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26. Income Tax Calculation

1. INCOME FROM SALARY

Chargeability

Existence of ‘master-servant’ or ‘employer-employee’ relationship is absolutely essential for taxing income under the head “Salaries”. Where such relationship does not exist income is taxable under some other head as in the case of partner of a firm, advocates, chartered accountants, LIC agents, small saving agents, commission agents, etc. Besides, only those payments which have a nexus with the employment are taxable under the head ‘Salaries’.

Salary is chargeable to income-tax on due or paid basis, whichever is earlier.
Any arrears of salary paid in the previous year, if not taxed in any earlier previous year, shall be taxable in the year of payment
Advance Salary : is taxable in the year it is received. It is not included in the income of recipient again when it becomes due. However, loan taken from the employer against salary is not taxable
Arrears of Salary : is taxable in the year in which it is received.
Bonus : Bonus is taxable in the year in which it is received.
Pension : Pension received by the employee is taxable under ‘Salary’ Benefit of standard deduction is available to pensioner also. Pension received by a widow after the death of her husband falls under the head ‘Income from Other Sources.
Profit in lieu of salary : Any compensation due to or received by an employees from his employer or former employer at or in connection with the termination of his employment or modification of the terms and conditions relating thereto;
Any payment (other than ‘Receipts Exempt from Tax’ under section 10) due to or received by an employee from his employer or former employer or from a provident or other fund to the extent it doers not consist of contributions by the assessee or interest on such contributions or any sum/bonus received under a Keyman Insurance Policy.

Any amount whether in lump sum or otherwise, due to or received by an assessee from his employer, either before his joining employment or after cessation of employment.
Dearness Allowance/Additional Dearness : Allowance are fully taxable
 

:: City Compensatory Allowance

CCA is taxable as it is a personal allowance granted to meet expenses wholly, necessarily and exclusively incurred in the performance of special duties unless such allowance is related to the place of his posting or residence .

Certain allowances prescribed under Rule 2BB, granted to the employee either to meet his personal expenses at the place where the duties of his office of employment are performed by him or at the place where he ordinarily resides, or to compensate him for increased cost of living are also exempt.

:: House Rent Allowance

HRA received by an employee residing in his own house or in a house for which no rent is paid by him is taxable. In case of other employees, HRA is exempt upto a certain limit

:: Entertainment Allowance

Entertainment allowance is fully taxable, but a deduction is allowed in certain cases.

:: Academic Allowance

Allowance granted for encouraging academic research and other professional pursuits, or for the books for then purpose, shall be exempt u/s 10(14). Similarly newspaper allowance shall also be exempt.

:: Conveyance allowance

It is exempt to the extent it is paid and utilized for meeting expenditure on travel for official work.

2. INCOME FROM HOUSE PROPERTY

:: Chargeability 

The annual value of a house property is taxable as income in the hands of the owner of the property. House property consists of any building or land appurtenant thereto of which the assessee is the owner. The appurtenant lands may be in the form of a courtyard or compound forming part of the building. But such land is to be distinguished from an open plot of land, which is not charged under this head but under the head ‘Income from Other Sources’ or Business Income, as the case may be. Besides, “house property includes flats, shops, office space, factory sheds, agricultural land and farm houses.

Even if the house property is situated outside India it is taxable in India if the owner-assessee is resident in India.
The following incomes are excluded from the charge of income tax under this head :

Annual value of house property used for business purposes.
Income of rent received from vacant land.
Income from house property in the immediate vicinity of agricultural land and used as a store house, dwelling house etc. by the cultivators.
However, following incomes shall be taxable under the head ‘income from house property'.

1. Income from letting of any farm house agricultural land appurtenant thereto for any purpose other than agriculture shall not be deemed as agricultural income, but taxable as income from house property.

2. Any arrears of rent, not taxed u/s 23, received in a subsequent year, shall be taxable in the year.

:: Annual Value

Income from house is taxable on the basis of annual value. Even if the property is not let-out, national rent receivable is taxable as its annual value.

The annual value of any property is the sum which the property might reasonably be expected to fetch if the property is let from year to year.

