless of whether they are actually rented or lying vacant.

The purpose of this provision is to prevent individuals from avoiding tax on properties they own but do not use themselves. By deeming such properties as let out, the Income Tax Department assesses a notional rental income on these properties.

Key aspects of Deemed to be Let Out Property:

• Applicability: Arises when an individual owns more than two residential properties for self-occupation.
• Notional Rent: Tax is levied on the expected rent that the property could have fetched if it were actually let out. This is determined based on factors like the property's location, size, and prevailing market rent.
• Taxability: The notional rental income is taxable under the head "Income from House Property."
• Deductions: Similar to an actually let-out property, the owner can claim deductions for municipal taxes paid and interest paid on any housing loan taken for the deemed let-out property. However, the standard deduction of 30% on the Net Annual Value is also applicable.
• Choice of Self-Occupied Properties: The taxpayer has the discretion to choose which two properties they wish to treat as self-occupied. This choice can be made annually while filing the tax return.

Q.11. Profit in Lieu of salary

"Profit in lieu of salary" refers to certain payments received by an employee that are considered as part of their taxable income under the head "Income from Salaries," even if they are not strictly regular salary. Section 17(3) of the Income Tax Act, 1961 defines what constitutes profits in lieu of salary.

Key inclusions under this category are:

• Compensation for termination or modification of employment terms: Any amount received from an employer or former employer due to the end of employment (resignation, retirement, removal, etc.) or changes in the conditions of employment. For example, severance pay.
• Payments from unrecognised provident or superannuation funds: To the extent that these payments don't include the employee's own contributions or interest on those contributions.
• Amount received under a Keyman Insurance Policy: Including any bonus on such a policy.
• Payments received before joining or after cessation of employment: Any amount received by an employee from a prospective or former employer, even if not directly related to the active employment period. For instance, a signing bonus or a payment after retirement that isn't a standard pension.
• Other amounts received from the employer: Any other sum paid by the employer to the employee that is not part of the regular salary or specifically exempt under the Income Tax Act.

Taxability:

Profits in lieu of salary are taxed in the same manner as regular salary income, according to the individual's applicable income tax slab rates. Employers are generally required to deduct Tax Deducted at Source (TDS) on these payments.

Exclusions:

Certain payments are specifically excluded from the definition of "profits in lieu of salary" to the extent they are exempt under Section 10 of the Income Tax Act. These typically include:

• Death-cum-retirement gratuity
• Commuted value of pension
• Retrenchment compensation (within specified limits)
• Payments from statutory and recognised provident funds
• Payments from approved superannuation funds
• House Rent Allowance (HRA)

Q.12. Any Five items exempt u/s 10.

Section 10 of the Income Tax Act lists various incomes that are exempt from tax. Here are five notable examples:

1. Agricultural Income (Section 10(1)): Income derived from agriculture in India is entirely exempt from income tax. This includes rent or revenue derived from land used for agricultural purposes, income from agricultural operations, and income from processing or marketing agricultural produce. This exemption aims to support the agricultural sector.

2. House Rent Allowance (HRA) (Section 10(13A)): Salaried individuals receiving HRA from their employer can claim an exemption on a portion of it, subject to certain conditions. The exempt amount is the least of: actual HRA received, actual rent paid minus 10% of salary, or 50% of salary (for those living in metro cities) or 40% of salary (for those living in non-metro cities). This helps employees offset the cost of rented accommodation.

3. Leave Travel Concession (LTC) / Leave Travel Allowance (LTA) (Section 10(5)): Employees are entitled to an exemption for the amount received as LTC/LTA from their employer for travel within India by themselves and their family. The exemption is limited to the actual travel expenses incurred and is subject to specific rules regarding the number of journeys in a block of four years and the mode of travel.

4. Death-cum-Retirement Gratuity (Section 10(10)): Gratuity received by government employees is fully exempt from tax. For non-government employees, the exemption is the least ¹ of: actual gratuity received, ₹20 lakh (as per current limits), or half-month's salary for each completed year of service. Gratuity is a lump-sum payment received by an employee upon retirement or death.

5. Interest on Provident Fund (PF) (specified limits under Section 10(11) and 10(12)): Interest earned on the accumulated balance in a recognized Provident Fund (RPF) is exempt up to a certain limit. Similarly, the accumulated balance received on retirement or resignation from a recognized Provident Fund is also generally exempt, subject to certain conditions regarding continuous service. These exemptions encourage long-term savings for retirement.

