EMPLOYEES HOW TO SAVE INCOME TAX - · PDF fileEMPLOYEES HOW TO SAVE INCOME TAX CONTENTS Chapter-heads I-5 1 ... 3.9 Sweat equity shares 67 3.10 Other fringe benefits 69 3.10-1 Constitutional

EMPLOYEES HOW TO SAVE INCOME TAX

CONTENTS

Chapter-heads I-5

1

BASIC CONCEPTS

1.1 Assessment year/previous year 1

1.1-1 Previous year 1

1.2 Residential status and incidence of tax 2

1.2-1 Rule of residence in brief 2

1.2-2 Tax incidence 3

1.3 Scheme of the Act 4

2

HOW TO COMPUTE SALARY INCOME

2.1 Are you an employee 5

2.1-1 Master and servant relationship 5

2.1-1a Servant v. Agent 5

2.1-1b Managing Director 6

2.1-1c High Courts/Supreme Court Judges 6

2.1-1d Advocate General 6

2.1-1e Chief Minister 7

2.1-1f Union Public Service Commission 7

2.1-2 Contract of employment v. Contract for employment 7

2.2 Basis of charge 8

2.3 Salary components and their tax treatment 8

2.4 Salary while in service 9

2.4-1 Basic salary 9

2.4-2 Advance salary 9

2.4-3 Arrears of salary 9

2.4-4 Leave salary 10

2.4-5 Bonus 10

2.4-6 Salary in lieu of notice 10

2.4-7 Fees or commission 10

2.4-8 Remuneration for extra work 10

2.4-9 Voluntary payments/gifts from employer 10

2.4-10 Compensation/annuity from employer 11

2.4-11 Encashment of unutilised leave 11

2.4-12 Tips received by hotel employees 11

2.4-13 Others 11

2.5 Allowances 11

2.5-1 City compensatory allowance 11

2.5-2 Dearness allowance 12

2.5-3 House rent allowance 12

2.5-3a Conditions to be satisfied 12

2.5-3b Quantum of exemption 12

2.5-3c Meaning of ‘salary’ 13

2.5-4 Entertainment allowance 14

2.5-5 Special allowances 14

2.5-6 Tiffin allowance/Fixed medical allowance/ Servant

allowance 16

2.5-7 Other allowances 16

2.5-7a Government employees rendering services

outside India 16

2.5-7b High Court Judges 16

2.5-7c Supreme Court Judges 17

2.6 Leave encashment on retirement 17

2.6-1 Government employees 17

2.6-2 Other employees 18

2.6-2a Basic conditions 18

2.6-2b Whether resignation is covered 18

2.6-2c Quantum of exemption 18

2.6-2d When amount is received from more

than one employer 19

2.6-3 Leave encashment paid to legal heirs 20

2.7 Retrenchment compensation 20

2.7-1 Quantum of exemption 21

2.7-2 Meaning of ‘average pay’ 21

2.7-3 Meaning of ‘wages’ 21

2.7-4 Compensation awarded by Supreme Court 22

2.7-5 Compensation on closing down of undertaking 22

2.8 Pension 22

2.8-1 Pension totally exempt from tax 22

2.8-1a Gallantry award winners 22

2.8-1b United Nations Organisation Personnel 23

2.8-1c Family pension to widow/children/

nominee of military personnel 23

2.8-2 Uncommuted pension 23

2.8-3 Commuted pension in case of Government

employees 24

2.8-4 Commuted pension in case of non-Government

employees 24

2.8-5 Commuted pension from LIC fund 24

2.8-6 Other points 24

2.9 Gratuity 25

2.9-1 In case of Government employees 25

2.9-2 LIC employees 25

2.9-3 LIC agents 26

2.9-4 Gratuity received under Payment of Gratuity Act 26

2.9-4a Scheme of the Gratuity Act 26

2.9-4b Conditions for eligibility 26

2.9-4c Amount fixed as gratuity 26

2.9-4d Quantum of exemption 27

2.9-5 Any other gratuity 28

2.9-5a Conditions to be satisfied 28


2.9-5c Points to be noted 29

2.10 Payments received on voluntary retirement/separation 31

2.10-1 Prescribed categories of employees 31

2.10-2 Guidelines for the scheme 32

2.10-2a Other issues 34

2.10-3 Meaning of ‘salary’ 35

2.10-4 Departmental clarifications for approval to scheme 35


2.10-5a Relief under section 89(1) - Position

prior to 31-3-2009 36

2.10-5b Relief under section 89(1) – Position

from 1-4-2009 37

2.10-6 One-time benefit 38

2.10-7 Terminal benefits 39

2.10-8 Payment to widow of employee 39

2.11 Payments to and from provident funds 39

2.12 Payments to and from approved superannuation funds 41

2.13 Payments from approved gratuity funds 42

2.14 Salary/Pension received from UNO 42

2.15 Sums received under Life Insurance policies 42

2.16 New Pension Scheme 42

2.16-1 Salient features of the new scheme 43

2.16-2 Employer’s contribution is treated as ‘income’ 43

2.16-3 Deduction on contributions under section 80CCD 44

2.16-4 Incentive to new entrants 44

2.17 Leave travel concession 44

2.17-1 Conditions to be satisfied 44