In determining reasonable rent factors such as actual rent paid by the tenant, tenant’s obligation undertaken by owner, owners’ obligations undertaken by the tenant, location of the property, annual rateable value of the property fixed by municipalities, rents of similar properties in neighbourhood and rent which the property is likely to fetch having regard to demand and supply are to be considered.

:: Annual Value of Let-out Property

Where the property or any part thereof is let out, the annual value of such property or part shall be the reasonable rent for that property or part or the actual rent received or receivable, whichever is higher.

:: Deduction of House Tax/Local Taxes paid

In case of a let-out property, the local taxes such as municipal tax, water and sewage tax, fire tax, and education cess levied by a local authority are deductible while computing the annual value of the year in which such taxes are actually paid by the owner.

 :: DEDUCTION FROM INCOME FROM PROPERTY

Other than self-occupied properties
Repairs and collection charges: Standard deduction of 30% of the net annual value of the property.

Interest on borrowed capital : Interest payable in India on borrowed capital, where the property has been acquired constructed, repaired, renovated or reconstructed with such borrowed capital, is allowable (without any limit) as a deduction (on accrual basis). Furthermore, interest payable for the period prior to the previous year in which such property has been acquired or constructed shall be deducted in five equal annual instalments commencing from the previous year in which the house was acquired or constructed.

Amounts not Deductible

Any interest chargeable under the Act payable out of India on which tax has not been paid or deducted at source and in respect of which there is no person who may be treated as an agent.
Expenditures not specified as specifically deductible. For instance, no deduction can be claimed in respect of expenses on electricity, water supply, salary of liftman, etc.
Self Occupied Properties
No deduction is allowed under section 24(1) by way of repairs, insurance premium, etc. in respect of self-occupied property whose annual value has been taken to be nil under section 23(2) (a) or 23(2) (b) of the act. However, a maximum deduction of Rs. 30,000 by way of interest on borrowed capital for acquiring, constructing, repairing, renewing or reconstructing the property is available in respect of such properties.

In case of self-occupied property acquired or constructed with capital borrowed on or after 1.4.1999 and the acquisition or construction of the house property is made within 3 years from the end of the financial year in which capital was borrowed the maximum deduction for interest shall be Rs. 1,50,000. For this purpose, the assessee shall furnish a certificate from the person extending the loan that such interest was payable in respect of loan for acquisition or construction of the house, or as refinance loan for repayment of an earlier loan for such purpose.

The deduction for interest u/s 24(1) is allowable as under :

i. Self-occupied property : deduction is restricted to a maximum of Rs. 1,50,000 for property acquired or constructed with funds furrowed on or after 1.4.1999 within 3 years from the end of the financial year in which the funds are borrowed. In other cases, the deduction is allowable upto Rs. 30,000.

ii. Let out property or part there of : all eligible interests are allowed.

It is , therefore, suggested that a property for self, residence may be acquired with borrowed funds, so that the annual interest accrual on borrowings remains less than Rs. 1,50,000. The net loss on this account can be set off against income from other properties and even against other incomes.

If buying a property for letting it out on rent, raise borrowings from other family members or outsiders. The rental income can be safely passed off to the other family members by way of interest. If the interest claim exceeds the annual value, loss can be set off against other incomes too.

2. At the time of purchase of new house property, the same should be acquired in the name(s) of different family members. Alternatively, each property may be acquired in joint names. This is particularly advantageous in case of rented property for division of rental income among various family members. However, each co-owner must invest out of his own funds (or borrowings) in the ratio of his ownership in the property

3. INCOME FROM CAPITAL GAIN

 ::  Chargeability

Any profits or gains arising from the transfer of capital assets effected during the previous year is chargeable to income-tax under the head “Capital gains” and shall be deemed to be the income of that previous year in which the transfer takes place. Taxation of capital gains, thus, depends on two aspects – ‘capital assets’ and transfer’.

 ::  Capital Asset

‘Capital Asset’ means property of any kind held by an assesses including property of his business or profession, but excludes non-capital assets.

