Taxation framework for Income from House Property

The document explains the taxation framework for income from house property under the Income-tax provisions. Income arising from buildings or land appurtenant thereto is taxable under this head, provided the taxpayer is the owner or deemed owner. Properties are categorized as let-out, self-occupied, or deemed let-out, and income is computed based on annual value determined using municipal value, fair rent, standard rent, and actual rent. Rental income is taxable irrespective of whether the property is residential or commercial, subject to exceptions such as use for own business or inseparable letting with assets, which may be taxed under other heads.

Annual value forms the basis of computation, with deductions allowed for municipal taxes, a standard deduction of 30%, and interest on borrowed capital. Self-occupied properties have nil annual value, with interest deduction subject to limits. Let-out properties allow full interest deduction, while deemed let-out properties are taxed on expected rent. Provisions also address vacancy, unrealised rent, and arrears, with specific rules for their treatment.

The law defines deemed ownership in cases such as transfer to spouse or minor child without consideration, possession under contract, long-term lease, or allotment by cooperative societies. Composite rent is split based on whether letting of assets and building is separable or inseparable, determining the applicable head of income.

Losses under this head can be set off against other income up to ₹2,00,000 and carried forward for eight years, subject to conditions. Interest deductions depend on the purpose and timing of loans, with pre-construction interest allowed in instalments. Additional deductions are available under specific provisions like Sections 80EE and 80EEA, subject to conditions.

Special provisions govern co-ownership, stock-in-trade properties, and recovery of unrealised rent. The framework also includes detailed rules for computation, treatment of composite rent, and eligibility for exemptions. Overall, the document outlines a structured approach to determining taxable income from house property, emphasizing ownership, classification, and statutory deductions.

Income Tax Department
Ministry of Finance, Government of India

Income from House Property

Introduction

Income arising from any property, being building or land appurtenant thereto, is taxable under the head “Income from House Property.” Properties are categorised as let-out, self-occupied, or deemed let-out, and their income is computed based on annual value, considering factors such as municipal valuation, fair rent, and actual rent. The annual value of up to two self-occupied properties can be considered nil under specific conditions.

Chargeability of Income

Property Characteristics: Only buildings or appurtenant land qualify; income from vacant land is excluded.

Ownership: Income is taxable only in the hands of the owner or deemed owner.

Usage Exceptions: Properties used for the owner’s business/profession or let inseparably with plant/machinery are taxed under other heads.

Taxable Heads for Exceptions

The income from a house property is taxable under the head ‘Income from House Property’, regardless of whether the property is residential or commercial or the purpose for which it is used. However, there are certain exceptions:

Own Business/Profession: If used directly, income is not taxed under this head.

Composite Letting: Inseparable letting with assets is taxed as “Other Sources” or “Business Income.”

Organized Letting: Residential letting is taxed under “House Property,” while commercial letting depends on specifics.

Computation of Income

a. Annual Value: Calculated based on municipal valuation, fair rent, standard rent or actual rent.

b. Deductions:

• • • Municipal taxes paid.
    • Standard deduction at 30% of net annual value.
    • Interest on borrowed capital for property acquisition or improvement.

c. Additions:

• • Arrears of rent or unrealised rent

Exemptions and Reliefs

Income from farm building ( Section 2(1A)(c) ) : Any income derived from farm building shall be considered as agriculture income, and consequently exempt from tax.

Agricultural Income ( Section 2(1A) ) : Income from farm buildings near agricultural land is exempt.

Trust Property ( Section 11 ) : Income applied for charitable or religious purposes is exempt.

Ex-Ruler’s Palace ( Section 10(19A) ) : Exemption for one palace of a former ruler.

Local Authorities ( Section 10(20) ) : Exemption for income chargeable under this head.

Educational/Medical Institutions ( Section 10(23C) ) : Qualifying institutions are exempt.

Registered Trade Union ( Section 10(24) ) : Any income chargeable under the head ‘house property’ of a registered trade union is exempt from tax.

Self-Occupied Properties ( Section 23(2) ) : Annual value of up to two properties is nil.

Co-operative Societies ( Section 80P ) : Eligible deductions for income from specific operations.

Deemed Owner of House Property

Deemed owner of House Property

Circumstances of Deemed Ownership

Transfer to Spouse/Minor Child Without Adequate Consideration: If a person transfers house property to his spouse or minor child (excluding a married minor

daughter) without adequate consideration, he is deemed the owner. However, if transferred to a spouse under a separation agreement, the recipient is considered the owner.

Holder of Impartible Estate: The holder of an indivisible property, such as terrace rights, is deemed the owner.

Co-operative Society Members: Members allotted a building or portion under a housing scheme are deemed the owners.

Property under possession in part performance of a contract: A person in possession of a property under a written agreement, having paid or ready to pay consideration

in part performance of a contract, is deemed the owner even without registration.

Acquired Rights in Property: Any person with rights (through sale, exchange, or lease of 12+ years) is deemed the owner, excluding monthly or yearly leases.

Computation of Income from House Property

Computation of Income from House Property

Income from house property is computed by determining the annual value of the property and allowing deductions such as municipal taxes, standard deduction, and housing loan interest. Properties are categorized as let-out, self-occupied, or deemed let-out.

Computation Process

a. Categories:

• • Let-Out Property: Annual value is based on the higher of expected rent or actual rent received.
  • Self-Occupied Property: Annual value is nil; deductions allowed only for housing loan interest (up to Rs. 2,00,000).
  • Deemed Let-Out Property: Annual value is computed based on expected rent.

b. Annual Value Determination:

• • Factors include municipal value, fair rent, standard rent (if Rent Control Act applies), and actual rent received or receivable.
  • For vacant properties, actual rent may be deemed as annual value if it is lower than the expected rent due to vacancy.
  • Rent which an owner cannot realise from his tenant (i.e., unrealised rent) is allowed to be deducted from actual rent.

c. Deductions:

• • Municipal Taxes: Deducted if the owner pays during the relevant year.
  • Standard Deduction: 30% of net annual value (i.e., Annual value minus Municipal Tax).
  • Interest on Home Loan: Full interest for let-out properties; limited to Rs. 30000 or Rs. 2,00,000, as the case may be, for self-occupied properties.

Special Scenarios

• Self-occupied house property: If the property is self-occupied by the owner or cannot be occupied by him for any reason, it is treated as self-occupied property. The
• annual value of any two of such properties can be considered nil.
• Co-ownership: Income is apportioned based on definite shares, with each co-owner entitled to deductions.
• Stock-in-Trade: Annual value is considered ‘nil’ for up to two years post-construction.

Tax Treatment of Losses

• Loss under this head (up to Rs. 2,00,000) can be set off against other heads of income. Unabsorbed losses are carried forward for 8 years. The loss under the head house property can be carried forward even if the Income-tax return is filed after the due date.
• If the assessee opted for the default tax regime under section 115BAC. In that case, his total income shall be computed without allowing any loss under the head “Income from house property” to be set off against income from other heads.

Recovery of Unrealized Rent

Arrears or unrealized rent recovered later is taxable in the year of receipt, with a 30% deduction allowed.

Interest on Housing Loan

Interest paid or payable on borrowed capital for the purchase, construction, repair, or renovation of a house property is deductible under section 24(b) from the income taxable under the head “Income from House Property.” The quantum of deduction depends on the use of the property (let-out, self-occupied, or deemed let-out).

Quantum of Deduction

a. Let-Out or Deemed Let-Out Properties: Full deduction for interest paid or payable, even if it exceeds the property’s annual value.

b. Self-Occupied Properties: Deduction is limited to:

• • Rs. 30,000: For loans taken for repair, renovation, or if conditions for a higher limit are not met.
  • Rs. 2,00,000: For loans taken on or after April 1, 1999, for purchase or construction, if the property is completed within 5 years of borrowing.

Pre-Construction Period Interest

Interest for the period before acquisition or construction completion is deductible in 5 annual instalments starting from the year of completion.

The pre-construction period ends on March 31 preceding the year of property acquisition/construction completion or the repayment of loan whichever is earlier.

Other Provisions

No interest deduction under the default tax regime: Under the default tax regime of section 115BAC , the interest deduction under section 24(b) for a self-occupied house property is not allowed.

Deduction on Accrual Basis: Interest is deductible on an accrual basis. Thus, deduction can be claimed even if it is unpaid during the year.

Interest on Re-Finance: Deduction applies to interest on loans taken to repay original housing loans. [Circular No. 28, Dated 20-08-1969]

Interest Payable Abroad: Deduction is allowed only if the tax on such interest is deducted at source and paid to the Indian Government.

Interest on House Building Advance: Interest on house building advance taken by Government employees under House Building Advance Rules, is allowed to be deducted on accrual basis. [Circular No. 363, Dated 24-06-1983]

No deduction for ancillary expenses: Deduction is not allowed for penal interest, ancillary expenses like processing fees, brokerage, or commission.

Income Tax Department
Ministry of Finance, Government of India

Annual value how determined.

Section – 23

23. (1) For the purposes of section 22, the annual value of any property shall be deemed to be—

a. the sum for which the property might reasonably be expected to let from year to year; or

b. where the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable; or

c. where the property or any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy the actual rent received or receivable by the owner in respect thereof is less than the sum referred to in clause (a), the amount so received or receivable :

Provided that the taxes levied by any local authority in respect of the property shall be deducted (irrespective of the previous year in which the liability to pay such taxes was incurred by the owner according to the method of accounting regularly employed by him) in determining the annual value of the property of that previous year in which such taxes are actually paid by him.

Explanation.—For the purposes of clause (b) or clause (c) of this sub-section, the amount of actual rent received or receivable by the owner shall not include, subject to such rules as may be made in this behalf, the amount of rent which the owner cannot realise.

[(2) The annual value of the property consisting of a house or any part thereof shall be taken as nil, if the owner occupies it for his own residence or cannot actually occupy it due to any reason.]

(3) The provisions of sub-section (2) shall not apply if—

a. the house or part of the house is actually let during the whole or any part of the previous year; or

b. any other benefit therefrom is derived by the owner.

(4) Where the property referred to in sub-section (2) consists of more than two houses—

a. the provisions of that sub-section shall apply only in respect of two of such houses, which the assessee may, at his option, specify in this behalf;

b. the annual value of the house or houses, other than the house or houses in respect of which the assessee has exercised an option under clause (a), shall be determined under sub-section (1) as if such house or houses had been let.

(5) Where the property consisting of any building or land appurtenant thereto is held as stock-in-trade and the property or any part of the property is not let during the whole or any part of the previous year, the annual value of such property or part of the property, for the period up to two years from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority, shall be taken to be nil.

Income Tax Department
Ministry of Finance, Government of India

Deductions from income from house property.

Section – 24

24. Income chargeable under the head “Income from house property” shall be computed after making the following deductions, namely:—

a. a sum equal to thirty per cent of the annual value;

b. where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital:

Provided that in respect of property referred to in sub-section (2) of section 23, the amount of deduction or, as the case may be, the aggregate of the amount of deduction shall not exceed thirty thousand rupees :

Provided further that where the property referred to in the first proviso is acquired or constructed with capital borrowed on or after the 1st day of April, 1999 and such acquisition or construction is completed within five years from the end of the financial year in which capital was borrowed, the amount of deduction or, as the case may be, the aggregate of the amounts of deduction under this clause shall not exceed two lakh rupees. Explanation.—Where the property has been acquired or constructed with borrowed capital, the interest, if any, payable on such capital borrowed for the period prior to the previous year in which the property has been acquired or constructed, as reduced by any part thereof allowed as deduction under any other provision of this Act, shall be deducted under this clause in equal instalments for the said previous year and for each of the four immediately succeeding previous years:

Provided also that no deduction shall be made under the second proviso unless the assessee furnishes a certificate, from the person to whom any interest is payable on the capital borrowed, specifying the amount of interest payable by the assessee for the purpose of such acquisition or construction of the property, or, conversion of the whole or any part of the capital borrowed which remains to be repaid as a new loan. Explanation.—For the purposes of this proviso, the expression “new loan” means the whole or any part of a loan taken by the assessee subsequent to the capital borrowed, for the purpose of repayment of such capital:

Provided also that the aggregate of the amounts of deduction under the first and second provisos shall not exceed two lakh rupees.

Income Tax Department
Ministry of Finance, Government of India

Amounts not deductible from income from house property.

Section – 25

25. Notwithstanding anything contained in section 24, any interest chargeable under this Act which is payable outside India (not being interest on a loan issued for public subscription before the 1st day of April, 1938), on which tax has not been paid or deducted under Chapter XVII-B and in respect of which there is no person in India who may be treated as an agent under section 163 shall not be deducted in computing the income chargeable under the head “Income from house property”.

Income Tax Department
Ministry of Finance, Government of India

Special provision for arrears of rent and unrealised rent received subsequently

Section – 25A

25A. (1) The amount of arrears of rent received from a tenant or the unrealised rent realised subsequently from a tenant, as the case may be, by an assessee shall be deemed to be the income from house property in respect of the financial year in which such rent is received or realised, and shall be included in the total income of the assessee under the head “Income from house property”, whether the assessee is the owner of the property or not in that financial year.

(2) A sum equal to thirty per cent of the arrears of rent or the unrealised rent referred to in sub-section (1) shall be allowed as deduction.

Income Tax Department
Ministry of Finance, Government of India

Property owned by co-owners.

Section – 26

26. Where property consisting of buildings or buildings and lands appurtenant thereto is owned by two or more persons and their respective shares are definite and ascertainable, such persons shall not in respect of such property be assessed as an association of persons, but the share of each such person in the income from the property as computed in accordance with sections 22 to 25 shall be included in his total income.

Explanation.—For the purposes of this section, in applying the provisions of sub-section (2) of section 23 for computing the share of each such person as is referred to in this section, such share shall be computed, as if each such person is individually entitled to the relief provided in that sub-section.

Income Tax Department
Ministry of Finance, Government of India

“Owner of house property”, “annual charge”, etc., defined.

Section – 27

27.  For the purposes of sections 22 to 26—

i. an individual who transfers otherwise than for adequate consideration any house property to his or her spouse, not being a transfer in connection with an agreement to live apart, or to a minor child not being a married daughter, shall be deemed to be the owner of the house property so transferred;

ii. the holder of an impartible estate shall be deemed to be the individual owner of all the properties comprised in the estate;

iii. a member of a co-operative society, company or other association of persons to whom a building or part thereof is allotted or leased under a house building scheme of the society, company or association, as the case may be, shall be deemed to be the owner of that building or part thereof;

(iiia) a person who is allowed to take or retain possession of any building or part thereof in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882), shall be deemed to be the owner of that building or part thereof;

(iiib) a person who acquires any rights (excluding any rights by way of a lease from month to month or for a period not exceeding one year) in or with respect to any building or part thereof, by virtue of any such transaction as is referred to in clause (f) of section 269UA, shall be deemed to be the owner of that building or part thereof;

iv. [***]

v. [***]

vi. taxes levied by a local authority in respect of any property shall be deemed to include service taxes levied by the local authority in respect of the property.

Income Tax Department
Ministry of Finance, Government of India

B.—Income from house property

Unrealised rent.

Rule – 4

4. For the purposes of the Explanation below sub-section (1) of section 23, the amount of rent which the owner cannot realise shall be equal to the amount of rent payable but not paid by a tenant of the assessee and so proved to be lost and irrecoverable where,—

a. the tenancy is bona fide;

b. the defaulting tenant has vacated, or steps have been taken to compel him to vacate the property;

c. the defaulting tenant is not in occupation of any other property of the assessee;

d. the assessee has taken all reasonable steps to institute legal proceedings for the recovery of the unpaid rent or satisfies the Assessing Officer that legal proceedings would be useless.

Form No. : 1

¹[Appendix IV

FORM NO. 1

[See rule 11UE (1)]

Undertaking under sub-rule (1) of rule 11UE of the Income-tax Rules, 1962

To,
Principal Commissioner/Commissione
………………….. ………………………. ……………………

Sir/Madam,

I ……………………………………..  (name in block letters) son/daughter of …………………………………………. designation …………………………………..  and nationality ………………………………….  and related passport number………………………………….. (hereinafter referred to as “signatory”) having Permanent Account Number/Aadhaar Number (see Note 1) ………………………………………………………………….  on behalf of …………………………………………  (name of the declarant) having Permanent Account Number/Aadhaar number/Tax Deduction Account Number (see Note 2) ………………………………………..  and being duly authorised and competent to represent the declarant in this regard pursuant to Board Resolution and legal authorisation (see Note 3), as the case may be ,hereby declare as follows:

a. That specified orders have been passed or made in respect of income accruing or arising through or from the transfer of an asset or a capital asset situate in India in consequence of the transfer of a share or interest in a company or entity registered or incorporated outside India made before the 28th day of May, 2012 and particulars of such specified orders are provided in Part A of the Annexure.

b. The declarant has (strike off the options that are not applicable),

i. not filed any appeal or application or petition or proceeding before any Income-tax authority or Authority for Advance Rulings constituted under section 245-O of the Act or the Board for Advance Rulings constituted under section 245-OB or Income-tax Settlement Commission constituted under section 245B or the Interim Board for Settlement constituted under section 245AA or any tribunal or court against the relevant orders, and hereby undertakes that it shall not file any appeal, application, petition or proceeding in future against the relevant order or orders. Particulars of such relevant order or orders are provided in Part B of the Annexure;

ii. filed one or more appeals or applications or petitions or proceeding before any Income-tax authority or Authority for Advance Rulings constituted under section 245-O of the Act or the Board for Advance Rulings under section 245-OB or Income-tax Settlement Commission constituted under section 245B or the Interim Board for Settlement constituted under section 245AA or any tribunal or court against the relevant orders and has irrevocably withdrawn, on a with prejudice basis, all such appeals or applications or petitions or proceeding and evidence thereof is furnished herewith and hereby undertakes that it shall not file any appeal, application, petition or proceeding in future against the relevant order or orders. Particulars of such appeals or applications or petitions or proceeding filed and irrevocably withdrawn with prejudice by the declarant, are provided in Part C of the Annexure;

iii. filed one or more appeals or applications or petitions or proceeding before any Income-tax authority or Authority for Advance Rulings constituted under section 245-O of the Act or the Board for Advance Rulings under section 245-OB or Income-tax Settlement Commission constituted under section 245B or the Interim Board for Settlement constituted under section 245AA or any tribunal or court against the relevant order or orders and all the appeals or applications or petitions or proceeding filed by the declarant have been disposed of and no further appeal or application or petition or proceeding has been filed by the declarant and evidence thereof is furnished herewith and hereby undertake that it shall not file any appeal, application, petition or proceeding in future against the relevant order or orders. Particulars of such appeals or applications or petitions or proceeding filed and disposed of, are provided in Part C of the Annexure;

iv. filed appeals or applications or petitions or proceeding before any Income-tax authority or Authority for Advance Rulings constituted under section 245-O of the Act or the Board for Advance Rulings under section 245-OB or Income-tax Settlement Commission constituted under section 245B or the Interim Board for Settlement constituted under section 245AA or any tribunal or court against the relevant orders and one or more of such appeals or applications or petitions or proceeding are pending as on the date of this undertaking and hereby undertakes to irrevocably withdraw, terminate and discontinue any and all such appeals or applications or petitions or proceeding that are pending as on the date of signing this undertaking, on a with prejudice basis, in accordance with clause (e) below. The declarant further undertakes that it shall not file any such appeal, application, petition or proceeding in future against the relevant order or orders. Particulars of such pending appeals or applications or petitions or proceeding filed by the declarant and their status as on the date of this undertaking, are provided in Part D of the Annexure;

c. The declarant has (strike off the options that are not applicable),

i. not initiated any proceeding for arbitration, conciliation or mediation, and no notice has been given thereof under any law for the time being in force or under any agreement entered into by India with any other country or territory outside India, whether for protection of investment or otherwise against the relevant orders, and hereby undertakes that it shall not initiate any such arbitration, conciliation or mediation in future. Particulars of such relevant order or orders are provided in Part B of the Annexure;

ii. initiated proceeding for arbitration, conciliation or mediation, or notices thereof has been given, under any law for the time being in force or under any agreement entered into by India with any other country or territory outside India, whether for protection of investment or otherwise against the relevant order or orders and has irrevocably, on a with prejudice basis, withdrawn any such proceeding for arbitration, conciliation or mediation, and notices given thereof and evidence thereof is furnished herewith. The declarant hereby undertakes that it shall not reopen in future any such proceeding or initiate or file any such arbitration, conciliation or mediation in future arising out of or in connection with the relevant order or orders. Particulars of such proceeding for arbitration, conciliation or mediation and notices given thereof, initiated and irrevocably withdrawn with prejudice by the declarant, are provided in Part E of the Annexure;

iii. initiated proceeding for arbitration, conciliation or mediation, or notices thereof has been given, under any law for the time being in force or under any agreement entered into by India with any other country or territory outside India, whether for protection of investment or otherwise against the relevant order or orders and all the arbitration, conciliation or mediation filed by the declarant have been disposed of and no further proceeding has been initiated by the declarant and evidence thereof is furnished herewith. The declarant hereby undertakes that it shall not reopen in future any such proceeding or initiate or file any such arbitration, conciliation or mediation in future arising out of or in connection with the relevant order or orders. Particulars of such proceeding for arbitration, conciliation or mediation and notices given thereof, initiated and disposed of, are provided in Part E of the Annexure;

iv. initiated proceeding for arbitration, conciliation or mediation, or notices thereof has been given, under any law for the time being in force or under any agreement entered into by India with any other country or territory outside India, whether for protection of investment or otherwise against the relevant order or orders and one or more of such proceeding or notices are pending on the date of undertaking and hereby undertakes to irrevocably withdraw, terminate and discontinue any and all such proceeding or notices for arbitration, conciliation or mediation that are pending as on the date of signing this undertaking, on a with prejudice basis, in accordance with clause (e) below. Particulars of such pending proceeding and notices filed by the declarant are provided in Part F of the Annexure. The declarant hereby further undertakes that it shall not initiate any such arbitration, conciliation or mediation in future arising out of or in connection with the relevant order or orders;

v. received or got any awards, orders, judgments or any other reliefs issued in favour of the declarant, arising out of or in any way relating to the imposition of tax, interest and penalty based on the relevant order or orders, under any agreement entered into by India with any other country or territory outside India, whether for protection of investment or otherwise and hereby undertakes to irrevocably waive any right to seek or pursue any claim or costs or declaratory relief in relation to or arising out of such awards, orders or judgments or any other relief that may have been ordered, issued or passed against India and any Indian affiliate, whether it is in proceeding initiated by the declarant or by India and any Indian affiliate. The declarant also undertakes to irrevocably waive any right to seek or pursue any claim for costs or relief in respect of any proceeding initiated by the Republic of India to set aside such award, order or judgment or any other relief issued in favour of the declarant. The declarant hereby undertakes that it shall not initiate or file any such arbitration, conciliation or mediation in future. Particulars of such awards, orders, judgment or any other relief are provided in Part G of the Annexure;

.d. The declarant has (strike off the options that are not applicable),

i. not initiated any proceeding to enforce or pursue attachments in connection with any awards, orders, judgments, any other relief that may have been ordered, issued or passed by any tribunal or court or other judicial, quasi-judicial or administrative authority in relation to the said arbitration, conciliation or mediation proceeding in favour of the declarant as referred in clause (c) of this undertaking either against the Republic of India and any Indian affiliate, and hereby undertakes that it shall not initiate any such proceeding in future. Particulars of such award, order or judgment are provided in Part B of the Annexure;

ii. initiated proceeding to enforce or pursue attachments in connection with any awards, orders, judgments or any other relief that may have been ordered, issued or passed by any tribunal or court or other judicial, quasi-judicial or administrative authority in relation to the said arbitration, conciliation or mediation proceeding in favour of the declarant, as referred to in clause (c) of this undertaking against the Republic of India and any Indian affiliate. The declarant has irrevocably and with prejudice withdrawn or discontinued any such proceeding and hereby undertakes that it shall not reopen any such proceeding in future or file or initiate fresh proceeding to enforce or pursue attachments and evidence thereof is furnished herewith. Particulars of such proceeding, initiated and withdrawn or discontinued by the declarant, are provided in Part H of the Annexure;

iii. initiated proceeding to enforce or pursue attachments in connection with any awards, orders, judgments or any other relief that may have been ordered, issued or passed by any tribunal or court or other judicial, quasi-judicial or administrative authority in relation to the said arbitration, conciliation or mediation proceeding in favour of the declarant, as referred to in clause (c) of this undertaking against the Republic of India and any Indian affiliate. All such proceeding filed by the declarant have been disposed of and no further proceeding has been filed by the declarant and evidence is herewith furnished and hereby undertakes that it shall not reopen any such proceeding in future or file or initiate fresh proceeding to enforce or pursue attachments. Particulars of such proceeding, initiated and disposed of, are provided in Part H of the Annexure;

iv. initiated proceeding to enforce or pursue attachments in connection with any awards, orders, judgments, or any other relief that may have been ordered, issued or passed by any tribunal or court or other judicial, quasi-judicial or administrative authority in relation to the said arbitration, conciliation or mediation proceeding in favour of the declarant as referred to in clause (c) of this undertaking, either against the Republic of India and any Indian affiliate and one or more of such proceeding are pending on the date of undertaking and, the declarant has obtained one or more orders from any court or other authority which remain outstanding against India and any Indian Affiliate. The declarant hereby undertakes that it shall not file in future any such proceeding to enforce or pursue attachments regarding any awards, orders, judgments, or any other relief that may have been ordered , issued or passed by any tribunal or court or other judicial, quasi-judicial or administrative authority in relation to the said arbitration, conciliation or mediation proceeding in favour of the declarant as referenced in clause (c) of this undertaking or to enforce the orders from any court or other authority which remain outstanding against Republic of India and any Indian Affiliate. The declarant further undertakes to fully cooperate with the Republic of India or any Indian affiliate which is subject to such outstanding order, in order to set-aside or otherwise nullify any such outstanding order, and irrevocably and with prejudice waives any rights or remedies arising from such outstanding order. Particulars of such proceeding are provided in Part I of the Annexure. The declarant also undertakes to irrevocably withdraw, terminate and discontinue with prejudice any and all such proceeding to enforce or pursue attachments in accordance with clause (e).

e. The declarant hereby undertakes as follows:

i. to irrevocably and with prejudice withdraw, discontinue, terminate and take all necessary steps to irrevocably and with prejudice close the pending proceeding referred in sub-clause (iv) of clause (b), sub-clause (iv) of clause (c), sub-clause (v) of clause (c) and sub-clause (iv) of clause (d) of this undertaking, as well as any other pending proceeding against India or Indian affiliates relating to the relevant order or orders and not referenced in clauses (b), (c) and (d) above, and not to pursue in any way and by any means in future the pending proceeding as referenced in clauses (b), (c), and (d) above, and any other pending proceeding relating to the relevant order or orders not referred in the above clauses and any other fresh proceeding relating to the relevant order or orders. In so acting, declarant shall act in accordance with this undertaking and in full cooperation with the Republic of India;

ii. to irrevocably terminate, release, discharge, and forever irrevocably waive any right, whether direct or indirect, and any claims, demands, liens, actions, suits, causes of action, obligations, controversies, debts, costs, attorneys’ fees, court’s fees, expenses, damages, judgments, orders, declaratory reliefs and liabilities of whatever kind or nature at law, in equity, or otherwise, whether now known or unknown previously (or in future discovered), suspected or unsuspected, and whether or not concealed or hidden, which have existed or may have existed, or do exist or which hereafter can, shall or may exist , in relation to any award, order, judgment, or any other relief as referred in clauses (b), (c) and (d) of this undertaking, against the Republic of India and all Indian affiliates, ordered, issued or passed in connection with the relevant order or orders, whether it is in proceeding initiated by the declarant or by Republic of India and any Indian Affiliate. The declarant further undertakes to fully cooperate with the Republic of India or any Indian affiliate which is subject to any outstanding order referenced in clause (d), in order to set-aside or otherwise nullify any such outstanding order, and irrevocably and with prejudice waives any rights or remedies arising from such outstanding order. For the avoidance of doubt, the declarant’s irrevocable waiver includes irrevocable waiver of any right provided by any existing ex parte, provisional, or other kind of court order permitting enforcement or attachment against the Republic of India and any Indian affiliate, in furtherance of any award, order judgment, or any other relief that may have been ordered or issued or passed by any arbitral tribunal as referred in clauses (b), (c) and (d) above. For further avoidance of doubt, the declarant also undertakes to irrevocably waive any right to seek or pursue any claim for costs in respect of any proceeding initiated by Republic of India and any Indian affiliate to set aside such award, order or judgement ordered, issued or passed in favour of the declarant. Such irrevocable waiver includes, but is not limited to, any right under any relevant ex parte order;

iii. to irrevocably waive any right to seek or pursue any claim for costs in respect of any proceeding initiated by the Republic of India to set aside such award, order or judgment, or any other relief issued in favour of the declarant.

f. The declarant specifically represents that all Parts of the Annexure as described in this undertaking are full and complete to the best of its knowledge.

g. The declarant hereby undertakes to irrevocably terminate, release, discharge and forever irrevocably waive any right, whether direct or indirect, and any remedies, claims, demands, liens, actions, suits, causes of action, obligations, controversies, debts, costs, attorneys’ fees, court’s fees, expenses, damages, judgments, orders, compensation, and liabilities of whatever kind or nature at law, in equity, or otherwise, whether now known or unknown, suspected or unsuspected, and whether or not concealed or hidden, which have existed or may have existed, or do exist or which hereafter can, shall or may exist, based on pursuit of any remedy or any and all claims, demands, damages, judgments, awards, costs, expenses, compensation or liabilities of any kind (whether asserted or unasserted) in relation to any facts, events, or omissions occurring from the beginning of time to the date of this undertaking and thereafter in future in relation to taxation of said income or relevant order or orders, or any related award, judgment or court order, which may otherwise be available to the declarant under any law for the time being in force, in equity, under any statute or under any agreement entered into by Republic of India with any country or territory outside Republic of India, whether for protection of investment or otherwise , whether it is in proceeding initiated by the declarant or by Republic of India and any Indian affiliate. For the avoidance of doubt, the declarant’s above waiver includes an irrevocable waiver of any claim against India and any Indian Affiliate to costs incurred or interest accrued in relation to the relevant order or orders, or any related ongoing or completed litigation, arbitration, conciliation or mediation. Moreover, for the avoidance of any doubt, the declarant hereby undertakes (for itself and on behalf of all related parties) to forgo any reliance on any right under any award, judgment, or court order pertaining to the relevant order or orders or under the relevant order or orders.