2.17-2 Meaning of ‘family’ 45

2.17-2a Position qua Central Government

employees 45


2.17-4 Points to be noted 46

2.17-5 Restricted concession for children under sub-rule

(4) of rule 2B 48

2.18 Taxability of shares allotted under ESOP/ESOS 49

2.19 Profits in lieu of salary 49

2.19-1 Compensation 49

2.19-1a Compensation for denial of job after

being selected 49

2.19-1b Compensation for premature termination

of employment 50

2.19-2 Other payments 50

2.19-3 Keyman insurance policy 50

2.19-4 Lump sum incentives 51

2.20 Deductions from gross salary 51

2.20-1 Entertainment allowance 51

2.20-2 Profession tax 51

2.21 Computation of salary income 51

Annex 2.1 Gallantry Awards notified under section 10(18) 53

3

VALUATION OF PERQUISITES

3.1 The statutory background 54

3.2 What is a perquisite 54

3.2-1 Dictionary meanings 54

3.2-2 ‘Perquisite’ is ‘income’ 55

3.3 Statutory definition 55

3.4 Certain basic principles 56

3.4-1 Employee must have a vested right 56

3.4-2 Amounts disallowed in employer’s assessment 57

3.4-3 Reimbursement of necessary disbursements 57

3.5 Benefit/Amenity to specified employees 57

3.5-1 Meanings of ‘benefit’ and ‘amenity’ 57

3.5-2 Benefit must have been authorised by employer 58

3.5-3 The specified employees 58

3.5-4 Salary received from more than one employer 58

3.5-5 Legal expenses of employee met by employer 59

3.5-6 Transport facility between residence and place of

work 59

3.5-7 Cash reimbursement of medical expenses 60

3.5-8 Notional interest on interest-free security deposit 60

3.6 Discharge of employee’s obligations by employer 60

3.6-1 Meaning of ‘obligation’ 60

3.6-2 Actual payment is contemplated 61

3.6-3 Income-tax due by employee paid by employer 61

3.6-4 Personal accident insurance 62

3.6-5 Foreign tour expenses of relatives 63

3.6-6 Where obligation could not be said to exist 63

3.6-7 Interest subsidy directly paid to financial institutions 63

3.7 Life Insurance/annuity payments 64

3.7-1 The excluded funds 64

3.7-2 Employee must have obtained indefeasible right 64

3.7-3 Annuity to ex-employee 65

3.8 Contributions to superannuation funds 65

3.9 Sweat equity shares 67

3.10 Other fringe benefits 69

3.10-1 Constitutional validity 69

3.10-2 Meaning of ‘fringe benefits’ 70

3.10-3 Whether applicable to all employees 70

3.10-4 Abolition of fringe benefit tax 71

3.11 Rule 3 effective from 1-4-2009 71

3.11-1 Constitutional validity of rule 3 as amended in 2001 71

3.11-2 Perquisite may be provided directly or indirectly 72

3.11-3 Perquisite need not necessarily be non-monetary 72

3.11-4 Perquisites provided to household members are

also covered 72

3.11-5 Definition of ‘household members’ 72

3.11-6 Taxable perquisites 73

3.11-7 Concept of ‘cost to the employer’ 73

3.12 Rule 3 is mandatory 74

3.13 Provision of residential accommodation 74

3.13-1 Departmental clarifications 74

3.13-2 Scope of the rule 74

3.13-3 Constitutional validity of rule 3 as amended in 2001 75

3.13-4 Some basic propositions 75

3.13-4a When employee does not use the

accommodation provided 75

3.13-4b When employee is the tenant 76

3.13-4c Provision of accommodation during

official visits 76

3.13-4d When rent is reimbursed to employee 76

3.13-4e Relevance of fact as to who owned the

accommodation 77

3.13-5 Meaning of ‘accommodation’ 77

3.13-6 Accommodation provided to certain employees is

excluded 77

3.13-6a Meaning of ‘Remote area’ 78

3.13-6b Employees working in project

execution sites 78

3.13-7 Definition of ‘Salary’ 78

3.13-7a Items includible under ‘salary’ 78

3.13-7b Items excludible under ‘salary’ 79

3.13-7c Salary must be taken on ‘due’ basis 79

3.13-7d ‘Salary’ must be period-related 79

3.13-7e Salary received from more than one

employer 80

3.13-7f Rewards from employer to employee 80

3.13-8 Valuation of unfurnished accommodation 80

3.13-8a Government employees 81

3.13-8b Government employees on

deputation to body/undertaking

controlled by Government 81

3.13-8c All other employees 82

3.13-8d Meaning of ‘lease rent’ 83

3.13-9 Value of furnished accommodation 84

3.13-10 Accommodation provided in hotel 85

3.13-10a Meaning of ‘hotel’ 85

3.13-10b Value of the perquisite 86

3.13-10c Relief to employees proceeding on

