ICAI Notes: Income Tax Liability- Computation and Optimisation | Taxation for CA Intermediate PDF Download

 Page 1


a
     
CHAPTER 
9 
 
LEARNING OUTCOMES 
 
PA 
 
  INCOME TAX 
LIABILITY - 
COMPUTATION AND 
OPTIMISATION 
 
 
 
 
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. 
 
© The Institute of Chartered Accountants of India
Page 2


a
     
CHAPTER 
9 
 
LEARNING OUTCOMES 
 
PA 
 
  INCOME TAX 
LIABILITY - 
COMPUTATION AND 
OPTIMISATION 
 
 
 
 
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. 
 
© The Institute of Chartered Accountants of India
a
 
 
      9.2 
INCOME TAX LAW 
 
 
CHAPTER OVERVIEW 
COMPUTATION OF TOTAL INCOME 
Determination of residential status 
Classification of Income under 
5 heads 
Salaries 
Income from 
house property 
Profits and gains 
of business or 
profession 
Capital 
gains 
Income from 
other sources 
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) 
© The Institute of Chartered Accountants of India
Page 3


a
     
CHAPTER 
9 
 
LEARNING OUTCOMES 
 
PA 
 
  INCOME TAX 
LIABILITY - 
COMPUTATION AND 
OPTIMISATION 
 
 
 
 
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. 
 
© The Institute of Chartered Accountants of India
a
 
 
      9.2 
INCOME TAX LAW 
 
 
CHAPTER OVERVIEW 
COMPUTATION OF TOTAL INCOME 
Determination of residential status 
Classification of Income under 
5 heads 
Salaries 
Income from 
house property 
Profits and gains 
of business or 
profession 
Capital 
gains 
Income from 
other sources 
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) 
© The Institute of Chartered Accountants of India
 
 
INCOME TAX LIABILITY – COMPUTATION 
AND OPTIMISATION 
a
a
    9.3 
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 
income is earned by 
an individual 
Treatment of income earned in each capacity 
(1) In his personal 
capacity (under the 5 
heads of income) 
Income from salaries, Income from house property, 
Profits and gains of business or profession, Capital 
gains and Income from other sources. 
(2) As a partner of a 
firm/LLP 
(i) Salary, bonus etc. received by a partner is 
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]. 
© The Institute of Chartered Accountants of India
Page 4


a
     
CHAPTER 
9 
 
LEARNING OUTCOMES 
 
PA 
 
  INCOME TAX 
LIABILITY - 
COMPUTATION AND 
OPTIMISATION 
 
 
 
 
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. 
 
© The Institute of Chartered Accountants of India
a
 
 
      9.2 
INCOME TAX LAW 
 
 
CHAPTER OVERVIEW 
COMPUTATION OF TOTAL INCOME 
Determination of residential status 
Classification of Income under 
5 heads 
Salaries 
Income from 
house property 
Profits and gains 
of business or 
profession 
Capital 
gains 
Income from 
other sources 
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) 
© The Institute of Chartered Accountants of India
 
 
INCOME TAX LIABILITY – COMPUTATION 
AND OPTIMISATION 
a
a
    9.3 
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 
income is earned by 
an individual 
Treatment of income earned in each capacity 
(1) In his personal 
capacity (under the 5 
heads of income) 
Income from salaries, Income from house property, 
Profits and gains of business or profession, Capital 
gains and Income from other sources. 
(2) As a partner of a 
firm/LLP 
(i) Salary, bonus etc. received by a partner is 
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]. 
© The Institute of Chartered Accountants of India
a
 
 
      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 
persons included in 
the income of the 
individual 
(i) Transferee’s income, where there is a 
transfer of income without transfer of assets 
(ii) Income arising to transferee from a 
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.  
 
© The Institute of Chartered Accountants of India
Page 5


a
     
CHAPTER 
9 
 
LEARNING OUTCOMES 
 
PA 
 
  INCOME TAX 
LIABILITY - 
COMPUTATION AND 
OPTIMISATION 
 
 
 
 
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. 
 
© The Institute of Chartered Accountants of India
a
 
 
      9.2 
INCOME TAX LAW 
 
 
CHAPTER OVERVIEW 
COMPUTATION OF TOTAL INCOME 
Determination of residential status 
Classification of Income under 
5 heads 
Salaries 
Income from 
house property 
Profits and gains 
of business or 
profession 
Capital 
gains 
Income from 
other sources 
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) 
© The Institute of Chartered Accountants of India
 
 
INCOME TAX LIABILITY – COMPUTATION 
AND OPTIMISATION 
a
a
    9.3 
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 
income is earned by 
an individual 
Treatment of income earned in each capacity 
(1) In his personal 
capacity (under the 5 
heads of income) 
Income from salaries, Income from house property, 
Profits and gains of business or profession, Capital 
gains and Income from other sources. 
(2) As a partner of a 
firm/LLP 
(i) Salary, bonus etc. received by a partner is 
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]. 
© The Institute of Chartered Accountants of India
a
 
 
      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 
persons included in 
the income of the 
individual 
(i) Transferee’s income, where there is a 
transfer of income without transfer of assets 
(ii) Income arising to transferee from a 
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.  
 
© The Institute of Chartered Accountants of India
 
 
INCOME TAX LIABILITY – COMPUTATION 
AND OPTIMISATION 
a
a
    9.5 
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, 
© The Institute of Chartered Accountants of India