Direct Taxes CBCAT6T09

Syllabus topics (RTMNU)

• Introduction of Direct Tax, its Meaning, Definition, Features, and Concept
• Meaning of Assessee, Assessment year, Previous year
• Types of Residential Status
• Various Heads and sources of Incomes
• Exempted Incomes
• Meaning of Deductions, Gross Total Income, Total Income
• Tax Slabs
• Introduction of New Tax Regime, Its meaning, definition, features, and concept
• Tax slabs under the New Tax Regime

Direct Tax — Meaning, Definition, Features and Concept

Tax is a compulsory payment made by people and businesses to the Government without any direct return benefit. A direct tax is a tax whose burden (incidence) and payment (impact) fall on the same person; it cannot be shifted to another person. Examples: income tax, corporation tax. (Indirect tax, like GST, is collected from one person but its burden is passed on to the consumer.)

Features of direct tax:

1. Compulsory: must be paid by law.
2. Burden cannot be shifted to others.
3. Progressive: higher income, higher rate — based on ability to pay.
4. Certain: taxpayer knows how much and when to pay.
5. Levied by the Central Government under the Income-tax law (Article 246, Union List) and administered by the CBDT and the Income Tax Department.
6. Reduces inequality of income.
7. Civic consciousness: taxpayers feel the burden and watch how Government spends.

Assessee, Assessment Year and Previous Year

Assessee (Section 2(7)): a person by whom any tax or other sum is payable under the Act, including a person against whom proceedings have started, a deemed assessee (e.g. legal heir) and an assessee-in-default (e.g. an employer who did not deduct TDS). "Person" (Section 2(31)) includes an individual, HUF, company, firm, AOP/BOI, local authority and artificial juridical person.

Previous year (Section 3): the financial year (1 April to 31 March) in which income is earned. Assessment year (Section 2(9)): the 12 months starting 1 April immediately after the previous year, in which that income is taxed. Example: income of PY 2025-26 is assessed in AY 2026-27. Under the 2025 Act both are replaced by the "tax year".

Types of Residential Status

Tax liability depends on residential status (Section 6), decided separately for each previous year. An individual can be:

• Resident — if in India for (a) 182 days or more in the previous year, OR (b) 60 days or more in the previous year AND 365 days or more in the 4 preceding years. (Special rules apply to Indian citizens leaving for jobs abroad and to visiting Indian citizens/PIOs.)
• Resident and Ordinarily Resident (ROR) — a resident who does not fall in the RNOR tests.
• Resident but Not Ordinarily Resident (RNOR) — a resident who was non-resident in 9 out of 10 preceding years, OR was in India for 729 days or less in the 7 preceding years (plus some special cases).
• Non-Resident (NR) — who satisfies neither basic condition.

Heads and Sources of Income

Section 14 groups all income under five heads: (1) Salaries; (2) Income from House Property; (3) Profits and Gains of Business or Profession; (4) Capital Gains; (5) Income from Other Sources.

Exempted Incomes

Incomes that are not included in total income (mainly Section 10): agricultural income in India [10(1)]; amount received by a member from HUF [10(2)]; share of profit from a firm [10(2A)]; gratuity within limits [10(10)]; leave encashment within limits [10(10AA)]; LIC maturity amount subject to conditions [10(10D)]; interest on PPF [10(11)]; scholarships for education [10(16)]; certain allowances [10(14)] and HRA [10(13A)] — the last two mainly in the old regime.

Deductions, Gross Total Income and Total Income

Gross Total Income (GTI): total of income under all five heads after clubbing and set-off of losses. Deductions (Chapter VI-A, Sections 80C to 80U) are amounts allowed to be subtracted from GTI to encourage savings, insurance, donations etc. Total Income = GTI − deductions, rounded off to the nearest ₹10 (Section 288A). Tax is calculated on total income.

Tax Slabs (Old Regime)

For an individual below 60 years, FY 2025-26 (AY 2026-27), old regime — check latest Budget figures:

Basic exemption is ₹3,00,000 for senior citizens (60–79) and ₹5,00,000 for super senior citizens (80+). Rebate u/s 87A up to ₹12,500 if total income does not exceed ₹5,00,000. Add 4% Health & Education Cess (and surcharge on very high incomes).