transfer 87

3.13-11 Value of accommodation provided at concessional

rent 88

3.13-11a The background 88

3.13-11b High Court's ruling 89

3.13-11c Supreme Court's ruling 90

3.13-11d The amendment 91

3.13-12 When employer derives corresponding benefit 94

3.13-13 Additional relief to employees proceeding on

transfer 94

3.13-14 Official residences provided to Judges 96

3.13-15 Illustrations 96

3.14 Provision of domestic servants 99

3.14-1 Departmental clarification 99

3.14-2 Contents of the sub-rule 99

3.14-3 Certain domestic servants excluded 99

3.14-4 Meaning of ‘personal attendant’ 100

3.14-5 Degree of service by personal attendant is not

relevant 100

3.14-6 Meaning of ‘actual cost to employer’ 100

3.14-7 Illustration 100

3.14-8 No double taxation is involved 101

3.15 Supply of Gas/Electricity/Water 101


3.15-2 Determination of ‘cost to the employer’ 102

3.16 Educational facilities 103


3.16-2 Gist of the provision 103

3.16-3 When educational institution is maintained and

owned by employer 104

3.16-4 When educational institution is patronised by

the employer 107

3.16-5 When facility is provided in any other educational

institution 107

3.16-6 Deduction towards recoveries 107

3.16-7 Assistance provided through welfare trusts 107

3.16-8 Certain other issues 108

3.16-8a Training of employees 108

3.16-8b Fixed education allowance 108

3.16-8c Payment of school fees of employees’

children 108

3.16-8d Reimbursement of school fees of

employees’ children 108

3.17 Concessional/Interest-free loans 108


3.17-2 A drafting error in the sub-rule 109


3.17-3a Loans to household members are

also included 110

3.17-3b Certain loans are excluded 110

3.17-3c Prescribed rates 111

3.17-3d Method of computation 111

3.17-3e Illustration 112

3.17-4 When loan is arranged at a concessional rate 112

3.17-5 Others 113

3.18 Use of employer’s movable assets 113



3.18-3 Prior use by employer or age of asset is not

relevant 114

3.18-4 Meaning of ‘use’ 114

3.18-5 Only movable assets are covered 114

3.18-5a Exclusion of certain electronic

equipments 114

3.18-6 Asset must ‘belong’ to employer 114

3.19 Transfer of employer’s movable assets 114



3.19-3 Illustration 116

3.20 Provision of motor-car and other conveyances : Rule 3(2) 117


3.20-1a Constitutional validity 117

3.20-2 Use must be authorised by the employer 117

3.20-3 Big v. Small cars 118

3.20-4 Car used exclusively for official purposes 118

3.20-5 Valuation when car is exclusively used for

personal purposes 118

3.20-6 Valuation where one car is used both for official

as well as personal purposes 119

3.20-6a Car owned or hired by employer 119

3.20-6b Car owned by employee 120

3.20-7 Valuation when more than one car is provided for

both official and personal use 120

3.20-8 Valuation in the case of other conveyances 120

3.20-9 Conveyance allowance not covered 121

3.20-9a Transport facility between office and

residence 121

3.20-10 Illustrations 121

3.21 Transport facility allowed by transport undertakings 123


3.21-2 The requirements to be satisfied 123

3.21-3 Meaning of ‘any other arrangement’ 123

3.21-4 Journeys on leave travel/tour/transfer are excluded 124

3.21-5 Journeys by chartered conveyances 124

3.21-6 The value of the perquisite 124

3.21-7 Exemption to railway and airline employees 124

3.21-8 Employees affected by the rule 124

3.21-9 When facility is extended to retired employees 125

3.22 Holiday facilities 125


3.22-2 Contents of rule 3(7)(ii) 125

3.22-3 Constitutional validity of rule 3 as amended in

2001 126

3.22-4 Types of expenses covered 127

3.22-4a ‘Travelling’ v. ‘Touring’ 127

3.22-4b Meaning of ‘accommodation’ 127

3.22-4c Facility maintained by employer 127

3.22-5 Types of tours covered 128

3.22-5a Official tours 128

3.22-5b Official tours extended as vacation 128

3.22-5c Private/Holiday tours 128

3.22-5d Illustrations 129

3.22-6 Household member accompanying on official

tours 130

3.22-7 Leave travel concession is excluded 130

3.22-8 Value of the perquisite 130

3.23 Free food and non-alcoholic beverages 130


3.23-2 Position under the sub-rule 130

3.23-3 Monetary limit fixed 131

3.23-4 When such ‘food and non-alcoholic beverages’