h. The declarant further represents that as of the date of this undertaking, it has not transferred any of its claims under any award, judgment, or court order pertaining to the relevant order or orders or under the relevant order or orders, or granted any rights, to third parties, and further undertakes to not transfer any of its claims to third parties after entering this undertaking. Where any such claim or right is transferred, the declarant confirms that it has provided the particulars of all the interested parties in Part L, and the undertakings from each of such interested parties is attached with this undertaking in accordance with Part M of the Annexure.

i. In the event that, notwithstanding the foregoing, any person asserts, brings, files or maintains any claim against the Republic of India or Indian affiliates (hereinafter collectively referred to as “releasees”) at any time on or after the date of furnishing this undertaking, the declarant shall indemnify, defend and hold harmless such releasees from and against any and all costs, expenses (including attorney’s fees and court’s fees), interest, damages, and liabilities of any nature arising out of or in any way relating to the assertion or, bringing, filing or maintaining of such claim. The declarant specifically represents that, to the best of its knowledge, after—

i. the execution of this undertaking;

ii. the execution of any separate related undertaking by any other party in connection with the relevant order or orders; and

iii. irrevocable withdrawal of all pending proceeding as outlined in this undertaking, no other claim regarding the said relevant order or orders referenced above, or any related award, judgment, or court order, shall remain outstanding against the Republic of India or any Indian affiliates. To avoid any doubt, the declarant’s indemnity of releasees under this clause shall include any claim brought by any third party alleging that it has obtained the declarant’s claims under an award, judgment or court order or the relevant order or orders. An indemnity bond to this effect is attached in Part N of the undertaking.

j. For the removal of any doubt, the declarant fully assumes the risk through the indemnity in clause (i) of any omission or mistake with respect to securing releasees against any related claim by any person. If the declarant fails to obtain any release from such person, the declarant warrants that it will indemnify the Republic of India or any Indian affiliates from any defense costs, court costs, and damages. An indemnity bond to the effect of clauses (i) and (j) is annexed to the undertaking.

k. The declarant further undertakes to refrain from facilitating, procuring, encouraging or otherwise assisting any person (including but not limited to any related party or interested party) from bringing any proceeding or claims of any kind referred to in the above clauses, or any proceeding or claim of any kind related to any relevant order or orders referred to above (whether in respect of tax, interest or penalty). The declarant shall notify by a public notice or press release, at any time before furnishing intimation in Form No. 3 where this Form is required to be furnished under rule 11UF and before furnishing this undertaking in other cases, that by signing this undertaking any claims arising out of or relating to the relevant order or orders or any related award, judgment or court order, no longer subsist. Such public notice or press release shall include, among other things, confirmation that,—

i. the declarant (and its related parties) forever irrevocably forgo any reliance on any right and provisions under any award, judgment or court order pertaining to the relevant order or orders or under the relevant order or orders;

ii. the declarant has provided this undertaking, which includes a complete release of the Republic of India and any Indian Affiliates with respect to any award, judgment or court order pertaining to the relevant order or orders or under the relevant order or orders, and with respect to any claim pertaining to the relevant order or orders;

iii. the undertaking also includes an indemnity against any claims brought against the Republic of India or any India affiliate, including by related parties or interested parties, contrary to the release; and

iv. the declarant confirms it will treat any such award, judgment or court order as null and void and without legal effect to the same extent as if it had been set aside by a competent court and will not take any action or initiate any proceeding or bring any claim based on that.

l. The declarant confirms that the undertakings given herein are intended to be enforceable by the Republic of India, including so as to secure the irrevocable waiver, withdrawal or discontinuance (as appropriate) of all the proceeding and claims referred to in any of the clauses of this undertaking.

m. The declarant represents and warrants that:

i. it has full legal power and authority to execute and deliver this undertaking (including but not limited to the issuance of the indemnity described in clauses (i) and (j)under applicable law;

ii. the execution, delivery and performance of this undertaking (including but not limited to the issuance of the indemnity described in clauses (i) and (j) has been duly authorised by all necessary corporate action, including but not limited to any board resolution or similar authorisation under applicable law (see Note 3);

iii. this undertaking constitutes the legal, valid and binding obligation of the declarant, enforceable against the declarant in accordance with its terms;

iv. such authorisations described in the above sub-clauses (i), (ii) and (iii) are effective under applicable law, and to this end, letters from local counsel in the relevant jurisdictions are attached to this undertaking which confirm the legality of such authorisations under applicable law.

n. The declarant confirms that by submitting the present undertaking, it fulfills the conditions specified in the Explanation below the sixth proviso to Explanation 5 to clause (i) of sub-section (1) of section 9.

o. The details of the bank account in which the refund may be credited are provided in Part J of the Annexure.

p. The details of all the interested parties are provided in Part K and Part L of the Annexure. The undertaking in Part M of the Annexure by each of such persons is attached with this undertaking. The declarant represents and warrants that:

i. all such undertakings have been executed and delivered by the person who has full legal power and authority to execute and deliver such undertakings;

ii. the execution, delivery and performance of this undertaking has been duly authorised by all necessary corporate action; and

iii. this undertaking constitutes the legal, valid and binding obligation of the declarant, enforceable against such person in accordance with its terms. Such separate, related undertakings may take the same form as this undertaking.

q. The declarant is or is not covered under sub-rule (6) of rule 11UF and in case if the declarant is not covered under said sub-rule all the conditions provided under sub-rule (2) of rule 11UE have been fulfilled.

r. This undertaking is governed by relevant Indian law and any dispute with respect to this undertaking shall be subject to Indian laws and be decided in accordance with the procedures specified in the Act under the exclusive jurisdiction of the relevant income-tax authorities, tribunals or courts in Republic of India, as the case may be, which are empowered to decide disputes under the Act.

I also confirm that I am aware of all the consequences and implications of this undertaking.

Place:…………………………………

Signature:………………………………….

Date: ……………………………………………………………………………………………………………………………. 

Attachments

1. The Board Resolution or legal authorisation, as the case may be, as referred to in clause (m) of the undertaking

2. An indemnity bond to the effect of clause (i) and clause (j) of the undertaking attached in Part N of the undertaking.

3. Copy of the public notice referred to in clause (k) of the undertaking, where Form No. 3 is not required to be furnished under sub-rule (6) of rule 11UF.

4. Attachments as required in different parts of the Annexure to this undertaking.

Income Tax Department
Ministry of Finance, Government of India

Tutorials

Disclaimer:

The contents of this document are for information purposes only. This aims to enable public to have a quick and an easy access to information and do not purport to be legal documents.

Viewers are advised to verify the content from Government Acts/Rules/Notifications etc.

INCOME FROM HOUSE PROPERTY

Income chargeable to tax under the head “house property”

Rental income from a property being building or land appurtenant thereto of which the taxpayer is owner is charged to tax under the head “Income from house property”.

Rental income from sub-letting

Rental income in the hands of owner is charged to tax under the head “Income from house property”. Rental income of a person other than the owner cannot be charged to tax under the head “Income from house property”. Hence, rental income received by a tenant from sub-letting cannot be charged to tax under the head “Income from house property”. Such income is taxable under the head “Income from other sources” or profits and gains from business or profession, as the case may be.

Rental income from a shop

Rental income from a property, being building or land appurtenant thereto, of which the taxpayer is the owner is charged to tax under the head “Income from house property”. To tax the rental income under the head “Income from house property”, the rented property should be building or land appurtenant thereto. Shop being a building, rental income will be charged to tax under the head “Income from house property”.

Meaning of deemed owner

Rental income from property is charged to tax under the head “Income from house property in the hands of the owner of the property”. If a person receiving the rent is not the owner of the property, then rental income is not charged to tax under the head “Income from house property” (E.g. Rent received by tenant from sub-letting).

In the following cases a person may not be the registered owner of the property, but he will be treated as the owner (i.e., deemed owner) of the property and rental income from property will be charged to tax in his hands:

1. If an individual transfers his or her house property to his/her spouse (not being a transfer in connection with an agreement to live apart) or to his/her minor child (not being married daughter) without adequate consideration, then the transferor will be deemed as owner of the property.

2. Holder of impartible estate is deemed as the owner of the property comprised in the estate.

3. A member of co-operative society, company or other association of persons to whom a building (or part of it) is allotted or leased under house building scheme of the society, company or association, as the case may be, is treated as deemed owner of the property.

(4) A person acquiring property by satisfying the conditions of section 53A of the Transfer of Property Act, will be treated as deemed owner (although he may not be the registered owner). Section 53A of said Act prescribes following conditions:

a. There must be an agreement in writing.

b. The purchase consideration is paid or the purchaser is willing to pay it.

c. Purchaser has taken the possession of the property in pursuance of the agreement.

(5) In case of lease of a property for a period not less than 12 years (whether originally fixed or provision for extension exists), lessee is deemed to be the owner of the property. However, any right by way of lease from month-to-month or for a period not exceeding one year is not covered by this provision.

Meaning of composite rent

When apart from recovering rent of the building, in some cases the owner gets rent of other assets (like furniture) or he charges for different services provided in the building (for instance, charges for lifts, security, air conditioning, etc.). The amount so recovered is known as “composite rent”.

Tax treatment of composite rent of building let out along with other assets

Composite rent includes rent of building and rent towards other assets or facilities. The tax treatment of composite rent is as follows:-

a. In a case where letting out of building and letting out of other assets are inseparable (i.e., both the lettings are composite and not separable, e.g., letting of equipped theatre), entire rent (i.e. composite rent) will be charged to tax under the head “Profits and gains of business and profession” or “Income from other sources”, as the case may be. Nothing is charged to tax under the head “Income from house property”.

b. In a case where, letting out of building and letting out of other assets are separable (i.e., both the lettings are separable, e.g., letting out of refrigerator along with residential bungalow), rent of building will be charged to tax under the head “Income from house property” and rent of other assets will be charged to tax under the head “Profits and gains of business and profession” or “Income from other sources”, as the case may be. This rule is applicable, even if the owner receives composite rent for both the lettings. In other words, in such a case, the composite rent is to be allocated for letting out of building and for letting of other assets.

Tax treatment of composite rent in a case of letting of building along with provision of services

In a case letting of building along with provision of services, composite rent includes rent of building and charges for different services (like lift, watchman, water supply, etc.):In this situation, the composite rent is to be bifurcated and the sum attributable to the use of property will be charged to tax under the head “Income from house property” and charges for various services will be charged to tax under the head “Profits and gains of business and profession” or “Income from other sources” (as the case may be).

Computation of income from a let out property

Income chargeable to tax under the head “Income from house property” in the case of a let-out property is computed in the following manner:

Particulars	Amount (₹)
Gross Annual Value	XXXX
Less: Municipal taxes paid during the year	XXXX
Net Annual Value (NAV)	XXXX
Less: Deduction under Section 24
Deduction under Section 24(a) @ 30% of NAV (Standard Deduction)	XXXX
Deduction under Section 24(b) on account of interest on borrowed capital	XXXX
Income from House Property	XXXX

Computation of gross annual value of a let out property

Gross annual value of a property which is let-out throughout the year is determined in the following manner:

Step 1:Compute reasonable expected rent of the property (manner of computation is discussed in later part)

Step 2:Compute actual rent of the property (manner of computation is discussed in later part).

Step 3:Compute gross annual value (manner of computation is discussed in later part).

Computation of reasonable expected rent of a let out property (i.e. step 1).

Reasonable expected rent will be higher of the following:

♦ Municipal value of the property (*); or

♦ Fair rent of the property (Note 1).

If a property is covered under Rent Control Act, then the reasonable expected rent cannot exceed standard rent (Note 2).

(*) Meaning of Municipal Value

For collection of municipal taxes, local authorities make periodic survey of all buildings in their jurisdiction. Such value determined by the municipal authorities in respect of a property, is called as municipal value of the property.

Note 1:Meaning of Fair Rent It is the reasonable expected rent which the property can fetch. It can be determined on the basis of rent fetched by a similar property in the same or similar locality.

Note 2:Meaning of Standard Rent It is the maximum rent which a person can legally recover from his tenant under the Rent Control Act. Standard rent is applicable only in case of properties covered under Rent Control Act.

Illustration for better understanding

From the following information compute the reasonable expected rent of each property:

Particulars	Property A (Rs.) Property B (Rs.) Property C (Rs.)
Municipal Value	8,48,484	8,48,484	8,48,484
Fair Rent	2,52,252	2,52,252	2,52,252
Standard Rent	Not Applicable	84,252	9,84,000

**

Reasonable expected rent will be higher of the following:

♦ Municipal value of the property; or

♦ Fair rent of the property.

In case of a property covered under the Rent Control Act, reasonable expected rent will be higher of municipal value or fair rent subject to standard rent of the property.

Based on above discussion, the computation of reasonable expected rent will be as follows :

Computation of reasonable expected rent

Property A (₹)	Property B (₹)	Property C (₹)
Reasonable Expected Rent ₹8,48,484 (Higher of municipal value and fair rent)	Reasonable Expected Rent ₹84,252 (Higher of municipal value and fair rent, restricted to standard rent)	Reasonable Expected Rent ₹8,48,484 (Higher of municipal value and fair rent; standard rent higher, hence no restriction)

Computation of actual rent of a let out property (i.e. step 2)

Actual rent means the rent for which the property is let out during the year. While computing actual rent, rent pertaining to vacancy period is not to be deducted. However, unrealised rent (*) is to be deducted from actual rent if conditions specified in this regard are satisfied.

(*) Unrealised rent is the rent of the property which the owner of the property could not recover from the tenant, i.e., rent not paid by the tenant. If following conditions are satisfied, then unrealised rent is to be deducted from actual rent of the year:

♦ The tenancy is bona fide.

♦  The defaulting tenant has vacated the property, or steps have been taken to compel him to vacate the property.

♦  The defaulting tenant is not in occupation of any other property of the taxpayer.

♦  The taxpayer has taken all steps to recover such amount, including legal proceedings or he satisfies the Assessing Officer that legal proceedings would be useless.

Illustration for better understanding

Mr. Raj owns a bungalow. Throughout the year 2025-26 the bungalow is rented to Mr. Kumar at a monthly rent of Rs. 84,000. Due to internal dispute, Mr. Kumar did not pay rent for the month of March, 2026. What will be the amount of actual rent to be used to compute gross annual value of the property?

**

Rent for the month of March, 2026 is not received and, hence, unrealised rent will come to Rs. 84,000.

While computing gross annual value of the property, unrealised rent of Rs. 84,000 will be deducted from actual rent. Thus, actual rent to be considered while computing gross annual value will come to Rs. 9,24,000 (Rs. 10,08,000 – Rs. 84,000 unrealised rent). Unrealised rent of Rs. 84,000 will be deducted from actual rent if all the conditions discussed in this regard are satisfied.

If any of the conditions specified in this regard is not satisfied, then while computing gross annual value, actual rent will be taken as Rs. 10,08,000 (i.e., rent for entire year without deducting unrealised rent of Rs. 84,000).

Computation of gross annual value of a let out property (i.e. step 3)

Gross annual value of a property which is let-out throughout the year will be higher of amount computed at step 1 or step 2 (as discussed earlier).

Illustration for better understanding

From the information provided by Mr. Raja in respect of 3 properties rented out by him compute the gross annual value of all the properties.

Particulars	Property A (₹)	Property B (₹)	Property C (₹)
Municipal Value	8,48,484	8,48,484	2,52,252
Fair Rent	2,52,252	2,52,252	8,48,484
Standard Rent	Not Applicable	84,252	9,84,000
Actual rent for the entire year	9,60,000	60,000	9,60,000
Unrealised rent (*)	1,60,000	NIL	80,000

**

Gross annual value will be computed as follows:

Step 1: Compute reasonable expected rent of the property.

Step 2: Compute actual rent of the property.

Step 3: Compute gross annual value.

Step 1 : Computation of reasonable expected rent, it will be higher of municipal value or fair rent (subject to standard rent). Computation will be as follows :

Particulars	Property A (₹)	Property B (₹)	Property C (₹)
Municipal Value	8,48,484	8,48,484	2,52,252
Fair Rent	2,52,252	2,52,252	8,48,484
Standard Rent	Not Applicable	84,252	9,84,000
Amount at Step 1	8,48,484	84,252	8,48,484

Step 2: Computation of actual rent after deducting unrealised rent. The computation will be as follows :

Particulars	Property A (₹)	Property B (₹)	Property C (₹)
Amount at Step 2 (*)	8,00,000	60,000	8,80,000

(*) Actual rent after deducting unrealised rent will come to Rs. 8,00,000 (9,60,000 – Rs. 1,60,000) in case of property A, Rs. 60,000 in case of property B and Rs. 8,80,000 (Rs. 9,60,000 – Rs. 80,000) in case of property C.

Step 3 :Gross annual value will be higher of amount computed at Step 1 or Step 2. The computation will be as follows :

Particulars	Property A (₹)	Property B (₹)	Property C (₹)
Amount at Step 1	8,48,484	84,252	8,48,484
Amount at Step 2	8,00,000	60,000	8,80,000
Amount at Step 3 (Gross Annual Value – higher of above)	8,48,484	84,252	8,80,000

Computation of gross annual value in the case of a property which is vacant for some time during the year

Where the property or any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy the actual rent received or receivable by the owner in respect thereof is less than the reasonable expected rent than the actual rent so received or receivable (as reduced by the vacant allowance) shall be considered to be the Gross Annual Value of the property.

Expenses to be deducted from gross annual value of a let out property

While computing income chargeable to tax under the head “Income from house property” in the case of a let-out property, only following items can be claimed as deductions from gross annual value. In other words, deduction cannot be claimed for any expenditure incurred by the taxpayer other than following:

1. Deduction on account of municipal taxes paid by the taxpayer during the year (*).

(*) Only municipal taxes paid by the owner during the year can be deducted, hence, municipal taxes due but not paid during the year cannot be deducted or taxes borne by the tenant cannot be deducted.

2. Deduction under section 24(a) @ 30% of Net Annual Value.

3. Deduction under section 24(b) on account of interest on capital borrowed for the purpose of purchase, construction, repair, renewal or reconstruction of the property. The provisions in this regard are as follows :

While computing income chargeable to tax under the head “Income from house property” in case of a let-out property, the taxpayer can claim deduction under section 24(b) on account of interest on loan taken for the purpose of purchase, construction, repair, renewal or reconstruction of the property.

In case of a let-out property, there is no limit on the quantum of interest which can be claimed as deduction under section 24(b). However, in case of a self occupied property, limit is Rs. 2,00,000 or Rs. 30,000, as the case may be (discussed in later part).

Note: With effect from Assessment Year 2020-21, deduction for interest paid or payable on borrowed capital shall be allowed in respect of two self-occupied house properties. However, the aggregate amount of deduction under this provision shall remain same i.e., Rs. 30,000 or Rs. 2,00,000, as the case may be.

Interest is classified as pre-construction period interest and post construction period interest.

Pre or Post construction period

While computing income chargeable to tax under the head “Income from house property” in case of a let-out property, the taxpayer can claim deduction under section 24(b) on account of interest on loan taken for the purpose of purchase, construction, repair, renewal or reconstruction of the property.

Deduction on account of interest is classified in two forms, viz., interest pertaining to pre- construction period and interest pertaining to post-construction period. The detailed discussion in this regard is as follows:

Post-construction period interest is the interest pertaining to the relevant year (i.e., the year for which income is being computed). Pre-construction period is the period commencing from the date of borrowing of loan and ends on earlier of the following:

♦ Date of repayment of loan; or

♦ 31st March immediately prior to the date of completion of the construction/acquisition of the property.

Interest pertaining to pre-construction period is allowed as deduction in five equal annual instalments, commencing from the year in which the house property is acquired or constructed.

Thus, total deduction available to the taxpayer under section 24(b) on account of interest will be 1/5th of interest pertaining to pre-construction period (if any) + Interest pertaining to post construction period (if any).

Meaning of Self-occupied property

A self-occupied property (SOP) means a property owned by the taxpayer which is occupied throughout the year by the owner for the purposes of his own residence and is not actually let out during the whole or any part of the year. Thus, a property not occupied by the owner for his residence cannot be treated as a self occupied property. However, there is one exception to this rule. If the following conditions are satisfied, then the property can be treated as self-occupied and the annual value of a property will be “Nil”, even though the property is not occupied by the owner throughout the year for his residence:

a. The taxpayer owns a property;

b. Taxpayer occupies it for his own residence or is unable to occupy it due to any reason.

c. The property is not actually let out at any time during the year;`

d. No other benefit is derived from such property.

Computation of income from self occupied property

A self-occupied property means a property which is occupied throughout the year

“Income from house property” in case of a self-occupied property is computed in following manner :

Particulars	Amount (₹)
Gross Annual Value	Nil
Less: Municipal taxes paid during the year	Nil
Net Annual Value (NAV)	Nil
Less: Deduction under Section 24
Deduction under Section 24(a) @ 30% of NAV	Nil
Deduction under Section 24(b) on account of interest on borrowed capital	(XXXX)
Income from House Property	XXXX

From the above computation it can be observed that “Income from house property” in the case of a self occupied property will be either Nil (if there is no interest on housing loan) or negative (i.e., loss) to the extent of interest on housing loan. Deduction in respect of interest on housing loan in case of a self-occupied property cannot exceed Rs. 2,00,000 or Rs. 30,000, as the case may be (discussed later).

Tax implication of more than one house property occupied for residence purpose

The SOP benefit (i.e., treating property as SOP and claiming GAV as Nil) is available only when property occupied by the owner for his residence or it is not occupied by the owner due to any reason.

If a person has more than one such property, then the SOP benefit will be granted only in respect of any one property as selected by him and other property/properties will be treated as “Deemed to be let-out”. Income from deemed to be let-out property is computed in the same manner as discussed in the case of “Let-out” Property.

However, with effect from Assessment Year 2020-21, a person can claim two properties as self- occupied house properties. Deduction in respect of interest on housing loan in case of self-occupied property

The provisions relating to deduction under section 24(b) on account of interest on housing loan in case of self-occupied property are same as applicable in case of let-out property. In other words, deduction available to taxpayer under section 24(b) in respect of self-occupied property will be 1/5th of interest pertaining to pre-construction period (if any) + Interest pertaining to post-construction period (if any) [provisions of section 24(b) are already discussed earlier].

However, in the case of self-occupied properties, aggregate deduction under section 24(b) cannot exceed Rs.2,00,000 or Rs. 30,000 (as the case may be). If all the following conditions are satisfied, then the limit in respect of interest on borrowed capital will be Rs.2,00,000:

1. Capital is borrowed on or after 1-4-1999.

2. Capital is borrowed for the purpose of acquisition or construction (i.e., not for repair, renewal, reconstruction).

3. Acquisition or construction is completed within 5 years from the end of the financial year in which the capital was borrowed.

4. The person extending the loan certifies that such interest is payable in respect of the amount advanced for acquisition or construction of the house or as re­finance of the principal amount outstanding under an earlier loan taken for acquisition or construction of the property.

If any of the above condition is not satisfied, then the limit of Rs. 2,00,000 will be reduced to Rs. 30,000.
Computation of income when property is self-occupied for part of the year and let out for part of the year

At times a property may be let-out for some time during the year and is self-occupied for the remaining period (i.e., let-out as well as self occupied during the year). For the purpose of computation of income chargeable to tax under the head “Income from house property”, such a property will be treated as let-out throughout the year and income will be computed accordingly.

However, while computing the taxable income in case of such a property, actual rent will be considered only for the let-out period. Computation of income when, part of the property is self-occupied and part is let out

A house property may consist of two or more independent units, one of which is self-occupied and the remaining is/are used for any other purpose (i.e., let-out or used for own business). Income from such property will be computed in the following manner:

A Part/unit which is occupied by the taxpayer for his residence throughout the year will be treated as an independent property and income from such a part/unit will be computed in the manner as discussed in case of a self-occupied property.

A Part/unit which is let out will be treated as an independent property and income from such a part/unit will be computed in the manner as discussed in case of let out property.

Computation of income when property is held as stock-in-trade and not let out during the whole or any part of the year

A new sub-section (5) has been inserted in Section 23 of the Income-tax Act with effect from assessment year 2018-19 to provide that the annual value of a property or part thereof which is held as stock-in-trade by the owner of the property and not let out during the whole or any part of the year shall be taken to be nil.

However, this concession will be available only for the period up to 1 year from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority.

The Finance Act, 2019 has further extended the benefit and raised the time limit to 2 years. Thus, with effect from Assessment Year 2020-21, annual value of a house property shall be taken to be ‘nil’ if it is held as stock-in-trade upto two years from the end of the financial year in which completion certificate is received.

Tax treatment of unrealised rent which is subsequently realised

Any subsequently recovery of unrealized rent shall be deemed to be the income of taxpayer under the head “Income from house property” in the year in which such rent is realized (whether or not the assessee is the owner of that property in that year). The amount received is charged to tax after deducting a sum equal to 30% of such unrealised rent.

Tax treatment of arrears of rent

The amount received on account of arrears of rent (not charged to tax earlier) will be charged to tax after deducting a sum equal to 30% of such arrears. It is charged to tax in the year in which it is received. Such amount is charged to tax whether or not the taxpayer owns the property in the year of receipt.

Deduction in respect of interest on loan taken for residential house property Deduction under Section 80EE from Assessment Year 2017 -18

As per Section 80EE of the Income-tax Act, deduction of up to Rs. 50,000 is allowed to an Individual towards interest on loan taken for acquisition of a residential house property. However, the deduction is allowed subject to following conditions:

a. the loan should be sanctioned by the financial institution during the period beginning on the 01-04-2016 and ending on 31-03-2017;

b. the amount of loan should not exceed Rs. 35 lakhs;

c. the value of residential house property should not exceed Rs. 50 lakh; and

d. the assessee should not own any residential house property on the date of sanction of loan.

Deduction under Section 80EEA for Individuals who are not eligible for deduction under Section 80EE

With an objective to provide an impetus to the ‘Housing for all’ initiative of the Government and to enable the home buyer to have low-cost funds at his disposal, the Finance (No. 2) Act, 2019 has inserted a new Section 80EEA under the Income-tax Act for those individuals who are not eligible to claim deduction under Section 80EE. An individual can claim deduction of up to Rs. 150,000 under section 80EEA subject to following conditions:

a. Loan should be sanctioned by the financial institution during the period beginning on 01-04-2019 and ending on the 31-03-2022;

b. Stamp duty value of residential house property should not exceed Rs. 45 lakhs;

c. The assessee should not own any residential house property on the date of sanction of loan; and

d. The assessee should not be eligible to claim deduction under Section 80EE.

Hence, an individual who does not meet the criteria of section 80EE shall be eligible to claim deduction under section 80EEA of up to Rs. 150,000 in addition to deduction under section 24(b).

MCQ ON INCOME FROM HOUSE PROPERTY

Q1. Rental income from a property being building or land appurtenant thereto of which the taxpayer is is charged to tax under the head “Income from House Property”.

(a) Owner (b) Power of attorney holder

(c) Sub-tenant (d) Holder in due course

Correct answer : (a)

Justification of correct answer :

Rental income from a property being building or land appurtenant thereto of which the taxpayer is owner is charged to tax under the head “Income from House Property”.

Thus, option (a) is the correct option.

Rental income received by a tenant from sub-letting is also charged to tax under the head “Income from House Property”.

(a) True (b) False

Correct answer : (b)

Justification of correct answer :

Rental income in the hands of owner is charged to tax under the head “Income from house property”. Rental income of a person other than the owner cannot be charged to tax under the head “Income from house property”. Hence, rental income received by a tenant from sub-letting cannot be charged to tax under the head “Income from house property”.

Thus, the statement given in the question is false and hence, option (b) is the correct option.

Q3. If an individual transfers his or her house property to his/her spouse (not being a transfer in connection with an agreement to live apart) or to his/her minor child (not being married daughter) without adequate consideration, then the______________ will be deemed as owner of the property.

(a) Transferor (b) Transferee

(c) Transferor: 60% and transferee: 40% (d) Transferor: 40% and transferee: 60%

Correct answer : (a)

Justification of correct answer :

If an individual transfers his or her house property to his/her spouse (not being a transfer in connection with an agreement to live apart) or to his/her minor child (not being married daughter) without adequate monetary consideration, then the transferor will be deemed as owner of the property.

Thus, option (a) is the correct option.

Q4. In a case where letting out of building and letting out of other assets are inseparable, entire rent (i.e. composite rent) will be charged to tax under the head “Income from house property”.

(a) True (b) False

Correct answer : (b)

Justification of correct answer :

In a case where letting out of building and letting out of other assets are inseparable (i.e., both the lettings are composite and not separable, e.g., letting of equipped theatre), entire rent (i.e. composite rent) will be charged to tax under the head “Profits and gains of business and profession” or “Income from other sources”, as the case may be. Nothing is charged to tax under the head “Income from house property”.

Thus, the statement given in the question is false and hence, option (b) is the correct option.

Q5. In a case where, letting out of building and letting out of other assets are separable, rent of building will be charged to tax under the head ____________ and rent of other assets will be charged to tax under the head                            .

a. Income from House Property, Income from House Property

b. Profits and gains of business and profession, Income from House Property

c. Income from House Property, Profits and gains of business and profession” or “Income from other sources” (as the case may be)

d. Profits and gains of business or profession, Income from other sources

Correct answer : (c)

Justification of correct answer :

In a case where, letting out of building and letting out of other assets are separable (i.e., both the lettings are separable, e.g., letting out of refrigerator along with residential bungalow), rent of building will be charged to tax under the head “Income from house property” and rent of other assets will be charged to tax under the head “Profits and gains of business and profession” or “Income from other sources” (as the case may be).

Thus, option (c) is the correct option.

Q6. Deduction available under section 24(a) is______________ of NAV.

(a) @ 10% (b) @ 30%

(c) @ 50% (d) @ 70%

Correct answer : (b)

Justification of correct answer :

Deduction available under section 24(a) is @ 30% of NAV.

Thus, option (b) is the correct option.

Q7. In case of a property covered under the Rent Control Act, reasonable expected rent will be______________ municipal value or fair rent subject to standard rent of the property.

(a) Lower of (b) Equal to

(c) Higher of (d) Average of

Correct answer : (c)

Justification of correct answer :

In case of a property covered under the Rent Control Act, reasonable expected rent will be higher of municipal value or fair rent subject to standard rent of the property.

Thus, option (c) is the correct option.

Q8. While computing income chargeable to tax under the head “Income from house property” in the case of a let-out property, taxes due as well as paid by the owner and the tenant during the year can be deducted.

(a) True (b) False

Correct answer : (b)

Justification of correct answer :

While computing income chargeable to tax under the head “Income from house property” in the case of a let-out property, only taxes paid by the owner during the year can be deducted. Hence, taxes due but not paid during the year cannot be deducted or taxes borne by the tenant cannot be deducted.

Thus, the statement given in the question is false and hence, option (b) is the correct option.