Q.13. Deduction U/s 80D.

Deduction under Section 80D of the Income Tax Act allows individuals and Hindu Undivided Families (HUFs) to claim a deduction for expenses incurred on medical insurance premiums and certain preventive health check-ups. This provision aims to incentivize individuals to secure health insurance and prioritize preventive healthcare.

• Eligible Assessee: Individuals and HUFs.   
• Eligible Payments:
  • Premiums paid for medical insurance policies for self, spouse, dependent children, and parents.   
  • Contributions to Central Government Health Scheme or other notified schemes.   
  • Expenses incurred on preventive health check-ups (subject to certain limits).   
• Maximum Deduction Limits (for individuals):
  • For self, spouse, and dependent children: Up to ₹ 25,000.   
  • Additional deduction for parents (if their age is below 60 years): Up to ₹ 25,000.   
  • Additional deduction for parents (if their age is 60 years or above): Up to ₹ 50,000.   
  • For preventive health check-ups: Limited to ₹ 5,000 in total, within the overall limits mentioned above.   
• Mode of Payment: Premiums generally need to be paid through modes other than cash to be eligible for deduction. However, payment for preventive health check-ups can be made in any mode, including cash.   
• Specific Situations: There are specific rules regarding deductions for senior citizens, dependent parents, and multi-year policies.

Q.14. Income from Deemed to be Let Out Property.

In India, if an individual owns more than two residential properties, beyond the permitted two self-occupied houses, the remaining are considered "deemed to be let out" for income tax purposes, even if they are vacant. This means a notional rent, representing the property's earning potential, is calculated and taxed as "Income from House Property."   

The Gross Annual Value (GAV) is determined based on factors like municipal value, fair rent, and standard rent (if applicable). After deducting municipal taxes paid, the Net Annual Value (NAV) is arrived at. Taxpayers can then claim a standard deduction of 30% of the NAV and deduct the entire interest paid on any home loan associated with the deemed let-out property. The resulting income (or loss) is added to the individual's total taxable income. This provision ensures that individuals holding multiple properties contribute to the tax revenue based on the potential income they could have earned.

Q.15. Deduction from Income from Salary

Income from salary is a significant component of many individuals' taxable income. Fortunately, the Income Tax Act provides several avenues for deductions, allowing taxpayers to reduce their tax liability.   

A key deduction is the standard deduction, currently a fixed amount, which can be claimed by all salaried individuals. This is a flat deduction intended to cover general expenses.   

Beyond the standard deduction, employees can claim deductions for specific investments and expenditures under Chapter VIA of the Income Tax Act. Some common deductions relevant to salaried individuals include:   

• Section 80C: Investments in schemes like Public Provident Fund (PPF), Employees' Provident Fund (EPF), Life Insurance Premiums, Equity Linked Savings Schemes (ELSS), and principal repayment of home loans qualify for deduction up to a specified limit.   
• Section 80D: Premiums paid for health insurance for self, family, and parents are deductible.   
• Section 80TTA/80TTB: Interest earned on savings accounts (and in the case of senior citizens, on deposits with banks, post offices, etc.) can be claimed up to a certain limit.
• Section 80G: Donations made to specified charitable institutions and funds are eligible for deduction.   
• Section 80E: Interest paid on education loans taken for higher education of self, spouse, children, or legal guardian can be deducted.   
• House Rent Allowance (HRA) Exemption (under Section 10(13A)): Salaried individuals receiving HRA can claim exemption based on certain conditions, such as actual HRA received, actual rent paid, and a percentage of their salary.

Q.16. Gross Annual Value of House Property

The Gross Annual Value (GAV) of a house property serves as the initial benchmark for calculating income from house property under the Income Tax Act in India. It essentially reflects the potential annual earning capacity of the property.   

For properties that are let out, the GAV is typically the higher of:

1. The Expected Rent (Reasonable Rent), which is the rent the property could reasonably fetch annually. This is determined by considering the municipal value, fair rent of similar properties, and the standard rent (if applicable under rent control laws).
2. The Actual Rent Received or Receivable, excluding any unrealized rent that meets specific conditions.