New Tax Regime — Meaning, Features and Slabs

Meaning: The new tax regime (Section 115BAC) is a simplified system with lower slab rates but almost no exemptions and deductions. From FY 2023-24 it is the default regime; a taxpayer may opt for the old regime (salaried persons can choose each year when filing the return; business income earners have limited switching).

Features: lower rates and more slabs; no HRA, LTA, 80C, 80D, home-loan interest on self-occupied house, professional tax etc.; standard deduction of ₹75,000 for salaried persons is allowed; employer's NPS contribution u/s 80CCD(2) is allowed; higher rebate u/s 87A; simple to compute.

Slabs for FY 2025-26 (AY 2026-27), new regime — check latest Budget figures:

Rebate u/s 87A (new regime, FY 2025-26): up to ₹60,000, so a resident individual with total income up to ₹12,00,000 pays no tax (not available on special-rate incomes like some capital gains). With the ₹75,000 standard deduction, a salaried person earning up to ₹12,75,000 pays no tax.

Likely exam questions

1. (Long, 8/16 marks) Define direct tax and explain its features. Explain the terms: assessee, previous year, assessment year, gross total income and total income.
2. (Long, 8/16 marks) What is the new tax regime? Explain its features and slab rates, and distinguish between the old and new tax regimes.
3. (Short, 4 marks) Explain the basic conditions for determining the residential status of an individual.
4. (Short, 4 marks) Name the five heads of income.
5. (Short, 4 marks) Write any four exempted incomes under Section 10.

Syllabus topics (RTMNU)

• Meaning & Definition
• Gross Annual Value
• Net Annual Value
• Arrears of Rent
• Unrealised Rent
• Interest on Loan
• Preconstruction & Post Construction
• Composite Rent
• Computation of Income from house property

Income from House Property — Meaning and Definition

Under Section 22, the annual value of a property consisting of any building or land attached to it, of which the assessee is the owner, is taxable under "Income from house property", except the part used by the owner for his own business or profession.

Three conditions: (1) the property is a building or land appurtenant to it; (2) the assessee is the owner (including deemed owner, e.g. a person who transfers a house to his spouse without adequate consideration); (3) it is not used for the owner's own business or profession. Note: the tax is on the annual value (earning capacity), not just the rent received.

Gross Annual Value (GAV)

GAV is found in steps (Section 23(1)):

1. Municipal Value (MV): value fixed by the municipality for levying property tax.
2. Fair Rent (FR): rent a similar property in the same area would fetch.
3. Standard Rent (SR): maximum rent allowed under the Rent Control Act (if applicable).
4. Expected Rent (ER) = higher of MV and FR, but not more than SR.
5. Actual Rent (AR) received or receivable for the let-out period, less unrealised rent.
6. GAV = higher of ER and AR. (If AR is lower than ER only because of vacancy, GAV = AR.)

Net Annual Value (NAV)

NAV = GAV − municipal taxes (property tax). Municipal taxes are deductible only if (a) they are borne by the owner, and (b) they are actually paid during the previous year (arrears paid this year are also allowed).

Arrears of Rent and Unrealised Rent

Unrealised rent (Rule 4): rent the owner could not recover is deducted from actual rent if (i) the tenancy is bona fide, (ii) the defaulting tenant has vacated or steps were taken to make him vacate, (iii) the tenant is not occupying any other property of the owner, and (iv) legal proceedings were taken (or it is shown they would be useless).

Arrears of rent and unrealised rent later recovered (Section 25A): taxable in the year of receipt, even if the assessee is no longer the owner, after a deduction of 30% of the amount. No other deduction is allowed.

Deductions u/s 24: Standard Deduction and Interest on Loan

1. Standard deduction (Section 24(a)): 30% of NAV, whatever the actual expenses on repairs, insurance etc.
2. Interest on borrowed capital (Section 24(b)): interest on a loan taken for buying, building, repairing or reconstructing the house, on accrual basis.

Pre-construction and post-construction interest: Interest for the current year after completion is post-construction interest, deducted in that year. Interest for the period before completion (from the date of borrowing to the 31 March before the year of completion) is pre-construction interest; it is deducted in 5 equal annual instalments, starting from the year in which construction is completed.