Q9. Deduction under section 24(b) is available on account of

a. Municipal taxes paid by the owner

b. Capital expenditure incurred by the owner

c. Revenue expenditure incurred by the owner

d. Interest on capital borrowed for the purpose of purchase, construction, repair, renewal or reconstruction of the property

Correct answer : (d)

Justification of correct answer :

Deduction under section 24(b) is available on account of interest on capital borrowed for the purpose of purchase, construction, repair, renewal or reconstruction of the property.

Thus, option (d) is the correct option.

Q10. If a person occupies more than two property for his residence, then the SOP benefit will be granted in respect of all such properties occupied by him for his residence.

(a) True (b) False

Correct answer : (b)

Justification of correct answer :

If a person occupies more than two properties for his residence, then the SOP benefit will be granted only in respect of any two properties as selected by him and other property/properties will be treated as “Deemed to be let-out”.

Thus, the statement given in the question is false and hence, option (b) is the correct option.

Income Tax Department
Ministry of Finance, Government of India

Disclaimer:

The contents of this document are for information purposes only. This aims to enable public to have a quick and an easy access to information and do not purport to be legal documents.

Viewers are advised to verify the content from Government Acts/Rules/Notifications etc.

Tax treatment on compulsory acquisition of land

Capital gains on compulsory acquisition of immovable property [Section 45(5)]

The capital gains arising from the compulsory acquisition of immovable property shall be taxable in the following previous year:

a. Where the government acquires a capital asset under any law or where consideration for transfer of the capital asset is determined or approved by the government or RBI, the capital gains shall be chargeable to tax in the previous year in which initial compensation (or part thereof) is received.

b. Where any amount of compensation is to be received in pursuance of an interim order of a Court or Tribunal, it is chargeable to tax in the previous year in which the final order of such Court or Tribunal is made.

c. When the owner of the capital asset is not satisfied with the amount of compensation, he can approach the judicial authorities to enhance it. When compensation is enhanced, the capital gains computed originally shall not be re-computed. The capital gains shall be computed separately for the enhanced compensation part only, and it shall be taxable on a receipt basis.Where due to the death of the original transferor or for any other reason, enhanced compensation is received by any other person, the recipient of such compensation is taxable on such capital gain.

Computation of period of holding

The period of holding of the asset transferred shall be counted from the date of purchase or acquisition till the date of compulsory acquisition of the capital asset. In the subsequent computation of capital gain in respect of enhanced compensation, the nature of capital gain is determined with reference to the first computation.

Computation of full value of consideration

The compensation received or receivable by the assessee in respect of the compulsory acquisition of capital assets will be treated as the full value of consideration for the purpose of computing the capital gains in respect of original compensation.

Similarly, the enhanced compensation received by the assessee in respect of the compulsory acquisition of capital asset will be treated as sales consideration for the purpose of computing the capital gains in respect of enhanced compensation.

Where compensation is reduced subsequently by any Court, Tribunal, or other authority, the assessed capital gain of that year is re-computed with reference to the reduced compensation, taking it as the full value of consideration.

Computation of cost of acquisition/improvement

The cost of acquisition/improvement of the capital asset transferred by way of compulsory acquisition shall be computed as per general provisions. Where compensation is received in installments, the cost of acquisition is allowed to be deducted in full in the year in which the first installment is received.

For computing capital gain from enhanced compensation, the cost of acquisition and cost of improvement is taken nil.
Computation of exemptions

Certain exemptions can be claimed under Sections 54 to 54GB from the capital gains arising from the transfer of a capital asset by way of compulsory acquisition subject to the fulfilment of certain conditions.

TDS in case of compulsory acquisition of immovable property [Section 194LA]

Section 194LA provides that where any immovable property, other than agricultural land, is compulsorily acquired under any law in force, the person responsible for paying any sum to a resident by way of compensation or enhanced compensation is required to deduct tax. The tax shall be deducted at the rate of 10% from the compensation paid or payable.

Who is required to deduct tax under this section?

Any person responsible for making payment of consideration or enhanced consideration on account of compulsory acquisition of immovable property shall be required to deduct tax at source. The tax shall be deducted at the time of payment of compensation or enhanced compensation.

Who is a deductee?

Tax is required to be deducted under this provision only if the sum is paid or payable to a person who is resident in India.

Rate of TDS and Threshold limit

Tax is required to be deducted at the rate of 10% from the compensation paid or payable to the resident person.

If the deductee does not furnish PAN, the tax shall be deducted at the rate of 20% as per Section 206AA, or if the deductee has not furnished a return of income for a specified period, the payer shall deduct tax at the rate of 20% as per the Section 206AB.

Where both the provision of Section 206AA and Section 206AB are applicable, the tax shall be deducted at the rates provided in Section 206AA or Section 206AB, whichever is higher.

Note: The provisions of Section 206AB are omitted w.e.f. 01-04-2025.

There is no requirement to deduct tax if the amount of compensation or aggregate of compensation paid or payable during the financial year does not exceed Rs. 5,00,000. [Rs. 2,50,000 upto 31-03-2025]

Exemption from TDS

The tax shall not be deducted under Section 194LA in the following circumstances:

• If the amount of compensation is exempt from Income-tax under Section 96 of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013.
• If the sum is payable to the Govt., RBI, Mutual Fund, or any Corporation established under the Act which is exempt from tax. Certificate for lower or nil deduction

Where the estimated tax liability of an assessee justifies nil or lower deduction of tax, he can apply to the assessing officer for the issue of nil or lower deduction certificate under Section 197.

How to deposit TDS?

Tax deducted under this provision is required to be deposited to the credit of the Central Government through Challan ITNS 281 within 7 days from the end of the month in which the tax was deducted. However, the tax deducted during the month of March shall be deposited by 30 April of the next financial year.

Filing of TDS statement

The person responsible for the deduction of tax at source under this provision is required to file a statement of tax deducted at source in Form 26Q quarterly.

TDS Certificate

The deductor shall issue a TDS certificate to the assessee in Form No. 16A within 15 days from the due date of furnishing of the TDS statement.

Consequences for failure to deduct or deposit tax

Where any person responsible for deducting tax at source fails to deduct tax or after deducting fails to deposit the same, he shall be treated as assessee-in-default. In that case, interest under section 201 will be applicable.

Penalty and Prosecution

Failure to comply with the provisions of deduction of tax at source under this provision may result in penalties and prosecution as per the following provisions:

a. If a person fails to deduct tax at source, he shall be liable for payment of penalty under Section 271C;

b. If a person deducts tax but fails to deposit the same to the credit of the Central Government, he shall be liable for the penalty under Section 221 and prosecution under Section 276B. However, the prosecution shall not be intiated if payment in respect to TDS has been made to the credit of the Central Government at any time on or before the time prescribed for filing the TDS statement in respect to such payment.

Consequences for failure to furnish TDS Statement

Where any person fails to furnish a TDS statement, Section 234E shall be applicable, wherein the deductor is liable to pay fees at the rate of Rs. 200 per day during which such default continues. However, such fees should not exceed the amount of TDS.

Moreover, he shall be liable for penalties under Sections 271H of Rs. 10,000 which can be extended to Rs. 100,000, and Section 272A of Rs. 500 for every day during which failure continues.

Consequences for failure to issue TDS Certificates

Where any person responsible for issuing TDS certificates fails to issue such certificates, a penalty under Section 272A shall be applicable of Rs. 500 for every day during which failure continues.

Interest on compensation or enhanced compensation [Section 56(2)(viii)]

Income received by way of interest on compensation or enhanced compensation is taxable under the head Income from Other Sources. A deduction of 50% of such interest income shall be allowed under Section 57.

Further, in view of Section 145B, such interest shall be taxable in the previous year in which it is received. The interest on compensation or enhanced compensation shall be chargeable to tax only if the original or enhanced compensation is taxable. Thus, if compensation is exempt from tax, the interest payable on such compensation shall also be exempt from tax.

Capital gains in case of compulsory acquisition of urban agricultural land [Section 10(37)]

An individual or Hindu Undivided Family (HUF) can claim exemption in respect of capital gain arising on transfer by way of compulsory acquisition of agricultural land situated in an urban area, provided compensation is received on or after April 1, 2004. This exemption is available if the land was used by the assessee (or by his parents in the case of an individual) for agricultural purpose for a period of 2 years immediately preceding the date of its transfer.

MCQs on Tax treatment on compulsory acquisition of land

Q1. Where a capital asset is acquired by the government under any law, the capital gains shall be chargeable to tax in the previous year in which the _______________ .

a. Capital asset is compulsorily acquired

b. Initial compensation (or part thereof) is received

c. Final compensation is received

d. Compensation amount is finalised by the government

Correct Answer – (b)

Explanation: Where a capital asset is acquired by the government under any law or where consideration for transfer of the capital asset is determined or approved by the government or RBI, the capital gains shall be chargeable to tax in the previous year in which initial compensation (or part thereof) is received.

Q2. Where any amount of compensation is to be received in pursuance of an interim order of a Court or Tribunal, it is chargeable to tax in the previous year in which the ________.

a. Interim order of such Court or Tribunal is made

b. Interim compensation is received

c. Final order of such Court or Tribunal is made

d. Final compensation is received

Correct Answer – (c)

Explanation: If any amount of compensation is to be received in pursuance of an interim order of a Court or Tribunal, it is chargeable to tax in the previous year in which the final order of such Court or Tribunal is made.

Q3. The period of holding of the asset transferred by way of compulsory acquisition shall be counted from the date of purchase or acquisition till the date of ________.

a. Compulsory acquisition of the capital asset

b. Receipt of initial compensation (or part thereof)

c. Receipt of final compensation

d. None of the above

Correct Answer: (a)

Explanation: The period of holding of the asset transferred by way of compulsory acquisition shall be counted from the date of purchase or acquisition till the date of compulsory acquisition of the capital asset.

Q4. Where compensation is received in installments, the cost of acquisition is allowed to be deducted in full in the year ________.

a. in which asset is compulsorily acquired

b. in which the first installment is received

c. in which the last installment is received

d. None of the above

Correct Answer: (b)

Explanation: Where compensation is received in installments, the cost of acquisition is allowed to be deducted in full in the year in which the first installment is received.

Q5. Tax in case of compulsory acquisition of an immovable property (other than agricultural land) is deducted under ________.

a. Section 194-IC

b. Section 194-IA

c. Section 194LA

d. Section 194LC

Correct Answer: (c)

Explanation:Section 194LA provides that where any immovable property, other than agricultural land, is compulsorily acquired under any law in force, the person responsible for paying any sum to a resident by way of compensation or enhanced compensation is required to deduct tax.

Q6. What is the tax rate for deduction of tax under Section 194LA?

a. 1%

b. 5%

c. 10

d. 20%

Correct Answer: (c)

Explanation: Section 194LA provides that where any immovable property, other than agricultural land, is compulsorily acquired under any law in force, the person responsible for paying any sum to a resident by way of compensation or enhanced compensation is required to deduct tax. The tax shall be deducted at the rate of 10% from the compensation paid or payable.

Q7. Tax under Section 194LA is not required to be deducted if the amount of compensation or aggregate of compensation paid or payable during

the financial year does not exceed_________ .

a. Rs. 1,00,000

b. Rs.2,50,000

c. Rs. 10,00,000

d. Rs. 50,00,000

Correct Answer: (d)

Explanation: There is no requirement to deduct tax under Section 194LA if the amount of compensation or aggregate of compensation paid or payable during the financial year does not exceed Rs. 5,00,000.

Q8. What is the amount of deduction allowed under Section 57 against the income received by way of interest on compensation or enhanced compensation?

a. No deduction is allowed

b. 20% of such interest income

c. 50% of such interest income

d. Actual expenses incurred in earning such interest income

Correct Answer: (c)

Explanation: Income received by way of interest on compensation or enhanced compensation is taxable under the head Income from Other Sources. A deduction of 50% of such interest income shall be allowed under Section 57.

Q9. An individual or Hindu Undivided Family (HUF) can claim an exemption in respect of capital gain arising on transfer by way of compulsory acquisition of agricultural land situated in an urban area if the land was ___________ immediately preceding the date of its transfer.

a. used for any purpose for a period of 2 years

b. used for agricultural purpose for a period of 2 years

c. acquired and used for 5 years

d. None of the above

Correct Answer: (b)

Explanation: An individual or Hindu Undivided Family (HUF) can claim an exemption under section 10(37) in respect of capital gain arising on transfer by way of compulsory acquisition of agricultural land situated in an urban area provided compensation is received on or after April 1, 2004. This exemption is available if the land was used by the taxpayer (or by his parents in the case of an individual) for agricultural purpose for a period of 2 years immediately preceding the date of its transfer.

Income Tax Department
Ministry of Finance, Government of India

Disclaimer:

The contents of this document are for information purposes only. This aims to enable public to have a quick and an easy access to information and do not purport to be legal documents.

Viewers are advised to verify the content from Government Acts/Rules/Notifications etc.

Deductions/Allowances allowed to a salaried employee

‘Salary’ is the first head of income. The income taxable under this head shall be calculated on the due basis or the receipt basis, whichever occurs earlier. Taxable salary shall include taxable allowances, perquisites, retirement benefits, and profit in lieu of salary. Certain deductions are also allowed from salary income.

Taxability of Allowances

Allowances are additional components of salary that are regularly given to the employees to meet the expenditure for particular purposes. Allowances are generally fixed irrespective of actual expenditure and are taxable. Under the Act, it is taxable under Section 15 on a due or accrual basis, irrespective of whether it is paid in addition to or in lieu of salary. However, some exemptions are allowed by the Income-tax Act.

Types of Allowances

In accordance with the term of employment or condition of the workplace or statutory requirement, an employer may provide various allowances to the employees. An allowance is assumed to be taxable under the head ‘Salary’ unless it is specifically exempted from tax, fully or partly. The treatment of popular allowances shall be in accordance with the following provision.

Fully Taxable Allowances

Allowance	Description
Dearness Allowance	Dearness Allowance is provided to an employee to compensate for the effect of rising prices and inflation.
Overtime Allowance	Allowance given to employees for working overtime.
City Compensatory Allowance	City Compensatory Allowance is paid by employers to their employees to compensate them for the high cost of living in metro cities.
Transport Allowance to employee other than blind/ deaf and dumb/ orthopedicallyhandicapped employee	Transport allowance granted to an employee to meet his expenditure for the purpose of commuting between the place of his residence and the place of his duty is fully taxable. However, in the case of blind/deaf and dumb/ orthopedically handicapped employees, an exemption of up to Rs. 3,200 per month is provided.
Medical Allowance, Tiffin Allowance, and Servant Allowance are also taxable under Section 15.

Partially Taxable Allowances

Transport allowance granted to an employee to meet his expenditure for the purpose of commuting between the place of his residence and the place of his duty is fully taxable. However, in the case of blind/deaf and dumb/ orthopedically handicapped employees, an exemption of up to Rs. 3,200 per month is provided.

Description	Exemption
House Rent Allowance is paid by the employers to the employees to meet the cost of rented house taken by them. [Section 10(13A)] (See Note)	Minimum of the following three amounts: • HRA Actually Received • Actual house rent paid minus 10% of salary • 50% of salary (if the residence is in Delhi, Mumbai, Kolkata, or Chennai), otherwise 40% of salary
Transport Allowance granted to an employee working in any transport system to meet his personal expenditure during the performance of his duties for going from one place to another, provided he does not receive the daily allowance	Lower of 70% of such transport allowance or Rs. 10,000 per month
Children Education Allowance – Granted to meet the tuition fees of a maximum of two children	Up to Rs. 100 per month per child for a maximum of 2 children
Hostel Allowance – Granted to meet the Hostel expenditure of a maximum of two children	Up to Rs. 300 per month per child for a maximum of 2 children

Office Duty Allowances

–

Office Duty Allowances	These allowances are exempt to the extent of a minimum ofactual allowance received or actual amount spent for thepurpose of duties of employment.
Travelling allowance Conveyance allowance Daily allowance Helper allowance Research allowance Uniform allowance

Special Compensatory Allowance (Hilly Areas) (Subject to certain conditions and locations) Varies from Rs. 300 per month to Rs. 7,000 per month.

Border Area Allowance, or Remote Locality Allowance, or Disturbed Area Allowance, or        Varies from Rs. 200 per month to Rs. 1,300 per month. Difficult Area Allowance (Subject to certain conditions and locations)

Tribal Area or Special Compensatory or Scheduled Area or Agency Area Allowance (Subject Up to Rs. 200 per month to certain locations)

Compensatory Field Area Allowance. (Subject to certain conditions and locations) Up to Rs. 2,600 per month Compensatory Modified Field Area Allowance. (Subject to certain conditions and locations) Up to Rs. 1,000 per month

Counter Insurgency Allowance granted to the members of armed forces operating in areas away from their permanent locations.

Underground Allowance granted to employees working in uncongenial, unnatural climates in underground mines

High Altitude Allowance granted to the armed forces operating in high-altitude areas a) Up to Rs. 1,060 per month (for an altitude of 9,000 to 15,000 feet) b) Up to Rs. 1,600 per month (for an altitude above 15,000 feet)

Special Compensatory Highly Active Field Area Allowance granted to members of the armed forces

Island Duty Allowance granted to members of the armed forces in Andaman and Nicobar and Lakshadweep group of Island

Note: House Rent Allowance

The exemption for House Rent Allowance (‘HRA’) shall be allowed if the residential accommodation occupied by the employee is not owned by him and he actually pays rent in respect of such residential accommodation. Thus, no exemption is allowed if the employee stays in an accommodation owned by him or where he does not pay any rent in respect of the accommodation.

‘Salary’ for this purpose shall be the aggregate of basic salary, dearness allowance (if it forms part of salary for retirement benefits), and commission paid to the employee.

The exemption is allowed only for the period during which the rented house is occupied by the employee and not for any period after or before that. If rental expenditure is less than 10% of salary, no exemption shall be allowed to the employee for the HRA.

Deductions from Salary [Section 16]

Income-tax Act allows three deductions from the salary income, i.e., Standard Deduction, Deduction for Entertainment Allowance, and Deduction for Professional Tax. Standard Deduction is allowed to every employee whose income is taxable under the head salary. In contrast, the other two deductions are allowed subject to certain conditions.

Standard Deduction

This deduction is available to all employees drawing salary income, including retired employees drawing pension income. The Standard Deduction is absolute and unconditional, and the employee does not require to furnish any supporting evidence to claim this deduction. The deduction is the same for all employees with a ceiling of Rs. 50,000, irrespective of the salary drawn. However, with effect from 01-04-2025, the Finance (No. 2) Act, 2024 increased the amount of standard deduction from the existing Rs. 50,000 to Rs. 75,000 in a case where the assessee-employee computes the income tax under the new (default) tax regime prescribed under Section 115BAC(1A)(ii). Accordingly, this will apply to assessment year 2025-26.

Entertainment Allowance

The entertainment allowance received by an employee is a taxable allowance. If such entertainment allowance is received by a Government employee, a deduction is allowed to him while computing the taxable income under the head salary. However, no deduction is allowed under this provision to a taxpayer who is not an employee of any Central or State Government.

The amount of deduction allowable to the Govt. employee for the Entertainment Allowance shall be lower of the following:

• Actual amount of entertainment allowance received during the previous year
• 20% of salary exclusive of any allowance, benefit, or other perquisites
• 5,000
  Professional tax

Professional tax paid by the employee, by way of deduction from his salary, is allowed as a deduction from the taxable salary income. Even if paid in advance, the professional tax paid during the year is deductible from the salary income.

If the employer pays the professional tax out of his pocket, without deducting it from the employee’s salary, then it shall be first included in the employee’s income as a perquisite. After that, a deduction on such professional tax is allowed from gross salary.

Deduction allowed to salaried employee [Chapter VI-A]
Section 80C

Common investments or expenditures for which the deduction under Section 80C is allowed are as under:

1. Payment for life insurance premium

2. Sum paid under a contract for a deferred annuity

3. Contributions to the Employees’ or Recognised Provident Fund

4. Contribution to Public Provident Fund Account

5. Contribution to an approved superannuation fund

5. Subscription to any notified security or notified deposit scheme (Sukanya Samriddhi Account Scheme)

7. Subscription to notified savings certificates

8. Contribution to notified unit-linked insurance plan

9. Tuition fees for the full-time education of any 2 children

10. Certain payments for the purchase/construction of residential house property

11. Notified annuity plan of LIC or other insurers

12. Investment in Equity Linked Saving Scheme

13. Term deposits for a fixed period of not less than 5 years with a scheduled bank

14. Deposit in Senior Citizen Savings Scheme

15. Contribution to Tier-II NPS account by central government’s employees.

Section 80CCC

Up to 1,50,000 (Subject to overall limit of Rs. 1,50,000 under Section 80C, 80CCC and 80CCD )

Contribution to certain specified Pension Funds of LIC/other insurers (Subject to certain conditions).

Section 80CCD

Contribution to New Pension Scheme (NPS) notified by the Central Government (Subject to certain conditions).

Section 80CCH

Amount paid/deposited in Agniveer Corpus Fund by the assessee and contribution made by Central Government to such fund

Section 80D

Amount paid (in any mode other than cash) to LIC or other insurers to effect or keep in force an insurance on the health of a specified person (self, spouse, dependent children or parents). An individual can also make payment to the Central Government health scheme and/or on account of preventive health check-up.

Note:

• Deduction for preventive health check-up shall not exceed in aggregate Rs. 5,000.
• Payment on account of preventive health check-up may be made in cash.
• Within the overall limit, deduction shall also be allowed up to Rs. 50,000

towards medical expenditure incurred on the health of a specified person provided such person is a resident senior citizen and no amount has been paid to effect or to keep in force an insurance on the health of such person.

• Amount contributed to a pension scheme or 10% or 14%, as the case

may be, of salary/gross total income*, whichever is less (subject to ceiling limit of Rs. 1,50,000 as provided under Section 80CCE) shall be allowed as deduction under section 80CCD(1).

• Additional deduction to the extent of Rs. 50,000 shall also be available

to the assessee under section 80CCD(1B). The additional deduction is not subject to a ceiling limit of Rs. 1,50,000 as provided under Section 80CCE.

• Contribution made by the employer shall also be allowed as a deduction

under section 80CCD(2) while computing the total income of the employee. However, the amount of deduction could not exceed 14% of the salary in case of central/state Govt. employees and 10% or 14%, as the case may be, in any other employees.

*10% of salary in case of employees otherwise 20% of gross total income.

Note: The benefit of additional deduction of upto Rs. 50,000 under section 80CCD(1B) is also available to sum deposited to the account of minor by parent or guardian (effective from AY 2026-27)

Whole of the amount paid/deposited

• For self, spouse, and dependent children: Up to Rs. 25,000 (Rs. 50,000 if specified person is a senior citizen)
• For parents: additional deduction of Rs. 25,000 shall be allowed (Rs. 50,000 if the parent is a senior citizen)

Section 80DD

Rs. 75,000 (Rs. 1,25,000 in case of severe disability)

a. Any expenditure incurred for the medical treatment (including nursing), training, and rehabilitation of a dependent, being a person with disability

b. Any amount paid or deposited under an approved scheme framed in this behalf by the LIC or any other insurer or the Administrator or the specified company for the maintenance of a dependent, being a person with disability

(Subject to certain conditions).

Section 80DDB

Note:

Dependant of individual means the spouse, children, parents, brothers and sisters of the individual or any of them. Up to Rs. 40,000 (Rs. 100,000 in case of senior citizen)

Expenses actually paid for medical treatment of specified diseases and ailments for the assessee himself or wholly dependent spouse, children, parents, brothers and sisters(Subject to certain conditions).

Section 80E

Amount paid out of income chargeable to tax by way of payment of interest on loan taken from financial institution/approved charitable institution for pursuing higher education (Subject to certain conditions).

The amount of interest paid during the initial year and 7 immediately succeeding assessment years (or until the above interest is paid in full).

Q1. Transport allowance granted to an employee (except who is blind or deaf and dumb or orthopedically handicapped with disability of lower

extremities) to meet his expenditure for the purpose of commuting between the place of his residence and the place of his duty is__________ .

a. Fully Taxable

b. Exempt up to Rs. 3,200 per month

c. Exempt up to Rs. 1,600 per month

d. None of the above

Correct answer: (a)

Explanation: Transport allowance granted to an employee to meet his expenditure for the purpose of commuting between the place of his residence and the place of his duty is fully taxable. However, in the case of blind/deaf and dumb/ orthopedically handicapped employees, an exemption of up to Rs. 3,200 per month is provided.

Q2. Medical allowance granted by an employer to the employee is fully taxable.

a. True

b. False

Correct answer: (a)

Explanation: Medical Allowance, Tiffin Allowance, and Servant Allowance granted by an employer to the employee is fully taxable.

Q3. House Rent Allowance paid by the employers to the employees is exempt up to _________.

• HRA Actually Received
• Actual house rent paid minus 10% of salary
• 50% of the salary (if the residence is in Delhi, Mumbai, Kolkata, or Chennai), otherwise 40% of the salary
• Lower of (a), (b) and (c)

Correct answer: (d)

Explanation: House Rent Allowance paid by the employers to the employees is exempt up to the minimum of the following amounts:

• HRA Actually Received
• Actual house rent paid minus 10% of salary
• 50% of salary (if the residence is in Delhi, Mumbai, Kolkata, or Chennai), otherwise 40% of salary.

Q4. Transport Allowance granted to an employee working in any transport system to meet his personal expenditure during the performance of his

duties for going from one place to another is exempt up to_________ .

a. 70% of such transport allowance

b. 10,000 per month

c. Lower of (a) or (b)

d. Higher of (a) or (b)

Correct answer: (c)

Explanation: Transport Allowance granted to an employee working in any transport system to meet his personal expenditure during the performance of his duties for going from one place to another, provided he does not receive the daily allowance and is exempt up to Lower of 70% of such transport allowance or Rs. 10,000 per month.

Q5. Which of the following allowances are exempt to the extent of a minimum of actual allowance received or actual amount spent for the purpose of duties of employment?

a. Travelling allowance

b. Research allowance

c. Uniform allowance

d. All of the above

Correct answer: (d)

Explanation: Office Duty Allowances are exempt to the extent of a minimum of actual allowance received or actual amount spent for the purpose of duties of employment. This includes Travelling allowance, Conveyance allowance, Daily allowance, Helper allowance, Research allowance and Uniform allowance.

Q6. The entertainment allowance received by an employee (other than a government employee) is exempt up to ______.

a. Actual amount of entertainment allowance received

b. 20% of salary exclusive of any allowance, benefit, or other perquisite

c. Rs. 5,000

d. None of the above

Correct answer: (d)

Explanation: The entertainment allowance received by an employee is a taxable allowance. If such entertainment allowance is received by a Government employee, a deduction is allowed to him while computing the taxable income under the head salary. The amount of deduction allowable to the Govt. employee for the Entertainment Allowance shall be lower of the following:

• Actual amount of entertainment allowance received during the previous year
• 20% of salary exclusive of any allowance, benefit, or other perquisite
• 5,000

Q7. Which of the following payments are covered for the deduction under Section 80C?

• Life insurance premium
• Contribution to Public Provident Fund Account
• Tuition fees
• All of the above
  Correct answer: (d)

Explanation: Deduction under Section 80C can be claimed for all of the above-mentioned payments including Life insurance premium, Contribution to Public Provident Fund Account, and Tuition fees (excluding development fees, donations, etc.) paid by an individual to any university, college, school, or other educational institution situated in India, for the full-time education of any 2 of his/her children.

Q8. What is the maximum amount allowed under Section 80D for the payment made by an individual for the health insurance premium of the parents (senior citizen)?

a. Rs. 25,000

b. Rs. 50,000

c. Rs. 1,00,000

d. Rs. 5,000

Correct answer: (b)

Explanation: An individual can claim a maximum deduction of Rs. 50,000 under section 80D where payment is made in respect of medical insurance premium on the health of his parents (if the parent is a senior citizen) otherwise Rs. 25,000 shall be allowed as deduction.

Income Tax Department
Ministry of Finance, Government of India

Computation of Tax for Individual

Disclaimer:

The contents of this document are for information purposes only. This aims to enable public to have a quick and an easy access to information and do not purport to be legal documents.

Viewers are advised to verify the content from Government Acts/Rules/Notifications etc.

Computation of Tax for Individual

The income taxable in the hands of an individual and tax liability thereon shall be computed according to his residential status. The income taxable under the Income-tax Act is computed under the five heads of income, and tax thereon is computed as per the tax slab rates applicable for that previous year.

Determination of residential status

Income-tax liability of an individual is calculated on the basis of his ‘Total Income’. His residential status in India influences the income to be included in the taxable income. An individual can be categorised into the following residential status during the previous year:

a. Resident in India

b. Resident but Not-ordinarily Resident

c. Non-Resident in India

An individual, who is a resident in India, is liable to pay tax in India on his global income. On the other hand, a non-resident person is liable to pay tax in India only on that income which accrues or arises or is deemed to accrue or arise in India, and income received or deemed to be received in India. However, if the income of an individual is taxable in India and outside India, then he can claim a foreign tax credit in respect of such income.

Computation of income

Income tax is levied on the total income of an individual. Thus, the first step is to compute the total income. The total income of an assessee is computed in the following steps:

Calculate income under 5 heads

In Income-tax Act, the income is computed in the following 5 heads of income:

a. Salary

b. House Property

c. Profits and gains from business or profession

d. Capital Gain

e. Income from Other Sources.

Clubbing of income of any other person

An individual is generally taxed in respect of his own income, but in respect of certain income, the Income-tax Act clubs the income of other persons in an individual’s income. Hence, an individual has to add another person’s income to his own income if clubbing provisions apply in his case.

Set off and carry forward of losses

Where an individual has incurred losses under any head of income, then he is allowed to make the following adjustments subject to relevant provisions relating to set-off and carry forward of losses:

a. Intra-head adjustment to set-off of losses from one source of income against income from another source taxable under the same head of income.

b. Inter-head adjustment to set-off of losses from one head of income against income taxable under another head of income.

If losses cannot be set off in the same year due to inadequacy of eligible profits, then certain losses are carried forward to the next assessment year.

Allowability of deductions under Chapter VI-A

The aggregate of income so computed as per aforesaid steps is called ‘Gross Total Income (GTI)’, out of which various deductions are allowed to a taxpayer on account of investments and savings made by him.

Determining total income

The balance income after allowing the deductions is called ‘Total Income’. The total income is bifurcated into 2 parts – Normal Income and Special Income. The normal income of a taxpayer is charged to tax as per applicable tax rates, and special income is charged to tax at special rates.

Computation of tax

To calculate an individual’s tax liability, income shall be first apportioned into normal income and special income. The bifurcation is done as normal income is taxable at applicable slab rates. However, where an individual opts for New Tax Regime as provided under Section 115BAC, the tax on normal income shall be charged at the rates provided under the said section. Whereas special income is taxed at special rates as prescribed under the Act.