 ::  Transfers Resulting in Capital Gains

Sale or exchange of assets;
Relinquishment of assets;
Extinguishment of any rights in assets;
Compulsory acquisition of assets under any law;
Conversion of assets into stock-in-trade of a business carried on by the owner of asset;
Handing over the possession of an immovable property in part performance of a contract for the transfer of that property;
Transactions involving transfer of membership of a group housing society, company, etc.., which have the effect of transferring or enabling enjoyment of any immovable property or any rights therein ;
Distribution of assets on the dissolution of a firm, body of individuals or association of persons;
Transfer of a capital asset by a partner or member to the firm or AOP, whether by way of capital contribution or otherwise; and
Transfer under a gift or an irrevocable trust of shares, debentures or warrants allotted by a company directly or indirectly to its employees under the Employees’ Stock Option Plan or Scheme of the company as per Central Govt. guidelines.

 ::  Year of Taxability

Capital gains form part of the taxable income of the previous year in which the transfer giving rise to the gains takes place. Thus, the capital gain shall be chargeable in the year in which the sale, exchange, relinquishment, etc. takes place.

Where the transfer is by way of allowing possession of an immovable property in part performance of an agreement to sell, capital gain shall be deemed to have arisen in the year in which such possession is handed over. If the transferee already holds the possession of the property under sale, before entering into the agreement to sell, the year of taxability of capital gains is the year in which the agreement is entered into.

 ::  Classification of Capital Gains

Short Term : Gains on transfer of capital assets held by the assessee for not more than 36 months (12 months in case of a share held in a company or any other security listed in a recognized stock exchange in India, or a unit of the UTI or of a mutual fund specified u/s 10(23D) ) immediately preceding the date of its transfer.

Long Term : The capital gains on transfer of capital assets held by the assessee for more than 36 months (12 months in case of shares held in a company or any other listed security or a unit of the UTI or of a specified mutual fund).

 ::  Period of Holding a Capital Asset

Generally speaking, period of holding a capital asset is the duration for the date of its acquisition to the date of its transfer. However, in respepct of following assets, the period of holding shall exclude or include certain other periods.

 

 ::  Computation of Capital Gains

 

1. As certain the full value of consideration received or accruing as a result of the transfer.

2. Deduct from the full value of consideration-

i

Transfer expenditure like brokerage, legal expenses, etc.,

ii

Cost of acquisition of the capital asset/indexed cost of acquisition in case of long-term capital asset and Cost of improvement to the capital asset/indexed cost of improvement in case of long term capital asset The balance left-over is the gross capital gain/loss.

iii

Deduct the amount of permissible exemptions u/s 54,54B,54D54EC,54ED,54F,54G and 54H.

 ::  Full value of Consideration

This is the amount for which a capital asset is transferred. It may be in money or money’s worth or combination of both. For instance, in case of a sale, the full value of consideration is the full sale price actually paid by the transferee to the transferor. Where the transfer is by way of exchange of one asset for another or when the consideration for the transfer is partly ion cash and partly in kind, the fair market value of the asset received as consideration and cash consideration, if any, together constitute full value of consideration.

In case of damage or destruction of an asset in fire flood, riot etc., the amount of money or the fair market value of the asset received by way of insurance claim, shall be deemed as full value of consideration.

1. Fair value of consideration in case land and/ or building; and

2. Transfer Expenses.

 ::  Cost of Acquisition

Cost of acquisition is the amount for which the capital asset was originally purchased by the assessee.

Cost of acquisition of an asset is the sum total of amount spent for acquiring the asset. Where the asset is purchased, the cost of acquisition is the price paid. Where the asset is acquired by way of exchange for another asset, the cost of acquisition is the fair market value of that other asset as on the date of exchange.

Any expenditure incurred in connection with such purchase, exchange or other transaction e.g. brokerage paid, registration charges and legal expenses, is added to price or value of consideration for the acquisition of the asset. Interest paid on moneys borrowed for purchasing the asset is also part of its cost of acquisition.

Where capital asset became the property of the assessee before 1.4.1981, he has an option to adopt the fair market value of the asset as on 1.4.1981, as its cost of acquisition.
 
 ::  Cost of Improvement

Cost of improvement means all capital expenditure incurred in making additions or alterations to the capital assets, by the assessee. Betterment charges levied by municipal authorities also constitute cost of improvement. However, only the capital expenditure incurred on or after 1.4.1981, is to be considered and that incurred before 1.4.1981 is to be ignored.

