CA > Inter > Paper 3 – Skim Notes

Section 2 : Overview, Scenario, Crossword Puzzle

Overview

  • Section II includes Chapter 3 focusing on the heads of income.
  • Each head of income forms a separate unit within the chapter.
  • The five heads of income are Salaries, Income from House Property, Profits and Gains of Business or Profession, Capital Gains, and Income from Other Sources.
  • Taxpayers must classify income earned under the relevant head.
  • Each head has specific charging sections defining taxable income.
  • Deductions are available under each head subject to specific conditions and threshold limits.
  • Presumptive income provisions exist under Profits and Gains of Business or Profession.

Key Topics

Unit 1: Salaries

  • Salaries include basic salary, dearness allowance, and various other allowances (HRA, children’s educational allowance, etc.).
  • Exemptions exist for certain allowances such as HRA, subject to conditions (Section 10(13A)).
  • Entertainment allowance, transport allowance, and gifts from employers may have taxable implications (Sections 16 and 17).
  • Employer contributions to provident fund have specific tax implications (Sections 80C and 17).
  • Income from retirement benefits (pension) is also fully taxable.
  • Salary income must be computed carefully to consider deductions and exemptions.

Deep Dive

  • Section 15 lays down the provisions for charging Salaries to tax.
  • Deeming provisions under Section 17 define perquisites, impacting taxable income.
  • HRA calculations often require an understanding of local rent laws.

Unit 2: Income from House Property

  • Rental income from property owned is taxable under this head.
  • Computed as gross rent minus specific deductions (such as property taxes).
  • Deductions under Section 24 allow for standard deduction (30% of income) and interest on housing loans.
  • Arrears of rent collected must be declared in the year of receipt (Section 25A).
  • Property repairs do not directly lead to claims unless under specified exemptions.

Deep Dive

  • Deemed income provisions apply for self-occupied properties (only one can be self-occupied), affecting tax calculations.
  • Section 22 defines the scope of the income chargeable under this head.

Unit 3: Profits and Gains of Business or Profession

  • Taxable income derived from business or professional activities.
  • Expenses incurred wholly and exclusively for business are deductible (Section 28).
  • Certain presumptive provisions (Sections 44AD, 44ADA) allow income to be assessed based on receipts.
  • Deductions must comply with specific conditions outlined in various sections including 40 and 41.

Deep Dive

  • Businesses with income exceeding prescribed thresholds must maintain books of accounts (Section 44AB).
  • Specific rules apply for valuation of inventory and deductibility of cash payments under Section 40A.

Unit 4: Capital Gains

  • Capital gains arise from the sale of a capital asset like real estate or shares.
  • Taxability depends on whether the asset is long-term or short-term (Section 2(29A)).
  • Specific exemptions exist if proceeds are reinvested in qualifying assets (Section 54).
  • Calculating capital gains requires taking into account indexation, especially for long-term assets.

Deep Dive

  • Section 45 defines charging capital gains from the transfer of capital assets.
  • Special considerations exist for joint owners and rights of possession under capital gains tax.

Unit 5: Income from Other Sources

  • Residual head for incomes not classified under the other four heads.
  • Includes interest income, gifts, winnings from lotteries, etc. (Section 56).
  • Certain exemptions apply (e.g., gifts received from relatives are exempt).
  • The section specifies disallowed deductions related to the income.

Deep Dive

  • Strict rules govern the taxation of lottery winnings, with a flat tax rate applicable (Section 115BB).
  • Section 57 specifies the permissible deductions under this head.

Summary

Section II provides an extensive overview of income tax categorization into five heads: Salaries, Income from House Property, Profits and Gains of Business or Profession, Capital Gains, and Income from Other Sources. Each unit offers distinct rules governing the taxation of various income streams, complete with allowances, deductions, and relevant sections from the Income-tax Act, 1961. Ensuring thorough understanding and application of these rules is vital for taxpayers to accurately compute their tax liabilities.