An individual is liable to pay tax on normal income only if it exceeds the maximum exemption limit.

Applicability of AMT

Every assessee (other than a company) is subject to Alternative Minimum Tax (‘AMT’) if he has claimed any of the following deductions:

a. Deduction under any provision (other than Section 80P) included in Chapter VI-A under the heading ‘C- Deduction in respect of certain income’; or

b. Deduction under Section 10AA; or

c. Deduction under Section 35AD.

The alternative minimum tax is payable by the individual if the adjusted total income exceeds Rs. 20 lakhs and the tax payable by him on his total income (computed as per normal provisions of the Act) is less than 18.5% (or 9% in case of a unit in IFSC) of ‘adjusted total income’.

Computation of tax liability on total income

Amount

AMT liability

Tax payable on deemed total income computed as per AMT

Particulars	Amount (₹)
Tax payable on deemed total income computed as per AMT provisions	xxx
Add: Surcharge	xxx
AMT after surcharge	xxx
Add: Health and Education Cess	xxx
Total tax payable as per AMT provisions (A)	xxx

Normal tax liability

Particulars	Amount (₹)
Tax on income at normal rates	xxx
Tax on income at special rates	xxx
Tax on Total Income	xxx
Less: Rebate under Section 87A	(xxx)
Tax payable after rebate	xxx
Add: Surcharge	xxx
Tax payable after surcharge	xxx
Add: Health and Education Cess	xxx
Total tax payable as per normal provisions (B)	xxx
Gross tax payable [Higher of AMT liability (A) or Normal tax liability (B)]	xxx
Less: Tax-deferred on perquisite value of ESOPs issued by eligible start-ups	(xxx)
Gross tax payable (after excluding ESOP deferred tax)	xxx
Less:
– AMT Credit	(xxx)
– Relief under Section 89	(xxx)
– Foreign tax credit under Section 90/90A/91	(xxx)
Net tax liability	xxx
Add:
– Interest under Section 234A, 234B, 234C	xxx
– Fees for late filing under Section 234F	xxx
Final Tax Payable	xxx

–

Aggregate Tax Liability Statement

Particulars	Amount (₹)
Aggregate tax liability	xxx
Less: Taxes Paid
– TDS deducted	(xxx)
– TCS collected	(xxx)
– Advance tax paid	(xxx)
– Self-Assessment Tax	(xxx)
Total tax payable / (refundable)	xxx

Tax Rates for Individual

Normal Tax Rates (Old tax regime)

The normal tax rates are prescribed every year under the First Schedule of the Finance Act. The tax rates in the case of an individual have been enumerated in the below table:

Net Income Range	Resident Super Senior Citizen	Resident Senior Citizen	Any Other Individual
Up to ₹2,50,000	Nil	Nil	Nil
₹2,50,001 – ₹3,00,000	Nil	Nil	5%
₹3,00,001 – ₹5,00,000	Nil	5%	5%
₹5,00,001 – ₹10,00,000	20%	20%	20%
Above ₹10,00,000	30%	30%	30%

‘Super senior citizen’ means an individual whose age is 80 years or more at any time during the relevant previous year.

‘Senior citizen’ means an individual whose age is 60 years or more at any time during the relevant previous year but less than 80 years on the last day of the previous year.

Normal Tax Rates (New tax regime)

Section 115BAC provides a new tax regime for individuals, which has reduced tax slabs. However, to avail of the benefit of this tax regime, the assessee has to forgo specified exemptions and deductions.

If an eligible assessee opts for this regime, the income shall be taxable at the following rate:

• For assessment year 2025-26

Total Income (₹)	Rate
Up to ₹3,00,000	Nil
₹3,00,001 – ₹7,00,000	5%
₹7,00,001 – ₹10,00,000	10%
₹10,00,001 – ₹12,00,000	15%
₹12,00,001 – ₹15,00,000	20%
Above ₹15,00,000	30%

For the assessment year 2026-27

Total Income (₹)	Tax Rate
Up to 4,00,000	Nil
4,00,001 – 8,00,000	5%
8,00,001 – 12,00,000	10%
12,00,001 – 16,00,000	15%
16,00,001 – 20,00,000	20%
20,00,001 – 24,00,000	25%
Above 24,00,000	30%

The assessee opting for payment of taxes under Section 115BAC is required to satisfy the following conditions:

(a) Total income of the assessee has to be computed without claiming the following specified exemptions and deductions;

• • Leave Travel concession [Section 10(5)];
  • House Rent Allowance [Section 10(13A)];
  • Official and personal allowances (other than those as may be prescribed) [Section 10(14)];
  • Allowances to MPs/MLAs [Section 10(17)];
  • Exemption for income of minor [Section 10(32)];
  • Deduction for units established in Special Economic Zones (SEZ) [Section 10AA];
  • Entertainment Allowance [Section 16(ii)];
  • Professional Tax [Section 16(iii)];
  • Interest on housing loan (In case of property referred under section 23(2) i.e. self-occupied house property) [Section 24(b)];
  • Additional depreciation in respect of new plant and machinery [Section 32(1)(iia)];
  • Deduction for investment in new plant and machinery in notified backward areas [Section 32AD];

• • Deduction in respect of tea, coffee, or rubber business [Section 33AB];
  • Deduction in respect of business consisting of prospecting or extraction or production of petroleum or natural gas in India [Section 33ABA];
  • Deduction for donation made to approved scientific research association, university, college, or other institutes for doing scientific research which may or may not be related to business [Section 35(1)(ii)];
  • Deduction for payment made to an Indian company for doing scientific research which may or may not be related to business [Section 35(1)(iia)];
  • Deduction for donation made to a university, college, or other institution for doing research in social science or statistical research [Section 35(1)(iii)];
  • Deduction for donation made for or expenditure on scientific research [Section 35(2AA)];
  • Deduction in respect of capital expenditure incurred in respect of certain specified businesses, i.e., cold chain facility, warehousing facility, etc. [Section 35AD];
  • Deduction for expenditure on agriculture extension project [Section 35CCC]; and
  • Deduction under Sections 80C to 80U other than specified under Section 80JJAA, Section 80CCD(2), Section 80CCH(2), and Section 80LA(1A) [Chapter VI-A].
  • Total income of the assessee has to be computed without set-off of losses or depreciation carried forward from earlier years if such loss or depreciation is attributable to any of the specified exemptions and deductions;
  • Total income of the assessee has to be computed without set-off of any loss under the head “Income from house property” with any other head of income;
  • Total income of the assessee has to be calculated after claiming depreciation in the prescribed manner; and
  • Total income of the assessee has to be computed without claiming any exemptions or deductions for allowances or perquisites provided under any other law for the time being in force.

Special Tax Rates

Income-tax Act prescribes the following special tax rates in respect of certain income:

Section	Assessee	Particulars	Tax Rate
Section 111A	Any Person	Short-term capital gains arising from the transfer of equity shares or units of an equity-oriented mutual fund or units of a business trust, where such transfer is chargeable to Securities Transaction Tax (STT)	15% (if transferred before 23-07-2024) / 20% (if transferred on or after 23-07-2024)
Section 112	Any person	Long-term capital gains arising from the transfer of listed securities (other than a unit) or zero-coupon bonds without giving effect to the benefit of indexation	10% (if the asset is transferred before 23-07-2024) or 12.5% (if the asset is transferred on or after 23-07-2024)
Section 112	Non-resident	Long-term capital gains arising from the transfer of unlisted shares or shares of closely held companies without giving effect to the benefit of indexation and currency translation	10% (if the asset is transferred before 23-07-2024) or 12.5% (if the asset is transferred on or after 23-07-2024)
Section 112	Any Person	Any other long-term capital gains	20% (if the asset is transferred before 23-07-2024) or 12.5% (if the asset is transferred on or after 23-07-2024)
Section 112A	Any Person	Long-term capital gains, in excess of Rs. 1.25 lakhs, arising from the transfer of equity shares, units of an equity-oriented mutual fund, or units of business trust if the transfer of such capital asset is chargeable to Securities Transaction Tax (STT)	10% (if the asset is transferred before 23-07-2024) or 12.5% (if the asset is transferred on or after 23-07-2024)
Section 115A	Non-resident	Interest received from Government or an Indian concern on monies borrowed or debt incurred by such Government or the Indian concern in foreign currency	20%
Section 115A	Non-resident	Interest received from notified Infrastructure Debt Fund as referred to in Section 10(47)	5%
Section 115A	Non-resident	Interest received from an Indian Co. or business trust as specified in Section 194LC, i.e., interest in respect of monies borrowed by them in foreign currency or long-term infrastructure bonds or rupee-denominated bonds	Interest payable in respect of long-term bond or rupee-denominated bonds listed on a recognised stock exchange in IFSC – 4% if bonds are issued before 01-07-2023 and 9% if bonds are issued on or after 01-07-2023; In any other case – 5%
Section 115A	Non-resident	Interest on rupee-denominated bonds of an Indian Co. or Government Securities or municipal debt securities as referred to in Section 194LD	5%
Section 115A	Non-resident	Interest income distributed by business trust to its unit holders as referred to in Section 194LBA	5%
Section 115A	Non-resident	Dividend income	10% if the dividend is received from a unit in an IFSC otherwise 20%
Section 115A	Non-resident	Income received in respect of units of specified Mutual Funds or of UTI purchased in foreign currency	20%
Section 115A	Non-resident	Income by way of royalty or fees for technical services received from Indian concern or Government in pursuance of an approved agreement made after 31-3-1976. However, the benefit shall not be available if royalty or fees for technical services is connected with the assessee’s Permanent Establishment (PE) in India	20%
Section 115AC	Non-resident	Long-term capital gains arising from the transfer of Bonds or GDRs of an Indian Company or Public sector company (PSU) purchased in foreign currency	10% (if the asset is transferred before 23-07-2024) or 12.5% (if the asset is transferred on or after 23-07-2024)
Section 115AC	Non-resident	Interest on bonds of an Indian Company or Public Sector Company (PSU) purchased in foreign currency	10%
Section 115AC	Non-resident	Dividend on GDRs of an Indian Company or Public Sector Company (PSU) purchased in foreign currency	10%
Section 115ACA	Resident Individual	Long-term capital gains arising from the transfer of GDRs issued by an Indian company, engaged in specified knowledge-based industry or service, to its employees if such GDRs are purchased in foreign currency and capital gain is computed without taking benefit of foreign exchange fluctuation and indexation	10% (if the asset is transferred before 23-07-2024) or 12.5% (if the asset is transferred on or after 23-07-2024)
Section 115ACA	Resident Individual	Dividend on GDRSs issued by an Indian company, engaged in a specified knowledge-based industry or service, to its employees if such GDRs are purchased in foreign currency	10%

Non-resident Indian Income from specified asset purchased in foreign currency                                                                                                                                                                                                   20% Rebate under Section 87A

• In the case of a resident individual, a rebate of up to Rs. 12,500 is allowed under Section 87A from the amount of tax if the total income of such individual does not exceed Rs. 500,000.
• A maximum rebate of Rs. 25,000 is allowed under section 87A from the amount of income tax on total income, which is chargeable to tax under section 115BAC(1A) . However, this rebate is allowed if the total income of assessee chargeable to tax under section 115BAC(1A) is up to Rs. 7,00,000. [Applicable for AY 2025-26]
• A maximum rebate of Rs. 60,000 is allowed under Section 87A from the amount of income tax on total income, which is chargeable to tax under section 115BAC(1A). However, this rebate is allowed if the total income of assessee chargeable to tax under section 115BAC(1A) is up to Rs. 7,00,000. [Applicable from AY 2026-27]

Further, if the total income chargeable to tax under section 115BAC(1A) exceeds Rs. 7,00,000/12,00,000 and the tax payable on such income exceeds the difference between the total income and Rs. 7,00,000/12,00,000 he can claim a rebate with marginal relief to the extent of the difference between the tax payable on such total income and the amount by which it exceeds Rs. 7,00,000/12,00,000.

Rate of Surcharge

In respect of an individual, the rate of surcharge shall be as under:

Nature of Income	Up to Rs. 50 lakhs	More than Rs. 50 lakhs but up to Rs. 1 crore	More than Rs. 1 crore but up to Rs. 2 crores	More than Rs. 2 crores but up to Rs. 5 crores	More than Rs. 5 crores
Short-term capital gain covered under Section 111A or Section 115AD	Nil	10%	15%	15%	15%
Long-term capital gain covered under Section 112A or Section 115AD or Section 112	Nil	10%	15%	15%	15%
Dividend income (not being dividend income chargeable to tax at a special rate under sections 115A, 115AB, 115AC, 115ACA)	Nil	10%	15%	15%	15%
Unexplained income chargeable to tax under Section 115BBE	25%	25%	25%	25%	25%
Any other income (if opted for the old tax regime)	Nil	10%	15%	25%	37%
Any other income (if opted for the new tax regime of Section 115BAC)	Nil	10%	15%	25%

Every person is liable to pay health and education cess at the rate of 4% on the amount of income tax plus surcharge.

MCQs on Computation of tax for individual

Q1. A non-resident person is liable to pay tax in India on __________.

a. Global Income

b. Income which accrues or arises or deemed to accrue or arise in India

c. received or deemed to be received in India

d. Both (b) and (c)

Correct answer: (d)

Explanation: An individual, who is resident in India, is liable to pay tax in India on his global income. On the other hand, a non-resident person is liable to pay tax in India only on that income which accrues or arises or is deemed to accrue or arise in India, and income received or deemed to be received in India.

Q2. In the case of an individual, Alternate Minimum Tax (AMT) is payable at the rate of _______.

a. 18. 5%

b. 15%

c. 10%

d. 25%

Correct answer: (a)

Explanation: The alternative minimum tax is payable by the individual if the adjusted total income exceeds Rs. 20 lakhs and the tax payable by him on his total income (computed as per normal provisions of the Act) is less than 18.5% (or 9% in case of a unit in IFSC) of ‘adjusted total income’.

Q3. The Basic exemption limit for a resident Super Senior citizen is ________ if he opts out from the default tax regime under section 115BAC(6). (a) Rs. 2,50,000

a. Rs. 3,00,000

b. Rs. 5,00,000

c. None of the above

Correct answer: (c)

Explanation: The Basic exemption limit for a resident super senior citizen is Rs. 5,00,000, for a resident senior citizen is Rs. 3,00,000, and for any other individual is Rs. 2,50,000.

Q4. The Basic exemption limit for a resident Super Senior citizen is ________ for the assessment year 2026-27. (in case the assessee opts for taxation under section 115BAC).

a. Rs. 2,50,000

b. Rs. 4,00,000

c. Rs.5,00,000

d. Rs. None of the above

Correct answer: (b)

Explanation: For A.Y. 2026-27, the basic exemption limit under Section 115BAC is Rs. 4,00,000, irrespective of the classification of the individual.

Q5. Short-term capital gains arising from the transfer of equity shares, chargeable to Securities Transaction Tax (STT), are taxable at the rate of ______.

a. 10%

b. 15%

c. 30%

d. Slab rate

Correct answer: (b)

Explanation: Short-term capital gains arising from the transfer of equity shares or units of an equity-oriented mutual fund or units of business trust, if the transfer of such capital asset is chargeable to Securities Transaction Tax (STT) is taxable at the rate of 15% (if the asset is transferred before 23-07-2024) or 20% (if the asset is transferred on or after 23-07-2024).

Q6. A person having income by way of winnings from lotteries, or crossword puzzles, is taxable at the rate of _____.

a. 20%

b. 15%

c. 30%

d. Slab rate

Correct answer: (c)

Explanation: Income by way of winnings from lotteries, crossword puzzles, races including horse races, card games, and other games of any sort, or

gambling or betting of any form or nature whatsoever (other than winnings from online games) is taxed at the rate of 30%.

Q7. Which of the following deduction are allowed to an individual if he opts for the new tax regime of Section 115BAC?

a. Section 80C

b. Section 80D

c. Section 80CCD(2)

d. Section 80G

Correct answer: (c)

Explanation: If an individual has opted for new tax regime of Section 115BAC, the total income of such individual has to be computed without claiming the deductions under Sections 80C to 80U other than specified under Section 80JJAA, Section 80CCD(2), Section 80CCH(2), and Section 80LA(1A).

Q8. Whether set-off of losses under the head “Income from house property” with any other income is allowed to an individual if he opted for the tax regime of Section 115BAC?

a. Yes

b. No

Correct answer: (b)

Explanation: If an individual has opted default tax regime of Section 115BAC, the total income of the assessee has to be computed without set-off of any loss under the head “Income from house property” with any other head of income.

Taxability of Retirement Benefits

Disclaimer:

The contents of this document are for information purposes only. This aims to enable public to have a quick and an easy access to information and do not purport to be legal documents.

Viewers are advised to verify the content from Government Acts/Rules/Notifications etc.

Taxability of Retirement Benefits

Retirement benefits play a crucial role in providing financial security to employees in their post-retirement years. In India, employers provide various retirement benefits to employees. The most common retirement benefits offered by employers in India include the Employee Provident Fund (EPF) and the National Pension System (NPS), both of which are savings schemes that allow employees to accumulate a portion of their salary, along with a matching contribution from their employer. Additionally, employees are entitled to receive gratuity, a lump sum payment made as a token of appreciation for their service, and leave encashment on their retirement. If an employee is eligible for a pension, he may also receive the commuted pension. If an employee is voluntarily retired or retrenched, he may be entitled to voluntary retirement compensation or retrenchment compensation. The taxability of these retirement benefits under the Income-tax Act is as follows:

Gratuity

An employer is liable to pay gratuity to an employee who has completed 5 years of continuous services and his employment with the employer terminates due to retirement, resignation, or superannuation. However, in case of death or disablement of the employee, the employer is liable to pay the gratuity even if the employee does not complete 5 years of service. The taxability of gratuity shall be as under:

Gratuity Taxability Table

Pension

Pension is a payment made by the employer after the retirement/death of the employee as a reward for past services. There are two kinds of pension:-

a. Commuted Pension – Commutation of pension means immediate payment of the lump-sum amount to an employee in lieu of surrender of a portion of the monthly pension.

b. Uncommuted Pension – When the pension is paid on a periodical basis, it is called an uncommuted Pension.
The tax treatment of pension shall be as under:

Particulars	Taxability
Uncommuted Pension	Fully Taxable. However, disability pension payable to disabled armed forces personnel shall be exempt from tax.
Family Pension	33.33% of Family Pension subject to a maximum of Rs. 15,000 shall be exempt from tax. However, the family pension received by the family members of the armed forces shall be fully exempt from tax.
Commuted pension received by an employee of the Central Government, State Government, Local Authority, and Statutory Corporation	Fully Exempt
Commuted pension received by other employees who also receive gratuity	1/3 of the full value of commuted pension will be exempt from tax
Commuted pension received by other employees who do not receive any gratuity	1/2 of the full value of commuted pension will be exempt from tax

Every entity provides leaves to the employees, which can be availed of by them in emergency situations or for vacations. If these leaves are not availed of by them, they may lapse or are encashed at the year-end or are carried forward to next year, as per the service rules of the employer. The accumulated leaves standing to the credit of an employee may be availed of by the employee during the tenure of employment or may be encashed at the time of retirement or resignation. When leaves are surrendered in lieu of monetary consideration, it is known as ‘leave encashment’. The taxability of leave encashment shall be as under:

Fully Exempt

Encashment of unutilized earned leave at the time of retirement of other employees (not being a Government employee)

Voluntary Retirement Scheme

Voluntary retirement is an early retirement option given by an employer to its employees to take retirement before the decided age of retirement. To ensure social security for the retiring employees, employers provide ‘voluntary retirement compensation’ to its employees. Such compensation is taxable in the hands of the employees as profit in lieu of salary. However, exemption under Section 10(10C) is allowed to the extent of lower of the following:

a. Compensation received; or

b. 500,000.

The exemption is allowed subject to the following conditions:-

a. The voluntary retirement compensation is paid by the specified category of employer.

b. The scheme should be drawn to result in an overall reduction in the existing strength of the employees.

c. The employee has completed 10 years of service or completed 40 years of age. (This condition is not applicable in the case of employees of a Public Sector Company).

d. The vacancy caused by the voluntary retirement is not re-filled by any other new hiring. Moreover, the retiring employee must not be employed in any other company or concern of the same management.

e. The employee has not availed of any tax exemption in respect of voluntary retirement compensation in the past.

f. The amount of compensation does not exceed 3 months’ salary for each completed year of service or salary for the remaining period of employment left before such retirement. ‘Salary’ for this purpose shall be the total of last drawn basic salary, dearness allowance (if forms part of salary for computing retirement benefits), and commission paid to the employee.

g. The scheme should apply to all employees, including workers and executives of a concern excluding directors of a company or a co-operative society.

h. Employee should not claim relief under Section 89 in respect of such compensation.

Retrenchment Compensation

Retrenchment Compensation received by a workman under the Industrial Dispute Act, 1947, or any other law for termination of his employment is exempt from tax up to Rs. 5,00,000. The taxability of retrenchment compensation is as follows:

Particulars	Taxability
Payment of compensation under a Scheme approved by the Central Government	Fully Exempt
Payment of compensation on the closure of the undertaking due to the losses	Lower of the following is exempt: (a) Rs. 5,00,000. (b) Retrenchment compensation actually received. (c) Average wage * 15/26 * completed year of continuous service or any part thereof in excess of 6 months.
Payment of compensation on the closure of the undertaking for any other reason beyond the control of the employer	Lower of the following is exempt: (a) Rs. 5,00,000. (b) Retrenchment compensation actually received. (c) Average wage of three months.

Provident Fund

Employee’s Provident Fund (EPF) is a retirement benefit scheme that’s available to salaried employees. Contribution in EPF is made both by the employee and the employer. The contribution, earning, and withdrawals from the EPF account are exempt from tax except in certain circumstances.

Tax treatment in respect of contributions made to and payments from various provident funds are summarized in the table given below:

Treatment of	Recognised Provident Fund (RPF)	Statutory Provident Fund (SPF)	Unrecognised Provident Fund (UPF)
Employer’s Contribution	Contribution up to 12% of basic salary + DA is exempt from tax. However, it shall be taxable in the following two scenarios: (a) Any contribution above 12%; (b) Any contribution above Rs. 7,50,0001.	–	Not Taxable
Employee’s Contribution	Eligible for deduction under Section 80C	Eligible for deduction under Section 80C	Not eligible for deduction under Section 80C
Interest earned on PF	Exempt from tax. However, it shall be taxable in the following two scenarios: (a) Interest above the notified rate; (b) Interest relating to the employee’s contribution above Rs. 5 lakh, in case no contribution is made by employer; (c) Interest relating to the employee’s contribution above Rs. 2.5 lakh, in case employer has also contributed to the fund.	Exempt from tax. However, it shall be taxable in the following scenarios: (a) Interest relating to the employee’s contribution above Rs. 5 lakh, in case no contribution is made by employer; (b) Interest relating to the employee’s contribution above Rs. 2.5 lakh, in case employer has also contributed to the fund.	Not taxable at the time of accrual
Withdrawal after 5 years	Exempt from tax	Exempt from tax	Aggregate of the following shall be taxable: (a) Employer’s contribution; (b) Interest on employer’s contribution; and (c) Interest on employee’s contribution
Withdrawal before 5 years	Total income is computed as if the fund is not recognised from the beginning.	Exempt	Aggregate of the following shall be taxable: (a) Employer’s contribution; (b) Interest on employer’s contribution; and (c) Interest on employee’s contribution

National Pension System (NPS)

National Pension System (NPS) is a retirement savings scheme administered and regulated by Pension Fund Regulatory and Development Authority (PFRDA). Under the NPS, individual savings are pooled into a pension fund which is invested by PFRDA regulated professional fund managers as per the approved investment guidelines into the diversified portfolios comprising of government bonds, bills, corporate debentures and shares. These contributions would grow and accumulate over the years, depending on the returns earned on the investment made.

The tax treatment of the contribution made to the NPS, accumulation of return and the amount withdrawn from the NPS is as follows:

Particulars	Taxability
Contribution to NPS
(a) Employees’ contribution to NPS	The deduction is allowed up to 10% of salary plus additional deduction of Rs. 50,000.
(b) Employers’ contribution to NPS*	The deduction is allowed up to:  14% of salary in case of Central Government or State Government employees; 10%* of salary in case of other employees. * 14% if the total income of employee is chargeable to tax under section 115BAC(1A), i.e., new tax regime Note: The benefit of additional deduction of upto Rs. 50,000 under section 80CCD(1B) is also available to sum deposited to the account of minor by parent or guardian (effective from AY 2026-27)
(c) Any other person not being an employee	The deduction is allowed up to 20% of gross total income plus additional deduction of Rs. 50,000.
Accumulation
Yearly return on the corpus amount	Tax-free
Withdrawal
(a) Partial withdrawal	In subscriber is an employee, exempt to the extent of 25% of the contribution made by the employee to the NPS. Note: Any partial withdrawal from NPS shall be exempt to the extent of 25% of amount of contributions made by the parent or guardian of minor.
(b) Final withdrawal at the time of closure of account or opting out of the scheme	Exempt up to 60% of the total corpus available in the NPS account of the subscriber.
(c) Amount received by the nominee on death of subscriber	Fully exempt
Pension Income
Pension received out of NPS or annuity	Fully Taxable

MCQs on Taxability of retirement benefits

Q1. An employer is liable to pay gratuity to an employee who has completed ________ and his employment with the employer terminates due to retirement, resignation, or superannuation.

(a) 5 years of continuous service

(b) 2 years of continuous service

(c) 1 year of continuous service

(d) 10 years of continuous service

Correct answer – (a)

Explanation: An employer is liable to pay gratuity to an employee who has completed 5 years of continuous services and his employment with the employer terminates due to retirement, resignation, or superannuation.

Q2. Gratuity received by an employee during his service is ________.

(a) Fully taxable

(b) Fully exempt

(c) Exempt to the extent of Rs. 10 lakhs

(d) Exempt to the extent of Rs. 20 lakhs

Correct answer – (a)

Explanation: Gratuity received by an employee during his service is fully taxable.

Q3. When the pension is paid on a periodic basis, it is called ________.

(a) Commuted pension

(b) Uncommuted pension

Correct answer – (b)

Explanation: When the pension is paid on a periodical basis, it is called an uncommuted Pension.

Q4. Commuted pension received by an employee of the Local Authority is fully exempt.

(a) True

(b) False

Correct answer – (a)

Explanation: Commuted pension received by an employee of the Central Government, State Government, Local Authority, and Statutory Corporation is fully exempt.

Q5. Leave encashment received on the death of the employee is fully taxable.

(a) True

(b) False

Correct answer – (b)

Explanation: Leave encashment received on the death of the employee is fully exempt.

Q6. What is the maximum amount allowed as exempt under section 10(10C) in respect of voluntary retirement compensation?

(a) Compensation received

(b) Rs. 5,00,000

(c) Lowed of (a) and (b)

(d) Higher of (a) and (b)

Correct answer – (c)

Explanation: Exemption under Section 10(10C) is allowed to the extent of lower of the following:

(a) Compensation received; or

(b) Rs. 500,000.

Q7. What is the maximum amount allowed as exempt in respect of retrenchment compensation received on the closure of undertaking due to the losses?

(a) Retrenchment compensation received

(b) Rs. 5,00,000

(c) Average wage * 15/26 * completed year of continuous service or any part thereof in excess of 6 months.

(d) Lowed of (a), (b), and (c)

Correct answer – (d)

Explanation: Lower of the following is exempt where retrenchment compensation received by the employee on the closure of the undertaking due to the losses:

(a) Rs. 5,00,000.

(b) Retrenchment compensation actually received.

(c) Average wage * 15/26 * completed year of continuous service or any part thereof in excess of 6 months.

Q8. Whether employee’s contribution to the Unrecognised Provident Fund is allowed as a deduction under Section 80C?

(a) Yes

(b) No

Correct answer – (b)

Explanation: Employee’s contribution to the Unrecognised Provident Fund (UPF) is not allowed as a deduction under Section 80C.

Q9. Pension received out of annuity is ________.

(a) Fully taxable

(b) Fully exempt

(c) Partially taxable and partially exempt

Correct answer – (a)

Explanation: Pension received out of NPS or annuity is fully taxable.

The excess contribution shall be taxable only if the aggregate amount of contribution made by the employer to the account of employee in a Recognised Provident Fund, National Pension Scheme and Superannuation Fund exceeds Rs. 7,50,000. In this situation, the excess amount so contributed is taxable as perquisite in the hands of employee.

Taxability of income of charitable or religious trusts

Disclaimer:

The contents of this document are for information purposes only. This aims to enable public to have a quick and an easy access to information and do not purport to be legal documents.

Viewers are advised to verify the content from Government Acts/Rules/Notifications etc.Taxability of income of charitable or religious trusts

A charitable and religious trust is taxable in accordance with the provisions of Section 11 to Section 13. Section 11 provides for exemption in respect of income derived from property held under trust for charitable or religious purposes to the extent to which such income is applied or accumulated during the previous year for such purposes. The exemption is allowed on fulfilment of conditions specified in Section 11, Section 12, Section 12A, Section 12AA/12AB, and Section 13 of the Income-tax Act.

Meaning of ‘Charitable Purpose’

Section 2(15) of the Income-tax Act provides an inclusive definition of ‘charitable purpose’. It includes the following:

(a) Relief of the Poor;

(b) Education;

(c) Yoga;

(d) Medical Relief;

(e) Preservation of the environment (including watersheds, forests, and wildlife);

(f) Preservation of monuments or places or objects of artistic or historic interest; and

(g) Advancement of any other object of general public utility.

The advancement of any other object of general public utility shall not be a charitable purpose if it involves the carrying on of any activity in the nature of trade, commerce or business (or any activity of rendering any service in relation to any trade, commerce or business) for a cess or fee or any other consideration.

This exception, however, does not apply if such activity is undertaken in the course of the actual carrying out of such advancement of any other object of general public utility and the aggregate receipts from such activity during the previous year, do not exceed 20% of the total receipts of such trust during that previous year.

Registration of Trust

The income of a trust shall not be exempt under Section 11 unless it has obtained registration under Section 12AA/12AB. The person in receipt of the income is required to make an application for registration of trust in the prescribed form. The process of registration up to 31-03-2021 is governed by Section 12AA. A new Section 12AB has been inserted with effect from 01-04-2021 which lays down the new process to obtain registration and the period for which such registration shall be granted.

The registration of trusts or institutions shall be required in the following circumstances:

Trust registered under old Section 12A/12AA

The trusts or institutions that had been granted perpetual registration before 01-04-2021 are required to make an application for re-registration under the new scheme of registration under Section 12AB. The registration obtained under Section 12AB shall remain valid for a period of 5 years.