Self-occupied property (old regime): annual value is nil; interest deduction is limited to ₹2,00,000 (if the loan was taken on or after 1.4.1999 for buying/building and construction finished within 5 years; otherwise ₹30,000). New regime: no interest deduction for a self-occupied house; for a let-out house interest is allowed but the loss cannot be set off against other heads. Under the old regime a house-property loss can be set off against other heads up to ₹2,00,000 a year — check latest.

Composite Rent

When the owner receives rent for the building together with other services or assets (lift, security, AC, furniture, machinery), it is called composite rent. If the two parts can be separated, the building part is taxed under house property and the service/asset part under "Profits and gains of business" or "Other sources". If they cannot be separated, the whole composite rent is taxed under business or other sources.

Illustration 1 (Let-out house, PY 2025-26): Mr. Deshmukh owns a let-out house in Nagpur. MV ₹2,40,000; FR ₹2,70,000; SR ₹2,60,000; rent ₹25,000 p.m. (₹3,00,000 a year); unrealised rent of one month ₹25,000 (Rule 4 conditions satisfied); municipal taxes 10% of MV paid by him ₹24,000; interest on housing loan for the year ₹60,000; pre-construction interest ₹1,00,000 (house completed during PY 2023-24).

(PY 2025-26 is the 3rd year of the 5 instalments of pre-construction interest, since completion was in PY 2023-24.)

Illustration 2 (Self-occupied house): Mrs. Kale lives in her own house bought in 2020 with a housing loan. Interest for PY 2025-26 is ₹2,40,000. Compute income under both regimes.

Under the old regime the loss of ₹2,00,000 can be set off against her salary income. Principal repayment of the housing loan may be claimed u/s 80C (old regime only).

Likely exam questions

1. (Long, 8/16 marks) Explain the procedure of computing Gross Annual Value and the deductions allowed u/s 24 while computing income from house property.
2. (Long, 8/16 marks) Compute income from house property for PY 2025-26: Municipal value ₹2,40,000; Fair rent ₹2,70,000; Standard rent ₹2,60,000; Actual rent ₹25,000 p.m.; Unrealised rent ₹25,000 (Rule 4 satisfied); Municipal taxes paid ₹24,000; Interest on loan for the year ₹60,000; Pre-construction interest ₹1,00,000 (construction completed in PY 2023-24).
3. (Short, 4 marks) What is unrealised rent? State the conditions of Rule 4.
4. (Short, 4 marks) Explain the treatment of pre-construction interest.
5. (Short, 4 marks) What is composite rent?

Syllabus topics (RTMNU)

• Income from Salary
• Types of allowances (Taxable & Tax free)
• Perquisites
• Tax treatment of P.F., E.P.F., Superannuation Fund
• Allowances & Perquisites
• Computation of Income from Salary and Calculation of Tax Liability
• Deduction under section 80C, 80CCC, 80CCD, 80D, 80DDB, 80E, 80G, 80GG, 80U

Income from Salary — Meaning

Income is taxed under "Salaries" (Sections 15–17) only when there is an employer–employee relationship. Salary is taxable on due or receipt basis, whichever is earlier. Salary includes (Section 17(1)): wages, pension, gratuity, fees, commission, perquisites, advance salary, leave encashment, annual accretion to RPF above limits, and employer's contribution to NPS. Fees paid to a director or partner's salary from a firm is not "salary".

Types of Allowances (Taxable and Tax-free)

An allowance is a fixed money amount paid by the employer to meet particular expenses. Tax treatment (mainly old regime):

Perquisites

Perquisites (Section 17(2)) are benefits or facilities given by the employer in kind or free/at concessional rate. Taxable for all employees: rent-free or concessional accommodation; any obligation of the employee paid by the employer (e.g. his income tax, school fees); specified securities/sweat equity (ESOP) value. Taxable only for "specified employees" (directors, those with substantial interest, those earning above a limit): motor car, sweeper, gardener, watchman, gas/electricity/water facilities, free education. Tax-free perquisites: medical treatment in the employer's hospital, refreshments during office hours, computers/laptops given for use, employer's contribution to staff group insurance, training, free meals within limits.

