CHAPTER 9

INCOME TAX
LIABILITY -
COMPUTATION AND
OPTIMISATION

LEARNING OUTCOMES

After studying this chapter, you would be able to–

♦ compute the tax liability of an individual under the default tax regime
under section 115BAC;
♦ compute the tax liability of an individual as per the regular provisions of
the Income-tax Act, 1961;
♦ examine the applicability of the provisions of Alternate Minimum Tax (AMT), if
applicable and compute the tax liability applying such provisions and
determine the tax credit, if any, to be carried forward;
♦ compare the tax liability computed under the default tax regime under section
115BAC with the tax liability under the regular provisions of the Act (including
provisions relating to AMT, if applicable) and determine which is more
beneficial to the individual.
 9.2 INCOME TAX LAW

CHAPTER OVERVIEW

COMPUTATION OF TOTAL INCOME

Determination of residential status

Classification of Income under

5 heads

Income from Profits and gains

Salaries Capital Income from
house property of business or
gains other sources
profession

Compute income under each head applying the

charging & deeming provisions and providing for
permissible deductions/exemptions thereunder

Apply the clubbing provisions

Set-off/carry forward and

set-off of losses as per the provisions of the Act

Compute Gross Total Income (GTI)

Less: Deductions from Gross Total Income

Total Income (TI)

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AND OPTIMISATION

1. MEANING OF TOTAL INCOME

The total income of an individual is arrived at after making deductions under
Chapter VI-A from the Gross Total Income. As we have learnt earlier, Gross Total
Income is the aggregate of the income computed under the 5 heads of income,
after giving effect to the provisions for clubbing of income and set-off and carry
forward & set-off of losses.

2. INCOME TO BE CONSIDERED WHILE

COMPUTING TOTAL INCOME OF
INDIVIDUALS
Capacity in which Treatment of income earned in each capacity
income is earned by
an individual
(1) In his personal Income from salaries, Income from house property,
capacity (under the 5 Profits and gains of business or profession, Capital
heads of income) gains and Income from other sources.
(2) As a partner of a (i) Salary, bonus etc. received by a partner is
firm/LLP taxable as his business income.
(ii) Interest on capital and/or loans to the
firm/LLP is taxable as business income of the
partner.
The income mentioned in (i) and (ii) above are
taxable to the extent they are allowed as
deduction to the firm.
(iii) Share of profit in the firm is exempt in the
hands of the partner [Section 10(2A)]. The
profit credited to the partners’ accounts in the
firm would be exempt from tax in the hands
of such partners, even if the income
chargeable to tax becomes Nil in the hands of
the firm on account of any exemption or
deduction available under the provisions of
the Act [Circular No. 8/2014 dated
31.03.2014].
 9.4 INCOME TAX LAW

(3) As a member of HUF (i) Share of income of HUF is exempt in the

hands of the member [Section 10(2)].
(ii) Income from an impartible estate of HUF is
taxable in the hands of the holder of the
estate who is the eldest member of the HUF.
(iii) Income from self-acquired property
converted into joint family property, without
adequate consideration.
(4) Income of other (i) Transferee’s income, where there is a
persons included in transfer of income without transfer of assets
the income of the (ii) Income arising to transferee from a
individual revocable transfer of an asset.
In cases (i) and (ii), income is includible in the
hands of the transferor.
(iii) Income of spouse as mentioned in section
64(1)(ii)/(iv)
(iv) Income from assets transferred otherwise
than for adequate consideration to any
person for the benefit of spouse [Section
64(1)(vii)].
(v) Income from assets transferred otherwise
than for adequate consideration to son’s
wife or to any person for the benefit of son’s
wife [Section 64(1)(vi)/(viii)].
(vi) Income of minor child as mentioned in
section 64(1A).

3. COMPUTATION OF TOTAL INCOME AND TAX

PAYABLE BY AN INDIVIDUAL
Income-tax is levied on an assessee’s total income. Such total income has to be
computed as per the provisions contained in the Income-tax Act, 1961. Steps 1 to
8 given hereunder have to be followed for computing total income of an
individual assessee. Thereafter, steps 9 to 15 have to be followed for computing
the tax payable.
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AND OPTIMISATION
Step 1 – Determination of residential status
♦ The residential status of an individual has to be determined to ascertain
which income is to be included in computing the total income.
♦ In the case of an individual, the duration for which he is present in
India in the relevant previous year or relevant previous year and the
earlier previous years, as the case may be, determine his residential
status.
♦ An individual can be either a –
- Resident and ordinarily resident
- Resident but not ordinarily resident
- Non-resident

♦ An individual who is a citizen of India, having total income, other than the
income from foreign sources, exceeding ` 15 lakh during the previous year,
would be deemed resident in India in that previous year, if he is not liable to
tax in any other country or territory by reason of his domicile or residence or
any other criteria of similar nature. Such deemed resident would, by default,
be a resident but not ordinarily resident in India in that previous year.
♦ The residential status of an individual determines the scope of his taxable
income.
♦ For example, income which accrues outside India and is received outside
India is taxable in the hands of a resident and ordinarily resident but is not
taxable in the case of a non-resident. In the case of a resident but not
ordinarily resident, such income would be taxable only if it is derived from a
business controlled in India or profession set up in India.
Step 2 – Classification of income under different heads
♦ An individual may earn income from different sources. Under the Income-
tax Act, 1961, for computation of total income, all income of an individual
assessee can be classified into five different heads of income.
♦ There are five heads of income, namely, -

- Salaries,
- Income from house property,
 9.6 INCOME TAX LAW

- Profits and gains of business or profession

- Capital Gains
- Income from other sources
♦ The income of an assessee should be identified and grouped under the
respective head of income.
♦ Each head of income has a charging section (for example, section 15 for
salaries, section 22 for income from house property).

♦ Deeming provisions are also contained under certain heads, by which

specific items are sought to be taxed under those heads.
For example, unrealized rent and arrears of rent from house property would
be deemed to be income from house property in the hands of the recipient
individual even if he is not the owner of the house property at the time of
receipt of such amount.
♦ The charging section and the deeming provisions would help you to
determine the scope of income chargeable under a particular head.
Step 3 – Computation of income under each head
♦ Income is to be computed in accordance with the provisions governing a
particular head of income.
♦ Assess the income under each head by -
- applying the charging and deeming provisions,
- excluding items of income relating to that head in respect of which
specific exemptions are provided in section 10.
There are certain incomes which are wholly exempt from income-tax.
These incomes have to be excluded and will not form part of Gross
Total Income. For e.g. agricultural income which is exempt under both
the tax regimes.
Also, some incomes are partially exempt from income-tax. These
incomes are excluded while computing income under the relevant
head only to the extent of the limits specified in the Act. For e.g. House
Rent Allowance, Children Education Allowance are exempt upto
prescribed limits under the optional tax regime as per normal provisions
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AND OPTIMISATION
of the Act. However, there is no exemption for these allowances under
the default tax regime under section 115BAC.

- allowing the permissible deductions under that head, and

For example, while calculating income from house property of a
rented house property, municipal taxes paid by the owner and interest
on loan are allowed as deduction. Standard deduction of upto
` 50,000 (under optional regime) and ` 75,000 (under default
regime) is allowed under salaries. Similarly, deductions and
allowances are prescribed under other heads of income.
- disallowing the non-permissible deductions.
For example, while computing income under the head “Profits and
gains from business or profession” expenditure of personal nature and
expenditure which is in the nature of offence are not allowable as
deduction. Hence, such expenditure, if any, debited to profits and loss
account, has to be added back while computing income under this
head.
Likewise, while computing net consideration for capital gains,
brokerage is a permissible deduction from gross sale consideration
but securities transaction tax paid is not permissible.
♦ In this step, it is necessary to consider whether the individual is paying tax
under the default tax regime or exercising the option to shift out of the
default tax regime and pay tax under the optional tax regime as per the
normal provisions of the Act. Certain deductions which are allowable under
the normal provisions of the Act are not permissible under the default tax
regime, for example, additional depreciation, investment linked tax
deduction under section 35AD, contribution to scientific research
association, national laboratory, IIT etc. However, expenditure on in-house
scientific research related to the business of the assessee is allowable as
deduction under both the tax regimes.
Step 4 – Clubbing of income of spouse, minor child etc.
♦ An individual in a higher tax bracket may have a tendency to divert his
income to another person who is not subject to tax or who is in a lower tax
bracket.
 9.8 INCOME TAX LAW

For example, an individual may make a fixed deposit in the name of his
minor son, so that income from such deposit would accrue to his son, who
does not have any other income.
♦ In order to prevent evasion of income-tax by such means, clubbing
provisions have been incorporated in the Income-tax Act, 1961, under which
income arising to certain persons (like spouse, son’s wife etc.) have to be
included in the income of the person who has diverted his income to such
persons for the purpose of computing tax liability.
Further, income of a minor child, not being a minor child suffering from any
disability of the nature specified in section 80U (other than income derived
from exercise of special skills/talent or manual work done by him) is
includible in the hands of the parent whose total income is higher before
including minor’s income. Such income will be included in the hands of the
parent and if that parent has exercised the option to shift out of the default
tax regime and pays tax under normal provisions of the Act, exemption of
up to ` 1,500 under section 10(32) would be provided from that income.
Step 5 – Set-off or carry forward and set-off of losses
An individual may have different sources of income under the same head of
income. He may have profit from one source and loss from the other. Similarly, he
can have loss under one head of income and profits under another head of
income. There are provisions in the Act for allowing inter-source and inter-head
adjustment.

♦ Inter-source set-off of losses

- A person may have income from one source and loss from another
source under the same head of income. For instance, a person may
have profit from wholesale trade of merchandise and loss from the
business of plying vehicles.
The loss of one business can be set-off against the profits of another
business to arrive at the net income under the head “Profits and gains
of business or profession”. However, loss from speculation business
can be set-off only against profits from speculation business and not
any other business.
- Set-off of loss from one source against income from another source
within the same head of income is permissible, subject to certain
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exceptions, like long-term capital loss cannot be set-off against short-
term capital gains though short-term capital loss can be set-off
against long-term capital gains.
♦ Inter-head set-off of losses
- Likewise, set-off of loss from one head against income from another
head is also permissible, subject to certain exceptions, like business
loss cannot be set-off against salary income; loss under the head
“Capital Gains” cannot be set-off against any other head of income.
- Loss from house property cannot be set-off against any other head of
income, if the individual pays tax under the default tax regime under
section 115BAC.
If the individual exercises the option to shift out of the default tax
regime and pays tax under normal provisions of the Act, loss from
house property can be set-off against income under any other head
only to the extent of ` 2 lakhs. The remaining loss from house
property has to be carried forward to the subsequent year to be set-
off against income from house property in that year.
♦ Carry forward and set-off of losses
- Unabsorbed losses of the current year can be carried forward to the
next year for set-off only against the respective head of income.
- Here again, if there are any restrictions relating to inter-source set-off,
the same will apply, like long-term capital loss which is carried forward
can be set-off only against long-term capital gains and not short-term
capital gains of a later year.
- The maximum number of years up to which any particular loss can be
carried forward is also provided under the Act.

For example, business loss can be carried forward for a maximum of 8

assessment years to be set-off against business income. However, loss
from specified business referred to in section 35AD can be carried
forward indefinitely for set-off against profits of any specified
business.
 9.10 INCOME TAX LAW

It must be noted that loss from an exempt source cannot be set-off against
profits from a taxable source of income.

Example: Share of loss from a partnership firm cannot be set-off against sole
proprietary business income of the partner, since share of income of the firm is
exempt under section 10(2A).