A trust/institution has to make an online application in Form 10A for registration within 3 months from the date on which the provision comes into force. The due date for filing an application for registration has been extended multiple times, and the latest due date is 30-06-2024.

The order of registration shall be passed by the Commissioner within 3 months from the end of the month in which the application for registration is received.

Renewal of Registration

Trusts or institutions are registered under Section 12AB for a period of 5 years. Where the existing registration is due to expire, the trust or institution shall apply for renewal of registration at least six months prior to the completion of the 5 years.

Note: For trusts or institutions whose total income before exemption does not exceed Rs.5 crores in each of the two previous years preceding the year of application, the validity of registration shall be 10 years.

The Finance (No. 2) Act 2024 has amended Section 10(23C) and Section 12A to shift the approval-based category of exemption under Section 10(23C) to registration-based exemption under Section 12AB. Therefore, the trusts or institutions previously approved under Section 10(23C) (iv), (v), (vi), or (via) whose registration is due for renewal on or after 01-10-2024 are now eligible to apply for registration under Section 12A, subject to similar conditions.

The Commissioner is required to pass an order granting the registration or refusing to grant the registration within 6 months from the end of the month in which the application for registration was received. W.e.f. 01-10-2024, the order has to be passed within six months from the end of the quarter in which the application was received rather than six months from the end of the month in which the application was received.

Conversion of provisional registration into regular registration

The trust or institution provisionally registered under Section 12AB shall be required to convert such provisional registration into normal registration by filing an application in Form 10AB at least 6 months before the expiry of the period of the provisional registration or within 6 months of commencement of its activities, whichever is earlier.

After the amendment by the Finance (No. 2) Act 2024, the trusts or institutions provisionally approved under Section 10(23C) (iv), (v), (vi), or (via) whose registration is due for conversion on or after 01-10-2024, are now eligible to apply for registration under Section 12A, subject to similar conditions.

The Commissioner is required to pass an order granting the registration or refusing to grant the registration within 6 months from the end of the month in which the application for registration was received. W.e.f. 01-10-2024, the order has to be passed within six months from the end of the quarter in which the application was received rather than six months from the end of the month in which the application was received.

Registration of trust whose registration has become inoperative

The registration under Section 12AB shall become inoperative if approval is obtained under Section 10(23C) or the institution is notified under Section 10(23EA), 10(23EC), 10(23ED) or Section 10(46) or Section 10(46A) or, the 1st day of April of the previous year relevant to the assessment year for which the exemption is claimed under Section 10 (46B). Thus, if the registration becomes inoperative, the trust or institution will not be entitled to claim an exemption under Section 11 or 12.

The trust or institution, whose registration has become inoperative may apply to get its registration again operative under Section 12AB. The application for registration in such cases shall be made at least 6 months before the assessment year from which the said registration is sought to be made operative. Once the registration becomes operative, the trust or institution will not be entitled to claim an exemption under Section 10(23C)/10(23EA)/10(23EC)/10(23ED)/10(46)/10(46A)/10(46B).

The Commissioner is required to pass an order granting the registration or refusing to grant the registration within 6 months from the end of the month in which the application for registration was received. W.e.f. 01-10-2024, the order has to be passed within six months from the end of the quarter in which the application was received rather than six months from the end of the month in which the application was received.

Registration in conformity with the modified objects

If the trust or institution has adopted or undertaken modifications of the objects which do not conform to the conditions of registration, then such trusts or institutions are required to make an application for fresh registration under this provision. Application for fresh registration in such cases is required to be made within 30 days from the date of adoption or modification of objects of such trust or institution.

The Commissioner is required to pass an order granting the registration or refusing to grant the registration within 6 months from the end of the month in which the application for registration was received. W.e.f. 01-10-2024, the order has to be passed within six months from the end of the quarter in which the application was received rather than six months from the end of the month in which the application was received.

Provisional registration

(a) until 30-09-2023

The new trusts or institutions applying on or before 30-09-2023 for registration under Section 12AB must make the application for provisional registration even if such trusts or institutions have commenced the activities. Subsequently, such trusts or institutions have to convert their provisional registration into regular registration.

The application for provisional registration shall be filed in Form 10A at least 1 month before the commencement of the previous year relevant to the assessment year from which the registration is sought. Such provisional registration shall be valid for a period of 3 years. The trust or institution shall subsequently file an application for conversion of provisional registration into regular registration in Form 10AB at least 6 months before the expiry of the provisional registration period or within 6 months of the commencement of its activities, whichever is earlier.

(b) on or after 01-10-2023

The new trust or institution applying on or after 01-10-2023 shall file an application for provisional registration only if it has not commenced its activities. The trust or institution need not apply for provisional registration if it has commenced activities.

The application for provisional registration shall be filed at least 1 month before the commencement of the previous year relevant to the assessment year from which the registration is sought. Such provisional registration shall be valid for a period of 3 years. The trust or institution shall subsequently file an application for conversion of provisional registration into regular registration at least 6 months before the expiry of the provisional registration period or within 6 months of the commencement of its activities, whichever is earlier.

The order of registration shall be passed by the Commissioner within one month from the end of the month in which the application for registration was received.

Direct regular registration

Until 30-09-2023, the trust or institution has to apply for two registrations (provisional and regular) simultaneously, even if it has commenced the activities. However, on or after 01-10-2023, a trust or institution can apply directly for regular registration if it has already commenced the activities without applying for provisional registration.

The trusts or institutions satisfying the following two conditions can apply directly for regular registration:

(a) A trust/institution that has already commenced its activities.

(b) No income or part thereof of the said trust or institution has been excluded from the total income on account of applicability of Section 10(23C)(iv)/(v)/(vi)/(via), or Section 11 or Section 12, for any previous year ending on or before the date of such application, at any time after the commencement of such activities.

The Commissioner is required to pass an order granting the registration or refusing to grant the registration within 6 months from the end of the month in which the application for registration was received. W.e.f. 01-10-2024, the order has to be passed within six months from the end of the quarter in which the application was received rather than six months from the end of the month in which the application was received.

Condonation of Delay in Filing Registration Application

The Finance (No. 2) Act, 2024, inserted a proviso to Section 12A(a)(ac) w.e.f. 01-10-2024, to provide that, where the application is filed beyond the time allowed in sub-clauses (i) to (vi), the Principal Commissioner or Commissioner may, if he considers that there is a reasonable cause for delay in filing the application, condone such delay and such application shall be deemed to have been filed within time.

Period for which income is exempt

The exemption to a trust is generally available from the assessment year relevant to the previous year in which the application for registration is made. Hence, once the registration is granted, the exemption under Sections 11 and 12 shall be available from the assessment year immediately following the financial year in which the application is made.

In other words, the exemption shall be available prospectively from the following previous years:

(a) If the trust or institution has applied for the provisional registration at least one month before the subsequent previous year, the exemption shall be available for that subsequent previous year for which the provisional registration has been granted, provided the provisional registration has been converted into a normal registration within the prescribed time limit;

(b) If the trust or institution has applied directly for the normal registration, the exemption shall be available from the previous year in which the application for normal registration has been filed, and the registration has been granted.

Maintenance of Books of Account

To avail the exemption under Section 11 and Section 12, it is mandatory for a trust to keep and maintain books of account and other documents in such form and manner and at such place, as may be provided. This provision applies only if the total income of the charitable trust, without giving effect to the provisions of Sections 11 and 12, exceeds the maximum amount which is not chargeable to income tax in the previous year. The books of account and other documents shall be kept and maintained for a period of 10 years from the end of the relevant assessment year.

Rule 17AA prescribes the books and other documents to be kept and maintained by entities approved under Section 10(23C) or registered under Section 12AB. The books of account and other documents may be kept in the following forms:

(a) Written;

(b) Electronic form;

(c) Digital form;

(d) Print-outs of data stored in electronic or digital form; or

(e) Any other form of electromagnetic data storage device.

Audit of Accounts

Further, to avail the exemption under Section 11 and Section 12, it is mandatory for a trust to get its books of accounts audited. The books of accounts are required to be audited where the total income of the trust before exemption under section 11 and 12 exceeds the maximum amount not chargeable to tax. The accounts of the trust for that year should be audited by a Chartered Accountant. The audit report has to be furnished in Form 10B or Form 10BB at least one month prior to the due date of submission of the return of income.

Filing of return of income

The entities registered under Section 12AB are required to file the return of income under Section 139(4A) if the total income without giving effect to the provisions of Sections 11 and 12 exceeds the maximum amount which is not chargeable to Income-tax.

The exemption shall be available only if the return of income is filed within the time allowed to file the original return of income under Section 139(1) or the belated return of income under Section 139(4). Therefore, it means that the trusts or institutions cannot claim the exemption by filing an updated return of income under Section 139(8A).

Accumulation of Income

An organisation can accumulate 15 per cent of its income indefinitely. In other words, up to 15% of income can be transferred to the corpus every year. Income accumulated or set apart in excess of 15% of the income where such accumulation is not allowed under any specific provisions of the Act shall be taxable under Section 115BBI. The exemption is allowed to a trust for the income accumulated in excess of 15% subject to fulfilment of certain conditions. This exemption, however, shall be withdrawn if such conditions are not complied with by the assessee.

As per Section 11(2), if a trust is not able to apply 85 per cent of its income in a particular year, it can accumulate the shortfall to be used for religious or charitable purposes within the next 5 years. This accumulation is allowed if the assessing officer is informed about the purpose of the accumulation and the period for which the income is being accumulated. The information is to be furnished in Form 10 at least two months prior to the due date specified under Section 139(1) for furnishing the return of income for the previous year.

Even if a charitable institution is not able to utilise 85% of its income for charitable or religious purposes in India, it shall be deemed to be applied for such purposes in the situations described below. Such deemed application of income shall be considered when the institution furnishes the details electronically in Form 9A at least two months prior to the due date specified under Section 139(1) for furnishing the return of income for the previous year.

(a) Where income has not been received in the previous year;

(b) Where income could not be applied due to other reasons.

CBDT Circular No. 6/2023, dated 24-5-2023, clarified that the benefit of deemed application and accumulation shall be available even if Forms 9A and 10 are submitted on or before the due date for filing the return under Section 139(1).

Taxation of income accumulated u/s 11(2)

The circumstances in which the exemption for the accumulated amount under section 11(2) shall be withdrawn and the year in which such amount shall be taxable have been mentioned below:

(a) If the amount is applied for purposes other than religious or charitable or ceases to be accumulated or set apart for application to religious or charitable purposes. It shall be deemed to be the income of the previous year in which it is so applied or ceases to be so accumulated or set apart.

(b) If it ceases to remain invested in the statutory form of investment specified under Section 11(5). It shall be deemed to be the income of such person of the previous year in which it ceases to remain so invested or deposited.

(c) If it is not utilised for the purpose for which it is so accumulated within the allowed period of 5 years. It shall be deemed to be the income of such person of the previous year being the last previous year of the period, for which the income is accumulated or set apart but not utilised for the purpose for which it is so accumulated or set apart.

(d) It is credited or paid to any other trust or institution registered under Section 12AA/12AB or any other fund, institution, trust, hospital, university or other educational institution, or hospital or any other medical institution referred under Section 10(23C)(iv), (v), (vi) and (via). It shall be deemed to be the income of such person of the previous year in which it is credited or paid to such trust, or institution.

The deemed income arising in the above circumstances shall be taxable under Section 115BBI.

Utilisation of income accumulated u/s 11(2)

The amount so accumulated by the trust shall be utilised for the charitable and religious purposes for which it has been created. Until its utilisation, the amount shall be invested in the statutory forms as specified in Section 11(5). Any use of the accumulated funds for any other purpose or if it is not utilised at all, the exemption allowed in the year of accumulation shall be withdrawn.

Where it is beyond the control of the assessee trust or institution to spend the income for which it was accumulated, the Assessing Officer may allow the trust to apply the income so accumulated for any other religious or charitable purposes provided such other purposes are in conformity with the objects of the trust. In such cases, the exemption, granted to the assessee, cannot be withdrawn and the provisions of Section 11(2) will continue to apply.

Statutory form of investment or deposit [Section 11(5) and Rule 17C]

The fund shall be invested or deposited in the following permissible modes:

(a) Immovable property;

(b) Investment in Government Savings Certificates;

(c) Deposit in any Post Office Savings Bank Account;

(d) Deposit in any account with any scheduled bank or a cooperative bank (including a cooperative land mortgage bank or cooperative land development bank);

(e) Investment in units of UTI;

(f) Investment in Central Government or State Government Securities;

(g) Investment in debentures of any corporate body, the principal whereof and the interest whereon are guaranteed by the Central or a State Government;

(h) Investment or deposit in any public sector company. It is to be noted that if the company ceases to a public sector company subsequent to investment or deposit, the investment in shares will be considered as valid for 3 years from the date the company ceases to be a public sector company. Any other investment or deposit will be considered valid until the company repays them.

(i) Investment or deposits in any bonds issued by a financial corporation engaged in providing long-term funds for industrial development in India, if the corporation is eligible for deduction under Section 36(1)(vii);

(j) Investment or Deposits in any bonds issued by any public sector company carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes, provided the company is eligible to claim deduction under Section 36(1)(viii);

(k) Deposits with a public sector company or investment in any bonds issued by a public sector company providing long-term finance for urban infrastructure in India.

(l) Deposits with IDBI;

(m) Investment in the units issued under any scheme of mutual fund;

(n) Investment in any transfer of deposit to the Public Account of India;

(o) Deposits with authority constituted in India under any law for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, or for both;

(p) Investment by way of acquiring equity shares of a depository as defined in section 2(1)(e) of the Depositories Act, 1996;

(q) Investment in certain securities by a recognised stock exchange;

(r) Investment by way of acquiring equity shares of an incubatee by an incubator;

(s) Investment by way of acquiring shares of National Skill Development Corporation;

(t) Investment in debt instruments issued by any infrastructure finance company registered with the RBI;

(u) Investment in ‘stock certificate’ as defined in paragraph 2(c) of the Sovereign Gold Bonds Scheme, 2015;

(v) Investment made by a person authorised under section 4 of the Payment and Settlement Systems Act, 2007 in the equity share capital or bonds or debentures of a company:

• • Which is engaged in operations of retail payments system or digital payments settlement or similar activities in India and abroad and is approved by the RBI for this purpose; and
  •  In which at least 25% of equity shares are held by the National Payments Corporation of India.

(w) Investment made by a person authorised under section 4 of the Payment and Settlement Systems Act, 2007 in the equity share capital or bonds or debentures of Open Network for Digital Commerce Ltd, being a company incorporated under section 7(2) read with section 8(1) of the Companies Act, 2013, for participating in network-based open protocol models which enable digital commerce and inter-operable digital payments in India.

(x) Investment by way of acquiring units of POWERGRID Infrastructure Investment Trust.

Corpus Donation

Any voluntary contributions received by a trust or an institution, created wholly for charitable or religious purposes, with a specified direction (corpus donations) that they shall form part of the corpus of the trust or institution shall not be included in the total income. The corpus donation shall be invested or deposited in one or more of the forms or modes specified in Section 11(5) maintained specifically for such corpus.

Thus, the corpus donation received by an organisation will not be treated as exempt income if it is not invested or deposited in one or more of the forms or modes specified in Section 11(5) maintained specifically for such corpus.

Voluntary contribution for renovation and repair of religious institutions

Where the property held under a trust or institution includes any temple, mosque, gurdwara, church or other place notified under Section 80G(2)(b), any sum received by such trust or institution as a voluntary contribution for renovation or repair of such temple, mosque, etc., may, at its option, be treated as forming part of the corpus of the trust or the institution.

The option can be exercised subject to the fulfilment of the following conditions:

(a) The trust or institution applies such corpus only for the purpose for which the contribution was made;

(b) Such corpus is not utilised for making contributions or donations to any person;

(c) The corpus is maintained in a manner that is separately identifiable; and

(d) The corpus is invested or deposited in the forms specified in Section 11(5).

If the above conditions are violated, the amount of exempt corpus donation shall be deemed to be the income of the institution of the previous year during which the violation took place.

Anonymous Donation

‘Anonymous Donation’ means any voluntary contribution where the person receiving such contribution does not maintain a record of the identity of the donor indicating his name, address, and such other particulars as may be prescribed. The anonymous donations are taxable in the hands of specified trusts (except a religious trust) and institutions only if it exceeds higher of the following limit:

(a) Rs. 1 lakh; or

(b) 5% of total donation received.

The tax shall be levied only on the amount which exceeds higher of the above-referred limit. Anonymous donations are chargeable to tax at the rate of 30% (plus Surcharge and Health & Education Cess).

The exemptions under section 11 are not available to the taxable portion of anonymous donations and they are to be taxed as per the provisions of Section 115BBC. The taxable anonymous donations shall not be subject to 85% application for charitable purposes. However, exempted portions of anonymous donations shall be subject to 85% application for charitable purposes.

Merger of Trust

The Finance (No. 2) Act 2024 inserted a new Section 12AC to facilitate the merger of charitable trusts under the exemption regimes of Sections 10(23C) and 12AB with other trusts or institutions having similar objectives without the imposition of exit tax provisions.

If any trust or institution registered under Section 12AB or approved under sub-clauses (iv), (v), (vi), or (via) of Section 10(23C) merges with another trust or institution, the provisions of Chapter XII-EB shall not apply, provided the following conditions are met:

(a) The other trust or institution has the same or similar objects as the other trust or institution;

(b) The other trust or institution is registered under Section 12AA or Section 12AB or approved under sub-clauses (iv), (v), (vi), or (via) of Section 10(23C);

(c) The merger complies with conditions that may be prescribed by rules.

Taxability of Accreted Income

Income-tax Act provides for the levy of tax on accreted income of a specified person. Such tax is levied to ensure that the benefit conferred to a charitable trust over the years by way of tax exemption is not misused by converting it into a non-charitable organization. The tax on accreted income is levied in the following circumstances:

(a) If a trust is converted into any form which is not eligible for registration under Section 12AA or Section 12AB or approval under sub-clause (iv)/(v)/(vi)/(via) of Section 10(23C);

(b) If a trust is merged with an entity which is not having similar objectives and is not registered under Section 12AA or Section 12AB or approved under sub-clause (iv)/(v)/(vi)/(via) of Section 10(23C);

(c) In case of dissolution, the trust fails to transfer all its assets to any other trust or institution registered under Section 12AA or Section 12AB or approved under sub-clause (iv)/(v)/(vi)/(via) of Section 10(23C) within 12 months from the end of the month in which the dissolution takes place.

When is a specified trust or institution deemed to be converted?

A specified trust or institution shall be deemed to have been converted into any form not eligible for registration under Section 12AA or Section 12AB or approval under Section 10(23C) in the following cases:

(a) If registration granted to it under Section 12AA or Section 12AB or approval under Section 10(23C) has been cancelled; or

(b) If the specified person has modified its objects which do not conform to the conditions of registration or approval and it:

• • has not applied for fresh registration under Section 12AA or Section 12AB or approval under Section 10(23C);
  •  has filed an application for fresh registration under Section 12AA or Section 12AB or approval under Section 10(23C), but the said application has been rejected.

(c) If any trust or institution fails to make an application under Section 10(23C) or Section 12A(1)(ac) for:

• •  Re-registration/re-approval;
  • Conversion of provisional registration/approval to regular registration/approval;
  • Renewal of registration/approval within the specified period.

Calculation of accreted income

Accreted income shall be the amount of aggregate fair market value (FMV) of the total assets of the specified trust or institution as reduced by the total liability as on the specified date. The specified date shall be the following:

a. the date of the order cancelling the registration under Section 12AAor Section 12AB, or approval under Section 10(23C) as the case may be;

b. the date of adoption or modification of any object;

c. the last date for making an application for registration or approval expires;

d. the date of merger with an entity which is not having similar objectives and is not registered under Section 12AAor Section 12AB or approved under Section 10(23C);

e. the date of dissolution where the specified trust or institution fails to transfer all its assets to any other registered trust or institution.

Payment of Tax

The tax on accreted income shall be levied at the maximum marginal tax rate and this tax is in addition to income-tax chargeable in the hands of a specified person. The specified trust or institution shall be liable to pay the tax on accreted income to the credit of the Central Government within 14 days from the specified date.

If the specified trust or institution fails to pay the tax on the accreted income within the specified time, simple interest at the rate of 1% for every month or part thereof on the amount of such tax shall be charged for the period beginning on the date immediately after the last date on which such tax was payable and ending with the date on which the tax is actually paid.

Specified income under Section 115BBI

Exemption under Section 11 is available to a trust in respect to the income applied for charitable or religious purposes in India. If the income is applied for purposes other than religious or charitable purposes, it shall be taxable under Section 115BBI. Section 115BBI provides a special rate to tax the following specified income of a specified charitable institution:

(a) Income accumulated or set apart in excess of 15% of the income where such accumulation is not allowed under any specific provisions of the Act;

(b) Deemed income as referred to in Section 11(1B) [option is exercised but the income is not applied in the year of receipt or immediately following the year of receipt or accrual];

(c) If accumulated income is applied for purposes other than religious or charitable purposes or ceases to be accumulated or set apart for application to religious or charitable purposes;

(d) If the amount is applied for purposes other than the objects of the institution approved under Section 10(23C)(iv), (v), (vi) and (via) or ceases to be accumulated or set apart for application thereto;

(e) If accumulated income ceases to remain invested in the statutory form of investment specified under Section 11(5);

(f) If it is not utilised for the purpose for which it is so accumulated within the allowed period of 5 years;

(g) If accumulated income is credited or paid to any other trust or institution registered under Section 12AA/12AB or approved under Section 10(23C)(iv), (v), (vi) and (via);

(h) any income which is not exempt under Section 10(23C) on account of investment in impermissible mode as referred to in Section 11(5);

(i) any income which is not exempt under Section 11/12 on account of investment in impermissible mode as referred to in Section 11(5);

(j) any income which is not exempt under Section 10(23C) on account of its application for the benefit of any interested person;

(k) any income which is not exempt under Section 11/12 on account of its application for the benefit of any interested person;

(l) any income which is not excluded from total income due to its application towards charitable purposes outside India.

The aggregate of the specified income shall be charged to tax at the rate of 30% plus applicable surcharge and cess. Other income (not being a specified income) shall be taxed as per the tax rates applicable to the entity and the nature of income, as the case may be.

Cancellation of registration

The registration can be cancelled by the Principal Commissioner (PCIT) or Commissioner (CIT). The cancellation order, or an order refusing to cancel the registration, shall be passed before the expiry of 6 months. Such period of 6 months shall be calculated from the end of the quarter in which the first notice is issued by the PCIT or CIT calling for any document, information, or making any inquiry. The registration can be cancelled in any of the following situations:

PCIT/CIT notices the occurrence of the specified violation

The cancellation proceedings can be initiated if the PCIT/CIT has noticed the occurrence of a specified violation, and the violation need not be noticed only upon assessment. If the CIT independently concludes that there has been a specified violation, he can suo moto take cognizance of such violation even before the assessment by the Assessing Officer. The following shall be considered as ‘Specified Violation’:

(a) If any income derived from a property held under trust, wholly or in part, has been applied other than for the objects of the trust or institution.

(b) If the trust or institution has income from profits and gains of business which is not incidental to the attainment of its objectives.

(c) If separate books of account are not maintained by the trust or institution in respect of the business, which is incidental to the attainment of its objectives.

(d) If the trust or institution has applied any part of its income from the property held under a trust for private religious purposes, which does not enure for the benefit of the public.

(e) If the trust or institution established for charitable purposes has applied any part of its income for the benefit of any particular religious community or caste.

(f) If any activity being carried out by the trust or institution is not genuine or is not being carried out in accordance with the conditions subject to which it was registered.

(g) If the trust or institution has not complied with the requirement of any other law for the time being in force as is material to achieve its objects, and the order, direction, or decree, by whatever name called, holding that such non-compliance has occurred, has either not been disputed or has attained finality.

(h) If the application referred to in Section 12A(1)(ac) contains false or incorrect information. Hence, the PCIT/CIT can also initiate the cancellation proceedings if the registration application filed by the trust or institution contains false or incorrect information.

Reference is received from AO

If the Assessing Officer is satisfied about the specified violation committed and the PCIT or CIT has received a reference from him for any previous year under the second proviso to Section 143(3).

Selection of case with Risk Management Strategy

Cancellation proceedings can be initiated if the case is selected in accordance with Risk Management Strategy formulated from time to time.

Consequences of cancellation of registration

The following consequences may arise on the cancellation of the registration of a trust:

(a) The exemption under Sections 11 and 12 would not be available;

(b) The income will be computed under the normal provisions of the Act;

(c) Any donation or aid to an individual will be regarded as his income taxable under Section 56(2)(x) if it exceeds the threshold limit of Rs. 50,000;

(d) The approval granted under Section 80G may be cancelled;

(e) Levy of accreted tax under Section 115TD.

Withdrawal of exemption

The exemption to a charitable or religious organisation will be withdrawn if any of the provisions of Section 13 are violated, even if other conditions of Sections 11, Section 12, and Section 12A are complied with. Thus, incomes which are otherwise exempt will not be exempted if the provisions of Section 13 are contravened. An organisation, under the following circumstances, may lose its exemptions under Section 11 and Section 12:

(a) The exemption under Section 11 and Section 12 shall not be available if any part of the income from the property held under a trust for private religious purposes does not enure for the benefit of the public.

(b) If a charitable trust or institution is created for the benefit of any particular religious community or caste, no part of the income applied to such purposes is exempt from tax.

(c) If part of the income is used or applied for the benefit of an interested person, then only such part of the income shall not be considered for the exemption to the trust or institution. The exemption for the balance income shall not be withdrawn just because a part of the income is applied for the benefit of the interested person.

The following persons are categorised as ‘interested person’:

(a) The author of the trust or the founder of the institution;

(b) Any person who has made a total contribution up to the end of the relevant previous year of an amount exceeding Rs.1 lakh or his total contribution during the lifetime of the trust up to the end of previous year exceeds Rs.10 lakhs

(c) Where the author, founder or substantial contributor is a HUF, a member of the HUF;

(d) Any trustee of the trust or manager of the institution;

(e) Any relative of such author, founder, member, trustee or manager as aforesaid; and

(f) Any concern in which any of the persons referred to above [except (b)] has a substantial interest.

Meaning of Relative

Relative in relation to an individual means:

✓ Spouse of the individual;

✓ Brother or sister (and their spouses) of the individual;

✓ Brother or sister (and their spouses) of the spouse of the individual;

✓ Any lineal ascendant or descendant (and their spouses) of the individual;

✓ Any lineal ascendant or descendant (and their spouses) of the spouse of the individual;

✓ Any lineal descendant of a brother or sister of either the individual or of the spouse of the individual.

Meaning of Substantial Interest

A person is deemed to have a substantial interest in concern if he (or along with ‘interested persons’ as mentioned above) at any time during the previous year:

✓ Holds at least 20% of equity share capital, in case of a company; or

✓ Entitled to at least 20% of profits in the case of any other concern.

When is an Interested Person deemed to be benefited?

The income or the property of the trust shall be deemed to have been applied for the benefit of an interested person in the following cases.

• • Loan without adequate interest or security
  • Use of property without adequate rent
  • Excess payment of salary
  • Inadequate remuneration for services rendered
  • Excess payment for purchases of any share, security or other property
  • Inadequate consideration for sales of any share, security or other property
  • Diversion of income or property where the aggregate value exceeds Rs. 1,000
  • Investment in concern in which an interested person has a substantial interest

(d) If funds are deposited or invested in impermissible mode, then only income to the extent of such deposit or investment shall not be considered for the exemption. The exemption for the balance income shall not be withdrawn just because funds are deposited or invested in an impermissible mode.

(e) The exemptions under Section 11 and Section 12 shall not be available in respect of the anonymous donations taxable as per the provisions of Section 115BBC.

(f) The exemptions under Section 11 and Section 12 shall not be available if the trust violates the proviso to Section 2(15). In other words, the exemption shall be withdrawn if a trust is engaged in business activity and the aggregate receipts from such activity during the previous year exceed 20% of the total receipts.

(g) The exemption shall not be available for the amount accumulated under section 11(2) if the Form 10 and Income-tax return for the corresponding financial year are not submitted within the due date prescribed under Section 139(1).

Computation of Income under special circumstances

In the following situations, the income chargeable to tax shall be computed after allowing a deduction for expenditure incurred for the objects of the institution:

(a) where the provision of section 13(8) is applicable

(b) the institution has not obtained the audit report [section 12A(1)(b)(ii)]

(c) the institution has not maintained books of account in the prescribed form [section 12A(1)(b)(i)]

(d) the institution has not furnished the return of income within the time allowed under section 139(4A) [section 12A(1)(ba)]

Income to be computed after deduction of expenditure

The income chargeable to tax due to withdrawal of exemption shall be computed after allowing a deduction for expenditure (other than capital expenditure) incurred in India for the objects of the institution. The deduction is allowable subject to the satisfaction of the following conditions:

(a) The expenditure is not from the amount of corpus donations credited in the books of account up to the end of the financial year immediately preceding the relevant previous year;

(b) The expenditure is not from any loan or borrowing;

(c) Depreciation shall not be allowed in respect of an asset whose full cost has been claimed as an application of income;

(d) The expenditure is not in the form of contribution or donation to any person.

No deduction is to be allowed of certain expenditure

The income shall be computed without deduction of the following expenditures:

(a) No deduction shall be allowed for the capital expenditure;

(b) Disallowance shall be made under Section 40(a)(ia) for the default made in deduction of tax;

(c) Disallowance shall be made Section 40A(3)/40A(3A) for the payment made in cash;

(d) No deduction shall be allowed for the expenditure not incurred in India.

It should be noted that the disallowance made of the above expenditure or allowance shall not be allowed as a deduction to the assessee under any other provision. Further, if any loss arises due to such expenditure, no set-off shall be allowed for such losses.

MCQs on Taxability of charitable or religious trusts

Q1. Which of the following purposes are covered in the definition of charitable purpose?

(a) Education

(b) Yoga

(c) Medical Relief

(d) All of the above

Correct answer – (d)

Explanation: Section 2(15) of the Income-tax Act provides an inclusive definition of ‘charitable purpose’. It includes the following:

(a)Relief of the Poor;

(b)Education;

(c)Yoga;

(d)Medical Relief;

(e)Preservation of the environment (including watersheds, forests, and wildlife);

(f)Preservation of monuments or places or objects of artistic or historic interest; and

(g)Advancement of any other object of general public utility.

Q2. Where the existing registration under Section 12AB is due to expire, the trust or institution shall apply for renewal of registration at least ________ prior to the completion of the 5 years.

(a) 6 months

(b) 3 months

(c) 1 month

(d) 15 days

Correct answer – (a)

Explanation: Trusts or institutions are registered under Section 12AB for a period of 5 years. Where the existing registration is due to expire, the trust or institution shall apply for renewal of registration at least six months prior to the completion of the 5 years. For trusts or institutions whose total income before exemption does not exceed Rs.5 crores in each of the two previous years preceding the year of application, the validity of registration shall be 10 years.