 ::  Indexed cost of Acquisition/Improvement

For computing long-term capital gains, ‘Indexed cost of acquisition and ‘Indexed cost of Improvement’ are required to deducted from the full value of consideration of a capital asset. Both these costs are thus required to be indexed with respect to the cost inflation index pertaining to the year of transfer.
 
 ::  Rates of Tax on Capital Gains

Short-term Capital Gains

are included in the gross total income of the assessee and after allowing permissible deductions under Chapter VI-A, the total income is subject to tax at the rates in force given in Tables A, B,C & D in Appendix I of the Book. Rebate under Sections 88, 88B and 88C is also available against the tax payable on short-term capital gains.

Long-term Capital Gains are subject to a flat rate of tax @ 20% However, in respect of long term capital gains arising from transfer of listed securities or units of mutual fund/UTI, tax shall be payable @ 20% of the capital gain computed after allowing indexation benefit or @ 10% of the capital gain computed without giving the benefit of indexation, whichever is less.

 ::  Capital Loss

The amount by which the value of consideration for transfer of an asset falls short of its cost of acquisition and improvement/indexed cost of acquisition and improvement, and the expenditure on transfer, represents the capital loss. Capital Loss’ may be short-term or long-term, as in case of capital gains, depending upon the period of holding of the asset.
 
 ::  Set Off and Carry Forward of Capital Loss

Any short-term capital loss can be set off against any capital gain (both long-term and short term) and against no other income.
Any long-term capital loss can be set off only against long-term capital gain and against no other income.
Any short-term capital loss can be carried forward to the next eight assessment years and set off against ‘capital gains’ in those years.
Any long-term capital loss can be carried forward to the next eight assessment year and set off only against long-term capital gain in those years.

 ::  Capital Gains Exempt from Tax

Capital Gains from Transfer of a Residential House

Any long-term capital gains arising on the transfer of a residential house, to an individual or HUF, will be exempt from tax if the assessee has within a period of one year before or two years after the date of such transfer purchased, or within a period of three years constructed, a residential house.

Capital Gains from Transfer of Agricultural Land

Any capital gain arising from transfer of agricultural land, shall be exempt from tax, if the assessee purchases within 2 years from the date of such transfer, any other agricultural land. Otherwise, the amount can be deposited under Capital Gains Accounts Scheme, 1988 before the due date for furnishing the return.

Capital Gains from Compulsory Acquisition of Industrial Undertaking

Any capital gain arising from the transfer by way of compulsory acquisition of land or building of an industrial undertaking, shall be exempt, if the assessee purchases/constructs within three years from the date of compulsory acquisition, any land or building forming part of industrial undertaking. Otherwise, the amount can be deposited under the ‘Capital Gains Accounts Scheme, 1988’ before the due date for furnishing the return.

Capital Gains from an Asset other than Residential House

Any long-term capital gain arising to an individual or an HUF, from the transfer of any asset, other than a residential house, shall be exempt if the whole of the net consideration is utilized within a period of one year before or two years after the date of transfer for purchase, or within 3 years in construction, of a residential house.
 
 ::  Tax Planning for Capital Gains

1. An assessee should plan transfer of his capital assets at such a time that capital gains arise in the year in which his other recurring incomes are below taxable limits.

2. Assessees having income below Rs. 60,000 should go for short-term capital gain instead of long-term capital gain, since income upto Rs. 60,000 is taxable @ 10% whereas long-term capital gains are taxable at a flat rate of 20%. Those having income above Rs. 1,50,000 should plan their capital gains vice versa.

3. Since long-term capital gains enjoy a concessional treatment, the assessee should so arrange the transfers of capital assets that they fall in the category of long-term capital assets.

4. An assessee may go for a short-term capital gain, in the year when there is already a short-term capital loss or loss under any other head that can be set off against such income.

5. The assessee should take the maximum benefit of exemptions available u/s 54, 54B,54D ,54ED, 54EC,54F,54G and 54H.

6. Avoid claiming short-term capital loss against long-term capital gains. Instead claim it against short-term capital gain and if possible, either create some short-term capital gain in that year or, defer long-term capital gains to next year.

7. Since the income of the minor children is to be clubbed in the hands of the parent, it would be better if the minor children have no or lesser recurring income but have income from capital gain because the capital gain will be taxed at the flat rate of 20% and thus the clubbing would not increase the tax incidence for the parent.
 