Conversely, for self-occupied properties, the GAV is generally considered to be Nil, with this benefit available for a maximum of two properties. If an individual owns more than two houses for self-occupation, the excess properties are treated as deemed to be let out, and their GAV is determined based on the expected rent.   

Similarly, properties that remain vacant throughout the year are also considered deemed to be let out, and their GAV is the expected rent.

In essence, the GAV aims to establish a fair notional rent for the property, whether it's actually rented out or not. Once the GAV is determined, the municipal taxes paid by the owner are deducted to arrive at the Net Annual Value (NAV), which is then used to calculate the taxable income from house property after further deductions. Understanding the GAV is a fundamental step for property owners in accurately computing their tax obligations related to their real estate.  

Q.17. Entertainment Allowance

Entertainment Allowance is a specific allowance granted by an employer to their employees to meet expenses incurred on entertaining clients, customers, or other business associates. Unlike some other allowances, it's taxable in the hands of all employees, whether government or non-government.   

However, there's a special deduction available under Section 16(ii) of the Income Tax Act, specifically for government employees. This deduction is the least of the following three amounts:   

1. ₹ 5,000   
2. 20% of the employee's basic salary   
3. The actual amount of entertainment allowance received.   

It's crucial to understand that this deduction is exclusively for government employees. For non-government employees, the entire amount of entertainment allowance received is taxable as part of their salary income, and no deduction is allowed.   

Therefore, while Entertainment Allowance is a form of compensation, its tax treatment differs significantly between government and non-government employees due to the special deduction provision under Section 16(ii) applicable only to the former.

Q.18. Gross salary

Under the Income Tax Act, 1961, “Salary” refers to any remuneration or compensation received by an individual from an employer in return for services rendered under a contract of employment.

Salary income is taxable under the head “Income from Salary.”

2. Conditions for Income to be Taxed under ‘Salaries’

To be taxable under this head:

1. There must be a relationship of employer and employee.

2. The payment must be made by the employer to the employee.

3. The payment must be in the nature of salary, allowances, perquisites, or profits in lieu of salary.

3. Components of Gross Salary

1. Basic Salary: This is the fixed amount paid to an employee, forming the foundation of their compensation. It's usually a significant portion of the gross salary and is used as the basis for calculating other allowances and benefits.

2. Dearness Allowance (DA): DA is an allowance paid to employees to compensate for the impact of inflation. It is usually a percentage of the basic salary and is revised periodically based on the Consumer Price Index (CPI).

3. House Rent Allowance (HRA): HRA is an allowance provided to employees to cover the cost of renting accommodation. The amount of HRA can vary depending on the city of residence and the company's policy. There are specific rules for claiming exemptions on HRA, which are discussed later.

4. Conveyance Allowance: This allowance is provided to employees to cover the cost of commuting between their residence and workplace. A certain amount of conveyance allowance is exempt from tax.

5. Medical Allowance: This allowance is provided to employees to cover medical expenses. Like conveyance allowance, a certain amount of medical allowance is exempt from tax, provided the employee submits relevant medical bills.

6. Special Allowance: This is a generic term for any other allowance that doesn't fall under the above categories. It could be for specific duties, responsibilities, or other work-related expenses. Special allowances are generally fully taxable.

7. Leave Travel Allowance (LTA): LTA is an allowance provided to employees for travel expenses incurred during leave. There are specific rules for claiming exemptions on LTA, including the number of trips allowed in a block of years and the types of expenses that can be claimed.

8. Performance Bonus/Incentives: These are payments made to employees based on their performance or the company's performance. They are usually paid annually or semi-annually and are fully taxable.

9. Other Allowances: This category includes any other allowances provided by the employer, such as education allowance, telephone allowance, etc. The taxability of these allowances varies depending on the specific allowance and the relevant tax rules.