Step 6 – Computation of Gross Total Income

♦ The income computed under each head, after giving effect to the clubbing
provisions and provisions for set-off and carry forward and set-off of losses,
have to be aggregated to arrive at the gross total income.
♦ The process of computing GTI is depicted hereunder -
Add income → Apply → Apply the provisions for
computed under clubbing set-off and carry forward
each head provisions of losses
Step 7 – Deductions from Gross Total Income
Certain deductions are allowable from gross total income to arrive at the total
income. These deductions are contained in Chapter VI-A. These deductions are
allowable if the individual exercises the option to shift out of the default tax
regime and pay tax under normal provisions of the Act, subject to satisfaction of
the conditions prescribed in the relevant sections.
♦ Deduction in respect of certain payments, for example,

Section Nature of Payment/Deposit

80C Payment of life insurance premium, tuition fees of children,
deposit in public provident fund, repayment of housing loan
etc.
80D Medical insurance premium paid by an individual/HUF for the
specified persons/ contribution to CGHS etc.
80E Payment of interest on educational loan taken for self or
relative
♦ Deduction in respect of certain incomes, for example,

Section Nature of Income

80QQB Royalty income of authors of certain books other than text books
80RRB Royalty on patents
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♦ Deduction in respect of other incomes

Section Nature of Income

80TTA Interest on savings account with a bank, co-operative society
and post office.
80TTB Interest on deposit with a bank, co-operative society and post
office in case of senior citizens
♦ Other Deductions
Deduction under section 80U in case of a person with disability
In addition, deduction is also allowable under section 10AA in respect of an
assessee who derives profits and gains from an undertaking which manufactures
or produces articles or things or provides any service in any SEZ on or before
31.3.2021 if the individual exercises the option to shift out of the default tax
regime and pay tax under normal provisions of the Act.
There are limits in respect of deduction under certain sections. The
payments/incomes are allowable as deduction subject to such limits. For example,
the maximum deduction under section 80RRB is ` 3 lakhs; under section 80TTA is
` 10,000 and under section 80TTB is ` 50,000.
Note - Deduction under section 80CCD(2) [Employer’s contribution to pension
scheme of Central Government], section 80CCH(2) [Central Government’s
contribution to assessee’s account in Agniveer Corpus Fund] and section 80JJAA
would be available if the eligible assessee pays tax at concessional rates of tax u/s
115BAC under the default tax regime.
Step 8 – Computation of Total income
♦ The gross total income as reduced by the above deductions under Chapter
VI-A and section 10AA is the total income.
Total income = GTI – Deductions under Chapter VI-A and section 10AA
♦ It should be rounded off to the nearest multiple of ` 10.
♦ Tax is calculated on the total income of the assessee.
 9.12 INCOME TAX LAW

Step 9 – Application of the rates of tax on the total income in case of an

individual
♦ Concessional tax rates under default tax regime under section 115BAC
of the Income-tax Act, 1961

For individuals, there is a slab rate and basic exemption limit. At present, the
basic exemption limit is ` 3,00,000 under the default tax regime. The rates of
tax and level of total income are as under –

Total income (in `) Rate of Tax

(i) Upto ` 3,00,000 NIL
(ii) From ` 3,00,001 to ` 7,00,000 5%
(iii) From ` 7,00,001 to ` 10,00,000 10%
(iv) From ` 10,00,001 to ` 12,00,000 15%
(v) From ` 12,00,001 to ` 15,00,000 20%
(vi) Above ` 15,00,000 30%

♦ Tax rates prescribed by the Annual Finance Act under the optional tax
regime (regular provisions of the Act)
The slab rates for A.Y. 2025-26 applicable to Individual under normal
provisions of the Act are as follows:

Total income (in `) Rate of

Tax
(i) Upto ` 2,50,000 (below 60 years) Nil
(ii) Upto ` 3,00,000 (60 years or above but less than 80 years
and resident in India)
(iii) Upto ` 5,00,000 (above 80 years and resident in India)
` 2,50,001/ ` 3,00,001, as the case may be, to ` 5,00,000 [in 5%
cases (i) and (ii) above, respectively]
` 5,00,001 to ` 10,00,000 20%
Above ` 10,00,000 30%

♦ The rates of tax have to be applied on the total income to compute the tax
liability.
♦ Rates of tax in respect of certain incomes are provided under the Income-
tax Act, 1961 itself. Slab rates are not applicable under both the tax regimes
 INCOME TAX LIABILITY – COMPUTATION
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in respect of such incomes. For instance, the rates of tax for long term
capital gains on certain assets, long term capital gain on other assets,
certain short term capital gains, winnings from lotteries, crossword puzzles,
races and winnings from online games etc. are prescribed in sections 112A,
112, 111A, 115BB and 115BBJ, respectively.
♦ The special rates of tax have to be applied on the respective component of
total income and the general slab rates have to be applied on the balance
of total income as per the tax regime in which he pays tax.
♦ The unexhausted basic exemption limit can, however, be adjusted against
long-term capital gains taxable under section 112/112A and short-term
capital gains taxable under section 111A in case of resident individual in
both the tax regime.
Step 10 – Surcharge/ Rebate under section 87A
Surcharge: Surcharge is an additional tax payable over and above the income-
tax. Surcharge is levied as a percentage of income-tax.
In case the assessee pays tax under default tax regime under section 115BAC
The rates of surcharge applicable for A.Y.2025-26, in case the individual assessee
pays tax under default regime under section 115BAC, are as follows:

Rate of
Particulars surcharge on
income-tax

(i) Where the total income (including dividend income and 10%
capital gains chargeable to tax u/s 111A, 112 and 112A) >
` 50 lakhs but ≤ ` 1 crore
(ii) Where total income (including dividend income and capital 15%
gains chargeable to tax u/s 111A, 112 and 112A) > ` 1
crore but ≤ ` 2 crore

(iii) Where total income (excluding dividend income and 25%

capital gains chargeable to tax u/s 111A, 112 and 112A) >
` 2 crore
The rate of surcharge on the income-tax payable on the Not
portion of dividend income and capital gains chargeable to exceeding
tax u/s 111A, 112 and 112A included in total income 15%
 9.14 INCOME TAX LAW

(iv) Where total income (including dividend income and capital 15%
gains chargeable to tax u/s 111A, 112 and 112A) > ` 2
crore in cases not covered under (iii) above

In case the assessee exercises the option to shift out of the default regime
The rates of surcharge applicable for A.Y.2025-26, in case the individual assessee
exercises the option to shift out of the default regime, are as follows:

Rate of
Particulars surcharge on
income-tax
(i) Where the total income (including dividend income and 10%
capital gains chargeable to tax u/s 111A, 112 and 112A) >
` 50 lakhs but ≤ ` 1 crore
(ii) Where total income (including dividend income and capital 15%
gains chargeable to tax u/s 111A, 112 and 112A) > ` 1
crore but ≤ ` 2 crore
(iii) Where total income (excluding dividend income and 25%
capital gains chargeable to tax u/s 111A, 112 and 112A) >
` 2 crore but ≤ ` 5 crore
The rate of surcharge on the income-tax payable on the Not
portion of dividend income and capital gains chargeable to exceeding
tax u/s 111A, 112 and 112A included in total income 15%
(iv) Where total income (excluding dividend income and 37%
capital gains chargeable to tax u/s 111A, 112 and 112A) >
` 5 crore
The rate of surcharge on the income-tax payable on the Not
portion of dividend income and capital gains chargeable to exceeding
tax u/s 111A, 112 and 112A included in total income 15%
(v) Where total income (including dividend income and capital 15%
gains chargeable to tax u/s 111A, 112 and 112A) > ` 2
crore in cases not covered under (iii) and (iv) above
Marginal relief would also be available under both the tax regimes to ensure that
the increase in amount of tax payable (including surcharge) due to increase in
total income of an assessee beyond the prescribed limit should not exceed the
amount of increase in total income.
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Rebate under section 87A: Section 87A provides a rebate from the tax payable
by an assessee, being an individual resident in India.
Rebate to resident individual paying tax under default regime u/s 115BAC
(i) If the total income of the resident individual is chargeable to tax under
section 115BAC and the total income of such individual does not exceed
` 7,00,000, the rebate shall be equal to the amount of income-tax payable on
his total income for any assessment year or an amount of ` 25,000, whichever
is less.
(ii) If the total income of the resident individual is chargeable to tax under
section 115BAC and the total income of such individual exceeds ` 7,00,000
and income-tax payable on such total income exceeds the amount by which
the total income is in excess of ` 7,00,000, the rebate would be as follows.
Step 1 – Total income (-) ` 7 lakhs (A)
Step 2 - Compute income-tax payable on total income (B)

Step 3 - If B>A, rebate under section 87A would be a B – A.

Rebate to resident individual paying tax under optional tax regime (normal
provisions of the Act
If total income of such individual does not exceed ` 5,00,000, the rebate shall be
equal to the amount of income-tax payable on the total income for any
assessment year or an amount of ` 12,500, whichever is less.

However, rebate under section 87A is not available in respect of tax payable on
long-term capital gains taxable under section 112A.
Step 11 – Health and Education cess (HEC) on Income-tax
The amount of income-tax as increased by the union surcharge, if applicable,
should be further increased by an additional surcharge called the “Health and
Education cess on income-tax”, calculated at the rate of 4% of such income-tax
and surcharge, if applicable. Health and education cess is leviable in the case of
all assessees i.e. individuals, HUF, AOP/BOI, firms, local authorities, co-operative
societies and companies.
It is leviable to fulfill the commitment of the Government to provide and finance
quality health services and universalised quality basic education and secondary
and higher education
 9.16 INCOME TAX LAW

Total Tax = Tax on total (+) Surcharge, at (+) HEC@

Liability of income at applicable rates, if 4%
an individual applicable rates total income >
` 50 lakhs,
or
(-) Rebate u/s 87A

Step 12 – Alternate Minimum Tax (AMT)

The Income-tax Act, 1961 contains profit-linked and investment-linked
deductions in order to encourage investment in various industries and
infrastructure facilities. Taxpayers who exercise the option to shift out of the
default tax regime under section 115BAC and are eligible to claim such
deductions end up paying no income-tax or marginal income-tax though they are
capable of paying higher taxes. It has to be kept in mind that our Government
also needs regular/consistent inflow of tax, which is one of its major source of
revenue, to fund various expenses for the welfare of the country. Hence, in order
to ensure payment of reasonable tax by such zero-tax paying/marginal-tax paying
entities, the concept of alternate minimum tax has been introduced in the
Income-tax Act, 1961.
Chapter XII-BA contains special provisions for levy of alternate minimum tax in
case of persons other than a company 1. Any person other than a company, who
has claimed deduction under any section (other than section 80P) included in
Chapter VI-A under the heading “C – Deductions in respect of certain incomes” or
under section 10AA or investment-linked deduction under section 35AD would be
subject to AMT [Section 115JEE(1)].
The provisions of AMT would, however, not be applicable to an individual, HUF,
AOPs, BOIs, whether incorporated or not, or artificial juridical person, if the
adjusted total income of such person does not exceed ` 20 lakh [Section
115JEE(2)].
Individual/ HUF/ AoP/ BoI and artificial juridical person, paying tax under default
tax regime under section 115BAC, are also not liable to alternate minimum tax
under section 115JC.

1Since in respect of companies, minimum alternate tax (MAT) provisions are applicable, which will be
dealt with at the Final level.
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Note - At intermediate level, since profit-linked deductions provided under section

80-IA to 80-IE, section 80JJA, 80LA, 80M, 80P and 80PA have been excluded from
the scope of syllabus by way of Study Guidelines and computation of total income
and tax liability is restricted to individual assessees only, the discussion in relation
to AMT in this chapter is limited with respect to deduction under section 10AA,
section 35AD and deduction under section 80JJAA, 80QQB & 80RRB only.

Accordingly, where the regular income-tax payable by a person for a previous

year computed as per the normal provisions of the Income-tax Act, 1961 is less
than the AMT payable for such previous year, the adjusted total income shall be
deemed to be the total income of the person. Such person shall be liable to pay
income-tax on the adjusted total income @18.5% plus surcharge, if applicable,
and HEC @4% [Section 115JC].
“Adjusted total income” would mean the total income before giving effect to
Chapter XII-BA as increased by
(i) the deductions claimed, if any, under section 10AA;
(ii) the deduction claimed under section 35AD, as reduced by the depreciation
allowable under section 32, as if no deduction under section 35AD was
allowed in respect of the asset for which such deduction is claimed; and
(iii) deduction under any section included in Chapter VI-A under the heading C-
Deductions in respect of certain incomes [For Intermediate level, the
relevant sections are 80JJAA, 80QQB & 80RRB].
Tax credit for AMT [Section 115JD]
Tax credit is the excess of AMT paid over the regular income-tax payable under
the provisions of the Income-tax Act, 1961 for the year. Such tax credit shall be
carried forward and set-off against income-tax payable in the later year to the
extent of excess of regular income-tax payable under normal the provisions of the
Act over the AMT payable in that year. The balance tax credit, if any, shall be
carried forward to the next year for set-off in that year in a similar manner.
AMT credit can be carried forward for set-off upto a maximum period of 15
assessment years succeeding the assessment year in which the credit becomes
allowable.
 9.18 INCOME TAX LAW

Tax Credit allowable even if Adjusted Total Income does not exceed ` 20 lakh in
the year of set-off [Section 115JEE(3)]
In case where the assessee has not claimed any deduction under section 10AA or
section 35AD or deduction under section 80JJAA, 80QQB & 80RRB in any previous
year and the adjusted total income of that year does not exceed ` 20 lakh, it
would still be entitled to set-off his brought forward AMT credit in that year.
Tax credit not allowable to the assessee paying tax under the default tax
regime
A person who is paying tax under the default tax regime under section 115BAC
would not be eligible to claim AMT credit.
Step 13 – Examine whether to pay tax under default regime under section
115BAC or pay tax under the optional tax regime as per the regular provisions
of the Act

In case of an assessee not having income from business or profession:

In case of individuals not having income from business or profession, the total
income and tax liability may be computed every year, both in accordance with
default tax regime under section 115BAC and regular provisions of the Act
(including provisions relating to AMT, if applicable), in order to determine which
is more beneficial and accordingly, decide whether or not to shift out of the
default regime under section 115BAC.
In effect, such individual can choose whether or not to exercise the option of
shifting out in each previous year. He may choose to pay tax under default regime
under section 115BAC in one year and exercise the option to shift out of default
tax regime in another year.
In case of an assessee having income from business or profession:
In case of individuals having income from business or profession, the total income
and tax liability may be computed, both in accordance with default tax regime
under section 115BAC and regular provisions of the Act (including provisions
relating to AMT, if applicable), in order to determine which is more beneficial.
Such individual has an option to shift out/opt out of the default tax regime under
this section and the option has to be exercised on or before the due date
specified under section 139(1) for furnishing the return of income for such
previous year and once such option is exercised, it would apply to subsequent
assessment years.
 INCOME TAX LIABILITY – COMPUTATION
9.19
AND OPTIMISATION
Such person who has exercised the above option of shifting out of the default
regime for any previous year shall be able to withdraw such option only once and
pay tax under the default regime under section 115BAC for a previous year other
than the year in which it was exercised.
Thereafter, such person shall never be eligible to exercise option under this
section, except where such person ceases to have any business income
Step 14 – Credit for advance tax, TDS and TCS
♦ Tax is deductible at source at the time of payment of salary, rent, interest,
fees for professional services, royalty etc.
♦ The payer has to deduct tax at source at the rates specified in the respective
sections.
♦ Such tax deducted at source has to be reduced by the payee to determine
his net tax liability.
♦ Tax is collectible by the seller in case of certain goods at the rate specified
in the respective section. Credit of such tax collection at source is allowable
to determine the tax liability.
♦ The Income-tax Act, 1961 also requires payment of advance tax in
instalments during the previous year itself on the basis of estimated income,
if the tax payable, after reducing TDS/TCS, is ` 10,000 or more.
♦ An individual is required to pay advance tax in four instalments, on or
before 15th June, 15th September, 15th December and 15th March of the
financial year.
♦ Assessees declaring profits under presumptive taxation provisions under
section 44AD or under section 44ADA can, however, pay the entire advance
tax on or before 15th March of the financial year.
♦ From the total tax due, deduct the TDS, TCS and advance tax paid for the
relevant assessment year to arrive at the tax payable.
Tax Payable = Total tax liability – TDS – TCS - Advance tax paid
Step 15 - Tax Payable/ Tax Refundable
After adjusting the advance tax, tax deducted and collected at source, the
assessee would arrive at the amount of net tax payable or refundable. Such
amount should be rounded off to the nearest multiple of ` 10. The assessee has
to pay the amount of tax payable (called self-assessment tax) before or at the
 9.20 INCOME TAX LAW

time of filing of the return. Similarly, if any refund is due, assessee will get the same
after filing the return of income.
Note: Students are advised to read the above steps carefully and follow the given
procedure while solving problems on computation of total income and tax liability.

4. TAX PLANNING IN RESPECT OF SALARY

INCOME
The definition of salary is very wide and includes not only monetary salary but
also benefits and perquisites in kind. Under the default tax regime under section
115BAC, the only deduction available under section 16 in respect of salary income
is the standard deduction of upto ` 75,000. However, under the optional tax
regime as per normal provisions of the Act, the deductions available under
section 16 in respect of salary income are the standard deduction upto ` 50,000,
deduction for entertainment allowance (only for government employees) and
deduction for professional tax. The following are some of the aspects which can
be considered for tax planning in regard to salary income -
(1) Salary Structure: An employer may plan the salary structure of employees
keeping in view the deductions and exemptions available under the Act. If
salary is paid as a consolidated amount, without any break-up, the amount
of salary after providing standard deduction of upto ` 50,000 (under
optional regime) and ` 75,000 (under default regime), would become
taxable without any further exemption and deduction. Therefore, the
employer may structure the salary by including various allowances and
perquisites in addition to basic salary, so as to enable the employee to
optimise his tax liability.
For example, the employer may include allowances as part of the salary
structure of the employees for which exemption can be claimed under Rule
2BB if the employee exercises the option to shift out of the default tax
regime, e.g. Children education allowance, hostel allowance, house rent
allowance. The employer will get a deduction of all the above amounts paid
while computing his profits and gains of business or profession.
Further, if the employee exercises the option to shift out of the default tax
regime, the employer can give such allowances like special compensatory
allowance, border area allowance or remote area allowance or difficult area
allowance or disturbed area allowance depending upon the place of posting
of the employee. Some exemptions are available in respect of these
 INCOME TAX LIABILITY – COMPUTATION
9.21
AND OPTIMISATION
allowances. In this connection, Rule 2BB specifies the exempt allowances.
The employer has to make a careful study and fix the salary structure in
such a manner that it will include allowances which are exempt.
(2) Employees’ welfare schemes: There are several employees’ welfare
schemes such as recognised provident fund, approved superannuation fund,
gratuity fund. Payments received from such funds by the employees are
totally exempt or exempt upto significant amounts.
For example, gratuity received by an employee covered under the Payment
of Gratuity Act, 1972 is exempt upto ` 20 lakh. The provident fund received
by the employee from recognised provident fund is exempt, subject to
limits and conditions. The employer can institute such welfare schemes for
the benefit of the employees. Such amount contributed by the employer
towards the above funds is deductible. However, a note of caution is
necessary here in view of the restrictive provisions of section 40A(9) which
disallows any contribution made to any welfare funds except where such
contributions are covered by section 36(1)(iv)/(iva)/(v) or as required by or
under any other law for the time being in force. Further, the employer can
contribute to recognized provident fund account of the employee upto 12%
of salary, and the same would not be taxable in the hands of the employees.
The amount or aggregate of amounts of any contribution made in a
recognised provident fund, in NPS referred to in section 80CCD(1) and in an
approved superannuation fund by the employer to the account of the
assessee, to the extent it exceeds ` 7,50,000, would be taxable as perquisite
in the hands of the employee. Likewise, if an employee’s contribution to RPF
exceeds ` 2,50,000 p.a. or ` 5,00,000 p.a. (on or after 1.4.2021), as the case
may be, depending on whether the employer contributes to RPF, then,
interest accured on the amount exceeding the specified threshold would be
taxable. The detailed provisions have been dealt with in Unit 1 of Chapter 3.
(3) Insurance policies: Any payment made by an employer on behalf of an
employee to maintain a life policy will be treated as perquisite in the hands
of the employee. Further, payments received from the employer in respect
of key man insurance policies constitute income in the hands of the
employees. However, any sum reimbursed by the employer in respect of any
mediclaim premium paid by the employee to keep in force an insurance on
his health or the health of any member of his family under any scheme
 9.22 INCOME TAX LAW

approved by the Central Government or IRDA for the purpose of section

80D is not a perquisite in the hands of the employee.
Further, the payment of premium by the employer on behalf of the
employee will not be treated as a perquisite in the case of accident
insurance policies. This is due to the fact that the employer has a vested
interest in the safety of the life of his employee who is engaged in such
dangerous occupations. 2
In respect of accident insurance policies, the term perquisite applies to only
such sums in regard to which there was an obligation on the part of the
employer to pay and a vested right on the part of the employee. If the
employee has no vested interest in the policy, it cannot be considered as a
perquisite. In cases where an employer takes out accident insurance policy
covering all workmen and staff members and pays insurance premium and
whenever any worker/staff member meets with an accident and the amount
of claim is received from the insurance company and the same is paid away
by the employer to the said worker or his family members, the premium
paid by the employer in respect of group accident policies could not be
considered as a perquisite, under section 17 to be added in the salary
income of any employee 3. The amount received from insurance company on
accident or death by employee or his dependents will not also be in the
nature of income but a capital receipt and therefore the same will not be
taxable.
(4) Dearness allowance, dearness pay: The employer should ensure that
dearness allowance and dearness pay should form part of “salary”. This is
because certain items like employer’s contribution to the recognised
provident fund, commuted pension etc. are calculated on the basis of salary.
Therefore, if dearness allowance, dearness pay etc. are included in salary,
the above benefits will also increase leading to higher terminal benefits in
the hands of the employee.
Also, for determining the exemption in respect of employer’s contribution
to provident fund, house rent allowance etc., dearness allowance forming
part of pay for retirement benefits is included within the meaning of
“Salary”.

2
CIT v Lala Shri Dhar (1972) 84 ITR 192 (Del) and CIT v Vinay Bharat Ram (1981) 129 ITR 128 (Del)
3
CIT v. Lala Shri Dhar (1972) 84 ITR 192 (Delhi)
 INCOME TAX LIABILITY – COMPUTATION
9.23
AND OPTIMISATION
(5) Leave travel facility: If the employee exercises the option to shift out of
the default tax regime, the employer should avail leave travel facility. Under
section 10(5) of the Income-tax Act, 1961, exemption is provided in the
hands of the employee in respect of leave travel concession. Such
exemption is available for the employee, spouse, children (upto a maximum
of 2 children), dependent parents, dependent brothers and dependent
sisters.
However, if the employee pays tax under the default tax regime under
section 115BAC, exemption under section 10(5) would not be available.
(6) Rent free accommodation / House Rent Allowance (HRA): An employee
should analyse the tax incidence of a perquisite and an allowance, whenever
he is given an option, in order to choose the one which is more beneficial to
him. In the case of Rent Free Accommodation vs. HRA, it must be noted that
the perquisite of rent free accommodation is taxed as per Rule 3(1) of the
Income-tax Rules, 1962 and HRA is exempt to the extent mentioned in
section 10(13A) read with Rule 2A. However, exemption for HRA would be
available only if the employee exercises the option to shift out of the default
tax regime. The employee should therefore work out his tax liability and net
cash flow under both the options and then, decide on whether to receive
HRA or choose a rent free accommodation.
(7) Uncommuted/Commuted pension: Uncommuted pension is fully taxable.
Therefore, the employees should get their pension commuted. Commuted
pension is fully exempt from tax in the case of government employees and
partly exempt from tax in the case of non-government employees.
(8) Provident Fund: Accumulated balance due and becoming payable to an
employee participating in a Recognized Provident Fund (RPF) would be
exempt, where an employee who is a member of a recognised provident
fund and who resigns after completing five years of continuous service.
However, if he resigns before completing five years of continuous service he
should ensure that he joins an organisation which maintains a recognised
provident fund. The accumulated balance of the provident fund with the
previous employer will be exempt from tax provided the same is transferred
to the new employer who also maintains a recognised provident fund.
 9.24 INCOME TAX LAW

It may be noted the exemption would not be available in respect of income

by way of interest accrued during the previous year to the extent it relates
to the amount or the aggregate of amounts of contribution made by the
employee exceeding ` 2,50,000/` 5,00,000, as the case may be, in any
previous year in that fund, on or after 1st April, 2021 and computed in
prescribed manner.
(9) Other retirement benefits : Incidence of tax on retirement benefits like
leave encashment, commuted pension, accumulated balance of
unrecognized provident fund is lower if they are paid in the beginning of
the financial year.
The employer and the employees may mutually plan in such a way that
retirement takes place in the beginning of a financial year.
(10) Tax free perquisites: The following are the perquisites which are exempt
from tax–
(i) Use of computers and laptop by employee;
(ii) Medical facility in employer’s own hospital or a public hospital or
Government or other approved hospital;
(iii) Educational benefit in a school run by employer provided value of
benefit does not exceed ` 1,000 per month per child.
(11) Considerations for salary structuring: The perquisite valuation rules
prescribe the method for valuing the various perquisites provided by the
employer to his employees on the basis of the cost of such perquisites to
the employee. For a detailed study, students are advised to refer to the Unit
1 of Chapter 3 - ‘Salaries’. Accordingly, the entire salary structuring for
employees will have to be done after carefully weighing the pros and cons
of paying salary in monetary terms or allowing the benefit of perquisites in
kind to the employees.
It may be noted that a salaried person has an option to choose whether to pay
tax under the default tax regime under section 115BAC or shift out of the
default tax regime and pay tax under normal provisions of the Act in each
previous year.
Under section 115BAC, in respect of his total income, he cannot not avail
certain exemptions/deductions like Leave Travel Concession, HRA, exemption
under section 10(14) (other than those allowable under this section), interest
on housing loan on self-occupied property, deductions under Chapter VI-A
[other than under section 80CCD(2), 80CCH(2) and section 80JJAA] etc. The
 INCOME TAX LIABILITY – COMPUTATION
9.25
AND OPTIMISATION
exemptions allowable under section 10(14) under the default tax regime
under section 115BAC include travelling allowance, daily allowance,
conveyance allowance and transport allowance to blind/deaf and
dumb/orthopedically handicapped employee.
Therefore, a salaried taxpayer not availing the above deductions/
exemptions or availing a lesser amount of such deductions/ exemptions can
analyse his tax liability under default tax regime under section 115BAC vis-
à-vis the regular provisions of the Income-tax Act, 1961 in each year. An
employee intending to shift out of the default tax regime under section
115BAC has to intimate the same to the employer.
ILLUSTRATION 1
Mr. A, aged 32 years, is employed with XYZ (P) Ltd. on a basic salary of ` 50,000
p.m. He has received transport allowance of ` 15,000 p.m. and house rent
allowance of ` 20,000 p.m. from the company for the P.Y. 2024-25. He has paid
rent of ` 25,000 p.m. for an accommodation in Delhi. Mr. A has paid interest of
` 2,10,000 for housing loan taken for the construction of his house in Mumbai. The
construction of the house is completed in March, 2025 and his parents live in that
house.
Other Information
- Contribution to PPF - ` 1,50,000
- Contribution to pension scheme referred to in section 80CCD - ` 50,000