4. INCOME FROM BUSINESS AND PROFESSION
 

 ::  Chargeability   The following incomes shall be chargeable under this head : 

i. Profit and gains of any business or profession carried on by the assessee at any time during previous year.

ii. Any compensation or other payment due to or received by any person, in connection with the termination of a contract of managing agency or for vesting in the Government management of any property or business.

iii. Income derived by a trade, professional or similar association from specific services performed for its members.

iv. Profits on sale of REP licence/Exim scrip, cash assistance received or receivable against exports, and duty drawback of customs or excise received or receivable against exports.

v. The value of any benefit or perquisite, whether convertible into money or not, arising from business or in exercise of a profession.

vi. Any interest, salary, bonus, commission or remuneration due to or received by a partner of a firm from the firm to the extent it is allowed to be deducted from the firm’s income. Any interest salary etc. which is not allowed to be deducted u/s 40(b), the income of the partners shall be adjusted to the extent of the amount so disallowed.

vii. Any sum received or receivable in cash or in kind under an agreement for not carrying out activity in relation to any business, or not to share any know-how, patent, copyright, trade-mark, licence, franchise or any other business or commercial right of, similar nature of information or technique likely to assist in the manufacture or processing of goods or provision for services except when such sum is taxable under the head ‘capital gains’ or is received as compensation from the multilateral fund of the Montreal Protocol on Substances that Deplete the Ozone Layer.

viii. Any sum received under a Keyman Insurance Policy referred to u/s 10(10D).

ix. Any allowance or deduction allowed in an earlier year in respect of loss, expenditure or trading liability incurred by the assessee and subsequently received by him in cash or by way of remission or cessation of the liability during the previous year.

 

x. Profit made on sale of a capital asset for scientific research in respect of which a deduction had been allowed u/s 35 in an earlier year.

xi. Amount recovered on account of bad debts allowed u/s 36(1) (vii) in an earlier year.

xii. Any amount withdrawn from the special reserves created and maintained u/s 36 (1) (viii) shall be chargeable as income in the previous year in which the amount is withdrawn.

  

 ::  Expenses Deductible   Following expenses incurred in furtherance of trade or profession are admissible as deductions.

1

Rent, rates, taxes, repairs and insurance of buildings.

2

Repairs and insurance of machinery, plat and furniture.

3

Depreciation is allowed on :
i Building, machinery, plant or furniture, being tangible assets,
ii know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets, acquired on or after 1.4.1998.

4

Development rebate.

5

Development allowance for Tea Bushes planted before 1.4.1990.

6

Amount deposited in Tea Development Account or 40% profits and gains from business of growing and manufacturing tea in India,

7

Amount deposited in Site Restoration Fund or 20% of profit, whichever is less, in case of an assessee carrying on business of prospecting for, or extraction or production of, petroleum or natural gas or both in India. The assessee shall get his accounts audited from a chartered accountant and furnish an audit report in Form 3 AD.

8

Reserves for shipping business.

9

i. Expenditure on scientific research related to the business of assessee, is deductible in that previous year.
ii. One and one-fourth times any sum paid to a scientific research association or an approved university, college or other institution for the purpose of scientific research, or for research in social science or statistical research.

iii. One and one-fourth times the sum paid to a National Laboratory or a University or an Indian Institute of Technology or a specified person with a specific direction that the said sum shall be used for scientific research under a programme approved in this behalf by the prescribed authority.

iv. One and one half times, the expenditure incurred upto 31.3.2005 on scientific research on in-house research and development facility, by a company engaged in the business of bio-technology or in the manufacture of any drugs, pharmaceuticals, electronic equipments, computers telecommunication equipments, chemicals or other notified articles.

10.

Expenditure incurred before 1.4.1998 on acquisition of patent rights or copyrights, used for the business, allowed in 14 equal instalments starting from the year in which it was incurred.

11

Expenditure incurred before 1.4.1998 on acquiring know-how for the business, allowed in 6 equal instalments. Where the know-how is developed in a laboratory, University or institution , deduction is allowed in 3 equal instalments.