are supplied from employer’s canteen 132

3.23-5 Refreshments are excluded 133

3.23-6 Remote area excluded 133

3.23-7 Allowances are taxable 133


3.24 Gifts on ceremonial occasions 133



3.24-3 Form of the gift 134

3.24-4 Meaning of ‘ceremonial occasions’ 134

3.24-5 Monetary limit on gift 135


3.25 Credit card facilities 135



3.25-2a Meaning of ‘provided by the employer’ 136

3.25-2b Meaning of ‘expenses’ 136


3.25-4 Exemption to official expenses 137

3.25-4a Meaning of ‘entertainment’ 137


3.26 Club facilities 137



3.26-3 The type of perquisite 138

3.26-4 The value of the perquisite 138

3.26-5 Exemption to business expenses 139

3.26-6 Exemption to use of certain facilities 139

3.27 Other benefits/amenities 139

3.27-1 The residual provision 139


3.27-3 Types of benefit or amenity covered 140

3.27-4 Determination of value 140

3.27-5 Meaning of ‘arm’s length transaction’ 140

3.27-6 Telephone expenses excluded 140

3.28 Allotment of ESOP shares 141

3.28-1 Essential issues 141

3.29 ESOP-Related terminology 143

3.30 Analysis of the provisions of section 17(2)(vi) 144


3.31 ‘Specified security’ 145

3.31-1 Specified security need not be a security issued

by the employer 146

3.32 ‘Employee stock option’ 146

3.32-1 Stock appreciation rights/plans 147

3.32-2 Date of allotment of securities issued under

Employee Stock Option Plan/Scheme 147

3.33 ‘Sweat equity share’ 148

3.34 ‘Employees’ 148

3.34-1 Employees based in India 148

3.34-2 Persons other than employees like part-time

directors, promoters, etc. 148

3.35 Directly or indirectly, by the employer or former employer 149

3.36 Free of cost or at a concessional rate 150

3.37 Where shares allotted or transferred are subject to

lock-in-period 151

3.38 Foreign companies 152

3.38-1 100% subsidiary in India of a foreign company 152

3.39 Determination of fair market value - Rule 3(8) 154

3.40 Valuation of specified security other than equity share –

Rule 3(9) 156

3.41 Clarifications from Central Board of Direct Taxes 156

3.41A Perquisites/allowances exempt from tax in the case of

Chairman/Members of UPSC (serving & retired) 157

3.42 Medical facilities 157

3.42-1 Meaning of ‘family’ 158

3.42-2 Meaning of ‘hospital’ 158

3.42-3 Meaning of ‘treatment’ 158

3.42-4 Medical treatment in India 158

3.42-4a Hospital maintained by employer 158

3.42-4b Hospitals maintained/approved by

Government, etc. 158

3.42-4c Approved hospitals for prescribed

ailments 159

3.42-4d Treatment elsewhere 159

3.42-5 Medical treatment outside India 159

3.42-6 Medical insurance premia 160

3.42-7 Others 160

3.43 Tax paid by employer on perquisites 161

3.43-1 Option to employer to pay tax on perquisites

provided to employee 161

3.43-2 The nature of the option 161

3.43-3 How to determine the tax due 161

3.43-4 How to deduct and pay tax 162

3.43-5 Grossing up provision will not apply 163

3.43-6 Tax paid by employer is not deemed as income

received 163

3.43-7 Credit to employee for tax paid by employer 163

3.43-8 Payment of tax to Government account 164

3.43-9 Furnishing certificate to employee 164

3.43-10 Employer not entitled to any deduction 164

3.43-11 Option need not be in writing 164

Annex 3.1 Departmental clarification on valuation of Perquisites

(for Financial Year 2011-12) 165

Annex 3.2 Relevant extracts of Para 5.1 of Circular No. 6/2004, dated

6-12-2004 169

Annex 3.3 CBDT Circular No. 9/2007, dated 20-12-2007 173

Annex 3.4 Exemptions to allowance and perquisite paid to Chairman/

Retired Chairman or any other member/ retired member of UPSC 181

Annex 3.5 Guidelines for approval of hospitals and prescribe

diseases and ailments - Rule 3A 182

Annex 3.6 List of hospitals recognised under Central

Government Health Scheme 185

4

HOW TO COMPUTE PROPERTY INCOME

4.1 What is ‘house property’ 190

4.2 Ownership of property 190

4.3 Computation of income from house property 192

4.4 Computation of income from let out properties 192

4.4-1 Step One 192

4.4-1a Unrealised rent 194

4.4-2 Step Two - Arrive at net annual value 194

4.4-3 Step Three - Arrive at taxable property income 195

4.4-4 Interest on borrowings 195

4.4-4a Interest for the pre-acquisition or pre-construction period 195

4.4-4b Other points to be noted 196

4.4-5 Comprehensive illustrations 196

4.4A Computation of income from property having only vacant period during the previous