- Payment of medical insurance premium for father, who is of the age of 65 -

` 55,000
- Payment of medical insurance premium for self and spouse - ` 32,000
Compute the total income and tax liability of Mr. A for the A.Y. 2025-26 in the most
beneficial manner.
SOLUTION
Computation of total income and tax liability of Mr. A for A.Y. 2025-26
under default tax regime under section 115BAC

Particulars `
Salaries
Basic Salary [` 50,000 x 12] 6,00,000
Transport allowance [` 15,000 x 12] 1,80,000
 9.26 INCOME TAX LAW

HRA received [` 20,000 x 12] 2,40,000

Gross salary 10,20,000
Less: Standard deduction u/s 16(ia) (75,000)
9,45,000
Income from house property
Interest on housing loan -
Gross Total Income 9,45,000
Less: Deductions under Chapter VI- A
Section 80C
Contribution in PPF -
Section 80CCD
Contribution to pension scheme -
Section 80D
Mediclaim insurance premium for self and parents -
Total Income 9,45,000
Tax liability
Tax @5% on ` 4,00,000 [` 7,00,000 - ` 3,00,000] 20,000
Tax @10% on ` 2,45,000 [` 9,45,000 - ` 7,00,000] 24,500 44,500
Add: Health & Education cess @ 4% 1,780
Total Tax Liability 46,280

Computation of total income and tax liability of Mr. A for A.Y. 2025-26
under normal provisions of the Act

Particulars `
Salaries
Basic Salary [` 50,000 x 12] 6,00,000
Transport allowance [` 15,000 x 12] 1,80,000
HRA received 2,40,000
Less: Least of the following exempt u/s 10(13A) 2,40,000 -
HRA Received 2,40,000
Actual rent paid – 10% of salary [` 3,00,000 – ` 60,000] 2,40,000
50% of salary 3,00,000
 INCOME TAX LIABILITY – COMPUTATION
9.27
AND OPTIMISATION
Gross salary 7,80,000
Less: Standard deduction u/s 16(ia) (50,000)
7,30,000
Income from house property
[Annual Value is Nil. Deduction u/s 24(b) for interest on housing (2,00,000)
loan would be restricted to ` 2,00,000, in case of self-occupied
property, which would represent loss from house property]
Gross Total Income 5,30,000
Less: Deductions under Chapter VI-A
Section 80C
Contribution to PPF 1,50,000
Section 80CCD(1B)
Own contribution to pension scheme 50,000
Section 80D
Mediclaim insurance premium
For self and spouse, restricted to 25,000
For father, who is a senior citizen, restricted to 50,000
75,000
Total Income 2,55,000
Tax liability
Tax @ 5% on ` 5,000 [` 2,55,000 - ` 2,50,000] 250
Less: Rebate u/s 87A 250
Total Tax Liability -

Since tax liability as per the normal provisions of the Act is lower than the tax
liability under the default tax regime under section 115BAC, it would be beneficial
for Mr. A to shift out of the default tax regime under section 115BAC for
A.Y. 2025-26.

Note: In this case, Mr. A is entitled to exemption u/s 10(13A), benefit of interest
on housing loan in respect of self-occupied property and Chapter VI-A
deductions, owing to which his total income is reduced by ` 6,90,000. His total
income under the regular provisions of the Act is less than ` 5,00,000, owing to
which he becomes entitled to rebate u/s 87A. Hence, in this case, it is beneficial
 9.28 INCOME TAX LAW

for Mr. A to shift out of the default tax regime under section 115BAC for
A.Y. 2025-26.
ILLUSTRATION 2
Mr. Kadam is entitled to a salary of ` 41,000 per month. He is given an option by
his employer either to take house rent allowance or a rent free accommodation
which is owned by the company. The HRA amount payable was ` 7,000 per month.
The rent for the hired accommodation was ` 6,000 per month at New Delhi. Advice
Mr. Kadam whether it would be beneficial for him to avail HRA or Rent Free
Accommodation. Give your advice on the basis of “Net Take Home Cash benefits”.
Assume Mr. Kadam exercises the option to shift out of the default tax regime under
section 115BAC.
SOLUTION
Computation of tax liability of Kadam under both the options

Particulars Option I – Option II –

HRA RFA
(`) (`)
Basic Salary (` 41,000 x 12 Months) 4,92,000 4,92,000
Perquisite value of rent-free accommodation (10% of N.A. 49,200
` 4,92,000)
House rent Allowance (` 7,000 x 12 Months) ` 84,000
Less: Exempt u/s 10(13A) – least of the following -
- 50% of Basic Salary ` 2,46,000
- Actual HRA received ` 84,000
- Rent paid less 10% of salary ` 22,800 ` 22,800 61,200

Gross Salary 5,53,200 5,41,200

Less: Standard deduction u/s 16(ia) 50,000 50,000

Net Salary 5,03,200 4,91,200

Less: Deduction under Chapter VI-A - -

Total Income 5,03,200 4,91,200

Tax on total income 13,140 12,060

 INCOME TAX LIABILITY – COMPUTATION
9.29
AND OPTIMISATION

Less: Rebate under section 87A - Lower of ` 12,500 or

income-tax of ` 12,060, since total income does not
exceed ` 5,00,000 Nil 12,060

13,140 Nil
Add: Health and Education cess@4% 526 Nil

Tax liability 13,666 Nil

Tax liability (Rounded off) 13,670 Nil

Cash Flow Statement

Particulars Option I – HRA Option II – RFA

Inflow: Salary 5,76,000 4,92,000
Less: Outflow: Rent paid (72,000) -
Tax on total income (13,670) Nil
Net Inflow 4,90,330 4,92,000

Since the net cash inflow under option II (RFA) is higher than in Option I (HRA), it
is beneficial for Mr. Kadam to avail Option II, i.e., Rent Free Accommodation.
 9.30 INCOME TAX LAW

TEST YOUR KNOWLEDGE

1. Compute the tax liability of Mr. Gupta (aged 61) under default tax regime,
having total income of ` 1,02,00,000 for the A.Y.2025-26. Assume that his
total income comprises of salary income, income from house property and
interest on fixed deposit.
2. Miss Charlie, an American national, got married to Mr. Radhey of India in
USA on 02.03.2024 and came to India for the first time on 16.03.2024. She left
for USA on 19.9.2024. She returned to India again on 27.03.2025. While in
India, she had purchased a show room in Mumbai on 30.04.2024, which was
leased out to a company on a rent of ` 25,000 p.m. from 01.05.2024. She had
taken loan from a bank for purchase of this show room on which bank had
charged interest of ` 97,500 upto 31.03.2025. She had received the following
cash gifts from her relatives and friends during 1.4.2024 to 31.3.2025:
- From parents of husband ` 51,000
- From married sister of husband ` 11,000
- From two very close friends of her husband (` 1,51,000 and ` 21,000)

(a) Determine her residential status and compute the total income
chargeable to tax along with the amount of tax liability on such income
for the A.Y. 2025-26 if she opts out of the default tax regime under
section 115BAC.
(b) Would her residential status undergo any change, assuming that she is
a person of Indian origin and her total income from Indian sources is
` 18,00,000 and she is not liable to tax in USA?
3. Dr. Niranjana, a resident individual, aged 60 years is running a clinic in Surat.
Her Income and Expenditure Account for the year ending March 31st, 2025 is
as under:

Expenditure ` Income `
To Medicine consumed 35,38,400 By Consultation and 58,85,850
medical charges
 INCOME TAX LIABILITY – COMPUTATION
9.31
AND OPTIMISATION
To Staff salary 13,80,000 By Income-tax refund 5,450
(principal ` 5,000,
interest ` 450)
To Clinic consumables 1,10,000 By Dividend from units 10,500
of UTI (Gross)
To Rent paid 90,000 By Winning from game
show on T.V. (net of
TDS of ` 15,000) 35,000
To Administrative 2,55,000 By Rent 27,000
expenses
To Amount paid to 1,50,000
scientific research
association
approved u/s 35
To Net profit 4,40,400
59,63,800 59,63,800

(i) Rent paid includes ` 30,000 paid by cheque towards rent for her
residential house in Surat.
(ii) Clinic equipments are:
1.4.2024 Opening W.D.V. - ` 5,00,000
7.12.2024 Acquired (cost) by cheque - ` 2,00,000
(iii) Rent received relates to residential house property situated at Surat.
Gross Annual Value ` 27,000. The municipal tax of ` 2,000, paid in
December, 2024, has been included in "administrative expenses".
(iv) She received salary of ` 7,500 p.m. from "Full Cure Hospital" which has
not been included in the "consultation and medical charges".

(v) Dr. Niranjana availed a loan of ` 5,50,000 from a bank for higher
education of her daughter. She repaid principal of ` 1,00,000, and
interest thereon ` 55,000 during the previous year 2024-25.
(vi) She paid ` 1,00,000 as tuition fee (not in the nature of development
fees/ donation) to the university for full time education of her daughter.
 9.32 INCOME TAX LAW

(vii) An amount of ` 28,000 has also been paid by cheque on 27th March,
2025 for her medical insurance premium.
From the above, compute the total income of Dr. Smt. Niranjana for the
A.Y. 2025-26 under the default tax regime and optional tax regime as per the
normal provisions of the Act.
4. Ms. Purvi, aged 55 years, is a Chartered Accountant in practice. She maintains
her accounts on cash basis. Her Income and Expenditure account for the year
ended March 31, 2025 reads as follows:

Expenditure (` ) Income (` ) (` )
Salary to staff 15,50,000 Fees earned:
Stipend to articled 1,37,000 Audit 27,88,000
Assistants Taxation 15,40,300
services
Incentive to articled 13,000 Consultancy 12,70,000 55,98,300
Assistants Dividend on 10,524
shares of X Ltd.,
an Indian
company (Gross)
Office rent 12,24,000 Income from UTI 7,600
(Gross)
Printing and 12,22,000 Honorarium 15,800
stationery received from
various
institutions for
valuation of
answer papers
Meeting, seminar 31,600 Rent received 85,600
and conference from residential
flat let out
Purchase of car (for 80,000
official use)
Repair, 4,000
maintenance
and petrol of car
 INCOME TAX LIABILITY – COMPUTATION
9.33
AND OPTIMISATION
Travelling expenses 5,25,000
Municipal tax paid 3,000
in respect of house
property
Net Profit 9,28,224
57,17,824 57,17,824

Other Information:
(i) Allowable rate of depreciation on motor car is 15%.
(ii) Value of benefits received from clients during the course of profession is
` 10,500.
(iii) Incentives to articled assistants represent amount paid to two articled
assistants for passing CA Intermediate Examination at first attempt.
(iv) Repairs and maintenance of car include ` 2,000 for the period from
1-10-2024 to 30-09-2025.
(v) Salary includes ` 30,000 to a computer specialist in cash for assisting
Ms. Purvi in one professional assignment.
(vi) The travelling expenses include expenditure incurred on foreign tour of
` 32,000 which was within the RBI norms.
(vii) Medical Insurance Premium on the health of dependent brother and
major son dependent on her amounts to ` 5,000 and ` 10,000,
respectively, paid in cash.
(viii) She invested an amount of ` 10,000 in National Saving Certificate.
(ix) She has paid ` 70,000 towards advance tax during the P.Y. 2024-25.
Compute the total income and tax payable by Ms. Purvi for the A.Y. 2025-26 in a
most beneficial manner.
5. Mr. Y carries on his own business. An analysis of his trading and profit & loss
for the year ended 31-3-2025 revealed the following information:

(1) The net profit was ` 11,20,000.

(2) The following incomes were credited in the profit and loss account:
 9.34 INCOME TAX LAW

(a) Income from UTI ` 22,000 (Gross)

(b) Interest on debentures ` 17,500 (Gross)

(c) Winnings from horse races ` 15,000 (Gross)
(3) It was found that some stocks were omitted to be included in both the
opening and closing stocks, the value of which were:
Opening stock ` 8,000.
Closing stock ` 12,000.

(4) ` 1,00,000 was debited in the profit and loss account, being contribution
to a University approved and notified under section 35(1)(ii).
(5) Salary includes ` 20,000 paid to his brother which is unreasonable to
the extent of ` 2,500.
(6) Advertisement expenses include 15 gift packets of dry fruits costing
` 1,000 per packet presented to important customers.
(7) Total expenses on car was ` 78,000. The car was used both for business
and personal purposes. ¾th is for business purposes.
(8) Miscellaneous expenses included ` 30,000 paid to A & Co., a goods
transport operator in cash on 31-1-2025 for distribution of the
company’s product to the warehouses.
(9) Depreciation debited in the books was ` 55,000. Depreciation allowed
as per Income-tax Rules, 1962 was ` 50,000.
(10) Drawings of ` 10,000 debited in the books.
(11) Investment in NSC ` 15,000 debited in the books.