Tax Treatment of PF, EPF and Superannuation Fund

EPF under the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 is treated as a recognised PF. Also note: interest on an employee's own PF contribution above ₹2,50,000 a year (₹5,00,000 where the employer does not contribute) is taxable; and employer's total contribution to RPF, NPS and approved superannuation fund above ₹7,50,000 a year is a taxable perquisite — check latest. Approved superannuation fund: employer's contribution exempt within the above limit; employee's contribution qualifies u/s 80C; payments on death/retirement are exempt.

Computation of Income from Salary and Tax Liability

Deductions u/s 80C to 80U (Old Regime)

Illustration 1 (Old regime, FY 2025-26): Mr. Rahul, aged 35, works in Nagpur. Basic ₹6,00,000; DA ₹1,20,000 (forms part of salary for retirement benefits); HRA ₹1,80,000; rent paid ₹2,16,000; Children Education Allowance ₹500 p.m. for 2 children (₹12,000); professional tax ₹2,500; employer's contribution to RPF ₹72,000 and his own ₹72,000; LIC premium ₹50,000; PPF ₹40,000; mediclaim: self ₹18,000, senior-citizen parents ₹30,000.

Working notes: Salary for HRA and PF = 6,00,000 + 1,20,000 = ₹7,20,000. HRA exempt = least of (a) 1,80,000, (b) 2,16,000 − 72,000 = 1,44,000, (c) 40% × 7,20,000 = 2,88,000 → ₹1,44,000; taxable HRA ₹36,000. CEA exempt = 100 × 12 × 2 = 2,400; taxable ₹9,600. Employer's RPF ₹72,000 is within 12% of salary (₹86,400) → exempt.

Illustration 2 (same person, new regime): HRA and CEA are fully taxable and no 80C/80D/professional tax is allowed. Gross salary = 6,00,000 + 1,20,000 + 1,80,000 + 12,000 = ₹9,12,000; less standard deduction ₹75,000 → Total income ₹8,37,000. Tax: 4–8 lakh @ 5% = ₹20,000; 8,00,001–8,37,000 @ 10% = ₹3,700; total ₹23,700. Rebate u/s 87A (income up to ₹12 lakh) ₹23,700 → tax payable Nil. So the new regime is better for Rahul in FY 2025-26.

Likely exam questions

1. (Long, 8/16 marks) Explain the tax treatment of different types of provident funds. Also explain the deductions u/s 80C, 80D and 80E.
2. (Long, 8/16 marks) Mr. Rahul (Nagpur, age 35) has for PY 2025-26: Basic ₹6,00,000; DA ₹1,20,000 (forms part of salary); HRA ₹1,80,000; rent paid ₹2,16,000; Children Education Allowance ₹12,000 for 2 children; professional tax ₹2,500; own PF contribution ₹72,000; LIC premium ₹50,000; PPF ₹40,000; mediclaim self ₹18,000 and senior-citizen parents ₹30,000. Compute total income and tax liability under the old regime.
3. (Short, 4 marks) How is HRA exemption calculated?
4. (Short, 4 marks) What are perquisites? Give four examples of tax-free perquisites.
5. (Short, 4 marks) Explain deduction u/s 80GG.

Syllabus topics (RTMNU)

• Income from Other Source
• Basis of Charge
• Chargeable Incomes
• Exempted Incomes
• Incomes taxable under the head
• Computation of Income from other sources

Income from Other Sources — Meaning and Basis of Charge

"Income from other sources" is the residual head (Section 56(1)). Any income that is taxable but is not covered under the other four heads (Salaries, House Property, Business/Profession, Capital Gains) is taxed here. Basis of charge: the income must be (1) taxable (not exempt), and (2) not chargeable under any of the other four heads. Income is taxed on the basis of the method of accounting regularly followed by the assessee (cash or mercantile), except dividends, which follow specific rules.