Q3. What is the time limit to convert provisional registration into normal registration where the trust or institution is provisionally registered under section 12AB?

(a) At least 6 months before the expiry of the period of the provisional registration

(b) Within 6 months of the commencement of its activities

(c) Earlier of (a) and (b)

(d) None of the above

Correct answer – (c)

Explanation: The trust or institution provisionally registered under Section 12AB shall be required to convert such provisional registration into normal registration by filing an application in Form 10AB at least 6 months before the expiry of the period of the provisional registration or within 6 months of commencement of its activities, whichever is earlier.

Q4. The exemption under sections 11 and 12 shall be available only if the return of income is filed within the time allowed to file the return of income under ________.

(a) Section 139(1)

(b) Section 139(4)

(c) Either (a) or (b)

(d) Section 139(8A)

Correct answer – (c)

The exemption under sections 11 and 12 shall be available only if the return of income is filed within the time allowed to file the original return of income under Section 139(1) or the belated return of income under Section 139(4).

Q.5. Which of the following are the statutory form of investment or deposit specified under section 11(5)?

(a) Immovable property

(b) Investment in Government Savings Certificates

(c) Deposit in any Post Office Saving Bank Account

(d) All of the above

Correct answer – (d)

Explanation: Immovable property, Investment in Government Savings Certificates, and Deposit in any Post Office Savings Bank Account all are covered in the list of statutory forms of investment or deposit specified under Section 11(5).

Q6. The anonymous donations are taxable in the hands of specified trusts (except a religious trust) and institutions only if it exceeds ________.

(a) Rs. 1 lakh

(b) 5% of the total donation received

(c) Higher of (a) and (b)

(d) Lower of (a) and (b)

Correct answer – (c)

Explanation: The anonymous donations are taxable in the hands of specified trusts (except a religious trust) and institutions only if it exceeds higher of the following limit:

(a)Rs. 1 lakh; or

(b)5% of total donation received.

Q7. What are the consequences of cancellation of the registration of a trust?

(a) Exemption under sections 11 and 12 would not be available

(b) Income will be computed under the normal provision of the Act

(c) Approval granted under section 80G may be cancelled

(d) All of the above

Correct answer – (d)

Explanation: The following consequences may arise on the cancellation of the registration of a trust:

(a)The exemption under Sections 11 and 12 would not be available;

(b)The income will be computed under the normal provisions of the Act;

(c)Any donation or aid to an individual will be regarded as his income taxable under Section 56(2)(x) if it exceeds the threshold limit of Rs. 50,000;

(d)The approval granted under Section 80G may be cancelled;

(e)Levy of accreted tax under Section 115TD.

Q8. Which of the following persons can be categorised as interested person?

(a) Author of the trust

(b) Any trustee of the trust

(c) Any relative of such author or trustee

(d) All of the above

Correct answer – (d)

Explanation: The following persons are categorised as ‘interested person’:

(a)The author of the trust or the founder of the institution;

(b) Any person who has made a total contribution up to the end of the relevant previous year of an amount exceeding Rs.1 lakh or his total contribution during the lifetime of the trust up to the end of previous year exceeds Rs.10 lakhs.

(c) Where the author, founder or substantial contributor is a HUF, a member of the HUF;

(d) Any trustee of the trust or manager of the institution;

(e)Any relative of such author, founder, member, trustee or manager as aforesaid; and

(f)Any concern in which any of the persons referred to above [except (b)] has a substantial interest.

Q9. In which cases, an Interested Person deemed to be benefited?

(a) Loan given without adequate interest or security

(b) Excess payment of salary

(c) Inadequate remuneration for service rendered

(d) All of the above

Correct answer – (d)

Explanation: The income or the property of the trust shall be deemed to have been applied for the benefit of an interested person in the following cases.

• Loan without adequate interest or security
• Use of property without adequate rent
• Excess payment of salary
• Inadequate remuneration for services rendered
• Excess payment for purchases of any share, security or other property
• Inadequate consideration for sales of any share, security or other property
• Diversion of income or property where the aggregate value exceeds Rs. 1,000
• Investment in concern in which an interested person has a substantial interest

Tax Treatment of Hindu Undivided Families

Disclaimer:

The contents of this document are for information purposes only. This aims to enable public to have a quick and an easy access to information and do not purport to be legal documents.

Viewers are advised to verify the content from Government Acts/Rules/Notifications etc.

Tax Treatment of Hindu Undivided Families

The income taxable in the hands of a HUF and tax liability thereon shall be computed according to its residential status. The income taxable in the hands of an HUF is computed under four heads of income and tax thereon shall be computed as per the tax rates applicable for that previous year. The normal income of HUF is taxable as per slab rates provided under the Finance Act or under the new tax regime under Section 115BAC.

For the purpose of ascertaining tax liability of an HUF, the process can be divided into three broad steps – Determining the residential status, Computation of total income and Computation of tax.

Determination of residential status

The residential status of a HUF depends upon its place of control and management and the residential status of its Karta during the previous year. A HUF can be categorized into the following residential status during the previous year:

a) Resident in India

b) Non-Resident in India

A resident HUF is further sub-classified into the following status:

a) Resident and Ordinarily Resident

b) Resident but Not-ordinarily Resident

A resident HUF is considered as ordinarily resident in India if the following two conditions are satisfied:

• Karta has been a resident in India for 2 or more years out of 10 years preceding the previous year; and
• Karta has been in India for 730 days or more during the period of 7 years preceding the previous year.

If any of the above two conditions is not satisfied, the HUF shall be deemed as a resident but not ordinarily resident in India.

A HUF, which is resident in India, is liable to pay tax in India on its global income. On the other hand, a non-resident HUF is liable to pay tax in India only on those income which accrues or arises or deemed to accrue or arise in India and income received or deemed to be received in India.

However, if the income of an HUF is taxable in India as well as outside India then it can claim foreign tax credit in respect of such income.

Computation of income

Income tax is levied on the total income of a HUF. Thus, it is important to first compute the total income. The total income of a HUF is computed in the following steps:

Calculate income under 4 heads

In Income-tax Act, the income of a HUF is computed in the following 4 heads of income:

(a) House Property

(b) Profits and gains from business or profession

(c) Capital Gain

(d) Income from Other Sources.

Clubbing of income of any other person

A HUF is generally taxed in respect of his own income but in respect of certain income, the Income-tax Act clubs the income of other persons in HUF’s income. Hence, a HUF has to add the income of another person with his own income if clubbing provisions apply in its case.

Set off and carry forward of losses

If a HUF has incurred losses under any head of income then it is allowed to make the following adjustments subject to relevant provisions relating to set-off and carry forward of losses:

(a) Intra-head adjustment, i.e., set-off of losses from one source of income against income from another source taxable under the same head of income.

(b) Inter-head adjustment, i.e., set-off of losses from one head of income against income taxable under another head of income.

If losses cannot be set off in the same year due to inadequacy of eligible profits, then such losses are carried forward to the next assessment year.

Allowability of deductions under Chapter VI-A

The aggregate of income so computed as per aforesaid steps is called ‘Gross Total Income (GTI)’ out of which various deductions are allowed to a taxpayer on account of investments and savings made by it.

Determining total income

The balance income after allowing the deductions is called ‘Total Income’. The total income is bifurcated into 2 parts – Normal Income and Special Income. The normal income of a taxpayer is charged to tax as per applicable tax rates or as per New Tax Regime of Section 115BAC. Whereas, special income is charged to tax at special rates.

Aggregation of agricultural income for rate purposes

The agricultural income is exempt from tax under Section 10(1) but it is included in the total income for rate purpose. The object of aggregating the net agricultural income with non-agricultural income is to tax the non-agricultural income at higher rates.

Computation of tax

For the purpose of calculating the tax liability of a HUF, income shall be first apportioned into normal income and special income. The bifurcation is done as normal income is taxable at applicable slab rates. However, where a HUF opts for New Tax Regime as provided under Section 115BAC1, the tax on normal income shall be charged at the rates as provided under the said section. Whereas special income is taxed at special rates as prescribed under the Act.

A HUF is liable to pay tax on normal income only if it exceeds the maximum exemption limit.

Applicability of AMT

Every assessee (other than a company) is subject to Alternative Minimum Tax (‘AMT’) if he has claimed any of the following deductions:

(a) Deduction under any provision (other than Section 80P) included in Chapter VI-A under the heading ‘C- Deduction in respect of certain income’; or

(b) Deduction under Section 10AA; or

(c) Deduction under Section 35AD.

The alternative minimum tax is payable by the HUF if the adjusted total income exceeds Rs. 20 lakhs and the tax payable by it on its total income (computed as per normal provisions of the Act) is less than 18.5% (or 9% in case of a unit in IFSC) of ‘adjusted total income’.

Computation of tax liability on total income	Amount
AMT liability
Tax payable on deemed total income computed as per AMT provisions	xxx
Add: Surcharge	xxx
AMT after surcharge	xxx
Add: Health and Education Cess	xxx
Total tax payable as per AMT provisions (A)	xxx
Normal tax liability
Tax on income at normal rates Tax on income at special rates	xxx xxx
Tax on total income Add: Surcharge	xxx xxx
Tax payable after surcharge Add: Health and Education Cess	xxx xxx
Total tax payable as per normal provisions (B)	xxx
Gross tax payable [Higher of AMT liability (A) or Normal tax liability (B)] Less: – AMT Credit – Foreign tax credit under Section 90, 90A or 91	xxx (xxx) (xxx)
Net tax liability Add: – Interest under Section 234A, 234B, 234C – Fees for late filing of return under section 234F	xxx   xxx xxx
Aggregate tax liability Less: Taxes Paid – TDS deducted – TCS collected – Advance tax paid – Self-Assessment Tax	xxx   (xxx) (xxx) (xxx) (xxx)
Total tax payable/ refundable	xxx

Tax Rates for HUF

Tax Rates (Normal tax regime)

The normal tax rates are prescribed every year under the First Schedule of the Finance Act. The tax rates in the case of a HUF have been enumerated in the below table:

Total Income (Rs)	Rate
Up to Rs. 2,50,000	Nil
Rs. 2,50,001- Rs. 5,00,000	5%
Rs. 5,00,001- Rs. 10,00,000	20%
Above Rs. 10,00,000	30%

Tax Rates (New tax regime)

Section 115BAC provides for a new tax regime for HUFs. This provision provides an altogether new tax slab wherein the tax rates have been significantly reduced. However, to avail of the benefit of this tax regime, the assessee has to forgo specified exemptions and deductions.

From the Assessment Year 2024-25, the default tax regime will be the new tax regime. If a HUF does not want to pay tax according to the new tax regime, it will have to explicitly opt out of it and choose to be taxed under the old tax regime.

From the Assessment year 2025-26, the income shall be taxable at the following rate under new tax regime:

Total Income (Rs)	Rate
Upto 3,00,000	Nil
From 3,00,001 to 7,00,000	5%
From 7,00,001 to 10,00,000	10%
From 10,00,001 to 12,00,000	15%
From 12,00,001 to 15,00,000	20%
Above 15,00,000	30%

From the Assessment year 2026-27, the income shall be taxable at the following rate under new tax regime:

Total Income (Rs)	Rate
Upto 4,00,000	Nil
From 4,00,001 to 8,00,000	5%
From 8,00,001 to 12,00,000	10%
From 12,00,001 to 16,00,000	15%
From 16,00,001 to 20,00,000	20%
From 20,00,001 to 24,00,000	25%
Above 24,00,000	30%

Rate of Surcharge

In respect of a HUF, the rate of surcharge shall be as under:

Nature of Income	Range of Total Income
	Up to Rs. 50 lakhs	More than Rs. 50 lakhs but up to Rs. 1 crore	More than Rs. 1 crore but up to Rs. 2 crores	More than Rs. 2 crores but up to Rs. 5 crores	More than Rs. 5 crores
Short-term capital gain covered under Section 111A or Section 115AD	Nil	10%	15%	15%	15%
Long-term capital gain covered under Section 112A or Section 115AD or Section 112	Nil	10%	15%	15%	15%
Dividend income (not being dividend income chargeable to tax at a special rate under sections 115A, 115AB, 115AC, 115ACA)	Nil	10%	15%	15%	15%
Unexplained income chargeable to tax under Section 115BBE	25%	25%	25%	25%	25%
Any other income (if opted for the normal tax regime)	Nil	10%	15%	25%	37%
Any other income (if opted for the new tax regime of Section 115BAC)	Nil	10%	15%	25%	25%

Health and Education Cess

Every person is liable to pay health and education cess at the rate of 4% on the amount of income tax plus surcharge.

Computation of tax in case of partition of HUF

A Joint Hindu Family consists of all persons lineally descended from a common ancestor and includes their wives and unmarried daughters. There can be no limit to the number of members a HUF may consist of. Only a complete partition of HUF is recognized under the law. HUF partition can be claimed by coparceners only. Income in respect of the post-partition period is taxed as the individual income of the concerned member.

Partition during the previous year

The income of the joint family in respect of the pre-partition period is assessed in the status of HUF. Such assessment shall be made as if no partition has taken place. Further, the deductions and exemptions available to the HUF are to be allowed from such income and tax shall be levied at the rate applicable to the HUF. Each member or group of members is jointly and severally liable for the tax assessed on such income. This liability is in addition to any tax for which he may be separately liable.

Income in respect of the post-partition period is taxed as the individual income of the concerned member. All the provisions applicable to an individual such as rebate, relief and tax rates, etc. will apply to such income.

Partition after the expiry of previous year

Where the partition of the HUF took place after the expiry of the previous year, total income shall be assessed as if no partition has taken place. The deductions and exemptions available to the HUF are to be allowed from such income and tax shall be levied at the rate applicable to the HUF.

Determination of liability of members in case of complete partition

The tax payable in respect of the pre-partition income is to be apportioned between the members in accordance with the portion of the joint family property allotted to them on the partition. Thus, it is to be allocated among the members in the same proportion as the value of the property allotted bears to the total value of the property. The apportionment is not made on the basis of the income-yielding capacity of the different portions of the property allotted.

Determination of liability of members in case of partial partition

Partial partition means a partition which is partial as regards the person constituting the HUF, the properties belonging to the HUF, or both. The partial partition has been derecognised after 31-12-1978.

MCQs onTax treatment of HUF

Q1. The alternative minimum tax (AMT) is payable by the HUF if the adjusted total income exceeds__________.

(a) Rs. 10 Lakhs

(b) Rs. 20 lakhs

(c) Rs. 50 lakhs

(d) Rs. 25 lakhs

Correct answer: (b)

Explanation: The alternative minimum tax is payable by the HUF if the adjusted total income exceeds Rs. 20 lakhs and the tax payable by it on total income (computed as per normal provisions of the Act) is less than 18.5% (or 9% in case of a unit in IFSC) of ‘adjusted total income’.

Q2. A Joint Hindu Family consists of all persons lineally descended from a common ancestor and includes their wives but excludes unmarried daughters.

(a) True

(b) False

Correct answer: (b)

Explanation: A Joint Hindu Family consists of all persons lineally descended from a common ancestor and includes their wives and unmarried daughters.

Q3. HUF partition can be claimed by coparceners only.

(a) True

(b) False

Correct answer: (a)

Explanation: HUF partition can be claimed by coparceners only.

Q4. In case of partition during the previous year, the income of the joint family in respect of the pre-partition period is assessed in the status of_____.

(a) Individual

(b) HUF

Correct answer: (b)

Explanation: In the case of partition during the previous year, the income of the joint family in respect of the pre-partition period is assessed in the status of HUF.

Q5. A HUF, which is non-resident in India is liable to pay tax in India only on those income ________.

(a) Which accrues or arises in India

(b) Which deemed to accrue or arise in India

(c) Which received or deemed to be received in India

(d) All of the above

Correct answer – (d)

Explanation: A HUF, which is resident in India, is liable to pay tax in India on its global income. On the other hand, a non-resident HUF is liable to pay tax in India only on those income which accrues or arises or deemed to accrue or arise in India and income received or deemed to be received in India.

Special Regimes for Taxation of Individuals, HUF, AOP, BOI, AJP, Companies, and Co-operative Societies

Disclaimer:

The contents of this document are for information purposes only. This aims to enable public to have a quick and an easy access to information and do not purport to be legal documents.

Viewers are advised to verify the content from Government Acts/Rules/Notifications etc.Special Regimes for Taxation of Individuals, HUF, AOP, BOI, AJP, Companies, and Co-operative Societies

Certain assessees are allowed to opt for a lower tax rate regime subject to the fulfilment of certain conditions. These alternate tax regimes offer a lower tax rate, but certain deductions and exemptions have to be given up by the assessee. The following alternative tax regimes are available to an assessee:

(a) Section 115BA for domestic companies;

(b) Section 115BAA for domestic companies;

(c) Section 115BAB for domestic companies;

(d) Section 115BAC for Individuals, HUFs, AOP, BOI, or AJP;

(e) Section 115BAD for resident co-operative societies; and

(f) Section 115BAE for resident co-operative societies engaged in manufacturing

Special Tax Regimes for Domestic Companies

A domestic company is allowed to opt for any lower tax rate regimes subject to the fulfilment of certain conditions. The tax rates under these regimes vary from 15% to 25%. The rates of the surcharge shall also depend on the regime opted by the eligible domestic company. A domestic company can be taxable under any of the following tax regimes:

(a) Section 115BA

(b) Section 115BAA

(c) Section 115BAB

Conditions to be satisfied

(a) For Section 115BA

The following conditions should be satisfied in order to avail the benefit of a lower tax rate under this provision:

• • The domestic company has been set up and registered on or after 01-03-2016;
  • The company is not engaged in any business other than the business of manufacture or production of any article or thing and research in relation to, or distribution of, such article or thing manufactured or produced by it;
  • Total income of the company has been computed without claiming specified exemptions and deductions*;
  • Total income of the company has been computed without set-off of losses carried forward from earlier years if such loss is attributable to any of the specified exemptions and deductions; and
  • Total income of the company is calculated after claiming depreciation in the prescribed manner.

(b) For Section 115BAA

The following conditions should be satisfied in order to avail the benefit of a lower tax rate under this provision:

• • Total income of the company has been computed without claiming specified exemptions and deductions;
  • Total income of the company has been computed without set-off of losses or additional depreciation carried forward from earlier years if such loss or depreciation is attributable to any of the specified exemptions and deductions; and
  • Total income of the company is calculated after claiming depreciation in the prescribed manner.

(c) For Section 115BAB

The following conditions should be satisfied in order to avail the benefit of a lower tax rate under this provision:

• • The domestic company should be set up and registered on or after 01-10-2019;
  • The company is not engaged in any business other than the business of manufacture or production of any article or thing and research in relation to, or distribution of, such article or thing manufactured or produced by it. Further, the company should commence manufacturing on or before 31-03-2024.

It is to be noted that the business of manufacture or production of any article or thing shall include the business of generation of electricity but it shall not include the following businesses:

✓ development of computer software in any form or in any media;

✓ mining;nto cylinder;

✓ printing of book

✓ conversion of marble blocks or similar items into slabs;

✓ bottling of gas is or production of cinematograph film; or

✓ Any other notified business;

• • The company must not be formed by splitting up or reconstruction of an existing business. However, this condition is not applicable in case of an undertaking formed as a result of re-establishment, reconstruction, or revival in accordance with the provisions of Section 33B;
  • The company does not use any machinery or plant previously used for any purpose. However, there are two exceptions:

i. Any plant or machinery which was used outside India shall not be treated as old machinery or plant if the following conditions are satisfied:

✓ Before the date of installation by the assessee, such machinery or plant was not used in India;

✓ Such machinery or plant has been imported from any country outside India; and

✓ No deduction on account of depreciation has been allowed or allowable in respect of such machinery or plant before the date of installation by the assessee.

ii. The condition of not using the old machinery or plant shall be deemed to have been complied with if the value of old plant and machinery does not exceed 20% of the total value of plant and machinery;

• • The company does not use any building which was previously used as a hotel or a convention centre in respect of which deduction under Section 80-IDhas been claimed and allowed;
  • Total income of the company has been computed without claiming specified exemptions and deductions;
  • Total income of the company has been computed without set-off of losses or additional depreciation carried forward from earlier years if such loss or depreciation is attributable to any of the specified exemptions and deductions; and
  • Total income of the company is calculated after claiming depreciation in the prescribed manner.

Tax Rates

For Section 115BA – Section 115BA allows a domestic company to pay income tax at the rate of 25%). The special income shall be taxable at the special rates specified in respective provisions of the Act.

For Section 115BAA – Section 115BAA allows a domestic company to pay income tax at the rate of 22%. The special income shall be taxable at the special rates specified in respective provisions of the Act.

For Section 115BAB -The applicable tax rates in the case of a domestic company opting for section 115BAB are as follows:

Income	Tax Rates
Income from manufacturing activities	15%
Income from non-manufacturing activities*	22%
Short-term capital gain from transfer of depreciable assets	15%
Short-term capital gain from transfer of non-depreciable assets	22%
Excess profit derived due to arranged affairs	30%
Special Incomes	Special tax rates
* No deduction or allowance in respect of any expenditure or allowance shall be allowed in computing such income.

Rate of surcharge and health and education cess

The tax calculated on the total income shall be further increased by the surcharge at the following rates:

Company	Range of Total Income†
	Rs. 1 crore or less	Above Rs. 1 crore but up to Rs. 10 crore	Above Rs. 10 crore
Domestic Company opting for section 115BA	Nil	7%	12%
Domestic Company opting for section 115BAA	10%	10%	10%
Domestic Company opting for section 115BAB	10%	10%	10%

Further, the amount of income tax and the surcharge shall be increased by health and education cess calculated at the rate of 4% of such income tax and surcharge.

Time limit to opt for the scheme

For Section 115BA – The eligible domestic company has to exercise the option on or before the due date for furnishing the first of the returns of income, which the company is required to furnish under the Act.

For Section 115BAA – The eligible domestic company has to exercise the option on or before the due date for furnishing the returns of income, which the company is required to furnish under the Act.

For Section 115BAB – The eligible domestic company has to exercise the option on or before the due date for furnishing the first of the returns of income, which the company is required to furnish under the Act.

Form to be filed to opt for the scheme

For Section 115BA – This option should be exercised by electronically furnishing Form No. 10-IB.

For Section 115BAA – This option should be exercised by electronically furnishing Form No. 10-IC.

For Section 115BAB – This option should be exercised by electronically furnishing Form No. 10-ID.

Withdrawal from the scheme

For Section 115BA – Once the option has been exercised for any previous year, it cannot be subsequently withdrawn for the same or any other previous year. However, the domestic company can switch from this regime to the special tax regime of Section 115BAA.

For Section 115BAA – Once the option has been exercised for any previous year, it cannot be subsequently withdrawn for the same or any other previous year.

For Section 115BAB – Once the option has been exercised for any previous year, it cannot be subsequently withdrawn for the same or any other previous year.

Consequences of not computing total income as per the regime

For Section 115BAA – Where a domestic company after opting for this regime does not compute its total income in accordance with the provisions thereof in any previous year, the option for this regime shall become invalid for that previous year as well as subsequent years.

Thus, once a domestic company fails to compute its total income in accordance with the provisions of this regime, it shall never be able to opt for this regime again. In such cases, the company’s total income shall be computed as if the option had not been exercised for the relevant previous year and subsequent years.

For Section 115BAB – Where a domestic company after opting for this regime does not comply with conditions of this regime in any previous year, the option for this regime shall become invalid for that previous year as well as subsequent years. In such cases, the company’s total income shall be computed as if the option had not been exercised for the relevant previous year and subsequent years.

Thus, once a domestic company fails to comply with the conditions of this regime, it shall never be able to opt for this regime again. However, in such a situation, the domestic company can switch to Section 115BAA.

Applicability of MAT

For Section 115BA – If a domestic company has exercised the option of Section 115BA, the provisions of Minimum Alternate Tax (MAT) shall be applicable.

For Section 115BAA – If a domestic company has exercised the option of Section 115BAA, the provisions of MAT shall not be applicable.

For Section 115BAB – If a domestic company has exercised the option of Section 115BAB, the provisions of MAT shall not be applicable.

Specified exemptions and deductions

The option to pay tax at lower rates shall be available only if the total income of a domestic company is computed without claiming the following exemptions or deductions:

Exemptions/Deductions

Deduction for units established in Special Economic Zones (SEZ) [Section 10AA]

Additional depreciation in respect of new plant and machinery [Section 32(1)(iia)]

Deduction for investment in new plant and machinery in notified backward areas [Section 32AD]

Deduction in respect of tea, coffee, or rubber business [Section 33AB]

Deduction in respect of business consisting of prospecting or extraction or production of petroleum or natural gas in India [Section 33ABA]

Deduction for donation made to approved scientific research association, university college, or other institutes for doing scientific research which may or may not be related to business [Section 35(1)(ii)]

Deduction for payment made to an Indian company for doing scientific research which may or may not be related to business [Section 35(1)(iia)]

Deduction for donation made to university, college, or other institution for doing research in social science or statistical research [Section 35(1)(iii)]

Deduction for donation made to National Laboratory or IITs, etc. for doing scientific research which may or may not be related to business [Section 35(2AA)]

Deduction for capital expenditure (excluding the cost of land and building) on the scientific research relating to the business of bio-technology or manufacturing any article or thing [Section 35(2AB)]

Deduction in respect of capital expenditure incurred in respect of certain specified businesses, i.e., cold chain facility, warehousing facility, etc. [Section 35AD]

Deduction for expenditure on agriculture extension project [Section 35CCC]

Deduction for expenditure on skill development project [Section 35CCD]

Deduction in respect of certain incomes other than specified under Section 80JJAA or Section 80LA(1A)* or Section 80M** [Chapter VI-A]

* An eligible assessee being a Unit of an IFSC can claim a deduction under section 80LA(1A).

** Domestic company opting for Section 115BAA or Section 115BAB can claim a deduction under Section 80M.

Special Tax Regimes for Individual, HUF, AOP, BOI or AJP

Section 115BAC allows an individual, HUF, AOP (other than a co-operative society), BOI, or AJP to pay income tax at lower tax rates (plus surcharge and cess) provided the total income is computed without claiming specified exemptions or deductions. The special income shall be taxable at the special rates specified in respective provisions of the Act.

The Finance Act, 2023 makes it a default tax regime. If an assessee does not want to pay tax according to the new tax regime, he will have to explicitly opt out of it and choose to be taxed under the old tax regime in a prescribed manner.

Conditions to be satisfied

The following conditions should be satisfied in order to avail the benefit of a lower tax rate under this provision:

• Total income of the assessee has been computed without claiming specified exemptions and deductions;
• Total income of the assessee has been computed without set-off of losses or depreciation carried forward from earlier years if such loss or depreciation is attributable to any of the specified exemptions and deductions;
• Total income of the assessee has to be computed without set-off of any loss under the head ‘Income from house property’ with any other head of income;
• Total income of the assessee is calculated after claiming depreciation in the prescribed manner; and
• Total income of the assessee has to be computed without claiming any exemptions or deductions for allowances or perquisites provided under any other law for the time being in force.

Tax Rates

• For the assessment year 2025-26, the income shall be taxable at the following rate:

Total Income (Rs)	Rate
Upto 3,00,000	Nil
From 3,00,001 to 7,00,000	5%
From 7,00,001 to 10,00,000	10%
From 10,00,001 to 12,00,000	15%
From 12,00,001 to 15,00,000	20%
Above 15,00,000	30%
A maximum rebate of Rs. 25,000 is allowed under section 87A from the amount of income tax on total income, which is chargeable to tax under section 115BAC(1A). However, this rebate is allowed if the total income of assessee chargeable to tax under section 115BAC(1A) is up to Rs. 7,00,000. Further, if the total income chargeable to tax under section 115BAC(1A) exceeds Rs. 7,00,000 and the tax payable on such income exceeds the difference between the total income and Rs. 7,00,000, he can claim a rebate with marginal relief to the extent of the difference between the tax payable on such total income and the amount by which it exceeds Rs. 7,00,000 Further, under the new tax regime, the Surcharge and Health & Education Cess rates will be the same as those applicable under the normal tax regime, with one exception. If the total income of an assessee exceeds Rs. 5 crores, the surcharge rate will be 25% instead of 37%.

• For the assessment year 2026-27, the income shall be taxable at the following rate:

Total Income (Rs)	Rate
Upto 4,00,000	Nil
From 4,00,001 to 8,00,000	5%
From 8,00,001 to 12,00,000	10%
From 12,00,001 to 16,00,000	15%
From 16,00,001 to 20,00,000	20%
From 20,00,001 to 24,00,000	25%
Above 24,00,000	30%
A maximum rebate of Rs. 60,000 is allowed under section 87A from the amount of income tax on total income, which is chargeable to tax under section 115BAC(1A). However, this rebate is allowed if the total income of assessee chargeable to tax under section 115BAC(1A) is up to Rs. 12,00,000. Note: The total rebate under section 87A shall not exceed the amount of income tax payable as per the rates provided in section 115BAC(1A) [effective from AY 2026-27] Further, if the total income chargeable to tax under section 115BAC(1A) exceeds Rs. 12,00,000 and the tax payable on such income exceeds the difference between the total income and Rs. 12,00,000, he can claim a rebate with marginal relief to the extent of the difference between the tax payable on such total income and the amount by which it exceeds Rs. 12,00,000 Further, under the new tax regime, the Surcharge and Health & Education Cess rates will be the same as those applicable under the normal tax regime, with one exception. If the total income of an assessee exceeds Rs. 5 crores, the surcharge rate will be 25% instead of 37%.

Rate of surcharge

The rate of surcharge for the Assessment Year 2025-26 and 2026-27shall be as under:

Nature of Income	Range of Total Income
	Up to Rs. 50 lakhs	More than Rs. 50 lakhs but up to Rs. 1 crore	More than Rs. 1 crore but up to Rs. 2 crores	More than Rs. 2 crores
Short-term capital gain covered under Section 111A or Section 115AD	Nil	10%	15%	15%
Long-term capital gain covered under Section 112A or Section 115AD or Section 112	Nil	10%	15%	15%
Dividend income (not being dividend income chargeable to tax at a special rate under sections 115A, 115AB, 115AC, 115ACA)	Nil	10%	15%	15%
Unexplained income chargeable to tax under Section 115BBE	25%	25%	25%	25%
Any other income**	Nil	10%	15%	25%

* The Finance Act, 2022 has put a cap on the rate of surcharge to 15% in case of an AOP consisting of only companies as its members. The rate of surcharge in case of such AOP shall be as follows:

– 10% where total income exceeds Rs. 50 lakh but does not exceed Rs. 1 crore;

– 15% where total income exceeds Rs. 1 crore.