Compute the total income of Mr. Y for the assessment year 2025-26 under
optional tax regime as per normal provisions of the Act.
6. Balamurugan furnishes the following information for the year ended
31-03-2025:

Particulars `
Income from textile business (1,35,000)
Income from house property (15,000)
Lottery winning (Gross) 5,00,000
 INCOME TAX LIABILITY – COMPUTATION
9.35
AND OPTIMISATION
Speculation business income 1,00,000
Income by way of salary (Computed) 2,70,000
Long term capital gain u/s 112 taxable @20% 70,000

Compute his total income, tax liability and advance tax obligations under
default tax regime under section 115BAC.
7. Mr. Rajiv aged 50 years, a resident individual and practicing Chartered
Accountant, furnishes you the receipts and payments account for the financial
year 2024-25.
Receipts and Payments Account

Receipts ` Payments `
Opening balance 12,000 Staff salary, bonus and 21,50,000
(1.4.2024) Cash on stipend to articled clerks
hand and at Bank
Fee from professional 59,38,000 Other administrative 11,48,000
services (Gross) expenses
Rent 50,000 Office rent 30,000
Motor car loan from 2,50,000 Housing loan repaid to SBI 1,88,000
Canara Bank (@ 9% (includes interest of
p.a.) ` 88,000)
Life insurance premium 24,000
(10% of sum assured)
Motor car (acquired in Jan. 4,25,000
2025 by A/c payee cheque)
Medical insurance 18,000
premium (for self and wife)
(paid by A/c Payee
cheque)
Books bought on 1.07.2024 20,000
(annual publications by
A/c payee cheque)
Computer acquired on 30,000
1.11.2024 by A/c payee
cheque (for professional
use)
Domestic drawings 2,72,000
 9.36 INCOME TAX LAW

Public provident fund 20,000

subscription
Motor car maintenance 10,000
Closing balance 19,15,000
(31.3.2025) Cash on hand
and at Bank
62,50,000 62,50,000

Following further information is given to you:

(1) He occupies 50% of the building for own residence and let out the
balance for residential use at a monthly rent of ` 5,000. The building
was constructed during the year 1997-98, when the housing loan was
taken.
(2) Motor car was put to use both for official and personal purpose. One-
fifth of the motor car use is for personal purpose. No car loan interest
was paid during the year.
(3) The written down value of assets as on 1-4-2024 are given below:

Furniture & Fittings ` 60,000

Plant & Machinery ` 80,000
(Air-conditioners, Photocopiers, etc.)
Computers ` 50,000
Note: Mr. Rajiv follows regularly the cash system of accounting.
Compute the total income of Mr. Rajiv for the A.Y. 2025-26 assuming that he
has shifted out of the default tax regime under section 115BAC.
8. From the following details, compute the total income and tax liability of
Siddhant, aged 31 years, of Delhi both as per section 115BAC and as per the
regular provisions of the Income-tax Act, 1961 for the A.Y.2025-26. Advise
Mr. Siddhant whether he should opt for section 115BAC:

Particulars `
Salary including dearness allowance 4,35,000
Bonus 15,000
Salary of servant provided by the employer 12,000
Rent paid by Siddhant for his accommodation 49,600
 INCOME TAX LIABILITY – COMPUTATION
9.37
AND OPTIMISATION
Bills paid by the employer for gas, electricity and water 11,000
provided free of cost at the above flat

Siddhant purchased a flat in a co-operative housing society in Delhi for

` 4,75,000 in April, 2016, which was financed by a loan from Life Insurance
Corporation of India of ` 1,60,000@15% interest, his own savings of ` 65,000
and a deposit from a nationalized bank for ` 2,50,000 to whom this flat was
given on lease for ten years. The rent payable by the bank was ` 3,500 per
month. The following particulars are relevant:
(a) Municipal taxes paid by Mr. Siddhant ` 4,300 (per annum)
(b) House Insurance ` 860
(c) He earned ` 2,700 in share speculation business and lost ` 4,200 in
cotton speculation business.
(d) In the year 2021-22, he had gifted ` 30,000 to his wife and ` 20,000 to
his son who was aged 11. The gifted amounts were advanced to
Mr. Rajesh, who was paying interest@19% per annum.
(e) Siddhant received a gift of ` 30,000 each from four friends.
(f) He contributed ` 50,000 to Public Provident Fund.
9. Ramdin, aged 33 years, working as Manager (Sales) with Frozen Foods Ltd.,
provides the following information for the year ended 31.03.2025:
− Basic Salary ` 15,000 p.m.
− DA (50% of it is meant for retirement benefits) ` 12,000 p.m.
− Commission as a percentage of turnover of the Company 0.5 %
− Turnover of the Company ` 50 lakhs
− Bonus ` 50,000
− Gratuity ` 30,000
− Own Contribution to R.P.F. ` 30,000
− Employer’s contribution to R.P.F. 20% of basic salary

− Interest credited in the R.P.F. account @ 15% p.a. ` 15,000

− Gold Ring worth ` 10,000 was given by employer on his 25th wedding
anniversary.
 9.38 INCOME TAX LAW

− Music System purchased on 01.04.2024 by the company for ` 85,000

and was given to him for personal use.
− Two old light goods vehicles owned by him were leased to a transport
company against the fixed charges of ` 6,500 p.m. Books of account are
not maintained.
− Received interest of ` 5,860 on bank FDRs on 24.4.2024 and interest of
` 6,786 (Net) from the debentures of Indian Companies on 5.5.2024.
− Made payment by cheques of ` 15,370 towards premium on Life
Insurance policies and ` 22,500 for Mediclaim Insurance policy for self
and spouse.
− Invested in NSC ` 30,000 and in FDR of SBI for 5 years ` 50,000.
− Donations of ` 11,000 to an institution approved u/s 80G and of
` 5,100 to Prime Minister’s National Relief Fund were given during the
year by way of cheque.
Compute his total income and tax payable thereon for the A.Y. 2025-26.
Assume that Mr. Ramdin has exercised the option to shift out of the default
tax regime under section 115BAC.
10. From the following particulars furnished by Mr. X for the year ended
31.3.2025, you are requested to compute his total income and tax payable for
the assessment year 2025-26, assuming that he opts out of the default tax
regime under section 115BAC.
(a) Mr. X retired on 31.12.2024 at the age of 58, after putting in 26 years
and 1 month of service, from a private company at Mumbai.
(b) He was paid a salary of ` 25,000 p.m. and house rent allowance of
` 6,000 p.m. He paid rent of ` 6,500 p.m. during his tenure of service.
(c) On retirement, he was paid a gratuity of ` 3,50,000. He was covered by
the payment of Gratuity Act. Mr. X had not received any other gratuity
at any point of time earlier, other than this gratuity.
(d) He had accumulated leave of 15 days per annum during the period of
his service; this was encashed by Mr. X at the time of his retirement. A
sum of ` 3,15,000 was received by him in this regard. His average salary
for last 10 months may be taken as ` 24,500. Employer allowed 30 days
leave per annum.
 INCOME TAX LIABILITY – COMPUTATION
9.39
AND OPTIMISATION
(e) After retirement, he ventured into textile business and incurred a loss of
` 80,000 for the period upto 31.3.2025.
(f) Mr. X has deposited ` 1,00,000 in public provident fund.
11. Rosy and Mary are sisters, born and brought up at Mumbai. Rosy got married
in 1982 and settled at Canada since 1982. Mary got married and settled in
Mumbai. Both of them are below 60 years. The following are the details of
their income for the previous year ended 31.3.2025:

S. Particulars Rosy Mary

No. ` `
1. Pension received from State Government -- 60,000
2. Pension received from Canadian Government 20,000 --
3. Long-term capital gain on sale of land on 1,00,000 1,00,000
15.5.2024 at Mumbai taxable
4. Short-term capital gain on sale of shares on 20,000 2,50,000
23.4.2024 of Indian listed companies in respect
of which STT was paid
5. LIC premium paid -- 10,000
6. Premium paid to Canadian Life Insurance 40,000 --
Corporation at Canada
7. Mediclaim policy premium paid by A/c Payee -- 25,000
Cheque
8. Deposit in PPF -- 20,000
9. Rent received in respect of house property at 60,000 30,000
Mumbai

Compute the total income and tax liability of Mrs. Rosy and Mrs. Mary for the
A.Y. 2025-26 and tax thereon assuming both exercised the option to shift out
of the default tax regime.

12. Mr. X, an individual set up a unit in Special Economic Zone (SEZ) in the
financial year 2019-20 for production of washing machines. The unit fulfills
all the conditions of section 10AA of the Income-tax Act, 1961. During the
financial year 2023-24, he has also set up a warehousing facility in a district
of Tamil Nadu for storage of agricultural produce. It fulfills all the conditions
 9.40 INCOME TAX LAW

of section 35AD. Capital expenditure in respect of warehouse amounted to

` 75 lakhs (including cost of land ` 10 lakhs). The warehouse became
operational with effect from 1st April, 2024 and the expenditure of ` 75 lakhs
was capitalized in the books on that date.

Relevant details for the F.Y. 2024-25 are as follows:

Particulars `
Profit of unit located in SEZ 40,00,000
Export turnover received in India in convertible foreign 80,00,000
exchange on or before 30.9.2025
Domestic sales of above unit 20,00,000
Profit from operation of warehousing facility (before 1,05,00,000
considering deduction under Section 35AD)

Compute income-tax (including AMT under Section 115JC) liability of Mr. X

for A.Y. 2025-26 both as per section 115BAC and as per regular provisions of
the Income-tax Act, 1961 for A.Y. 2025-26. Advise Mr. X whether he should
pay tax under default tax regime or normal provisions of the Act.

ANSWERS
1. Computation of tax liability of Mr. Gupta for the A.Y.2025-26
under default tax regime
(A) Income-tax (including surcharge) computed on total income of
` 1,02,00,000
` 3,00,000 – ` 7,00,000 @5% ` 20,000
` 7,00,001 – ` 10,00,000 @10% ` 30,000
` 10,00,001 – ` 12,00,000 @15% ` 30,000
` 12,00,001 – ` 15,00,000 @20% ` 60,000
` 15,00,001 – ` 1,02,00,000 @30% ` 26,10,000
Total ` 27,50,000
Add: Surcharge @15% ` 4,12,500 ` 31,62,500
(B) Income-tax computed on total income of ` 1crore
(` 1,40,000 plus ` 25,50,000) ` 26,90,000
 INCOME TAX LIABILITY – COMPUTATION
9.41
AND OPTIMISATION
Add: Surcharge@10% ` 2,69,000
` 29,59,000
(C) Total Income Less ` 1crore ` 2,00,000
(D) Income-tax computed on total income of ` 1 crore
plus the excess of total income over ` 1 crore (B +C) ` 31,59,000
(E) Tax liability: lower of (A) and (D) ` 31,59,000
Add: Health and education cess @4% ` 1,26,360
Tax liability (including cess) ` 32,85,360
(F) Marginal Relief (A – D) ` 3,500
Alternative method -
(A) Income-tax (including surcharge) computed on total income of
` 1,02,00,000
` 3,00,000 – ` 7,00,000 @5% ` 20,000
` 7,00,001 – ` 10,00,000 @10% ` 30,000
` 10,00,001 – ` 12,00,000 @15% ` 30,000
` 12,00,001 – ` 15,00,000 @20% ` 60,000
` 15,00,001 – ` 1,02,00,000 @30% ` 26,10,000
Total ` 27,50,000
Add: Surcharge @ 15% ` 4,12,500 ` 31,62,500
(B) Income-tax computed on total income of ` 1 crore
[(` 1,40,000 plus ` 25,50,000) plus surcharge@10%] ` 29,59,000
(C) Excess tax payable (A)-(B) ` 2,03,500
(D) Marginal Relief (` 2,03,500 – ` 2,00,000, being the amount
of income in excess of ` 1,00,00,000) ` 3,500
(E) Tax liability (A)-(D) ` 31,59,000
Add: Health and education cess @4% ` 1,26,360
Tax liability (including cess) ` 32,85,360
 9.42 INCOME TAX LAW

2. (a) Under section 6(1), an individual is said to be resident in India in any

previous year, if he/she satisfies any one of the following conditions:
(i) He/she has been in India during the previous year for a total period
of 182 days or more, or

(ii) He/she has been in India during the 4 years immediately preceding
the previous year for a total period of 365 days or more and has
been in India for at least 60 days in the previous year.
If an individual satisfies any one of the conditions mentioned above,
he/she is a resident. If both the above conditions are not satisfied, the
individual is a non-resident.
Therefore, the residential status of Miss Charlie, an American National,
for A.Y.2025-26 has to be determined on the basis of her stay in India
during the P.Y.2024-25 and in the preceding four previous years.

