Income from Salary, House Property and Capital Gains for CA Final IBS

Understand Income from Salary, House Property and Capital Gains

Key rules to remember

Salary income

Gross salary (taxable items) − deductions allowed on salary (such as standard deduction) = Income from salary

Add taxable allowances, perquisites and retirement benefits first. Remove fully exempt items. The standard deduction amount depends on the regime and year.

Net annual value (let-out property)

NAV = Annual value − municipal taxes paid by the owner during the previous year

Municipal taxes are deductible only if the owner actually paid them during the previous year. Expected rent is the higher of municipal value and fair rent, but not more than standard rent under the Rent Control Act, where that Act applies. Annual value is the higher of expected rent and actual rent received. If actual rent is lower than expected rent only because of vacancy, the actual rent received is taken as annual value. Special rules also apply for unrealised rent.

Income from house property

NAV − 30% of NAV − interest on borrowed capital allowed

For a self-occupied house, annual value is nil and only interest is deducted, capped at ₹2,00,000 under the old regime, which gives a loss. This deduction is not allowed under the new regime (section 115BAC). Pre-construction interest is deducted in five equal instalments.

Capital gain (general)

Full value of consideration − expenses on transfer − cost of acquisition − cost of improvement

Long-term gains on most assets no longer get indexation under current rules. Check the Finance Act applicable to your attempt.

Holding period test

Listed securities: long-term if held more than 12 months. Unlisted shares, land, building and most other assets: long-term if held more than 24 months

Count from the date of acquisition to the date of transfer. Special asset-specific rules, such as certain mutual fund units, override the general test.

Slump sale gain

Slump sale consideration − net worth of the undertaking

Net worth = value of total assets − value of liabilities. Depreciable assets are taken at written down value under the Act. Other assets are taken at book value, ignoring revaluation. Self-generated goodwill gets no value. The gain is long-term if the undertaking was held more than 24 months.

Land or building transferred below stamp duty value (section 50C)

Full value of consideration = Stamp duty value, if the stamp duty value exceeds the actual consideration by more than 10% of the actual consideration

It applies to the seller of land or buildings. If the stamp duty value is within 110% of the actual consideration, the actual consideration is used. Check the tolerance in the law applicable to your attempt.

Unquoted share transfer below fair value (section 50CA)

Full value of consideration = Fair market value, if actual consideration is lower than the fair market value computed under the prescribed rules

It applies to the seller on transfer of unquoted shares. The fair market value is computed as per the prescribed method.

Receipts below value (56(2)(x) rule)

Shares and movable property: taxable amount = aggregate fair market value − consideration paid, if the aggregate fair market value exceeds the consideration by more than ₹50,000. Immovable property: taxable amount = stamp duty value − consideration paid, if the stamp duty value exceeds the consideration by more than the higher of ₹50,000 and 10% of consideration

Where shares or movable property are received for no consideration, the aggregate fair market value is taxable if it exceeds ₹50,000. Once the test is met, the whole excess is taxable, not just the part above the limit. For unquoted shares, the fair market value is determined under Rule 11UA. Exceptions exist, such as gifts from relatives.

Tax on listed equity gains (STT paid)

Short-term: 20%. Long-term: 12.5% on gains above ₹1,25,000 in the year

Applies to listed equity shares and equity-oriented fund units on which STT is paid under the conditions. The exemption limit is a combined limit for such long-term gains. Add surcharge and cess where relevant.

Tax on other long-term gains

Long-term capital gain on other assets: 12.5%, without indexation

The ₹1,25,000 threshold does not apply to this category. Resident individuals and HUFs can set the basic exemption shortfall against these gains.

How to solve Income from Salary, House Property and Capital Gains questions

1. 1Read the facts and tag each item to a head: salary, house property, capital gains, or another head. Note the residential status and the assessment year or financial year.
2. 2Salary: list every receipt, mark each as taxable, partly exempt or fully exempt, add the taxable parts, and then deduct the standard deduction and any other allowed deduction.
3. 3House property: decide if the property is let out, self-occupied or deemed let out. Work out the annual value, deduct municipal taxes paid, then deduct 30% and interest. Show the vacancy or unrealised rent treatment if the facts give them.
4. 4Capital gains: identify the asset, the date of acquisition and the date of transfer. Decide short-term or long-term using the holding period test for that asset type.
5. 5Fix the full value of consideration. Check whether a deemed value rule such as section 50C (land or buildings) or section 50CA (unquoted shares) replaces the actual price.
6. 6Deduct transfer expenses, cost of acquisition and improvement. For slump sales, deduct net worth instead. Then apply exemptions on reinvestment only if the conditions are met and shown in the facts.
7. 7Apply the special tax rate to each gain separately. Do not club listed equity gains, other long-term gains and short-term gains into one rate.
8. 8Add the heads, comment on the buyer or recipient side if the facts invite it, and end with a clear final figure and a one-line conclusion.

Quickest way: Table-and-tag method for case studies

Common mistakes in Income from Salary, House Property and Capital Gains

• Using actual sale price when a deemed value rule applies

  Students compute from the headline number in the case and forget that the price is below the prescribed fair value.

  Fix: Match the asset to the rule. For land or buildings, compare the price with the stamp duty value under section 50C. For unquoted shares, compare it with the fair market value under section 50CA. Then apply the deemed value if it is higher.

• Taxing only the seller and ignoring the buyer

  The question seems to ask about the seller, so the buyer's side is missed.

  Fix: In any undervalued deal, add one line on the receiving party's tax treatment under section 56(2)(x), with its threshold, for property received below fair value.

• Applying indexation or the ₹1,25,000 exemption to every long-term gain

  Students mix old rules and new rules, or generalise a rule meant for listed equity.

  Fix: Use the ₹1,25,000 limit only for the long-term gains on listed equity and equity-oriented units with STT paid. Follow the current rule on indexation as stated for your attempt.

• Wrong net worth in slump sale

  Students use market value of assets or include revalued amounts and self-generated goodwill.

  Fix: Take depreciable assets at tax WDV, other assets at book value without revaluation, and goodwill at nil unless purchased. Deduct liabilities.

• Treating a slump sale as a sale of individual assets

  A lump sum for several assets looks like a bundle of separate sales.

  Fix: If an undertaking is transferred for a lump sum without values assigned to each asset, treat it as a slump sale. Compute one gain on net worth.

• Deducting 30% before municipal taxes in house property

  The order of steps is memorised wrongly.

  Fix: Deduct municipal taxes first to get NAV. Then take 30% of NAV. Then deduct interest.

Worked examples