year 202

4.5 Computation of income from self-occupied property 203

4.5-1 ‘Occupation’ cannot be equated with ‘living’ or ‘physical presence’ 204

4.5-2 Position in respect of part of a house not self-occupied205

4.5-3 Position in brief 205

4.6 Computation of income - When more than one house is self-occupied 205

4.6-1 Determination of annual value in respect of house(s) other than the chosen

house 206

4.7 Deduction towards interest on borrowed capital in case of self-occupied properties

206

4.7-1 Limits on deduction 206

4.7-2 Points to be kept in view in general 207

4.7-3 Points to be kept in view for loans taken on or after 1-4-1999 207

4.7-4 Interest payable for pre-acquisition/pre- construction period 208

4.7-5 Step-by-step process 208

4.8 Computation in nutshell in case of self-occupied properties 209

4.8-1 When property is fully self-occupied throughout the year 209

4.8-2 When property has been acquired during the year and then self-occupied for

the rest of the year 209

4.8-3 When part of property has been self- occupied throughout the year and part

of the property is let out 209

4.8-4 Where house or part of the house is self- occupied for part of the year and

let out for the remaining part 209

4.8-5 Where more than one property is self-occupied 210

4.9 Computation of income from unoccupied property 210

4.9-1 What is an ‘unoccupied property’ 210

4.9-2 The nature of concession granted 210

4.9-3 The essential requisites 210

4.9-4 Meaning of ‘place’ 211

4.9-5 Reason is restricted to employment, business or profession 211

4.9-6 Immunity to constitutional authorities 211

4.9-7 Non-deriving of any benefit 212

4.9-8 Where there is more than one unoccupied house 212

4.9-9 Deduction towards interest on borrowed capital 212

4.10 Income from self-leased properties 212

4.11 Recovery of unrealised rent after claiming deduction - From assessment year 2002-03

213

4.12 Taxation of arrears of rent in the year of receipt [Sec. 25B] 213

4.13 Treatment of losses 213

5

HOW TO COMPUTE CAPITAL GAINS

5.1 When does capital gain arise 214

5.2 What is a capital asset 214

5.2-1 Items excluded 214

5.2-1a Jewellery 215

5.2-1b Motor car and other conveyances 215

5.2-1c Urban area 215

5.2-1d Indira Vikas Patra 215

5.3 What is ‘transfer’ 215

5.3-1 When asset gets damaged or destroyed and insurance compensation is

received 216

5.4 Transactions not regarded as transfer 216

5.5 Long-term and short-term capital assets 217

5.5-1 Short-term capital assets 217

5.5-2 Long-term capital assets 217

5.5-3 Certain special situations 218

5.5-4 Holding period in the case of securities 219

5.5-5 Holding period for DDA self-financing flats 220

5.6 Determination of consideration received on deemed basis 220

5.7 Net consideration received 220

5.8 Cost of acquisition 221

5.8-1 Assets acquired in certain specified situations [Section 49] 221

5.8-2 Shares allotted under ESOP 222

5.8-3 In case of properties covered under section 56 222

5.8-4 No capital gains if assets have no cost of acquisition222

5.8-5 When cost of acquisition can be taken as the fair market value as on April 1,

1981 [Section 55(2)] 223

5.9 Cost of improvements to assets 223

5.10 Computation of short-term capital gains 223

5.11 Tax on short-term capital gains 224

5.11-1 Concessional rate for sale of shares, etc. 224

5.11-1a Conditions 224

5.11-1b Consequences if the above conditions are satisfied 224

5.11-1c Where other income is below exemption limit 224

5.12 Computation of long-term capital gains 225

5.12-1 Indexed cost of acquisition 225

5.12-2 Indexed cost of improvement 227

5.13 Bonus shares/Right shares 228

5.13-1 Bonus shares 228

5.13-2 Right shares/Right entitlement 229

5.14 Exemptions 231

5.14-1 Where gains from one house property is reinvested in another house

property [Section 54] 231

5.14-1a Points to remember 232


5.14-1c Availment of exemption through deposits in capital gains

accounts scheme 235

5.14-1d Other relevant points 237

5.14-2 Where net consideration from any asset other than a residential house is

invested in one residential house [Section 54F] 238

5.14-2a Amount of exemption 239

5.14-2b Circumstances when exemption granted under section 54F may

be withdrawn 239

5.14-2c Capital gains accounts scheme 241

5.14-2d Other issues 241

5.14-3 Where gain from urban agricultural lands is reinvested in agricultural lands