Her stay in India during the P.Y.2024-25 and in the preceding four
years are as under:
P.Y. 2024-25

01.04.2024 to 19.09.2024 - 172 days

27.03.2025 to 31.03.2025 - 5 days
Total 177 days
Four preceding previous years
P.Y. 2023-24 [1.4.2023 to 31.3.2024] - 16 days
P.Y. 2022-23 [1.4.2022 to 31.3.2023] - Nil
P.Y. 2021-22 [1.4.2021 to 31.3.2022] - Nil
P.Y. 2020-21 [1.4.2020 to 31.3.2021] - Nil
Total 16 days

The total stay of the assessee during the previous year in India was less
than 182 days and during the four years preceding this year was for 16
days. Therefore, due to non-fulfillment of any of the two conditions for a
resident, she would be treated as non-resident for the A.Y.2025-26.
INCOME TAX LIABILITY – COMPUTATION
9.43
AND OPTIMISATION
Computation of total income of Miss Charlie for the A.Y. 2025-26

Particulars ` `

Income from house property

Show room located in Mumbai remained on
rent from 01.05.2024 to 31.03.2025@ 2,75,000
` 25,000/- p.m.
Gross Annual Value [` 25,000 x 11] (See Note
1 below)
Less: Municipal taxes Nil
Net Annual Value (NAV) 2,75,000
Less: Deduction under section 24
30% of NAV 82,500
Interest on loan 97,500 1,80,000 95,000
Income from other sources
Cash gifts received from non-relatives is
chargeable to tax as per section 56(2)(x), if the
aggregate value of such gifts exceeds ` 50,000.
- ` 50,000 received from parents of Nil
husband would be exempt, since parents
of husband fall within the definition of
‘relative’ and gifts from a relative are not
chargeable to tax.
- ` 11,000 received from married sister of Nil
husband is exempt, since sister-in-law falls
within the definition of relative and gifts
from a relative are not chargeable to tax.
- Gift received from two friends of husband 1,72,000 1,72,000
` 1,51,000 and ` 21,000 aggregating to
` 1,72,000 is taxable under section
56(2)(x) since the aggregate of ` 1,72,000
exceeds ` 50,000. (See Note 2 below)
Total income 2,67,000
 9.44 INCOME TAX LAW

Computation of tax liability by Miss Charlie for the A.Y. 2025-26

under normal provisions of the Act

Particulars `
Tax on total income of ` 2,67,000 850
Add: Health and Education cess@4% 34
Total tax liability 884
Total tax liability (rounded off) 880
Notes:
1. Actual rent received has been taken as the gross annual value in
the absence of other information (i.e. Municipal value, fair rental
value and standard rent) in the question.
2. If the aggregate value of taxable gifts received from non-relatives
exceed ` 50,000 during the year, the entire amount received (i.e.
the aggregate value of taxable gifts received) is taxable. Therefore,
the entire amount of ` 1,72,000 is taxable under section 56(2)(x).
3. Since Miss Charlie is a non-resident for the A.Y. 2025-26, rebate
under section 87A would not be available to her, even though her
total income does not exceed ` 5 lakhs.
(b) Residential status of Miss Charlie in case she is a person of Indian
origin and her total income from Indian sources exceeds ` 18,00,000
If she is a person of Indian origin and her total income from Indian
sources exceeds ` 15,00,000 (` 18,00,000, in her case), the condition of
stay in India for a period exceeding 120 days during the previous year
and 365 days during the four immediately preceding previous years
would be applicable for being treated as a resident. Since her stay in
India exceeds 120 days in the P.Y.2024-25 but the period of her stay in
India during the four immediately preceding previous years is less
than 365 days (only 16 days), her residential status as per section 6(1)
would continue to be same i.e., non-resident in India.
Further, since she is not a citizen of India, the provisions of section
6(1A) deeming an individual to be a citizen of India would not get
attracted in her case, even though she is a person of Indian origin and
 INCOME TAX LIABILITY – COMPUTATION
9.45
AND OPTIMISATION
her total income from Indian sources exceeds ` 15,00,000 and she is
not liable to pay tax in USA.

Therefore, her residential status would be non-resident in India for the

previous year 2024-25.
3. Computation of total income of Dr. Niranjana for A.Y. 2025-26
under default tax regime

Particulars ` ` `

I Income from Salary

Basic Salary (` 7,500 x 12) 90,000
Less: Standard deduction u/s 16(ia) 75,000 15,000
II Income from house property
Gross Annual Value (GAV) 27,000
Less: Municipal taxes paid 2,000
Net Annual Value (NAV) 25,000
Less: Deduction u/s 24@30% of 7,500 17,500
` 25,000
III Income from profession
Net profit as per Income and 4,40,400
Expenditure account
Less: Items of income to be treated
separately
(i) Rent received (taxable under 27,000
the head “Income from house
property”)
(ii) Dividend from units of UTI 10,500
(taxable under the head “Income
from other sources”)
(iii) Winning from game show on 35,000
T.V. (net of TDS) – taxable
under the head “Income from
other sources”
 9.46 INCOME TAX LAW

(iv) Income tax refund 5,450 77,950

3,62,450
Less: Allowable expenditure
Depreciation on clinic equipments
on ` 5,00,000@15% 75,000
on ` 2,00,000@7.5% 15,000 90,000
(On equipments acquired during
the year in December 2024, she is
entitled to depreciation @50% of
normal depreciation, since the
same are put to use for less than
180 days during the year)
2,72,450
Add: Items of expenditure not
allowable while computing
business income
(i) Amount paid to scientific 1,50,000
research association approved
u/s 35 (not allowed under
default tax regime)
(i) Rent for her residential 30,000
accommodation included in
Income and Expenditure A/c
(ii) Municipal tax paid relating to
residential house at Surat
included in administrative 2,000 1,82,000 4,54,450
expenses
IV Income from other sources
(a) Interest on income-tax 450
refund
(b) Dividend from UTI (taxable in 10,500
the hands of unit holders)
(c) Winnings from TV game show
(` 35,000 + ` 15,000) 50,000 60,950
Gross Total Income 5,47,900
INCOME TAX LIABILITY – COMPUTATION
9.47
AND OPTIMISATION
Less: Deductions under Chapter VI-
A:
(a) Section 80C [Not allowed under Nil
default tax regime]
(b) Section 80D [Not allowed under Nil
default tax regime]
(c) Section 80E [Not allowed under Nil
default tax regime]
Total income 5,47,900

Computation of total income of Dr. Niranjana for A.Y. 2025-26

under normal provisions of the Act

Particulars ` `
Gross Total Income as per default tax 5,47,900
regime
Add: Standard deduction of Rs. 25,000, 25,000
being the excess amount allowed u/s
115BAC
Less: Items of expenditure allowable while
computing business income under normal
provisions of the Act
100% deduction is allowable in respect of 1,50,000
the amount paid to scientific research
association allowable under normal
provisions of the Act.
Gross Total Income as per normal 4,22,900
provisions of the Act
Less: Deductions under Chapter VI-A:
(a) Section 80C - Tuition fee paid to university
for full time education of her daughter 1,00,000
(b) Section 80D - Medical insurance
premium (fully allowed since she is a 28,000
senior citizen)
 9.48 INCOME TAX LAW

(c) Section 80E - Interest on loan taken for

higher education is deductible 55,000 1,83,000
Total income 2,39,900

Notes:
(i) The principal amount received towards income-tax refund will be
excluded from computation of total income. Interest received will be
taxed under the head “Income from other sources”.
(ii) Winnings from game show on T.V. should be grossed up for the
chargeability under the head “Income from other sources” (` 35,000 +
` 15,000). Thereafter, while computing tax liability, TDS of ` 15,000
should be deducted to arrive at the tax payable. Winnings from game
show are subject to tax @30% as per section 115BB.
(iii) Dr. Niranjana would not be eligible for deduction u/s 80GG under
normal provisions of the Act, as she owns a house in Surat, a place
where she is residing as well as carrying on her profession.
4. Computation of total income and tax payable by Ms. Purvi for
the A.Y. 2025-26 under default tax regime under section 115BAC

Particulars ` `
Income from house property (See Working Note 1) 57,820
Profit and gains of business or profession 9,20,200
(See Working Note 2)
Income from other sources (See Working Note 3) 33,924
Gross Total Income 10,11,944
Less: Deductions under Chapter VI-A [not allowable -
under default tax regime]
Total Income 10,11,944
Total Income (rounded off) 10,11,940
Tax on total income
Upto ` 3,00,000 Nil
` 3,00,001 - ` 7,00,000 @5% 20,000
` 7,00,001 - ` 10,00,000 @10% 30,000
 INCOME TAX LIABILITY – COMPUTATION
9.49
AND OPTIMISATION
` 10,00,001 - ` 10,11,940 @ 15% 1,791 51,791
Add: Health and Education cess @ 4% 2,072
Total tax liability 53,863
Less: Advance tax paid 70,000
Less: Tax deducted at source on dividend income 1,052
from an Indian company u/s 194
Tax deducted at source on income from UTI u/s 194K 760 1,812
Tax Payable/ (Refundable) (17,949)
Tax Payable/ (Refundable) (rounded off) (17,950)

Computation of total income and tax payable

under normal provisions of the Act

Particulars ` `

Gross Total Income 10,11,944

[Income under the “Income from house property”
“Profits and gains from business or profession” and
“Income from other sources” would remain the same
even if Ms. Purvi opts out of the default tax regime
under section 115BAC]
Less: Deductions under Chapter VI-A (See Working 10,000
Note 4)

Total Income 10,01,944

Total Income (rounded off) 10,01,940
Tax on total income
Upto ` 2,50,000 Nil
` 2,50,001 – ` 5,00,000 @5% 12,500
` 5,00,000 - ` 10,00,000 @20% 1,00,000
` 10,00,000 – ` 10,01,940 @ 30% 582 1,13,082
Add: Health and Education cess @ 4% 4,523
Total tax liability 1,17,605
 9.50 INCOME TAX LAW

Less: Advance tax paid 70,000

Less: TDS u/s 194 on dividend 1,052
TDS u/s 194K on income from UTI 760 1,812
Tax Payable 45,793
Tax Payable (rounded off) 45,790

Since there is tax refundable under default tax regime under section 115BAC
and tax payable under the regular provisions of the Income-tax Act, 1961, it
would be beneficial for Ms. Purvi to pay tax under default tax regime under
section 115BAC.

Working Notes:
(1) Income from House Property

Particulars ` `
Gross Annual Value under section 23(1) 85,600
Less: Municipal taxes paid 3,000
Net Annual Value (NAV) 82,600
Less: Deduction u/s 24@30% of NAV 24,780 57,820

Note - Rent received has been taken as the Gross Annual Value in the
absence of other information relating to Municipal Value, Fair Rent
and Standard Rent.
(2) Income under the head “Profits & Gains of Business or
Profession”

Particulars ` `

Net profit as per Income and Expenditure account 9,28,224

Add: Expenses debited but not allowable
(i) Salary paid to computer specialist in cash 30,000
disallowed u/s 40A(3), since such cash
payment exceeds ` 10,000
(ii) Amount paid for purchase of car is not 80,000
allowable under section 37(1) since it is a
capital expenditure
INCOME TAX LIABILITY – COMPUTATION
9.51
AND OPTIMISATION
(ii) Municipal taxes paid in respect of 3,000 1,13,000
residential flat let out
10,41,224
Add: Value of benefit received from clients
during the course of profession [taxable as 10,500
business income under section 28(iv)]
10,51,724
Less: Income credited but not taxable under
this head:
(i) Dividend on shares of X Ltd., an Indian 10,524
company (taxable under the head “Income
from other sources")
(ii) Income from UTI (taxable under the head 7,600
“Income from other sources")
(iii) Honorarium for valuation of answer papers 15,800
(iv) Rent received from letting out of 85,600 1,19,524
residential flat
9,32,200
Less: Depreciation on motor car @15% (See
Note (i) below) 12,000
9,20,200

Notes :
(i) It has been assumed that the motor car was put to use for more
than 180 days during the previous year and hence, full
depreciation @ 15% has been provided for under section
32(1)(ii).
Note: Alternatively, the question can be solved by assuming that
motor car has been put to use for less than 180 days and
accordingly, only 50% of depreciation would be allowable as per
the second proviso below section 32(1)(ii).
 9.52 INCOME TAX LAW

(ii) Incentive to articled assistants for passing CA Intermediate

examination in their first attempt is deductible under section
37(1).
(iii) Repairs and maintenance paid in advance for the period 1.4.2025
to 30.9.2025 i.e. for 6 months amounting to ` 1,000 is allowable
since Ms. Purvi is following the cash system of accounting.
(iv) ` 32,000 expended on foreign tour is allowable as deduction
assuming that it was incurred in connection with her
professional work. Since it has already been debited to income
and expenditure account, no further adjustment is required.
(3) Income from other sources

Particulars `
Dividend on shares of X Ltd., an Indian company (taxable 10,524
in the hands of shareholders)
Income from UTI (taxable in the hands of unit holders) 7,600
Honorarium for valuation of answer papers 15,800
33,924
(4) Deduction under Chapter VI-A :

Particulars `
Deduction under section 80C (Investment in NSC) 10,000
Deduction under section 80D (See Notes (i) & (ii) below) Nil
Total deduction under Chapter VI-A 10,000