12

Any capital expenditure incurred and actually paid by an assessee on the acquisition of any right to operate telecommunication services by obtaining licence will be allowed as a deduction in equal instalments over the period starting from the year in which payment of licence fee is made or the year in which business commences where licence fee has been paid before commencement and ending with the year in which the licence comes to an end.

13

Expenditure by way of payment to a public sector company, local authority or an approved association or institution, for carrying out a specified project or scheme for promoting the social and economic welfare or upliftment of the public. The specified projects include drinking water projects in rural areas and urban slums, construction of dwelling units or schools for the economically weaker sections, projects of non-conventional and renewable source of energy systems, bridges, public highways, roads promotion of sports, pollution control, etc.

14

Expenditure by way of payment to association and institution for carrying out rural development programmes or to a notified rural development fund, or the National Urban Poverty Eradication Fund.

15

Expenditure incurred on or before 31.3.2002 by way of payment to associations and institutions for carrying out programme of conservation of natural resources or afforestation or to an approved fund for afforestation.

16

Amortisation of certain preliminary expenses, such as expenditure for preparation of project report, feasibility report, feasibility report, market survey, etc., legal charges for drafting and printing charges of Memorandum and Articles, registration expenses, public issue expenses, etc. Expenditure incurred after 31.3.1988, shall be deductible upto a maximum of 5% of the cost of project or the capital exployed, in 5 equal instalments over five successive years.

17

One-fifth of expenditure incurred on amalgamation or demerger, by an Indian company shall be deductible in each of five successive years beginning with the year in which amalgamation or demerger takes place.

18

One-fifth of the amount paid to an employee on his voluntary retirement under a scheme of voluntary retirement, shall be deductible in each of five successive years beginning with the year in which the amount is paid.

19

Deduction for expenditure on prospecting, etc. for certain minerals.

20

Insurance premium for stocks or stores.

21

Insurance premium paid by a federal milk co-operative society for cattle owned by a member.

22

Insurance premium paid for the health of employees by cheque under the scheme framed by G.I.C. and approved by the Central Government.

23

Payment of bonus or commission to employees, irrespective of the limit under the Payment of Bonus Act.

24

Interest on borrowed capital.

25

Provident and superannuation fund contribution.

26

Approved gratuity fund contributions.

27

Any sum received from the employees and credited to the employees account in the relevant fund before due date.

28

Loss on death or becoming permanently useless of animals in connection with the business or profession.

29

Amount of bad debt actually written off as irrecoverable in the accounts not including provision for bad and doubtful debts.

30

Provision for bad and doubtful debts made by –

31

Special reserve created and maintained by a financial corporation engaged in providing long-term finance for industrial or agricultural development or infrastructure development in India or by a public company carrying on the business of providing housing finance.

32

Family planning expenditure by company.

33

Contributions towards Exchange Risk Administration Fund .

34

Expenditure, not being in nature of capital expenditure or personal expenditure of the assessee, incurred in furtherance of trade. However, any expenditure incurred for a purpose which is an offence or is prohibited by law, shall not be deductible.

35

Entertainment expenditure can be claimed u/s 37(1), in full, without any limit/restriction, provided the expenditure is not of capital or personal nature.

36

Payment of salary, etc. and interest on capital to partners

37

Expenses deductible on actual payment only.

38

Any provision made for payment of contribution to an approved gratuity fund, or for payment of gratuity that has become payable during the year.

39

Special provisions for computing profits and gains of civil contractors.

40

Special provision for computing income of truck owners.

41

Special provisions for computing profits and gains of retail business.

42

Special provisions for computing profits and gains of shipping business in the case of non-residents.

43

Special provisions for computing profits or gains in connection with the business of exploration etc. of mineral oils.

44

Special provisions for computing profits and gains of the business of operation of aircraft in the case of non-residents.

45

Special provisions for computing profits and gains of foreign companies engaged in the business of civil construction, etc. in certain turnkey projects.

46

Deduction of head office expenditure in the case of non-residents.

47

Special provisions for computing income by way of royalties etc. in the case of foreign companies  

 ::  Expenses deductible if authors receiving income form royalties 

In case of Indian authors/writers where the amount of royalties receivable during a previous year are less than Rs. 25,000 and where detailed accounts regarding expenses incurred are not maintained, deduction for expenses may be allowed upto 25% of such amount or Rs. 5,000, whichever is less. The above deduction will be allowed without calling for any evidence in support of expenses.