[Section 54B] 243

5.14-3a Quantum of exemption 244

5.14-3b Withdrawal of exemption 244

5.14-3c Capital gains accounts scheme 244

5.14-3d Other issues 244

5.14-4 Reinvestments in respect of transfers of long-term capital assets effected on

or after 1-4-2000 245

5.14-4a The specified assets 245

5.14-4b Monetary limit on investment 246

5.14-4c Quantum of exemption 246

5.14-4d Effect of transferring/converting the investment 246

5.14-4e Other deductions not admissible 246

5.14-4f Whether investment in specified asset can be made out of

borrowed funds 246

5.14-4g Investment in joint names 246

5.14-5 Exemption on compulsory acquisition of urban agricultural land [Section

10(37)] 247

5.14-6 Exemption to capital gain on transfer of residential house property in certain

cases [Sec. 54GB] 247

5.14-6a Who can claim exemption 248

5.14-6b Which asset qualifies for exemption 248

5.14-6c Which new asset the taxpayer should acquire 248

5.14-6d How much is exempt 248

5.14-6e Is it possible to revoke the exemption 248

5.14-6f What is ‘eligible company’ 249

5.14-6g What is new asset 249

5.15 Tax on long-term capital gains 249

5.15-1 Long-term capital gains in respect of shares and securities as applicable from

the assessment year 2000-01 251


5.15-1b Tax computation 251

5.15-2 Long-term capital gains on sale of shares, etc. [Section 10(38)] 251


5.15-2b Consequences if the above conditions are satisfied 252

5.16 Capital losses 252

Annex 5.1 Bonds notified under section 54EC 253

6

HOW TO COMPUTE INCOME FROM

OTHER SOURCES

PART A : GENERAL PROVISIONS

6.1 Items includible 255

6.2 Dividends/Income from units of UTI or mutual funds 256

6.2-1 Accrued interest on NSC 256

6.3 Points to be borne in mind 256

6.4 Winnings from lotteries, etc. - An exception 257

6.5 Deductions admissible 257

6.5-1 Deductions in case of dividends/Units income 257

6.5-2 Special provision for family pensioners 257

6.5-3 Agents of UTI/Post Office Schemes, etc. 258

6.5-4 Agents of mutual funds 258

6.5-5 Types of deductions permissible to agents of UTI/Post Office

Schemes/Mutual Funds, etc. 259

6.6 Receipts under Keyman Insurance Policy 259

6.7 Other insurance moneys 259

6.8 Cash gifts deemed as income - Position from 1-9-2004 to 31-9-2009 259

6.8-1 Meaning of relative 260

6.9 Taxability of gifts of cash/movable properties/immovable properties - Position from 1-

10-2009 260

6.9-1 Four categories 261

6.9-2 Exempted categories 262

6.9-3 Calculation of value of properties 262

6.9-4 ‘Relative’ meaning of 262

6.9-5 Property, meaning of 263

6.9-5a Jewellery, meaning of 263

6.9-6 Points to be noted 263

6.9-7 Valuation of movable properties 264

6.9-7a Valuation of jewellery 264

6.9-7b Valuation of archaeological collections, drawings, paintings,

sculptures or any work of art 264

6.9-7c Valuation of shares and securities 264

6.9-7d Meaning of expressions used in determination of fair market

value 266

PART B : LIC OFFICERS & AGENTS

6.10 Introduction 267

6.11 Incentive bonus 267

6.12 Additional conveyance allowance 269

6.13 LIC agents 270

6.13-1 Deduction on commission 270

6.13-2 Maintenance of accounts 271

Annex 6.1 Deduction of expenses on commission payable to agents of mutual fund 272

Annex 6.2 Allowance of ad hoc deduction to insurance agents of LIC, not maintaining detailed

accounts for expenses incurred by them 273

7

KNOW ABOUT SOME EXEMPTIONS, CERTAIN DEEMED

INCOMES AND CLUBBING PROVISIONS

7.1 Insurance policies [Section 10(10D)] 274

7.2 Scholarships [Section 10(16)] 275

7.3 Awards [Section 10(17A)] 276

7.4 Compensation received by victim of Bhopal Gas Leak Disaster [Section 10(10BB)] 277

7.4A Compensation received on account of disaster [Section 10(10BC)]277

7.5 Units of UTI 277

7.6 Amount received under Reverse Mortgage Scheme 278

7.7 Clubbing provisions 278

7.7-1 Clubbing of minor’s income 278

7.7-1a Exemption under section 10(32) 278

7.7-1b Parent in whose hand income will be clubbed 278

7.7-2 Clubbing of spouse’s income in respect of remuneration of spouse 279

7.7-3 Clubbing of spouse’s income in respect of assets transferred 279

7.7-4 When an individual is assessable in respect of income from assets transferred