Notes:
(i) Premium paid to insure the health of brother is not eligible for
deduction under section 80D, even though he is a dependent,
since brother is not included in the definition of “family” under
section 80D.
(ii) Premium paid to insure the health of major son is not eligible for
deduction, even though he is a dependent, since payment is
made in cash.
 INCOME TAX LIABILITY – COMPUTATION
9.53
AND OPTIMISATION
5. Computation of total income of Mr. Y for the A.Y. 2025-26

Particulars `

Profits and gains of business or profession (See Working 11,21,500

Note 1 below)
Income from other sources (See Working Note 2 below) 54,500
Gross Total Income 11,76,000
Less: Deduction under section 80C (Investment in NSC) 15,000
Total Income 11,61,000

Working Notes:
1. Computation of profits and gains of business or profession

Particulars ` `
Net profit as per profit and loss account 11,20,000
Add: Expenses debited to profit and loss
account but not allowable as
deduction
Salary paid to brother disallowed to the 2,500
extent considered unreasonable [Section
40A(2)]
Motor car expenses attributable to personal 19,500
use not allowable (` 78,000 × ¼)
Depreciation debited in the books of 55,000
account
Drawings (not allowable since it is 10,000
personal in nature) [See Note (iii)]
Investment in NSC [See Note (iii)] 15,000 1,02,000
12,22,000
Add: Under statement of closing stock 12,000
12,34,000
Less: Under statement of opening stock 8,000
 9.54 INCOME TAX LAW

Less: Contribution to a University approved

and notified u/s 35(1)(ii) is eligible for
100% deduction. Since whole of the
actual contribution (100%) has been
debited to profit and loss account, no
-
further adjustment is required.
12,26,000
Less: Incomes credited to profit and loss
account but not taxable as business
income
Income from UTI [taxable under the head 22,000
“Income from other sources”]
Interest on debentures (taxable under 17,500
the head “Income from other sources”)
Winnings from horse races (taxable
under the head “Income from other 15,000 54,500
sources”)
11,71,500
Less: Depreciation allowable under the
Income-tax Rules, 1962 50,000
11,21,500
Notes:
(i) Advertisement expenses of revenue nature, namely, gift of dry
fruits to important customers, is incurred wholly and exclusively
for business purposes. Hence, the same is allowable as
deduction under section 37.
(ii) Disallowance under section 40A(3) is not attracted in respect of
cash payment exceeding ` 10,000 to A & Co., a goods transport
operator, since, in case of payment made for plying, hiring or
leasing goods carriages, an increased limit of ` 35,000 is
applicable (i.e. payment of upto ` 35,000 can be made in cash
without attracting disallowance under section 40A(3))
(iii) Since drawings and investment in NSC have been given effect to
in the profit and loss account, the same have to be added back
to arrive at the business income.
 INCOME TAX LIABILITY – COMPUTATION
9.55
AND OPTIMISATION
(iv) In point no. 9 of the question, it has been given that
depreciation as per Income-tax Rules, 1962 is ` 50,000. It has
been assumed that, in the said figure of ` 50,000, only the
proportional depreciation (i.e., 75% for business purposes) has
been included in respect of motor car.
2. Computation of “Income from Other Sources”

Particulars `
Dividend from UTI 22,000
Interest on debentures 17,500
Winnings from races 15,000
54,500
6. Computation of total income of Balamurugan
for the year ended 31.03.2025

Particulars ` `
Salaries 2,70,000
Less: Loss from house property (Cannot be set off - 2,70,000
against income under any other head)

Profits and gains of business or profession

Speculation business income 1,00,000
Less: Business loss of ` 1,35,000 set-off to the (1,00,000)
extent of ` 1,00,000
Nil
Balance current year business loss of ` 35,000 to
be set-off against long-term capital gain
Capital Gains
Long term capital gain 70,000
Less: Balance current year business loss set-off (35,000)
Long term capital gain after set off of business loss 35,000
Income from other sources
Lottery winnings (Gross) 5,00,000
Total Income 8,05,000
 9.56 INCOME TAX LAW

Computation of tax liability for A.Y.2025-26

Particulars `
On total income of ` 2,70,000 (excluding lottery winning and Nil
LTCG)
On LTCG of ` 5,000 @20% (balance unexhausted basic 1,000
exemption limit of ` 30,000 can be adjusted against LTCG
taxable u/s 112)
On lottery winnings of ` 5,00,000 @ 30% 1,50,000
1,51,000
Add: Health and Education cess @ 4% 6,040
Total tax liability 1,57,040

The assessee need not pay advance tax since the total income (excluding
lottery income) liable to tax is below the basic exemption limit. Further, in
respect of lottery income, tax would have been deducted at source @ 30%
under section 194B. Since the remaining tax liability of ` 6,040 (` 1,57,040 –
` 1,50,000) is less than ` 10,000, advance tax liability is not attracted.
Note - The first proviso to section 234C(1) provides that since it is not
possible for the assessee to estimate his income from lotteries, the entire
amount of tax payable (after considering TDS) on such income should be
paid in the remaining instalments of advance tax which are due. Where no
such instalment is due, the entire tax should be paid by 31st March, 2025.
The first proviso to section 234C(1) would be attracted only in case of non-
deduction or short-deduction of tax at source under section 194B. In this
case, it has been assumed that tax deductible at source under section 194B
has been fully deducted from lottery income. Since the remaining tax
liability of ` 1,040 (` 1,57,040 – ` 1,50,000) is less than ` 10,000, advance tax
liability is not attracted.
7. Computation of total income of Mr. Rajiv for the A.Y.2025-26

Particulars ` ` `
Income from house property
Self-occupied
Annual value Nil
Less: Deduction under section 24(b)
 INCOME TAX LIABILITY – COMPUTATION
9.57
AND OPTIMISATION
Interest on housing loan
50% of ` 88,000 = 44,000 but limited to 30,000
Loss from self-occupied property (30,000)
Let out property
Annual value (Rent receivable has been
taken as the annual value in the absence 60,000
of other information)
Less: Deductions u/s 24
30% of Net Annual Value 18,000
Interest on housing loan
(50% of ` 88,000) 44,000 62,000 (2,000)
Loss from house property (32,000)

Profits and gains of business or

profession
Fees from professional services 59,38,000
Less: Expenses allowable as deduction
Staff salary, bonus and stipend 21,50,000
Other administrative expenses 11,48,000
Office rent 30,000
Motor car maintenance (10,000 x 4/5) 8,000
Car loan interest – not allowable (since
the same has not been paid and the
assessee follows cash system of Nil 33,36,000
accounting)
Less: Depreciation 26,02,000
Motor car ` 4,25,000 x 7.5% x 4/5 25,500
Books being annual publications@40% 8,000
Furniture and fittings@10% of ` 60,000 6,000
Plant and machinery@15% of ` 80,000 12,000
Computer@40% of ` 50,000 20,000
 9.58 INCOME TAX LAW

Computer (New) ` 30,000 @ 40% x 50% 6,000 77,500 25,24,500

Gross Total income 24,92,500
Less: Deductions under Chapter VI-A
Deduction under section 80C
Housing loan principal repayment 1,00,000
PPF subscription 20,000
Life insurance premium 24,000
Total amount of ` 1,44,000 is allowed as 1,44,000
deduction since it is within the limit of
` 1,50,000
Deduction under section 80D
Medical insurance premium paid 18,000 1,62,000
Total income 23,30,500

8. Computation of total income and tax liability of Siddhant under default

tax regime under section 115BAC for the A.Y. 2025-26

Particulars ` `
Salary Income
Salary including dearness allowance 4,35,000
Bonus 15,000
Value of perquisites:
(i) Salary of servant 12,000
(ii) Free gas, electricity and water 11,000 23,000
4,73,000
Less: Standard deduction under section 16(ia) 75,000
3,98,000
Income from house property
Gross Annual Value (GAV) (Rent receivable is taken as 42,000
GAV in the absence of other information) (` 3,500 × 12)
Less: Municipal taxes paid 4,300
Net Annual Value (NAV) 37,700
 INCOME TAX LIABILITY – COMPUTATION
9.59
AND OPTIMISATION
Less: Deductions under section 24
(i) 30% of NAV ` 11,310
(ii) Interest on loan from LIC @15%
of ` 1,60,000 [See Note 2] ` 24,000 35,310 2,390
Income from speculative business
Income from share speculation business 2,700
Less: Loss of ` 4,200 from cotton speculation business 2,700 Nil
set-off to the extent of ` 2,700
Balance loss of ` 1,500 from cotton speculation
business has to be carried forward to the next year as
it cannot be set off against any other head of income.
Income from Other Sources
(i) Income on account of interest earned from advancing 3,800
money gifted to his minor son is includible in the
hands of Siddhant as per section 64(1A) [Exemption
under section 10(32) would not be available]
(ii) Interest income earned from advancing money
gifted to wife has to be clubbed with the income
of the assessee as per section 64(1) 5,700
(iii) Gift received from four friends (taxable under
section 56(2)(x) as the aggregate amount received
during the year exceeds ` 50,000) 1,20,000 1,29,500
Gross Total Income 5,29,890
Deduction under section 80C [No deduction under
Chapter VI-A would be allowed as per section Nil
115BAC(2)]
Total Income 5,29,890

Particulars `
Tax on total income [5% of ` 2,29,890 (` 5,29,890 - 11,495
` 3,00,000]
Less: Rebate u/s 87A, since total income does not exceed
` 7,00,000 11,495
Tax liability Nil
 9.60 INCOME TAX LAW

Computation of total income and tax liability of Siddhant

for the A.Y. 2025-26 under normal provisions of the Act

Particulars ` `
Gross total income (as per default scheme) 5,29,890
Add: Standard Deduction [Rs. 25,000 being excess 25,000
amount allowed under section 1 15BAC]
Less: Exemption u/s 10(32) in respect of interest
income of minor son included in the hands of 1,500
Siddhant
Gross total income (under the normal 5,53,390
provisions of the Act)
Less: Deductions under Chapter VI-A
Under section 80C [Contribution to PPF] 50,000
Total Income 5,03,390

Particulars `
Tax on total income [5% of ` 2,50,000 + 20% of ` 3,390] 13,178
Add: HEC @4% 527
Tax liability 13,705
Tax liability (Rounded off) 13,710

Since his total income as per the normal provisions of the Act exceeds
` 5,00,000, he would not be eligible for rebate under section 87A.
Since Mr. Siddhant is not liable to pay any tax under default tax regime
under section 115BAC, it would be beneficial for him to not to exercise the
option of shift out of the default tax regime for A.Y.2025-26.
Notes:
(1) It is assumed that the entire loan of ` 1,60,000 is outstanding as on
31.3.2025;
(2) Since Siddhant’s own flat in a co-operative housing society, which he
has rented out to a nationalized bank, is also in Delhi, he is not
eligible for deduction under section 80GG in respect of rent paid by
him for his accommodation in Delhi, since one of the conditions to be
satisfied for claiming deduction under section 80GG is that the
assessee should not own any residential accommodation in the same
place.
 INCOME TAX LIABILITY – COMPUTATION
9.61
AND OPTIMISATION
9. Computation of Total Income of Mr. Ramdin for the A.Y.2025-26
under normal provisions of the Act

Particulars ` `

Income from Salaries

Basic Salary (` 15,000 x 12) 1,80,000
Dearness Allowance (` 12,000 x12) 1,44,000
Commission on Turnover (0.5% of ` 50 lakhs) 25,000
Bonus 50,000
Gratuity (See Note 1) 30,000
Employer’s contribution to recognized provident fund
Actual contribution [20% of ` 1,80,000] 36,000
Less: Exempt (See Note 2) 33,240 2,760
Interest credited in recognized provident fund 15,000
account @15% p.a.
Less: Exempt upto 9.5% p.a. 9,500 5,500
Gift of gold ring worth ` 10,000 on 25th wedding
anniversary by employer (See Note 3) 10,000
Perquisite value of music system given for
personal use (being 10% of actual cost) i.e. 10% 8,500
of ` 85,000
4,55,760
Less: Standard deduction under section 16(ia) 50,000
4,05,760
Profits and Gains of Business or Profession
Lease of 2 light goods vehicles on contract basis
against fixed charges of ` 6,500 p.m. In this case, 1,80,000
presumptive tax provisions of section 44AE will
apply i.e. ` 7,500 p.m. for each of the two light
goods vehicle (` 7,500 x 2 x 12). He cannot claim
lower profits and gains since he has not
maintained books of account.
 9.62 INCOME TAX LAW

Income from Other Sources

Interest on bank FDRs 5,860
Interest on debentures (` 6786 x 100/90) 7,540 13,400
Gross total Income 5,99,160
Less: Deductions under Chapter VI-A
Section 80C
Premium on life insurance policy 15,370
Investment in NSC 30,000
FDR of SBI for 5 years 50,000
Employee’s contribution to recognized provident 30,000 1,25,370
fund
Section 80D – Mediclaim Insurance 22,500
Section 80G (See Note 4) 10,600
Total Income 4,40,690
Tax on total income
Income-tax [5% of ` 1,90,690 (i.e., ` 4,40,690 – 9,535
` 2,50,000)
Less: Rebate u/s 87A, since total income does not
exceed ` 5,00,000 9,535
Tax liability Nil
Less: Tax deducted at source (` 7,540 – ` 6,786) 754
Net tax refundable 754
Tax refundable (rounded off) 750

Notes:
1. Gratuity received during service is fully taxable.