Further, the amount of income tax and the surcharge shall be increased by health and education cess calculated at the rate of 4% of such income tax and surcharge.

Time limit to opt for the scheme

If an assessee having income (other than income from a business or profession) wants to opt for the old tax regime for a relevant year, he can do so while filing his return of income for the relevant assessment year under Section 139(1).

However, an assessee having income from a business or profession can also opt out of the new tax regime and switch to the old tax regime for a relevant year. However, he has to exercise this option in a prescribed manner on or before the due date for filing the return of income under Section 139(1) for such year. Further, once the option of the old tax regime is exercised by him, it shall apply for the year in which the option is exercised and for the subsequent assessment year.

Applicability of AMT

If an eligible assessee has exercised the option of Section 115BAC, the provisions of AMT under Section 115JC shall not be applicable.

Specified exemptions and deductions

The option to pay tax at lower rates shall be available only if the total income of an eligible assessee is computed without claiming the following exemptions or deductions:

Exemptions/Deductions

Leave Travel concession [Section 10(5)]

House Rent Allowance [Section 10(13A)]

Official and personal allowances (other than those as may be prescribed) [Section 10(14)]

Allowances to MPs/MLAs [Section 10(17)]

Exemption for income of minor [Section 10(32)]

Deduction for units established in Special Economic Zones (SEZ) [Section 10AA]

Entertainment Allowance [Section 16(ii)]

Professional Tax [Section 16(iii)]

Interest on housing loan (In case of self-occupied house property) [Section 24(b)]

Additional depreciation in respect of new plant and machinery [Section 32(1)(iia)]

Deduction for investment in new plant and machinery in notified backward areas [Section 32AD]

Deduction in respect of tea, coffee, or rubber business [Section 33AB]

Deduction in respect of business consisting of prospecting or extraction or production of petroleum or natural gas in India [Section 33ABA]

Deduction for donation made to approved scientific research association, university college, or other institutes for doing scientific research which may or may not be related to business [Section 35(1)(ii)]

Deduction for payment made to an Indian company for doing scientific research which may or may not be related to business [Section 35(1)(iia)]

Deduction for donation made to university, college, or other institution for doing research in social science or statistical research [Section 35(1)(iii)]

Deduction for donation made to National Laboratory or IITs, etc. for doing scientific research which may or may not be related to business [Section 35(2AA)]

Deduction in respect of capital expenditure incurred in respect of certain specified businesses, i.e., cold chain facility, warehousing facility, etc. [Section 35AD]

Deduction for expenditure on agriculture extension project [Section 35CCC]

Deduction in respect of certain incomes other than specified under Section 80CCD(2)*, Section 80CCH(2)*, Section 80JJAA, or Section 80LA(1A)** [Chapter VI-A]

* An eligible assessee opting for Section 115BAC can claim a deduction under Section 80CCD(2) and 80CCH(2).

** An eligible assessee being a Unit of an IFSC can claim a deduction under section 80LA(1A).

Special Tax Regimes for Co-operative society

A resident co-operative society is allowed to opt for any lower tax rate regimes subject to the fulfilment of certain conditions. The tax rates under these regimes vary from 15% to 22%. A resident co-operative society can be taxable under any of the following tax regimes:

(a) Section 115BAD

(b) Section 115BAE

Conditions to be satisfied

(a) For Section 115BAD

The following conditions should be satisfied in order to avail the benefit of a lower tax rate under this provision:

• • Total income of the co-operative society has been computed without claiming specified exemptions and deductions;
  • Total income of the co-operative society has been computed without set-off of losses or depreciation carried forward from earlier years if such loss or depreciation is attributable to any of the specified exemptions and deductions; and
  • Total income of the co-operative society is calculated after claiming depreciation in the prescribed manner.

(d)For Section 115BAE

The following conditions should be satisfied in order to avail the benefit of a lower tax rate under this provision:

• The assessee is a resident co-operative society and registered under the Co-operative Societies Act, 1912, or in any State Co-operative Societies Act;
• The co-operative society should be set up and registered on or after 01-04-2023;
• The co-operative society is not engaged in any business other than the business of manufacture or production of any article or thing and research in relation to, or distribution of, such article or thing manufactured or produced by it. Further, the co-operative society should commence manufacturing or production of an article or thing on or before 31-03-2024.

It is to be noted that the business of manufacture or production of any article or thing shall include the business of generation of electricity but it shall not include the following businesses:

✓ development of computer software in any form or in any media;

✓ mining;

✓ conversion of marble blocks or similar items into slabs;

✓ bottling of gas into cylinder;

✓ printing of books or production of cinematograph film; or

✓ Any other notified business;

• • The co-operative society must not be formed by splitting up or reconstruction of an existing business;
  • The co-operative society must not use any machinery or plant previously used for any purpose. However, there are two exceptions:

i. Any plant or machinery which was used outside India by any other person shall not be treated as old machinery or plant if the following conditions are satisfied:

✓ Before the date of installation by the assessee, such machinery or plant was not used in India;

✓ Such machinery or plant has been imported from any country outside India; and

✓ No deduction on account of depreciation has been allowed or allowable in respect of such machinery or plant before the date of installation by the assessee.

ii. The condition of not using the old machinery or plant shall be deemed to have been complied with if the value of old plant and machinery does not exceed 20% of the total value of plant and machinery;

• Total income of the co-operative society has been computed without claiming specified exemptions and deductions;
• Total income of the co-operative society has been computed without set-off of losses or depreciation carried forward from earlier years if such loss or depreciation is attributable to any of the specified exemptions and deductions; and
• Total income of the co-operative society is calculated after claiming depreciation in the prescribed manner.

Tax Rates

For Section 115BAD – Section 115BAD allows a co-operative society to pay income tax at the rate of 22% (plus 10% surcharge and 4% cess). The special income shall be taxable at the special rates specified in respective provisions of the Act.

For Section 115BAE -The applicable tax rates in the case of resident co-operative society opting for section 115BAE are as follows:

Income	Tax Rates
Income from manufacturing activities	15%
Income from non-manufacturing activities*	22%
Short-term capital gain from transfer of depreciable assets	15%
Short-term capital gain from transfer of non-depreciable assets	22%
Excess profit derived due to arranged affairs (See Note)	30%
Special Incomes	Special tax rates
* No deduction or allowance in respect of any expenditure or allowance shall be allowed in computing such income.

The tax calculated on the total income shall be further increased by the surcharge at the rate of 10% of the tax on total income. Further, the amount of income tax and the surcharge shall be increased by health and education cess calculated at the rate of 4% of such income tax and surcharge. The special income shall be taxable at the special rates specified in respective provisions of the Act.

Time limit to opt for the scheme

For Section 115BAD – The eligible co-operative society has to exercise the option on or before the due date for furnishing the returns of income, which it is required to furnish under the Act. This option should be exercised by electronically furnishing Form No. 10-IF.

For Section 115BAE – The eligible co-operative society has to exercise the option in the prescribed manner on or before the due date for furnishing the first returns of income under Section 139(1) for any previous year relevant to the assessment year commencing on or after 01-04-2024.

Withdrawal from the scheme

For Section 115BAD – Once the option has been exercised for any previous year, it cannot be subsequently withdrawn for the same or any other previous year.

For Section 115BAE – Once such an option is exercised, it shall apply to subsequent assessment years and cannot be subsequently withdrawn for the same or any other previous year.

Consequences of not complying with the conditions of the regime

For Section 115BAD – Where a co-operative society fails to satisfy the conditions specified under this section in any previous year, the option for this regime shall become invalid for that previous year as well as subsequent years. In such cases, the co-operative society’s total income shall be computed as if the option had not been exercised for the relevant previous year and subsequent years.

For Section 115BAE – Where a co-operative society after opting for this regime does not comply with conditions of this regime in any previous year, the option for this regime shall become invalid for that previous year as well as subsequent years. In such cases, the co-operative society’s total income shall be computed as if the option had not been exercised for the relevant previous year and subsequent years.

Applicability of AMT

If a co-operative society has exercised the option of Section 115BAD or Section 115BAE, the provisions of Alternate Minimum Tax (AMT) shall not be applicable.

Specified exemptions and deductions

The option to pay tax at lower rates shall be available only if the total income of an eligible co-operative society is computed without claiming the following exemptions or deductions:

Exemptions/Deductions	115BAD	115BAE
Deduction for units established in Special Economic Zones (SEZ) [Section 10AA]	✓	✓
Additional depreciation in respect of new plant and machinery [Section 32(1)(iia)]	✓	✓
Deduction for investment in new plant and machinery in notified backward areas [Section 32AD]	✓	–
Deduction in respect of tea, coffee, or rubber business [Section 33AB]	✓	✓
Deduction in respect of business consisting of prospecting or extraction or production of petroleum or natural gas in India [Section 33ABA]	✓	✓
Deduction for donation made to approved scientific research association, university college, or other institutes for doing scientific research which may or may not be related to business [Section 35(1)(ii)]	✓	✓
Deduction for payment made to an Indian company for doing scientific research which may or may not be related to business [Section 35(1)(iia)]	✓	✓
Deduction for donation made to university, college, or other institution for doing research in social science or statistical research [Section 35(1)(iii)]	✓	✓
Deduction for donation made to National Laboratory or IITs, etc. for doing scientific research which may or may not be related to business [Section 35(2AA)]	✓	✓
Deduction in respect of capital expenditure incurred in respect of certain specified businesses, i.e., cold chain facility, warehousing facility, etc. [Section 35AD]	✓	✓
Deduction for expenditure on agriculture extension project [Section 35CCC]	✓	✓
Deduction in respect of certain incomes other than specified under Section 80JJAA or Section 80LA(1A)* [Chapter VI-A]	✓	✓

* An eligible assessee being a Unit of an IFSC can claim a deduction under section 80LA(1A).

MCQs on Special regimes for taxation

Q1. Special tax regime under section 115BA can be availed by a domestic company set up or registered on or after __________.

(a) 01-03-2017

(b) 01-07-2016

(c) 01-04-2016

(d) 01-03-2016

Correct answer: (d)

Explanation: Special tax regime under section 115BA can be availed by a domestic company set up and registered on or after 01-03-2016.

Q2. The domestic company is required to pay tax at the rate of __________ if it opted Section 115BAA.

(a) 25%

(b) 15%

(c) 22%

(d) 20%

Correct answer: (c)

Explanation: Under section 115BAA, the domestic company is required to pay tax at the rate of 22%. However, the special income shall be taxable at the special rates specified in respective provisions of the Act.

Q3. What will be the rate of surcharge under section 115BA, if the total income is above Rs. 1 crore but less than Rs. 10 crores?

(a) 7%

(b) 10%

(c) 12%

(d) 15%

Correct answer: (a)

Explanation: Domestic Company opting for section 115BA is liable to pay surcharge at the rate of 7% if the total income is above Rs. 1 crore but up to Rs. 10 crores and 12% if the total income exceeds Rs. 10 crores.

Q4. What will be the rate of surcharge under section 115BAB, if the total income exceeds Rs. 10 crores?

(a) 7%

(b) 10%

(c) 12%

(d) 15%

Correct answer: (b)

Explanation: Domestic Company opting for section 115BAB is liable to surcharge at the rate of 10% irrespective of the total income.

Q5. The eligible domestic company has to exercise the option for opting special tax regime under section 115BAB ___________________, which the company is required to furnish under the Act.

(a) on or before the due date for furnishing the first of the returns of income

(b) on or before the due date for furnishing the returns of income

(c) at any time during the year

(d) None of the above

Correct answer: (a)

Explanation: For section 115BAB, the eligible domestic company has to exercise the option on or before the due date for furnishing the first of the returns of income, which the company is required to furnish under the Act.

Q6. For opting special tax regime under Section 115BAA,the option should be exercised by electronically furnishing _________-.

(a) Form No. 10-IA

(b) Form No. 10-IB

(c) Form No. 10-IC

(d) Form No. 10-ID

Correct answer: (c)

Explanation: The option to opt for section 115BAA should be exercised by electronically furnishing Form No. 10-IC.

Q7. Special Tax Regime under section 115BAC is not applicable to which of the following persons?

(a) Association of Persons

(b) Body of Individuals

(c) Co-operative Society

(d)Artificial Juridical Person

Correct answer: (c)

Explanation: Section 115BAC allows an individual, HUF, AOP (other than a co-operative society), BOI, or AJP to pay income tax at lower tax rates (plus surcharge and cess) provided the total income is computed without claiming specified exemptions or deductions.

Q8. Under section 115BAE, the resident co-operative society is required to pay tax at the rate of __________ on income from manufacturing activities.

(a) 25%

(b) 15%

(c) 22%

(d) 20%

Correct answer: (b)

Explanation: Under section 115BAE, the resident co-operative society is required to pay tax at the rate of 15% on income from manufacturing activities.

Q9. In which of the following sections, alternate minimum tax (AMT) is applicable?

(a) Section 115BAC

(b) Section 115BAD

(c) Section 115BAE

(d) None of the above

Correct answer: (d)

Explanation: If an eligible assessee has exercised the option of Section 115BAC, the provisions of AMT under Section 115JC shall not be applicable. Further, if a co-operative society has exercised the option of Section 115BAD or Section 115BAE, the provisions of Alternate Minimum Tax (AMT) shall not be applicable.

Q10 For the assessment year 2025-26, the new tax regime of Section 115BAC is a default tax regime.

(a) True

(b) False

Correct answer: (a)

Explanation: The Finance Act, 2023 makes the new tax regime of Section 115BAC a default tax regime from the assessment year 2024-25. If an assessee does not want to pay tax according to the new tax regime, he will have to explicitly opt out of it and choose to be taxed under the old tax regime in a prescribed manner.

TDS on benefit or perquisite arising from business or profession

Disclaimer: The contents of this document are for information purposes only. This aims to enable public to have a quick and an easy access to information and do not purport to be legal documents. Viewers are advised to verify the content from Government Acts/Rules/Notifications etc.

TDS on benefit or perquisite arising from business or profession

Section 194R provides that person responsible for providing to a resident, any benefit or perquisite, arising from business or exercise of a profession by such resident, shall ensure that, before providing such benefit or perquisite, tax is deducted from the value of such benefit or perquisite. The tax shall be deducted at the rate of 10% of the value of such benefit or perquisite. This provision is applicable with effect from 01-07-2022.

Deductor

Any person responsible for providing any benefit or perquisite, whether convertible into money or not, is required to ensure that the tax required to be deducted has been deducted in respect of such benefit or perquisite under Section 194R. The deductor can be a resident or a non-resident person. The tax shall be deducted before providing benefit or perquisite to the resident person.

For this purpose, the expression ‘person responsible for providing’ means the person providing such benefit or perquisite, or in the case of a company, the company itself, including the principal officer thereof.

However, this provision shall not apply to an individual or a HUF whose total sales, gross receipts, or turnover does not exceed Rs. 1 crore in the case of business or Rs. 50 lakhs in the case of the profession during the financial year immediately preceding the financial year in which such benefit or perquisite, as the case may be, is provided by such person.

Deductee

Tax is required to be deducted under this provision if the benefit or perquisite is provided to a resident person and it is arising from business or the exercise of a profession by such resident.

Rate of TDS and Threshold limit

Tax is required to be deducted at the rate of 10% of the value or aggregate of the value of benefit or perquisite. The rate shall not be further increased by Surcharge and Health & Education Cess.

If the deductee does not furnish PAN, the tax shall be deducted at the rate of 20% as per Section 206AA or if the deductee has not furnished a return of income for a specified period, the payer shall deduct tax at the rate of 20% as per the Section 206AB.

Where both the provision of Section 206AA and Section 206AB are applicable, that is, the deductee has neither furnished his PAN to the deductor nor has he furnished his return of income for the specified period, the tax shall be deducted at the rates provided in section 206AA or section 206AB, whichever is higher.

Note: the provisions of section 206AB are omitted w.e.f. 01-04-2025.

The tax shall be deducted under this provision if the value or aggregate of the value of the benefit or perquisite provided or likely to be provided during the financial year exceeds Rs. 20,000. In such a situation, the tax will be deducted on the entire value of the benefit or perquisite and not merely the excess of Rs. 20,000.

TDS where benefit or perquisite is provided in kind

The first proviso to section 194R(1) provides that where the benefit or perquisite is wholly in kind or partly in cash and partly in kind but such part in cash is not sufficient to meet the liability of deduction of tax in respect of the whole of such benefit or perquisite, the person responsible for providing such benefit or perquisite shall, before releasing the benefit or perquisite, ensure that tax required to be deducted has been paid in respect of the benefit or perquisite.

Where the payee himself pays tax, the tax would be required to be paid in the form of advance tax. The tax deductor may rely on a declaration and the copy of the advance tax payment challan provided by the recipient confirming that the tax required to be deducted on the benefit/perquisite has been deposited. This would be then required to be reported in the TDS return along with the challan number.

Valuation of benefit or perquisite for TDS

The valuation would be based on the fair market value of the benefit or perquisite except in the following cases:—

(a) The benefit/perquisite provider has purchased the benefit/perquisite before providing it to the recipient. In that case, the purchase price shall be the value for such benefit/perquisite.

(b) The benefit/perquisite provider manufactures such items given as benefit/perquisite, then the price that it charges to its customers for such items shall be the value for such benefit/perquisite.

Guidelines on Section 194R

The CBDT is empowered to issue guidelines for removing the difficulties arising in giving effect to the provisions of this section. Each such guideline shall be laid before each house of parliament and it shall be binding on the Income-tax authorities and the person providing the benefit or perquisite, i.e., deductor.

In the exercise of this power, the CBDT has issued Circular No. 12, dated 16-06-2022, and Circular No. 18, dated 13-09-2022 for the following guidelines:

Whether Section 194R apply only `when benefit or perquisite is taxable under Section 28(iv)?

The deductor is not required to check whether the amount of benefit or perquisite that he is providing would be taxable in the hands of the recipient under Section 28(iv) of the Act.

Whether Section 194R apply only when benefit or perquisite is taxable in the hands of the recipient?

Section 194R casts an obligation on the person responsible for providing any benefit or perquisite to a resident, to deduct tax at source @10%. There is no further requirement to check whether the amount is taxable in the hands of the recipient or under which section it is taxable.

Whether section 194R apply where the benefit or perquisite is provided in the form of capital asset?

It has been held by the various courts that benefits or perquisites shall be taxable in the hands of the recipient even if they are in the nature of the capital asset. The asset given as benefit or perquisite may be a capital asset in a general sense of the term like car, land, etc. but in the hands of the recipient it is benefit or perquisite, and, accordingly, section 194R shall also apply in such cases.

Whether the recipient can claim depreciation on an asset received as a benefit?

If a person receives an asset as a gift and uses such asset in his business or profession then he will be allowed to claim depreciation on such asset if the following conditions are satisfied:

(a) Provider of such gift or benefit deduct tax or ensures payment of tax under Section 194R;

(b) Recipient includes this gift or benefit as his income in the income-tax return.

(c) The amount of benefit shown as income on the income-tax return would be deemed as the “actual cost” of the asset.

(d) Recipient fulfills the other conditions for claiming depreciation.

Whether section 194R apply in case of settlement or waiver of loan by banks or financial institutions?

Waiver or settlement of a loan by banks or financial institutions may be an income for the borrower. However, requiring banks or financial institutions to deduct tax under Section 194R on such transactions would put an extra cost on them because they would be required to bear the burden of tax in addition to taking a haircut. Hence, to remove the difficulty, it is clarified that the following banks or financial institutions would not be required to deduct tax under section 194R on one-time loan settlement with borrowers or waiver of loan:

(a) Public Financial Institution;

(b) Scheduled Bank;

(c) Cooperative Bank (other than a primary agricultural credit society);

(d) Primary Co-operative Agricultural and Rural Development Bank;

(e) State Financial Corporation or an institution notified under State Financial Corporation Act;

(f) State Industrial Investment Corporation being a Government Company, engaged in the business of providing long-term finance for industrial projects;

(g) Deposit-taking NBFC;

(h) Systemically Important Non-deposit taking NBFC;

(i) Public company engaged in providing long-term finance for the construction or purchase of houses in India for residential purpose and which is registered in accordance with the guidelines/direction issued by the National Housing Bank;

(j) Asset Reconstruction Companies.

It is to be noted that the relaxation from deduction of tax is provided only to the aforesaid banks or institutions. Thus, if the loan is waived or settled by any other lender then he would be required to deduct tax under Section 194R.

Further, the taxability of settlement or waiver of a loan in the hands of the borrower would be governed by the relevant provisions of the Act even if the lender is not required to deduct tax under Section 194R.

Whether sales discounts, cash discounts, and rebates are benefit or perquisite?

Sales discounts, cash discounts, or rebates allowed to customers from the listed retail price represent a lesser realization of the sale price itself. To that extent, the purchase price of customers is also reduced.

Logically these are also benefits though related to sales/purchases. Since TDS under section 194R of the Act is applicable on all forms of benefit/perquisite, tax is required to be deducted. However, it is seen that subjecting these to tax deduction would put sellers in difficulty. To remove such difficulty it is clarified that no tax is required to be deducted under section 194R of the Act on sales discounts, cash discounts, and rebates allowed to customers.

However, at the same time, it is clarified in the Circular that this relaxation should not be extended to other benefits provided by the seller in connection with its sale.

To illustrate, the following are some of the examples of benefits or perquisites on which tax is required to be deducted under section 194R (the list is not exhaustive):

(a) When a person gives Free Samples.

(b) When a person gives incentives (other than discount, or rebate) in the form of cash or kind such as car, TV, computers, gold coin, mobile phone, etc.

(c) When a person sponsors a trip for the recipient and his/her relatives upon achieving certain targets.

(d) When a person provides free ticket for an event.

(e) When a person gives medicine samples free to medical practitioners.

Whether section 194R apply on supplying of free goods under promotional schemes like ‘buy more get more’?

Where free items from the stock of the seller are being offered with the purchase of some items, it is clarified that Section 194R shall not apply in such a case.

For instance, if the seller offers 2 items free with the purchase of 10 items. In substance, the seller is actually selling and the buyer is buying the 12 items at a price of 10 items. Thus, the seller and buyer record the transaction at the same value. In such a situation, there could be difficulty in applying the section 194R provision. Hence, to remove the difficulty it is clarified that on the above facts, no tax is required to be deducted.

Whether section 194R apply if instead of providing the benefit or perquisite directly to an entity, it is provided to the owner, director, or employee thereof?

It is clarified that where the benefit or perquisite is used by the owner, director, or employee of the recipient entity or their relatives who in their individual capacity may not be carrying on business or exercising a profession, the tax shall be required to be deducted in the name of recipient entity since the usage by owner/director/employee or relatives thereof is by virtue of their relation with the recipient entity and in substance, the benefit or perquisite has been provided to the recipient entity.

To illustrate, the free medicine sample may be provided by a company to a doctor who is an employee of a hospital. The TDS under section 194R is required to be deducted by the company in the hands of the hospital as the benefit/perquisite is provided to the doctor on account of him being an employee of the hospital. Thus, in substance, the benefit/perquisite is provided to the hospital.

The hospital may subsequently treat this benefit/perquisite as the perquisite given to its employees (if the person who used it is his employee) under Section 17 and deduct tax under Section 192. In such a case it would be first taxable in the hands of the hospital and then allowed as a deduction as salary expenditure. Thus, ultimately the amount would get taxed in the hands of the employee and not in the hands of the hospital. The hospital can get the credit of tax deducted under section 194R by furnishing its return of income.

Similarly, if the doctor is not an employee of the hospital but rather working as a consultant in the hospital. In this case, the benefit or perquisite provider may deduct tax under section 194R with the hospital as a recipient, and then the hospital may again deduct tax under section 194R for providing the same benefit or perquisite to the consultant doctor. To remove the difficulty, as an alternative, the original benefit or perquisite provider may directly deduct tax under section 194R of the Act in the case of the consultant doctor as a recipient.

Here, it is to be noted that the threshold limit of Rs. 20,000 shall be required to be seen with respect to the recipient entity. For instance, if a pharmaceutical company provides benefits of worth Rs. 5000 to 10 doctors working as an employee in a hospital. The value of benefit would be seen with respect to the hospital and not the doctors. Thus, the aggregate value of the benefit provided in this case is Rs. 50,000, and, accordingly, the tax shall be required to be deducted.

Whether section 194R apply where the benefit or perquisite is provided to a Government entity?

The provision of section 194R shall not apply if the benefit or perquisite is being provided to a Government entity, like a Government hospital, not carrying on business or profession.

Whether the amount of GST be included in the value of benefit or perquisite for TDS under section 194R?

The CBDT has clarified that GST will not be included for the purposes of valuation of benefit/perquisite for TDS under section 194R.

If an entity provides its product to social media influencers for publicity, will it be treated as a benefit or perquisite?

It is clarified that if the social media influencer returned the product like Car, Mobile, Outfit, Cosmetics, etc. to the entity after using it for rendering his services, i.e., social media influence, then it will not be treated as a benefit or perquisite for the purposes of section 194R. However, if the product is retained by the social media influencer then it will be in the nature of benefit/perquisite, and tax is required to be deducted accordingly under section 194R.

Whether reimbursement of out of pocket expenses would attract TDS under section 194R?

It is clarified that if the expenditure in respect of which the reimbursement is made is invoiced in the name of the person who is making the reimbursement then it shall not be treated as benefit or perquisite for the purpose of section 194R.

However, if the invoice is not in the name of the person making the reimbursement, then it shall be treated as a benefit or perquisite for the recipient, and, accordingly, tax shall be deducted under section 194R.

It is also clarified that even if the reimbursement is made on a cost-to-cost basis as per the terms of the agreement, it would attract TDS under section 194R if the expenditure in respect of which reimbursement is made is not invoiced in the name of the person making the reimbursement.

Whether reimbursement made to ‘pure agent’ would attract TDS under section 194R?

It is clarified that reimbursement made to a ‘pure agent’ would not be treated as a benefit/perquisite for the purpose of section 194R if the following conditions are satisfied:

(a) Pure agent makes payment to the third party on authorization by the principal;

(b) Amount of reimbursement is separately indicated in the invoice issued by the pure agent to the principal; and

Pure agent procures supplies from the third party in addition to the services he supplies on his own account.

Meaning of Pure Agent

“Pure agent” means a person who

(a) enters into a contractual agreement with the recipient of supply to act as his pure agent to incur expenditure or costs in the course of the supply of goods or services or both;

(b) neither intends to hold nor holds any title to the goods or services or both, so procured or provided as a pure agent of the recipient of supply;

(c) does not use for his own interest such goods or services so procured; and

(d) receives only the actual amount incurred to procure such goods or services in addition to the amount received for supply he provides on his own account.

Whether reimbursement would attract TDS under section 194R if it forms part of the consideration?

As per Circular No. 715, dated 08-08-1995, deduction of tax at source under Section 194C and Section 194J is made out of the gross amount of the bill including reimbursements. Thus, considering this fact, it is clarified that if the reimbursement forms part of the consideration in the bill on which tax is deducted under the relevant provisions of the Act (other than section 194R) then there will not be further liability for tax deduction under section 194R.

Whether expenditure pertaining to dealer or business conference be considered as benefit or perquisite for the purposes of section 194R?

It is clarified that the expenditure pertaining to deafer/business conference would not be considered as benefit or perquisite for the purposes of section 194R in a case where a dealer/business conference is held with the prime object to educate dealers/customers about any of the following or similar aspects:

• new product being launched
• discussion as to how the product is better than others
• obtaining orders from dealers/customers
• teaching sales techniques to dealers/customers
• addressing queries of the dealers/customers
• reconciliation of accounts with dealers/customers.

It is not necessary that all dealers are required to be invited in a conference for the expenses to be not considered as a benefit or perquisite. However, such conference must not be in the nature of incentives/benefits to select dealers/customers who have achieved particular targets. Further, in the following cases, the expenditure would be considered as benefit or perquisite for the purposes of section 194R:

(a) Expense attributable to leisure trip or leisure component, even if it is incidental to the dealer/business conference.

(b) Expenditure incurred for family members accompanying the person attending the dealer/business conference.

(c) Expenditure on participants of dealer/business conference for days which are on account of prior stay or overstay beyond the dates of such conference. However, a day immediately prior to the actual start date of the conference and a day immediately following the actual end date of the conference would not be considered as overstay.

Will section 194R apply if expenditure on dealer or business conference cannot be allocated to a particular dealer?

Where expenditure pertaining to dealer or business conference is treated as a benefit or perquisite for the participants, i.e., dealers, the benefit/perquisite provider is required to deduct tax under section 194R. Non-compliance with the provisions of section 194R would not only result in disallowance of such expense under Section 40(a)(ia) but may also result in treating the benefit/perquisite provider as assessee-in-default under Section 201.

To deduct tax under section 194R in respect of expenditures pertaining to dealer or business conferences, it is required to allocate such expenses to participating dealers. However, a dealer or business conference is a group activity. Thus, the allocation of expenses to each dealer may not be possible. Considering this fact, it is clarified that in such a situation, the benefit/perquisite provider may opt to not to claim the expenses, representing benefit or perquisite to dealers. If the benefit/perquisite provider decides to opt so, he will not be required to deduct tax under section 194R on such benefit/perquisite and therefore he will not be treated as assessee-in-default under Section 201.

Whether section 194R apply where the benefit or perquisite is provided by Embassy/High Commissions?

The provision of section 194R shall not apply if the benefit or perquisite is provided by the following:

(a) an organization in the scope of The United Nations (Privileges and Immunity Act) 1947;

(b) an international organization whose income is exempt under a specific Act of Parliament (such as the Asian Development Bank Act, 1966);

(c) an embassy;

(d) a High Commission;

(e) legation;

(f) commission;

(g) consulate;

(h) trade representation of a foreign state.

Whether section 194R apply on the issuance of bonus shares or right shares by a company?

It is clarified that tax under section 194R shall not be required to be deducted on the issuance of bonus shares or right shares by a company in which the public are substantially interested if bonus shares are issued or right shares are offered to all shareholders by such company.

Whether recipient can escape from tax liability if the provider of benefit or perquisite is not required to deduct tax under section 194R?

It is clarified that guidelines providing relaxation from deduction of tax under section 194R shall not impact the taxability of income in the hands of the recipient.

How to deposit TDS?

Tax deducted under this provision is required to be deposited to the credit of the Central Government through Challan ITNS 281 within 7 days from the end of the month in which the tax was deducted. However, the tax deducted during the month of March shall be deposited by 30th April of the next financial year.

Filing of TDS statement

The person responsible for the deduction of tax at source under this provision is required to file a statement of tax deducted at source in Form 26Q quarterly.

TDS Certificate

The deductor shall issue a TDS certificate to the assessee in Form No. 16A within 15 days from the due date of furnishing of the TDS statement.