to son’s wife [Sec. 64(1)(vi)] 281

7.7-5 Other clubbing provisions 281

7.7-6 General points 281

7.7-6a Income from accretion of property transferred or accumulated

income of such property - Whether includible in the hands of

transferor 281

7.7-6b Can negative income be clubbed 282

7.7-6c Head of income under which the clubbed income will be

included 282

7.8 Special provisions for persons governed by Portuguese Civil Law282

7.9 Losses from business 283

Annex 7.1 Awards/rewards notified under section 10(17A) 284

8

DEDUCTIONS & RELIEFS

8.1 Contributions/payments to life insurance premia, provident fund, etc. 285

8.2 The specified contributions/payments 285

8.2-1 Life insurance premia 286

8.2-1a Ceiling on qualifying amount 287

8.2-2 Deferred annuities 288

8.2-3 Provident fund contributions 288

8.2-4 Superannuation fund contributions 289

8.2-5 Unit-linked Insurance Plans (ULIP) 289

8.2-6 National Savings Certificates 290

8.2-7 Annuity plan 291

8.2-8 Equity-linked Savings Schemes 291

8.2-9 Pension Funds 292

8.2-10 Home Loan Account Scheme 292

8.2-11 Deposit scheme of public sector company/ housing authority 292

8.2-12 Payments for acquisition of residential house 292

8.2-12a Basic conditions 292

8.2-12b Items included under ‘payments’ 292

8.2-12c Items excluded from ‘payments’ 293

8-2-12d Withdrawal of deduction in refund cases294

8.2-12e Consequences of transfer of house 294

8.2-13 Tuition fees paid for education of children 294

8.2-14 Investments in companies engaged in infrastructural facilities 294

8.2-15 Term deposits 295

8.2-16 Notified bonds of National Bank for Agricultural and Rural Development

295

8.2-17 Senior Citizens Savings Scheme/Post Office Time Deposits 295

8.3 Contribution to certain pension funds [Section 80CCC] 296

8.4 Contribution to New Pension Scheme [Section 80CCD] 297

8.4A Ceiling limit on aggregate deduction 298

8.4B Additional deduction for assessment years 2011-12 and 2012-13 only [Section 80CCF]

298

8.5 Deduction in respect of investment made under any equity saving scheme [Section

80CCG] 299

8.5-1 Conditions 299

8.5-2 Amount of deduction 300

8.6 Deduction on health insurance/CGHS contributions/ Preventive health check-up

payments [Section 80D] 300

8.6-1 Items covered under section 80D 300

8.6-1a Meaning of ‘family’ 301


8.6-2a Source for payment 301

8.6-2b Individual/HUF 301

8.6-2c Mode of Payment 301

8.6-2d Type of health insurance 301

8.6-3 Monetary limit on deduction 301

8.6-3a Meaning of ‘senior citizen’ 302

8.7 Medical treatment etc. of dependants with physical disability [Section 80DD] 302

8.7-1 Meaning of ‘person with disability’ 302

8.7-1a Position for the assessment year 2004-05302

8.7-1b Position from the assessment year 2005-06303

8.7-2 Meaning of ‘dependant’ 304


8.7-3a Medical Authority 306

8.7-4 Quantum of deduction 307

8.7-4a Meaning of ‘Severe Disability’ 307

8.7-5 When person with disability predeceases the assessee307

8.7-6 Points to be specially noted 308

8.7A Medical treatment for specified chronic diseases/terminal ailments [Section 80DDB]

308

8.7A-1 Eligibility norms 308

8.7A-2 Specified diseases/ailments 309

8.7A-3 The competent medical authority 309

8.7A-3a Form of certificate 310

8.7A-4 Quantum of deduction 310

8.7A-4a Meaning of ‘senior citizen’ 311

8.8 Interest on loans taken for higher education [Section 80E] 311


8.9 Rent paid for residential accommodation [Section 80GG] 312

8.10 Deduction in respect of contributions given by any person to political parties [Section

80GGC] 313

8.11 Deductions under section 80L 314

8.12 Interest incomes exempt under section 10 314

8.13 Deduction in respect of royalty income of authors [Section 80QQB] 314




8.14 Deduction in respect of royalty on patents [Section 80RRB] 316




8.15 Deduction in respect of interest on deposits in savings account (Section 80TTA) 318

8.15-1 Post office savings bank interest exemption under section 10(15)(i) 318

8.16 Relief to persons with disability [Section 80U] 319

8.16-1 Person with disability 319

8.16-2 Medical authority 319

8.16-3 Furnishing of medical certificate 319

8.16-3a Furnishing of new medical certificate 319


8.17 Relief under section 89, read with rule 21A 320

8.17-1 Items on which relief is allowable 320

8.17-2 Computation of relief when salary has been received in arrears or in advance

[Rule 21A(2)] 320

8.17-3 Computation of relief in respect of gratuity [Rule 21A(3)] 321

8.17-4 Computation of relief in respect of compensation on termination of

employment [Rule 21A(4)] 322

8.17-5 Computation of relief in respect of payment in commutation of pension [Rule