Calculating Gross Salary

Gross Salary = Basic Salary + DA + HRA + Conveyance Allowance + Medical Allowance + Special Allowance + LTA + Performance Bonus/Incentives + Other Allowances

Example Calculation

An employee has the following salary details:

• Basic Salary: INR 400,000

• DA: INR 50,000

• HRA: INR 100,000

• Conveyance Allowance: INR 20,000

• Medical Allowance: INR 15,000

• LTA: INR 30,000

• Rent Paid: INR 120,000 (residing in a city other than Delhi, Mumbai, Kolkata, or Chennai)

• Investments under Section 80C: INR 150,000

• Medical Insurance Premium under Section 80D: INR 25,000

Calculation:

1. Gross Salary: 400,000 + 50,000 + 100,000 + 20,000 + 15,000 + 30,000 = INR 615,000

2. HRA Exemption:

   • Actual HRA received: INR 100,000

   • Rent paid minus 10% of basic salary: 120,000 - (0.10 * 400,000) = INR 80,000

   • 40% of basic salary: 0.40 * 400,000 = INR 160,000

   • Least of the above: INR 80,000

   • HRA Exemption = INR 80,000

3. LTA Exemption: Assume actual travel expenses were INR 25,000. LTA Exemption = INR 25,000

4. Gross Total Income: 615,000 - 80,000 - 25,000 = INR 510,000

5. Deductions:

• Section 80C: INR 150,000

• Section 80D: INR 25,000

• Total Deductions: INR 175,000

Q.19. Commutable Pension

1. Meaning of Pension

Pension is a payment made by an employer to an employee after retirement, in recognition of past services.
It’s generally paid periodically (every month), but sometimes a part of it can be taken as a lump sum at the time of retirement.

So, there are two types:

Uncommuted Pension

Periodic pension received monthly.

Commuted Pension

Lump-sum amount received in exchange for giving up part or full of future pension.

2. Meaning of Commuted Pension

Commuted Pension means when an employee chooses to receive a portion or full of his pension in advance as a lump sum, instead of receiving it in monthly instalments.

Example:
If a person is entitled to ₹40,000 per month as pension but decides to take 50% of it as a lump sum (say ₹10 lakh), that ₹10 lakh is the commuted pension, and the balance ₹20,000 per month continues as uncommuted pension.

Tax Treatment of Commuted Pension under the Income Tax Act, 1961

The taxability of commuted pension depends on whether the recipient is a government employee or a non-government employee. The Income Tax Act, 1961, provides specific rules for each category.

1. Government Employees

For government employees (including central government, state government, and local authority employees), any commuted pension received is fully exempt from income tax under Section 10(10A)(i) of the Income Tax Act. This is a significant benefit for government retirees.

Example:

Mr. Sharma, a retired central government employee, receives a commuted pension of ₹10,00,000. This entire amount is exempt from tax.

2. Non-Government Employees

The tax treatment for non-government employees is more complex and depends on whether they also receive gratuity.

(a) Receiving Gratuity:

If the non-government employee receives gratuity along with the pension, then one-third (1/3rd) of the commuted value of the pension which he would have received if he had commuted the whole of the pension is exempt under Section 10(10A)(ii). The remaining amount is taxable under the head "Salaries."

Example:

Ms. Verma, a retired employee of a private company, receives a gratuity of ₹5,00,000 along with a commuted pension of ₹6,00,000. If she had commuted the entire pension, the commuted value would have been ₹18,00,000.

Exempt amount = 1/3 * ₹18,00,000 = ₹6,00,000

Taxable amount = ₹6,00,000 (actual commuted pension received) - ₹6,00,000 (exempt amount) = ₹0

(b) Not Receiving Gratuity:

If the non-government employee does not receive gratuity, then one-half (1/2) of the commuted value of the pension which he would have received if he had commuted the whole of the pension is exempt under Section 10(10A)(ii). The remaining amount is taxable under the head "Salaries."

Example:

Mr. Patel, a retired employee of a private company, receives a commuted pension of ₹4,00,000 but does not receive any gratuity. If he had commuted the entire pension, the commuted value would have been ₹10,00,000.

Exempt amount = 1/2 * ₹10,00,000 = ₹5,00,000

Since the actual commuted pension received (₹4,00,000) is less than the exempt amount (₹5,00,000), the entire ₹4,00,000 is exempt.

Important Note: If the actual commuted pension received is more than the calculated exempt amount, the difference will be taxable.

Example:

Let's modify the previous example. Assume Mr. Patel received a commuted pension of ₹6,00,000, and the commuted value of the entire pension would still be ₹10,00,000.

Exempt amount = 1/2 * ₹10,00,000 = ₹5,00,000

Taxable amount = ₹6,00,000 (actual commuted pension received) - ₹5,00,000 (exempt amount) = ₹1,00,000

In this case, ₹1,00,000 would be taxable under the head "Salaries."