Consequences for failure to deduct or deposit tax

Where any person responsible for deducting tax at source fails to deduct tax or after deducting fails to deposit the same, he shall be treated as assessee-in-default. In that case, interest under section 201 will be applicable.

If the deductor fails to deduct TDS, interest at the rate of 1% per month or part of the month shall be applicable, till such failure continues. Interest shall be calculated from the date when such tax was required to be deducted till the date such tax is actually deducted.

Further, if the deductor after having deducted the tax, fails to deposit the same to the credit of the Central Government, interest at the rate of 1.5% per month or part thereof shall be applicable till such failure continues. The interest computation shall commence from the date on which the tax was deducted and end with the date when such tax was deposited to the government.

Penalty and Prosecution

Failure to comply with the provisions of deduction of tax at source under this provision may result in penalties and prosecution as per the following provisions:

(a) If a person fails to deduct tax at source, he shall be liable for payment of penalty under Section 271C;

(b) If a person fails to ensure payment of tax, he shall be liable for payment of penalty under Section 271C and prosecution under Section 276B;

(c) If a person deducts tax but fails to deposit the same to the credit of the Central Government, he shall be liable for the penalty under Section 221 and prosecution under Section 276B.

However, no person shall be punishable under Section 276B if he proves that there was reasonable cause for the failure. Further, a person can also file an application for compounding of offence.

Consequences for failure to furnish TDS Statement?

Where any person fails to furnish a TDS statement, section 234E shall be applicable, wherein the deductor is liable to pay fees at the rate of Rs. 200 per day during such default continues. However, such fees should not exceed the amount of TDS.

Moreover, he shall be liable for penalties under sections 271H of Rs. 10,000 which can be extended to Rs. 100,000, and 272A of Rs. 500 for every day during which failure continues.

Consequences for failure to issue TDS Certificates

Where any person, responsible for issuing TDS Certificates, fails to issue such certificates, a penalty under section 272A shall be applicable of Rs. 500 for every day during which failure continues.

MCQs on TDS on benefit or perquisite arising from business or profession

Q1. The tax under section 194R shall be deducted if the value or aggregate of the value of the benefit or perquisite provided or likely to be provided during the financial year of goods purchased from the seller in the previous year exceeds ________.

(a) Rs. 20,000

(b) Rs. 10,000

(c) Rs. 50,000

(d) Rs. 5,000

Correct answer – (a)

Explanation: The tax shall be deducted under section 194R if the value or aggregate of the value of the benefit or perquisite provided or likely to be provided during the financial year exceeds Rs. 20,000.

Q2. What is the tax rate for the deduction of tax under section 194R?

(a) 5%

(b) 10%

(c) 1%

(d) 0.1%

Correct answer – (b)

Explanation: The tax shall be deducted under section 194Rat the rate of 10% of the value of benefit or perquisite.

Q3. Whether section 194R apply only when benefit or perquisite is taxable in the hands of the recipient?

(a) Yes

(b) No

Correct answer – (b)

Explanation: section 194R casts an obligation on the person responsible for providing any benefit or perquisite to a resident, to deduct tax at source @10%. There is no further requirement to check whether the amount is taxable in the hands of the recipient or under which section it is taxable.

Q4. Which of the following TDS return is required to be furnished if tax is deducted under section 194R?

(a) 26Q

(b) 27Q

(c) 24Q

(d) 26QD

Correct answer – (a)

Explanation: The person responsible for the deduction of tax at source under section 194R is required to file a statement of tax deducted at source in Form 26Q quarterly.

Q5. Tax deducted under section 194R is required to be deposited to the credit of the Central Government through Challan ________.

(a) ITNS 280

(b) ITNS 281

(c) ITNS 285

(d) ITNS 283

Correct answer – (b)

Explanation: Tax deducted under section 194R is required to be deposited to the credit of the Central Government through Challan ITNS 281 within 7 days from the end of the month in which the tax was deducted. However, the tax deducted during the month of March shall be deposited by 30th April of the next financial year.

Q6. Which form is required to be issued as a TDS certificate if tax is deducted under section 194R?

(a) 16A

(b) 16B

(c) 16C

(d) 16D

Correct answer – (a)

Explanation: The deductor shall issue a TDS certificate to the assessee in Form No. 16A within 15 days from the due date of furnishing of the TDS statement.

TDS on payment for the transfer of Virtual Digital Assets (VDAs)

Disclaimer: The contents of this document are for information purposes only. This aims to enable public to have a quick and an easy access to information and do not purport to be legal documents. Viewers are advised to verify the content from Government Acts/Rules/Notifications etc.

TDS on payment for the transfer of Virtual Digital Assets (VDAs)

Section 194S provides that any person who is responsible for paying to any resident any sum by way of consideration for the transfer of a virtual digital asset shall deduct tax from such sum. The tax shall be deducted at the rate of 1% of such sum.

Deductor

Any person responsible for paying to any resident person any sum by way of consideration for the transfer of a virtual digital asset is required to deduct tax at source under Section 194S. The person responsible for the deduction of tax under different circumstances shall be as follows:

(a) Where the buyer and seller of virtual digital asset know each other in an over-the-counter (OTC) deal, the buyer shall deduct tax at source.

(b) In case of exchange of VDAs, both payer and payee may be liable to deduct tax at source as the transfer of VDA happens from both sides.

(c) Where VDAs are transferred through an Exchange and payment to the seller is made directly by the exchange, In such cases, the exchange shall be liable to deduct tax at source.

(d) Where VDAs are transferred through an Exchange but the payment is made to the seller through a broker. In such case, both the Exchange and the broker shall be liable to deduct tax at source. However, if there is a written agreement between the Exchange and the broker that the broker shall be deducting tax on such payment, then such broker alone may deduct the tax.

(e) Where VDA being transferred is owned by the exchange itself, the primary responsibility to deduct tax shall be of the buyer or his broker. However, as an alternative, the Exchange may enter into a written agreement with the buyer or his broker that in regard to all such transactions the Exchange would be paying the tax on or before the due date for that quarter.

(f) Where one VDA is exchanged with another VDA through an Exchange, the primary responsibility to deduct tax is of though buyer and the seller. But, as an alternative, the Exchange may deduct tax based on a written contractual agreement with the buyer and the seller.

(g) Where the payment for the transfer of VDA is made through payment gateways, the payment gateway will not be required to deduct tax if the tax has been deducted by the person required to make deduction under this provision.

Deductee

Tax is required to be deducted if the consideration is paid or payable to a resident person. If the recipient of the consideration is a non-resident, the tax may be deductible under Section 195.

Rate of TDS

Tax is required to be deducted at the rate of 1% of the consideration. The rate shall not be further increased by Surcharge and Health & Education Cess.

If the deductee does not furnish PAN, the tax shall be deducted at the rate of 20% as per Section 206AA or if the deductee has not furnished a return of income for a specified period, the payer shall deduct tax at the rate of 1% (if the payer is a specified person) or 5% (if the payer is not a specified person) as per the Section 206AB.

Note: The provisions of Section 206AB are omitted w.e.f. 01-04-2025

Meaning of specified person

The following payers are the specified persons for the purpose of this provision:

a) An individual or a HUF, whose total sales, gross receipts, or turnover does not exceed Rs. 1 crore in case of business or Rs. 50 lakhs in case of a profession, during the financial year immediately preceding the financial year in which virtual digital asset is transferred;

b) An individual or a HUF who does not have any income under the head profits and gains of business or profession.

A specified person is not required to apply or obtain a Tax Deduction or Collection Account Number (TAN) for deducting tax under this provision. Thus, he shall be required to quote his PAN in challan and TDS statement.

Time of tax deduction

The tax shall be deducted at the time of payment by any mode or at the time of credit of such sum to the account of the resident, whichever is earlier. Where a person does intra-day trading in crypto currencies, the tax shall be deducted every time a transaction is squared-off.

Threshold limit

No tax shall be deducted under this provision if the aggregate consideration payable by any person during the financial year does not exceed Rs. 10,000 (Rs. 50,000 if consideration is payable by a specified person).

The tax required to be withheld under this provision shall be on the “net” consideration after excluding GST/charges levied by the deductor for rendering service.

TDS where consideration is in kind

Where the consideration for transfer of VDA is wholly in kind or partly in cash and partly in kind but the part in cash is not sufficient to meet the liability of deduction of tax in respect of the whole of such transfer. In such cases, the payer shall ensure that the tax required to be deducted has been paid before releasing the consideration.

The CBDT has clarified that where the payee (i.e., seller) himself pays tax, the tax would be required to be paid in the form of advance tax. The tax deductor may rely on a declaration along with a copy of the advance tax payment challan provided by the seller confirming that the tax required to be deducted on the consideration received for the transfer of virtual digital asset has been deposited. This would be then required to be reported in the TDS return along with the challan number.

TDS where the transaction is through an exchange

Where VDAs are transferred through an Exchange, the buyer would be crediting or making payment to the Exchange (either directly or through a broker). The Exchange then would be required to credit or make payment to the owner of VDA (either directly or through a broker). Since there can be multiple players involved in a transaction taking place through an Exchange, there is a possibility of tax deduction requirement under section 194S at multiple stages. To remove the difficulty that may arise while deducting tax under this provision in such cases, the CBDT provides as follows:

TDS where the broker is not involved

Tax may be deducted only by the Exchange on crediting or making payment to the seller of VDA.

It is to be noted that where the broker himself owns the VDA, he will be regarded as the seller of VDA, and, accordingly, the consideration paid or payable by the Exchange to the broker shall be subject to deduction of tax under this provision.

TDS where the broker is involved

Where the payment between Exchange and the seller is through a broker (and the broker is not the seller), the responsibility to deduct tax under this provision shall be on both the Exchange and the broker.

However, if there is a written agreement between the Exchange and the broker that broker shall be deducting tax on such payment, then broker alone may deduct the tax. In such a case, the Exchange would be required to furnish a quarterly statement in Form No. 26QF for all such transactions of the quarter on or before the due date.

In this case, the exchange shall be required to report the details of the broker (name, address, PAN, and TAN) and the details of the transaction (date, value of VDA, number of VDA, and total consideration paid/credited for transfer of VDA) in Form 26QF.

TDS where VDA is owned by the exchange itself

Where VDA being transferred is owned by the exchange itself, the primary responsibility to deduct tax shall be of the buyer or his broker.

However, as an alternative, the Exchange may enter into a written agreement with the buyer or his broker that in regard to all such transactions the Exchange would be paying the tax on or before the due date for that quarter. In such a case, the Exchange shall be required to fulfill the following conditions:

(a) It shall furnish a quarterly statement in Form 26QF for all such transactions of the quarter on or before the due date. The exchange shall be required to report details of the broker or buyer (name, address, PAN), details of the transaction (date, value of VDA, number of VDA, total consideration), and details of tax paid (date of tax payment, BSR code of bank, amount paid, serial number of challan) in Form 26QF; and

(b) It shall furnish its income tax return and all these transactions must be included in such return.

TDS where one VDA is exchanged with another through exchange

Where one VDA is exchanged with another VDA through an Exchange, the primary responsibility to deduct tax is of though buyer and the seller. But, as an alternative, the Exchange may deduct tax based on a written contractual agreement with the buyer and the seller.

If such an alternative is exercised, the exchange would be required to deduct tax for both legs of the transactions (i.e., on behalf of both parties) and pay it to the Government. The exchange would be required to report it in Form 26Q as tax deducted on both legs of the transaction.

In this case, it is possible that the tax amount deducted by the Exchange is also in kind (by withholding a portion of VDAs). Thus, tax deducted in the form of VDAs will be required to be converted into cash before it can be deposited with the Government. In this regard, Circular No. 13, dated 22-06-2022 has prescribed the following mechanism which is required to be adopted by the Exchanges:

(a) If the VDAs (towards tax deducted) are not primary (Primary VDAs are those VDAs which can be easily converted into INR like BT, ETH, USDT, USDC, etc.), then the Exchange shall immediately execute a market order for converting these non-primary VDAs into primary VDAs.

(b) If the VDAs (towards tax deducted) are primary, then the Exchange shall not convert these primary VDAs into INR immediately but will wait for the closure of the day.

(c) On the closure of the day at 00:00 hrs, all Primary VDAs, including those converted from non-primary VDAs (towards tax deduction) shall be converted into INR.

(d) The Exchange shall execute the order to convert Primary VDA into INR based on the open buy orders in the market.

(e) The Exchange liquidating the VDA shall be prohibited to be a buyer for these VDAs.

(f) Time stamps of the timing of orders to be maintained for the transactions executed in step (a).

(g) Price and quantity data for every matched trade in Step 4 shall be maintained by the Exchange and shall be available for verification.

(h) Customer will be issued a contract note over email which will include the amount of tax withheld in kind under Section 194S and the amount of INR realized from such tax withheld.

(i) The amount of INR realized by following the above procedure shall be deposited in the Government Account by the due date of deposit of TDS.

(j) No tax to be further deducted on converting the tax withheld in kind in the form of VDA into INR or from one VDA to another VDA and then into INR.

Overriding effect of Section 194S

Where a transaction is subject to TDS under Section 194S and any other section like 194-O, tax shall be deducted under Section 194S. However, where the payer deducts tax under Section 194S, it shall not absolve the payee from deduction of tax under relevant provisions.

For example, if an architect receives Bitcoin from his client as consideration for services, then the architect shall be liable to deduct tax under Section 194S as he is giving the consideration in the form of architecture services to the client transferring the VDA and, on the other side, the client may also be liable to deduct tax under section 194J as he is making payment in form of VDA for services provided by the architect.

Deposit of TDS

By specified person – Tax deducted under this provision is required to be deposited to the credit of the Central Government through Form 26QE within 30 days from the last day of the month in which the tax has been deducted.

By others – Tax deducted under this provision is required to be deposited to the credit of the Central Government through Challan ITNS 281 within 7 days from the end of the month in which the tax was deducted. However, the tax deducted during the month of March shall be deposited by 30th April of the next financial year.

Filing of TDS statement

By specified person – Where the person responsible for the deduction of tax at source under this provision is a specified person, he is required to file a challan-cum-statement in Form 26QE.

By others – Where the person responsible for the deduction of tax at source under this provision is not a specified person, he is required to file a statement of tax deducted at source in Form 26Q quarterly.

TDS Certificate

By specified person – The deductor (specified person) shall issue a TDS certificate to the assessee in Form No. 16E within 15 days from the due date of furnishing of the challan-cum-statement in Form No. 26QE.

By others – The deductor (other than a specified person) shall issue a TDS certificate to the assessee in Form No. 16A within 15 days from the due date of furnishing of the TDS statement.

Consequences for failure to deduct or deposit tax

Where any person responsible for deducting tax at source fails to deduct tax or after deducting fails to deposit the same, he shall be treated as assessee-in-default. In that case, interest under section 201 will be applicable.

If the deductor fails to deduct TDS, interest at the rate of 1% per month or part of the month shall be applicable, till such failure continues. Interest shall be calculated from the date when such tax was required to be deducted till the date such tax is actually deducted.

Further, if the deductor after having deducted the tax, fails to deposit the same to the credit of the Central Government, interest at the rate of 1.5% per month or part thereof shall be applicable till such failure continues. The interest computation shall commence from the date on which the tax was deducted and end with the date when such tax was deposited to the government.

Penalty and Prosecution

Failure to comply with the provisions of deduction of tax at source under this provision may result in penalties and prosecution as per the following provisions:

a) If a person fails to deduct tax at source, he shall be liable for payment of penalty under Section 271C;

b) If a person fails to ensure payment of tax, he shall be liable for payment of penalty under Section 271Cand prosecution under Section 276B;

c) If a person deducts tax but fails to deposit the same to the credit of the Central Government, he shall be liable for the penalty under Section 221and prosecution under Section 276B.

However, no person shall be punishable under Section 276B if he proves that there was reasonable cause for the failure. Further, a person can also file an application for compounding of offence.

Consequences for failure to furnish TDS Statement

Where any person fails to furnish a TDS statement, section 234E shall be applicable, wherein the deductor is liable to pay fees at the rate of Rs. 200 per day during such default continues. However, such fees should not exceed the amount of TDS.

Moreover, he shall be liable for penalties under sections 271H of Rs. 10,000 which can be extended to Rs. 100,000, and 272A of Rs. 500 for every day during which failure continues.

Consequences for failure to issue TDS Certificates

Where any person, responsible for issuing TDS Certificates, fails to issue such certificates, a penalty under section 272A shall be applicable of Rs. 500 for every day during which failure continues.

MCQs on TDS on payment for the transfer of virtual digital assets (VDAs)

Q1. The tax under section 194S shall be deducted if the aggregate consideration payable by any person (other than a specified person) during the financial year exceeds ________.

(a) Rs. 20,000

(b) Rs. 10,000

(c) Rs. 50,000

(d) Rs. 5,000

Correct answer – (b)

Explanation: The tax shall be deducted under section 194S if the aggregate consideration payable by any person during the financial year exceeds Rs. 10,000 (Rs. 50,000 if consideration is payable by a specified person).

Q2. What is the tax rate for the deduction of tax under section 194S?

(a) 5%

(b) 10%

(c) 1%

(d) 0.1%

Correct answer – (c)

Explanation: The tax shall be deducted under section 194S at the rate of 1% of the consideration.

Q3. Who is responsible for the deduction of tax under section 194Swhere the buyer and seller of VDA know each other in an over-the-counter (OTC) deal?

(a) Buyer

(b) Seller

Correct answer – (a)

Explanation: Where the buyer and seller of virtual digital asset know each other in an over-the-counter (OTC) deal, the buyer shall deduct tax at source under section 194S.

Q4. Who is responsible for the deduction of tax under section 194S where VDAs are transferred through an Exchange and payment to the seller is made directly by the exchange?

(a) Buyer

(b) Seller

(c) Exchange

Correct answer – (c)

Explanation: Where VDAs are transferred through an Exchange and payment to the seller is made directly by the exchange, In such cases, the exchange shall be liable to deduct tax at source under section 194S.

Q5. Which of the following TDS return is required to be furnished if tax is deducted by the specified person under section 194S?

(a) 26Q

(b) 27Q

(c) 24Q

(d) 26QE

Correct answer – (d)

Explanation: Where the person responsible for the deduction of tax at source under this provision is a specified person, he is required to file a challan-cum-statement in Form 26QE.

Q6. Tax deducted under section 194Sby a specified person is required to be deposited to the credit of the Central Government through Form 26QE within ________ from the last day of the month in which the tax has been deducted.

(a) 15 days

(b) 7 days

(c) 30 days

(d) None of the above

Correct answer – (c)

Explanation: Tax deducted under section 194S by a specified person is required to be deposited to the credit of the Central Government through Form 26QE within 30 days from the last day of the month in which the tax has been deducted.

Q7. Which form is required to be issued as a TDS certificate if tax is deducted by a specified person under section 194S?

(a) 16E

(b) 16B

(c) 16C

(d) 16D

Correct answer – (a)

Explanation: The deductor (specified person) shall issue a TDS certificate to the assessee in Form No. 16E within 15 days from the due date of furnishing of the challan-cum-statement in Form No. 26QE.

TDS on Purchase of Goods

Disclaimer: The contents of this document are for information purposes only. This aims to enable public to have a quick and an easy access to information and do not purport to be legal documents. Viewers are advised to verify the content from Government Acts/Rules/Notifications etc.

TDS on Purchase of Goods

Section 194Q provides that every buyer who is responsible for paying any sum to any resident seller for the purchase of any goods is required to deduct tax at source. The tax shall be deducted if the aggregate value of goods purchased from the seller in the previous year exceeds Rs. 50 lakh. The tax shall be deducted at the rate of 0.1% of the sum exceeding Rs. 50 lakh.

Deductor

Any person, being a buyer, is required to deduct tax at source under this provision if the following conditions are satisfied:

• He is carrying on a business;
• He is paying any sum to a resident person for the purchase of any goods;
• Total sales, gross receipts or turnover from the business exceeds Rs. 10 crores during the financial year immediately preceding the financial year in which such goods are purchased; and
• Goods are purchased from the seller for a value or aggregate of value exceeding Rs. 50 lakhs in any previous year.

Exception

The following persons are not considered as a buyer for the purpose of this provision:

(a) ‘Air India Assets Holding Limited’ shall not be considered as ‘buyer’ in case of transfer of goods by ‘Air India Limited’ under a plan approved by the Central Government (Notification No. 107/2021, dated 10-09-2021)

(b) A Government department that is not carrying out any business or commercial activity.

Deductee

Tax is required to be deducted if the amount is paid or payable to a resident person being a seller. However, the following persons are not considered as a seller:

(a) any department of Central Government or State Government (Circular No. 20/2021, dated 25-11-2021);

(b) a person who is exempt from income tax under the Income-tax Act or any other Act passed by the Parliament. However, this exemption is not available if only part of the income is exempt from tax (Circular No. 13 of 2021, dated 30-06-2021).

Rate of TDS and threshold limit

Tax is required to be deducted if goods are purchased for a value or aggregate of value exceeding Rs. 50 lakhs in any previous year. Tax is required to be deducted at the rate of 0.1% of the purchase value exceeding Rs. 50 lakhs. The rate shall not be further increased by Surcharge and Health & Education Cess.

If the deductee does not furnish his PAN to the deductor, the tax shall be deducted at the rate of 5% under Section 206AA or if such deductee has not furnished the return of income for a specified period, the tax shall be deducted at the rate of 5% under Section 206AB.

Where both the provision of Section 206AA and Section 206AB are applicable, that is, the deductee has neither furnished his PAN to the deductor nor has he furnished his return of income for the specified period, the tax shall be deducted at the rates provided in section 206AA or section 206AB, whichever is higher.

Note: the provisions of section 206AB are omitted w.e.f. 01-04-2025.

Time of deduction

Tax is required to be deducted at the time of credit of such sum to the account of the seller or at the time of payment thereof by any mode, whichever is earlier. Thus, the provisions of this section shall even apply to the advance payment made by the buyer to the seller.

Exemption from TDS

No tax is required to be deducted in the following cases:

(a) A non-resident buyer is not required to deduct tax if the purchase of goods is not effectively connected with the permanent establishment in India. For this purpose, “permanent establishment” shall include a fixed place of business through which the business of the enterprise is wholly or partly carried on.

(b) No tax is required to be deducted during the year of incorporation of a business.

(c) Transactions in securities (and commodities) which are traded through recognised stock exchanges or cleared and settled by the recognised clearing corporation, including recognised stock exchanges or recognised clearing corporations located in International Financial Service Centre (IFSC).

TDS where goods are sold through an e-commerce platform

An e-commerce operator responsible for payment to a resident person selling goods or services through its platform is required to deduct tax at source under Section 194-O. If a transaction is covered both under Section 194-O and Section 194Q, the tax is required to be deducted under Section 194-O and not under Section 194Q. Thus, the e-commerce operator shall have the first obligation to deduct the tax. If he does so, the buyer will not have any obligation to deduct the tax under Section 194Q.

However, if the e-commerce operator makes a default, the liability to deduct the tax gets shifted to the buyer.

TDS under Section 194Q v.TCS under Section 206C(1H)

A seller who receives any amount as consideration for the sale of any goods is required to collect tax from the buyer as per Section 206C(1H). If a transaction is covered both under Section 194Q and Section 206C(1H), the buyer shall have the first obligation to deduct the tax. If he does so, the seller will not have any obligation to collect the tax under Section 206C(1H).

However, if, for any reason, the tax has been collected by the seller under Section 206C(1H), before the buyer could deduct tax under Section 194Q on the same transaction, such transaction would not be subjected to tax deduction again by the buyer.

Note: the provisions of section 206C(1H) are not applicable w.e.f. 01-04-2025. Thus, provisions of section 194Q apply to the sale of goods.

TDS applicability where an exemption from TCS is available under section 206C(1A)

Where an exemption is available from the collection of tax as per section 206C(1A), the seller shall not collect tax from the buyer either under section 206C(1) or under section 206C(1H). However, the buyer could be liable to deduct tax under section 194Q in such cases if the conditions specified therein are satisfied.

TDS in case of purchase return

The CBDT has clarified that where the seller has refunded the money against the purchase return, the tax deducted may be adjusted against the next purchase against the same seller. However, where the purchase return is replaced by the goods, no adjustment is required.

Adjustment for GST and other State levies & taxes

Tax under this provision shall be deducted on the amount credited without including GST & other non-GST levies such as VAT, Sales Tax, Excise Duty, CST, etc. if the following conditions are satisfied:

(a) Tax is deducted at the time of credit of the amount in the account of the seller; and

(b) The component of GST and non-GST levies comprised in the amount payable to the seller is indicated separately as per the terms of the agreement or contract between the buyer and the seller.

However, if the tax is deducted on payment basis because the payment is earlier than the credit, the tax would be deducted on the whole amount as it is not possible to identify the payment with GST component or non-GST levies component to be invoiced in future.

Deposit of TDS

Tax deducted under this provision is required to be deposited to the credit of the Central Government through Challan ITNS 281 within 7 days from the end of the month in which tax was deducted.

However, the tax deducted during the month of March shall be deposited by 30th April of the next financial year.

Filing of TDS statement

The person responsible for the deduction of tax at source under this provision is required to file a statement of tax deducted at source in Form 26Q quarterly.

TDS Certificate

The deductor shall issue a TDS certificate to the assessee in Form No. 16A within 15 days from the due date of furnishing of the TDS statement.

Consequences for failure to deduct or deposit tax

Where any person responsible for deducting tax at source fails to deduct tax or after deducting fails to deposit the same, he shall be treated as assessee-in-default. In that case, interest under section 201 will be applicable.

If the deductor fails to deduct TDS, interest at the rate of 1% per month or part of the month shall be applicable, till such failure continues. Interest shall be calculated from the date when such tax was required to be deducted till the date such tax is actually deducted.

Further, if the deductor after having deducted the tax, fails to deposit the same to the credit of the Central Government, interest at the rate of 1.5% per month or part thereof shall be applicable till such failure continues. The interest computation shall commence from the date on which the tax was deducted and end with the date when such tax was deposited to the government.

Penalty and Prosecution

Failure to comply with the provisions of deduction of tax at source under this provision may result in penalties and prosecution as per the following provisions:

a) If a person fails to deduct tax at source, he shall be liable for payment of penalty under Section 271C;

b) If a person deducts tax but fails to deposit the same to the credit of the Central Government, he shall be liable for the penalty under Section 221and prosecution under Section 276B.

However, no person shall be punishable under Section 276B if he proves that there was reasonable cause for the failure. Further, a person can also file an application for compounding of offence.

Consequences for failure to furnish TDS Statement

Where any person fails to furnish a TDS statement, section 234E shall be applicable, wherein the deductor is liable to pay fees at the rate of Rs. 200 per day during such default continues. However, such fees should not exceed the amount of TDS.

Moreover, he shall be liable for penalties under sections 271H of Rs. 10,000 which can be extended to Rs. 100,000, and 272A of Rs. 500 for every day during which failure continues.

Consequences for failure to issue TDS Certificates

Where any person, responsible for issuing TDS Certificates, fails to issue such certificates, a penalty under section 272A shall be applicable of Rs. 500 for every day during which failure continues.

MCQs on TDS on purchase of goods

Q1. The tax under section 194Q shall be deducted if the aggregate value of goods purchased from the seller in the previous year exceeds ________.

(a) Rs. 50 lakhs

(b) Rs. 1 crore

(c) Rs. 10 crores

(d) Rs. 2 crores

Correct answer – (a)

Explanation: The tax shall be deducted under section 194Q if the aggregate value of goods purchased from the seller in the previous year exceeds Rs. 50 lakh.

Q2. What is the tax rate for the deduction of tax under section 194Q?

(a) 5%

(b) 10%

(c) 1%

(d) 0.1%

Correct answer – (d)

Explanation: The tax shall be deducted under section 194Q at the rate of 0.1% of the sum exceeding Rs. 50 lakh.

Q3. Tax is required to be deducted at the time of ________.

(a) Credit of such sum to the account of the seller

(b) Payment thereof by any mode

(c) Earlier of (a) and (b)

(d) Later of (a) and (b)

Correct answer – (c)

Explanation: Tax is required to be deducted under section 194Q at the time of credit of such sum to the account of the seller or at the time of payment thereof by any mode, whichever is earlier.

Q4. Which of the following TDS return is required to be furnished if tax is deducted under section 194Q?

(a) 26Q

(b) 27Q

(c) 24Q

(d) 26QD

Correct answer – (a)

Explanation: The person responsible for the deduction of tax at source under section 194Q is required to file a statement of tax deducted at source in Form 26Q quarterly.

Q5. Tax deducted under section 194Q is required to be deposited to the credit of the Central Government through Challan ________.

(a) ITNS 280

(b) ITNS 281

(c) ITNS 285

(d) ITNS 283

Correct answer – (b)

Explanation: Tax deducted under section 194Q is required to be deposited to the credit of the Central Government through Challan ITNS 281 within 7 days from the end of the month in which tax was deducted.

However, the tax deducted during the month of March shall be deposited by 30th April of the next financial year.

Q6. Which form is required to be issued as a TDS certificate if tax is deducted under section 194Q?

(a) 16A

(b) 16B

(c) 16C

(d) 16D

Correct answer – (a)

Explanation: The deductor shall issue a TDS certificate to the assessee in Form No. 16A within 15 days from the due date of furnishing of the TDS statement.

Tax Tools

Tax Calculator: Old vs. New Regime

Q1. What is the new tax regime?

Ans: The Finance Act, 2020 introduced the new tax regime under Section 115BAC for individuals and HUFs, offering lower tax rates contingent upon certain conditions, including the forfeiture of specific exemptions and deductions. From the Assessment Year 2024-25 onwards, the Finance Act, 2023 has expanded the scope of this regime to include AOP, BOI, and AJP, making it the default tax regime for the taxpayers.

Q2.What is the difference between the old tax regime and new tax regime?

Ans: If a taxpayer opts for the new tax regime as per Section 115BAC, they are required to forgo exemptions and deductions while computing their total income. This means that if a person is currently availing of exemptions or deductions under the normal tax regime, they may not save as much tax or may even end up paying more tax under the new tax regime if the amount of exemptions and deductions they are currently receiving is substantial.

Q3.How to opt for old tax regime?

Ans: Where an assessee wants to opt for the old tax regime, Section 115BAC provides an option to the eligible assessee to opt out of the new tax regime in a prescribed manner.

Q4. Should i opt for new tax regime?

Ans:The decision to opt for the new tax regime will depend on the amount of exemptions and deductions available to the assessee. For example, if an individual has no deductions available to them under the old tax regime, it would always be more beneficial for them to opt for the new tax regime.

On the other hand, if an individual is availing of deductions under Section 80C,Section 80D, and the interest on housing loan under Section 24, it would be beneficial for them to opt for the old tax regime.

Fees for Default in Furnishing Return of Income Calculator