Chargeable Incomes (Section 56(2))

These are always taxed under this head:

• Dividends — taxable in the hands of shareholders (since 1 April 2020).
• Winnings from lotteries, crossword puzzles, races (including horse races), card games, gambling, betting, TV game shows — taxed at a flat 30% (plus cess) with no deduction or basic exemption (online games have their own rule) — check latest.
• Gifts (Section 56(2)(x)) received by any person: (a) money above ₹50,000 in aggregate in a year without consideration — the whole amount is taxable; (b) immovable property without consideration where the stamp duty value is above ₹50,000; (c) movable property (shares, jewellery, paintings etc.) whose fair value is above ₹50,000.
• Interest on securities (debentures, bonds, government securities), if not taxed as business income.
• Income from letting out machinery, plant or furniture, and composite rent where building and assets are let together (if not business income).
• Employees' contribution to PF/ESI received by employer (if not business income).
• Interest on compensation or enhanced compensation — taxable in the year of receipt with a 50% deduction.
• Advance money forfeited on a failed transfer of a capital asset.
• Keyman insurance policy sums (if not taxable as salary or business).

Incomes Taxable under this Head (General)

Besides the above, common items are: interest on bank fixed deposits, savings bank interest, post office deposits; family pension received by legal heirs of a dead employee; director's sitting fees; agricultural income from outside India; examiner's remuneration (if not salary); casual income; royalty to an author (if not profession); income from sub-letting.

Exempted Incomes

• Gifts from relatives (spouse, brother/sister, brother/sister of either parent or of the spouse, any lineal ascendant or descendant, and their spouses).
• Gifts received on the occasion of the individual's marriage, by will/inheritance, or in contemplation of death.
• Interest on PPF, Sukanya Samriddhi account; interest on tax-free bonds; agricultural income in India.
• Savings bank interest up to ₹10,000 is deductible u/s 80TTA (non-senior, old regime); a resident senior citizen gets up to ₹50,000 on all deposit interest u/s 80TTB (old regime).

Deductions Allowed (Section 57) and Not Allowed (Section 58)

Allowed (Section 57): (i) commission or remuneration paid to a banker for realising dividend or interest; (ii) interest on money borrowed to earn dividend income — limited to 20% of the dividend; (iii) for family pension: one-third of the pension or ₹15,000, whichever is lower (₹25,000 in the new regime) — check latest; (iv) repairs, insurance and depreciation on machinery/furniture let out; (v) 50% of interest on compensation; (vi) any other expense wholly for earning that income.

Not allowed (Section 58): personal expenses; interest payable outside India without TDS; expenses against lottery and similar winnings; payments in cash disallowed under the business rules.

Computation of Income from Other Sources

Illustration 1 (PY 2025-26, old regime): Mr. Patil has: dividend from an Indian company ₹40,000 (interest on loan taken to buy these shares ₹12,000); savings bank interest ₹14,000; FD interest ₹60,000; family pension ₹1,20,000; gift of ₹80,000 from a friend; gift of ₹1,00,000 from his father's brother; winnings from a lottery ₹1,00,000 (gross).

From GTI, he can claim ₹10,000 u/s 80TTA on savings interest (old regime). Tax on lottery: 30% of ₹1,00,000 = ₹30,000 plus cess; this is usually deducted at source (TDS) by the payer.

Illustration 2 (Gifts): Ms. Sneha received during PY 2025-26: on her birthday ₹20,000, ₹25,000 and ₹15,000 from three friends; ₹2,00,000 from her sister; ₹1,50,000 on her marriage from various persons; and a plot of land from a family friend for no payment, stamp duty value ₹3,00,000. Find the taxable amount.

Likely exam questions

1. (Long, 8/16 marks) What incomes are chargeable under the head 'Income from Other Sources'? Explain the deductions allowed and not allowed under Sections 57 and 58.
2. (Long, 8/16 marks) Compute income from other sources for PY 2025-26: Dividend ₹40,000 (interest on loan to buy shares ₹12,000); savings bank interest ₹14,000; FD interest ₹60,000; family pension ₹1,20,000; gift from friend ₹80,000; gift from father's brother ₹1,00,000; lottery winnings ₹1,00,000.
3. (Short, 4 marks) Explain the tax treatment of gifts u/s 56(2)(x).
4. (Short, 4 marks) How is family pension taxed?
5. (Short, 4 marks) Who is a 'relative' for the purpose of gifts?