Q.20. Family Pension

Family Pension is a regular payment made by an employer to the family members of a deceased employee (usually the spouse or dependent children), after the employee’s death, in recognition of the employee’s past services.

It is different from the pension received by the employee himself.

Family pension is a financial benefit provided to the eligible family members of a deceased employee who was either in government service or retired and was receiving a pension at the time of their death. It is designed to provide financial security and support to the family in the absence of the employee.

Eligibility for Family Pension

The eligibility criteria for family pension vary depending on the specific rules and regulations governing the pension scheme. However, some general guidelines are as follows:

• Relationship: The primary eligible family members typically include the spouse, children, and dependent parents of the deceased employee.

• Marital Status: Generally, the spouse is the first eligible recipient of the family pension. If the spouse is deceased or ineligible, the pension may be granted to the children.

• Age: There may be age restrictions for children to be eligible for family pension. For example, unmarried daughters may be eligible until they get married, and sons may be eligible until they reach a certain age (e.g., 25 years).

• Dependency: Dependent parents may also be eligible for family pension if they were wholly dependent on the deceased employee.

• Disability: Children with disabilities may be eligible for family pension for life, subject to certain conditions.

• Ineligibility: Remarriage of the spouse may render them ineligible for family pension, depending on the specific rules.

Calculation of Family Pension

The calculation of family pension also varies depending on the applicable rules and regulations. However, some common methods are:

• Fixed Percentage: In some cases, the family pension is calculated as a fixed percentage of the deceased employee's last drawn salary or pension. This percentage may vary depending on the specific scheme.

• Enhanced Rate: An enhanced rate of family pension may be payable for a certain period, typically after the death of the employee. This enhanced rate is usually higher than the normal rate of family pension.

• Normal Rate: After the period of enhanced rate, the family pension is payable at the normal rate.

• Minimum and Maximum Limits: There may be minimum and maximum limits prescribed for family pension amounts.

Example:

Let's assume an employee's last drawn salary was Rs.10000. The family pension rules state that the enhanced rate is 50% of the last drawn salary, and the normal rate is 30%.

• Enhanced Rate Family Pension: Rs.10000 * 50% = Rs.5000 per month (for a specified period)

• Normal Rate Family Pension: Rs.10000 * 30% = Rs.3000 per month (after the enhanced rate period)

Q.21. Deduction u/s 80 E

1. Meaning of Section 80E

Section 80E of the Income Tax Act, 1961 provides a deduction for interest paid on an education loan.
This deduction encourages higher education by reducing the tax burden on those who borrow to study.

2. Who Can Claim the Deduction

The deduction can be claimed by an individual (not HUF, company, or firm) who has taken an education loan for higher studies.

It doesn’t matter whether the individual is a student or a parent — whoever repays the loan can claim the deduction.

3. Eligible Persons for Whom Loan Can Be Taken

The loan must be taken for:

• Self,

• Spouse,

• Children, or

• A student for whom the individual is a legal guardian.

You cannot claim this deduction if the loan is taken for siblings or other relatives.

4. Purpose of Loan

The loan must be taken for higher education, which means:

• Education after passing Senior Secondary (Class 12) or equivalent,

• In India or abroad,

• In any field — professional course, engineering, medical, management, science, arts, etc.

5. Source of Loan

The education loan should be taken from:

• A financial institution (like a bank), or

• An approved charitable institution.

Loans from friends, relatives, or employers do not qualify.

6. Amount of Deduction

• The entire amount of interest paid during the year is allowed as deduction.

• There is no upper limit on the amount of interest.

• However, principal repayment is not deductible under this section (only interest is).

7. Period of Deduction

• Deduction is available for a maximum of 8 years, starting from the year in which the repayment begins, or until the interest is fully repaid — whichever is earlier.

So even if your loan tenure is more than 8 years, you can claim the benefit for only the first 8 years of repayment.

8. Important Points

• Deduction is available only for interest actually paid, not for interest accrued but not paid.

• You must have a certificate from the bank/institution showing the interest portion of the loan repaid during the year.

• The deduction is available under Chapter VI-A of the Income Tax Act.

9. Example

Mr. Raj took an education loan for his daughter’s MBA.
During the financial year 2024–25, he paid ₹85,000 as interest.

Deduction u/s 80E = ₹85,000

If he continues to pay interest for the next 7 years, he can claim it each year until the 8-year limit is over.