21A(5)] 322

8.17-6 Computation of relief in respect of other payments [Rule 21A(6)] 322

8.17-7 How to claim the relief 322

8.17-8 Relief under section 89 and exemption under section 10(10C) 322

Annex 8.1/2 Standard format of the certificate in case of disabilities other than mental

retardation 323

Annex 8.3 Standard format of the certificate in case of mental retardation 324

Annex 8.4 Clarification regarding deduction in respect of contribution to pension scheme

under section 80CCD 325

9

COMPUTATION OF NET INCOME

AND GROSS TAX

9.1 The step-by-step process 326

9.2 Rounding off of total income 327

9.3 Tax rates 327

9.4 Rounding off of tax 329

9.5 Illustration 330

10

COMPUTATION OF NET TAX PAYABLE

10.1 Assessment year 2012-13 331

11

HOW TO PAY TAXES

11.1 Four modes of payment 332

11.2 Deduction of tax at source 332

11.2-1 Particulars to be furnished by the employee to avail benefit of various

provisions 333

11.2-2 Documents to be produced by assessee to obtain deductions and benefits

334

11.2-3 Salary received from more than one employer 335

11.2-4 Employee having income from sources other than salary 335

11.2-5 Certificates to be furnished 336

11.2-6 Option to employer to pay tax on perquisites 336

11.2-7 Intimating PAN to employer 336

11.3 Advance tax 336

11.3-1 Relief to senior citizens 337

11.3-2 How to compute and pay advance tax 337

11.3-3 For the special attention of employees having more than one employer

during the financial year 338

11.4 Self-assessment tax 339

11.5 Demand tax 339

11.6 Where to pay taxes 339

11.7 Interest payable for defaults 339

11.7-1 For defaults in furnishing return of income [Section 234A] 339

11.7-2/3 Interest for default in payment of advance tax [Section 234B] 340

11.7-4 For deferment of advance tax [Section 234C] 341

11.7-4a Short payment of advance tax in case of capital gains 342

11.7-5 Interest on excess refund [Section 234D] 342

11.7-6 For making late payment of income-tax [Section 220(2)] 343

11.7-7 Interest payable to assessee [Section 244A] 343

12

FILE YOUR RETURNS OF INCOME

12.1 Who should file return of income 344

12.1-1 Assessees having taxable income 344

12.1-2 Assessee not falling under para 12.1-1 344

12.1-3 Assessees having salary income upto Rs. 5 lakhs 344

12.1-4 Residents having assets/accounts located outside India345

12.2 Return in response to notice 346

12.3 Bulk return by employer 346

12.4 When should the return be filed 346

12.5 Form of return applicable for the assessment year 2012-13 347

12.6 Mode of filing return 347

12.6-1 No enclosures allowed 347

12.7 Return can be filed even after the due date 347

12.8 Return can be revised 348

12.9 Treatment of defective returns 348

12.10/ Interest for defaults 349

12

12.13 Penalty for failure to furnish return of income 349

12.14 Permanent Account Number 349

12.15 Quoting of Permanent Account Number in documents pertaining to certain prescribed

transactions 350

12.15-1 The statutory requirement 350

12.15-2 The requirements under the rules 351

12.15-3 The prescribed transactions 351

12.15-3a Property deals 352

12.15-3b Vehicle deals 352

12.15-3c Fixed deposits in banks 352

12.15-3d Deposits in post offices 352

12.15-3e Opening bank accounts 352

12.15-3f New telephone connections 353

12.15-3g Hotel bills 353

12.15-3h Share transactions 353

12.15-3i Cash payments to banks 353

12.15-3j Cash payments for foreign travel 353

12.15-3k Application for issue of a credit/ debit card354

12.15-3l Purchase of units of mutual funds 354

12.15-3m Acquisition of shares in companies 354

12.15-3n Acquisition of debentures/bonds 354

12.15-3o Acquisition of RBI bonds 354

12.15-3p Payment of life insurance premium 354

12.15-3q Purchase of bullion or jewellery 355

12.15-4 Filing of declaration by persons having no PAN 355

12.15-5 Persons having agricultural income 355

13

ASSESSMENT AND HOW TO FACE IT

13.1 Position in respect of salaried employees 356

13.2 The statutory provisions 356

13.2-1 The scheme of Preliminary Processing of All Returns357

13.2-2 Centralised processing of returns 358

13.3 Regular/Scrutiny assessment 358

13.3-1 Issue of notice 359

13.3-2 Types of cases likely to be taken up for regular assessment 359

13.4 Importance of the acknowledgement slip 360

13.5 Preparations prior to hearing 360

13.6 Assessee’s role during the hearing 361

13.7 Assessee’s role after the hearing 361

13.8 Refunds 361

Annex 13.1 Check list for assessment 365

Annex 13.2 Centralised Processing of Returns Scheme, 2011 367

TAX TABLES 377