If the amount of royalties receivable exceeds Rs.25,000 only the actual expenses incurred shall be allowed.

   ::  Set Off and Carry Forward of Business Loss 

If there is a loss in any business, it can be set off against profits of any other business in the same year. The loss, if any, still remaining can be set off against income under any other head. However, loss in a speculation business can be adjusted only against profits of another speculation business. Losses not adjusted in the same year can be carried forward to subsequent years

5. INCOME FROM OTHER SOURCES

This is the last and residual head of charge of income. Income of every kind which is not to be excluded from the total income under the Income Tax Act shall be charge to tax under the head Income From Other Sources, if it is not chargeable under any of the other four heads-Income from Salaries, Income From House Property, Profits and Gains from Business and Profession and Capital Gains. In other words, it can be said that the residuary head of income can be resorted to only if none of the specific heads is applicable to the income in question and that it comes into operation only if the preceding heads are excluded.
 
 :: Following is the illustrative list of incomes chargeable to tax under the head Income from Other Source

(i)     Dividends
          Any dividend declared, distributed or paid by the company to its shareholders is chargeable to tax under the head ‘Income from Other Sources”, irrespective of the fact whether shares are held by the assessee as investment or stock in trade. Dividend is deemed to be the income of the previous year in which it is declared, distributed or paid. However interim dividend is deemed to be the income of the year in which the amount of such dividends unconditionally made available by the company to its shareholders.
          However, any income by way of dividends is exempt from tax u/s10(34) and no tax is required to be deducted in respect of such dividends.
 
(ii)      Income from machinery, plant or furniture belonging to the assessee and let on hire, if the income is not chargeable to tax under the head Profits and gains of business or profession;
 
(iii)     Where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to tax under the head Profits and gains of business or profession;
 
(iv)     Any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy if such income is not chargeable to tax under the head Profits and gains of business or profession or under the head Salaries.
 
 (v)     Where any sum of money exceeding twenty-five thousand rupees is received without consideration by an individual or a Hindu undivided family from any person on or after the 1st day of September, 2004, the whole of such sum :
      Provided that this clause shall not apply to any sum of money received
(a) From any relative; or
(b) On the occasion of the marriage of the individual; or
(c) Under a will or by way of inheritance; or
(d) In contemplation of death of the payer.
        Explanation. for the purposes of this clause, relative means
(i) spouse of the individual;
(ii) Brother or sister of the individual;
(iii) Brother or sister of the spouse of the individual;
(iv) Brother or sister of either of the parents of the individual;
(v) Any lineal ascendant or descendant of the individual;
(vi) Any lineal ascendant or descendant of the spouse of the individual;
 
(vii)   Any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or any fund set up under the
         provisions of the Employees’ State Insurance Act. If such income is not chargeable to tax under the head Profits and gains of business or profession.
 
(viii)  Income by way of interest on securities, if the income is not chargeable to tax under the head Profits and gains of business or profession.If books of     
        account in respect of such income are maintained on cash basis then interest is taxable on receipt basis. If however, books of account are maintained on
        mercantile system of accounting then interest on securities is taxable on accrual basis.
 
(ix)   Other receipts falling under the head “Income From Other Sources’:
 
1.      Director’s fees from a company, director’s commission for standing as a guarantor to bankers for allowing overdraft to 
         the company and director’s commission for underwriting shares of a new company.
2.      Income from ground rents.
3.      Income from royalties in general.
 
 :: Deductions:

The income chargeable to tax under this head is computed after making the following deductions:
1.      In the case of dividend income and interest on securities: any reasonable sum paid by way of remuneration or commission for the purpose of realizing dividend or interest.
2.      In case of income in the nature of family pension: Rs.15, 000or 33.5% of such income, whichever is low.
3.      In the case of income from machinery, plant or furniture let on hire:
(a)Repairs to building
(b)Current repairs to machinery, plant or furniture
(c)Depreciation on building, machinery, plant or furniture
(d)Unabsorbed Depreciation.
4.  Any other expenditure (not being a capital expenditure) expended wholly and exclusively for the purpose of earning of such income.