2. Employer’s contribution in the recognized provident fund is exempt

up to 12% of the salary i.e. 12% of (Basic Salary + DA for retirement
benefits + Commission based on turnover)
= 12% of (` 1,80,000+ (50% of ` 1,44,000)+ ` 25,000)
= 12% of 2,77,000 = ` 33,240
 INCOME TAX LIABILITY – COMPUTATION
9.63
AND OPTIMISATION
3. An alternate view possible is that only the sum in excess of ` 5,000 is
taxable in view of the language of Circular No.15/2001 dated
12.12.2001 that such gifts upto ` 5,000 in the aggregate per annum
would be exempt, beyond which it would be taxed as a perquisite. As
per this view, the value of perquisite would be ` 5,000. In such a case
the Income from Salaries would be ` 4,00,760.
4. Deduction under section 80G is computed as under:

Particulars `
Donation to PM National Relief Fund (100%) 5,100
Donation to institution approved under section 80G (50%
of ` 11,000) (amount contributed ` 11,000 or 10% of
Adjusted Total Income i.e. ` 45,129, whichever is lower) 5,500
Total deduction 10,600

Adjusted Total Income = Gross Total Income − Deductions under

section 80C and 80D = ` 5,99,160 − ` 1,47,870 = ` 4,51,290.
10. Computation of total income of Mr. X for A.Y.2025-26

Particulars ` `
Income from Salaries
Basic salary (` 25,000 x 9 months) 2,25,000
House rent allowance:
Actual amount received (` 6,000 x 9 months) 54,000
Less : Exemption under section 10(13A)(Note 1) 36,000 18,000
Gratuity:
Actual amount received 3,50,000
Less: Exemption under section 10(10)(ii) (Note 2) 3,50,000 -
Leave encashment:
Actual amount received 3,15,000
Less : Exemption under section 10(10AA) (Note 3) 2,45,000 70,000
Gross Salary 3,13,000
Less: Standard deduction under section 16(ia) 50,000
2,63,000
 9.64 INCOME TAX LAW

Profits and gains of business or profession

Business loss of ` 80,000 to be carried forward as
the same cannot be set off against salary income Nil
Gross Total income 2,63,000
Less : Deduction under section 80C
Deposit in Public Provident Fund 1,00,000
Total income 1,63,000
Tax on total income (Nil, since it is lower than the Nil
basic exemption limit of ` 2,50,000)

Notes:
(1) As per section 10(13A), house rent allowance will be exempt to the
extent of least of the following three amounts:
`
(i) HRA actually received (` 6,000 x 9) 54,000
(ii) Rent paid in excess of 10% of salary (` 6,500 – 36,000
` 2,500) x 9 months
(iii) 50% of salary 1,12,500

(2) Gratuity of ` 3,50,000 is exempt under section 10(10)(ii), being the

minimum of the following amounts:
`
(i) Actual amount received 3,50,000
(ii) Half month salary for each year of completed 3,75,000
service [(` 25,000 x 15/26) x 26 years]
(iii) Statutory limit 20,00,000

(3) Leave encashment is exempt upto the least of the following:

`
(i) Actual amount received 3,15,000
(ii) 10 months average salary (` 24,500 x 10) 2,45,000
(iii) Cash equivalent of unavailed leave calculated on the
basis of maximum 30 days for every year of actual
service rendered to the employer from whose
service he retired (See Note 4 below) 3,18,500
(iv) Statutory limit 25,00,000
 INCOME TAX LIABILITY – COMPUTATION
9.65
AND OPTIMISATION
(4) Since the leave entitlement of Mr. X as per his employer’s rules is 30
days credit for each year of service and he had accumulated 15 days
per annum during the period of his service, he would have
availed/taken the balance 15 days leave every year.

Leave entitlement of Mr. X on the

basis of 30 days for every year of
actual service rendered by him to = 30 days/year x 26 = 780 days
the employer
Less: Leave taken /availed by Mr. X
during the period of his service = 15 days/year x 26 = 390 days
Earned leave to the credit of Mr. X 390 days
at the time of his retirement
Cash equivalent of earned leave =390 × ` 24,500/30 = ` 3,18,500
to the credit of Mr. X at the time
of his retirement

11. Computation of total income of Mrs. Rosy and Mrs. Mary for the A.Y.2025-26

S. Particulars Mrs. Mrs.

No. Rosy Mary
(Non- (ROR)
resident)
` `
(I) Salaries
Pension recd from State Govt. ` 60,000
Less: Standard deduction u/s 16(ia) ` 50,000 - 10,000
Pension received from Canadian - -
Government is not taxable in the case of a
non-resident since it is earned and
received outside India
- 10,000
(II) Income from house property
Rent received from house property at 60,000 30,000
Mumbai (assumed to be the annual value in
the absence of other information i.e.
municipal value, fair rent and standard rent)
 9.66 INCOME TAX LAW

Less: Deduction u/s 24(a)@30% 18,000 9,000

42,000 21,000
(III) Capital gains
Long-term capital gain on sale of land at 1,00,000 1,00,000
Mumbai
Short term capital gain on sale of shares of
Indian listed companies in respect of which 20,000 2,50,000
STT was paid
1,20,000 3,50,000
(A) Gross Total Income [(I)+(II)+(III)] 1,62,000 3,81,000
Less: Deductions under Chapter VIA
1. Deduction u/s 80C
1. LIC Premium paid - 10,000
2. Premium paid to Canadian Life 40,000 -
Insurance Corporation
3. Deposit in PPF - 20,000
40,000 30,000
2. Deduction u/s 80D – Mediclaim premium paid - 25,000
40,000 55,000
(B) Total deduction under Chapter VI-A is
restricted to income other than capital
gains taxable under sections 111A & 112 40,000 31,000
(C) Total income (A-B) 1,22,000 3,50,000
Tax liability of Mrs. Rosy for A.Y.2025-26
Tax on long-term capital gains @20% of 20,000
` 1,00,000
Tax on short-term capital gains @15% of 3,000
` 20,000
Tax on balance income of ` 2,000 Nil
23,000
Tax liability of Mrs. Mary for A.Y.2025-26
Tax on STCG @15% of ` 1,00,000 [i.e., 15,000
` 2,50,000 less ` 1,50,000, being the
unexhausted basic exemption limit as per
 INCOME TAX LIABILITY – COMPUTATION
9.67
AND OPTIMISATION
proviso to section 111A] [See Notes 3 & 4
below]
Less: Rebate u/s 87A would be lower of 12,500
` 12,500 or tax liability, since total income
does not exceed ` 5,00,000
2,500
Add: Health and Education cess@4% 920 100
Total tax liability 23,920 2,600

Notes:
(1) Long-term capital gains on sale of land on 15.5.2024, is chargeable to
tax@20% as per section 112.
(2) Short-term capital gains on transfer of equity shares on 23.4.2024 in
respect of which securities transaction tax is paid is subject to
tax@15% as per section 111A.
(3) In case of resident individuals, if the basic exemption limit is not fully
exhausted against other income, then, the long-term capital gains u/s
112/short-term capital gains u/s 111A will be reduced by the
unexhausted basic exemption limit and only the balance will be taxed
at 20%/15%, respectively. However, this benefit is not available to
non-residents. Therefore, while Mrs. Mary can adjust unexhausted
basic exemption limit against long-term capital gains taxable under
section 112 and short-term capital gains taxable under section 111A,
Mrs. Rosy cannot do so.
(4) Since long-term capital gains is taxable at the rate of 20% and short-
term capital gains is taxable at the rate of 15%, it is more beneficial for
Mrs. Mary to first exhaust her basic exemption limit of ` 2,50,000
against long-term capital gains of ` 100,000 and the balance limit of
` 1,50,000 (i.e., ` 2,50,000 – ` 1,50,000) against short-term capital
gains.
(5) Rebate under section 87A would not be available to Mrs. Rosy even
though her total income does not exceed ` 5,00,000, since she is non-
resident for the A.Y. 2025-26.
 9.68 INCOME TAX LAW

12. Computation of total income and tax liability of Mr. X for A.Y.2025-26
(under default tax regime under section 115BAC)

Particulars ` `

Profits and gains of business or profession

Profit from unit in SEZ 40,00,000
Profit from operation of warehousing facility 1,05,00,000
Less: Depreciation under section 32
On building @10% of ` 65 lakhs 4 (normal
depreciation under section 32 is allowable) 6,50,000 98,50,000
Total Income 1,38,50,000
Computation of tax liability as per section
115BAC
Tax on ` 1,38,50,000 38,45,000
Add: Surcharge@15% 5,76,750
44,21,750
Add: Health and Education cess@4% 1,76,870
Total tax liability 45,98,620

Notes:
(1) Deductions u/s 10AA and 35AD are not allowable as per section
115BAC(2). However, normal depreciation u/s 32 is allowable.
(2) Mr. X is not liable to alternate minimum tax u/s 115JC under default
tax regime under section 115BAC.
Computation of total income and tax liability of Mr. X for A.Y.2025-26
(under the regular provisions of the Income-tax Act, 1961)

Particulars ` `
Profits and gains of business or profession
Profit from unit in SEZ 40,00,000
Less: Deduction u/s 10AA [See Note (1) below] 16,00,000
Business income of SEZ unit chargeable to tax 24,00,000

4
Assuming the capital expenditure of ` 65 lakhs is incurred entirely on buildings
 INCOME TAX LIABILITY – COMPUTATION
9.69
AND OPTIMISATION
Profit from operation of warehousing facility 1,05,00,000

Less: Deduction u/s 35AD [See Note (2) below] 65,00,000

Business income of warehousing facility 40,00,000
chargeable to tax
Total Income 64,00,000
Computation of tax liability (under the normal/
regular provisions)
Tax on ` 64,00,000 17,32,500
Add: Surcharge @ 10% (since the total income 1,73,250
exceeds ` 50 lakhs but does not exceed ` 1 cr)
19,05,750
Add: Health and Education cess@4% 76,230
Total tax liability 19,81,980

Computation of adjusted total income of Mr. X

for levy of Alternate Minimum Tax

Particulars ` `
Total Income (computed above as per 64,00,000
regular provisions of income tax)
Add: Deduction under section 10AA 16,00,000
80,00,000
Add: Deduction under section 35AD 65,00,000
Less: Depreciation under section 32
On building @10% of `65 lakhs 5 6,50,000 58,50,000
Adjusted Total Income 1,38,50,000
Alternate Minimum Tax@18.5% 25,62,250
Add: Surcharge@15% (since adjusted total 3,84,338
income > ` 1 crore)
29,46,588
Add: Health and Education cess@4% 1,17,863
30,64,451
Tax liability u/s 115JC (rounded off) 30,64,450

5
Assuming the capital expenditure of `65 lakhs is incurred entirely on buildings
 9.70 INCOME TAX LAW

Since the regular income-tax payable is less than the alternate minimum tax
payable, the adjusted total income shall be deemed to be the total income
and tax is leviable @18.5% thereof plus surcharge@15% and cess@4%.
Therefore, tax liability as per section 115JC is ` 30,64,450.

Since the tax liability of Mr. X under section 115JC is lower than the tax
liability as computed u/s 115BAC, it would be beneficial for him to opt out
of the default tax regime under section 115BAC for A.Y. 2025-26.
Moreover, benefit of alternate minimum tax credit is also available to the
extent of tax paid in excess over regular tax.
AMT Credit to be carried forward under section 115JEE

Tax liability under section 115JC 30,64,450

Less: Tax liability under the regular provisions of the 19,81,980
Income-tax Act, 1961
10,82,470

Notes:
(1) Deduction under section 10AA in respect of Unit in SEZ =
Export turnover of the Unit in SEZ
Profit of the Unit in SEZ× x 50%
Total turnover of the Unit in SEZ
80,00,000
40,00,000× x 50% = ` 16,00,000
1,00,00,000

(2) Deduction@100% of the capital expenditure is available under section

35AD for A.Y.2025-26 in respect of specified business of setting up
and operating a warehousing facility for storage of agricultural
produce which commences operation on or after 01.04.2009.
Further, the expenditure incurred, wholly and exclusively, for the
purposes of such specified business, shall be allowed as deduction
during the previous year in which he commences operations of his
specified business if the expenditure is incurred prior to the
commencement of its operations and the amount is capitalized in the
books of account of the assessee on the date of commencement of its
operations.
INCOME TAX LIABILITY – COMPUTATION
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AND OPTIMISATION
Deduction under section 35AD would, however, not be available on
expenditure incurred on acquisition of land.

In this case, since the capital expenditure of ` 65 lakhs (i.e., ` 75 lakhs

– ` 10 lakhs, being expenditure on acquisition of land) has been
incurred in the F.Y.2023-24 and capitalized in the books of account on
1.4.2024, being the date when the warehouse became operational,
` 65,00,000, being 100% of ` 65 lakhs would qualify for deduction
under section 35AD.