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Management Notes

Set off and Carry forward of Unabsorbed Depreciation, Carry forward and Set off of Speculation Loss [Sec. 113]

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The Income-tax Act, 2025 permits eligible business losses and depreciation that cannot be fully absorbed in a tax year to be adjusted according to prescribed rules. Unabsorbed depreciation arises when the depreciation allowance exceeds the income available for adjustment and is principally governed by Section 33(11). In contrast, Section 113 specifically governs the set-off and carry forward of speculation business losses. Speculation loss is ring-fenced and can be adjusted only against profits of another speculation business. The Act also prescribes different carry-forward rules and an order of priority where both speculation loss and depreciation relating to speculation business remain unabsorbed.

1. Set-off of Unabsorbed Depreciation

Unabsorbed depreciation arises when the depreciation allowance available to an assessee cannot be fully absorbed because the relevant income is insufficient. Under Section 33(11), the unabsorbed amount is carried forward and added to the depreciation allowance of the following tax year, subject to the provisions of the Act. It is therefore treated as part of the depreciation allowance available for the subsequent year. The rules governing unabsorbed depreciation are different from those applicable to ordinary business losses. Where depreciation relating to a speculation business and speculation loss are both carried forward, Section 113(4) requires priority to be given to the speculation-loss provisions.

2. Carry Forward of Unabsorbed Depreciation

Where the full depreciation allowance cannot be absorbed in the relevant tax year, the unabsorbed portion is carried forward according to Section 33(11). Unlike an ordinary business loss under Section 112, unabsorbed depreciation is governed by the special depreciation provision rather than the eight-year business-loss rule. The amount carried forward becomes part of the depreciation allowance available in the succeeding tax year and continues to receive the treatment prescribed by the Act. Therefore, business loss and unabsorbed depreciation should be maintained separately for tax computation. Where both amounts are available, the applicable statutory order of set-off must be followed while determining the assessee’s taxable business income.

Illustration – Unabsorbed Depreciation

Particulars Amount (₹)
Business Income before Depreciation 3,00,000
Less: Current Depreciation (4,50,000)
Income after Depreciation Nil
Unabsorbed Depreciation carried forward 1,50,000

Carry Forward and Set-off of Speculation Loss [Section 113]

3. Meaning and Set-off of Speculation Loss

A speculation loss is a loss computed in respect of a speculation business carried on by the assessee. Under Section 113(1), such loss is subject to a strict restriction: it can be set off only against profits and gains of another speculation business. It cannot be adjusted against profits from an ordinary non-speculative business or income chargeable under other heads merely because such income is available. This rule effectively keeps speculation losses separate from ordinary business losses. If sufficient speculation profit is available during the same tax year, the loss may be adjusted against it. Any remaining eligible loss is carried forward under Section 113(2).

4. Carry Forward of Speculation Loss

Where a speculation loss cannot be wholly adjusted against speculation profits during the tax year, Section 113(2) permits the unabsorbed amount to be carried forward to the following tax year. In that subsequent year, the brought-forward loss can again be set off only against profits and gains of a speculation business carried on by the assessee. If it is still not completely absorbed, the remaining amount may continue to be carried forward. However, Section 113(3) restricts such carry forward to four tax years immediately succeeding the tax year for which the speculation loss was first computed. Thereafter, the unabsorbed loss cannot be carried forward.

5. Priority over Depreciation

Section 113(4) specifies the order of adjustment where both a speculation loss and a carried-forward depreciation allowance relating to the speculation business are available. Where an allowance or part of an allowance under Section 33(11) or Section 45(7) relating to speculation business is to be carried forward, effect must first be given to the provisions of Section 113. Consequently, the eligible brought-forward speculation loss receives priority in the statutory sequence before the relevant carried-forward allowance is given effect. This ordering is important because speculation loss has a limited four-year carry-forward period, whereas depreciation is governed separately under the depreciation provisions of the Act.

Illustration – Speculation Loss

Suppose an assessee has a speculation loss of ₹5,00,000 and speculation profit of ₹2,00,000 during the relevant tax year.

Particulars Amount (₹)
Speculation Profit 2,00,000
Less: Speculation Loss (2,00,000)
Taxable Speculation Profit Nil
Original Speculation Loss 5,00,000
Less: Loss Set-off (2,00,000)
Speculation Loss carried forward 3,00,000

The balance ₹3,00,000 can be carried forward and set off only against future speculation profits, within the four-tax-year limit prescribed by Section 113.

Management Notes

Carry forward and Set off of Business Loss other than Speculation Loss [Sec. 112]

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Section 112 of the Income-tax Act, 2025 deals with the carry forward and set-off of business losses, other than losses from speculation business and other specially governed activities. Where a business loss cannot be fully adjusted in the tax year in which it arises, the unabsorbed portion may be carried forward to subsequent tax years, subject to prescribed conditions. Such brought-forward loss can generally be adjusted against profits and gains of eligible business or profession carried on by the assessee. The provision also prescribes the period of carry forward, continuity requirements and conditions for claiming the benefit of set-off.

1. Meaning of Business Loss

A business loss arises where the allowable business expenditure and deductions exceed the taxable receipts or profits from a business or profession during a tax year. For Section 112, the provision deals with ordinary business losses and excludes speculation losses and losses governed by separate special provisions. Before carrying forward the loss, the assessee must first apply the relevant current-year set-off provisions. If the entire business loss cannot be absorbed against eligible income during that year, the remaining amount becomes an unabsorbed business loss. Subject to statutory conditions, this balance may be carried forward and adjusted against eligible business or professional income in subsequent years.

2. Carry Forward of Business Loss

Where an eligible business loss cannot be wholly set off during the tax year in which it arises, the remaining amount may be carried forward under Section 112. The carried-forward loss retains its character as an ordinary business loss and may be considered for adjustment in subsequent tax years. Carry forward is subject to compliance with the conditions prescribed under the Act, including applicable requirements relating to determination and reporting of the loss. The benefit ensures that a genuine business loss is not permanently disregarded merely because sufficient taxable income is unavailable in the year of loss. The unabsorbed amount is therefore available for future set-off.

3. Set-off in Subsequent Tax Years

A business loss carried forward under Section 112 can generally be set off against profits and gains of business or profession assessable in a subsequent tax year, subject to the conditions prescribed by the Act. It cannot ordinarily be adjusted against income chargeable under heads such as salary, house property, capital gains or income from other sources once it has been carried forward. The business generating the loss need not necessarily continue in every situation if the statutory requirements otherwise permit the set-off. However, the assessee claiming the loss must satisfy the relevant conditions. The adjustment reduces taxable business income of subsequent tax years.

4. Period of Carry Forward

An eligible ordinary business loss may generally be carried forward for eight tax years immediately succeeding the tax year for which the loss was first computed. During this period, the loss may be adjusted against eligible business or professional income in accordance with Section 112. Where only part of the brought-forward loss can be absorbed in a particular year, the remaining amount may continue to be carried forward within the original prescribed period. The eight-year period is counted separately for each year’s loss. After expiry of the permitted period, any unabsorbed balance ordinarily lapses and cannot be carried forward for further set-off.

5. Filing of Return within Prescribed Time

For carrying forward an ordinary business loss, compliance with the return-of-income provisions is important. The loss should be determined in pursuance of a return furnished in accordance with the applicable statutory requirements and within the prescribed time, where timely filing is required for carry forward. Failure to comply may result in loss of the benefit of carrying forward the business loss, even though current-year set-off may be governed separately. Therefore, an assessee having a business loss should correctly disclose the loss and file the relevant return within the statutory period. Proper reporting enables the loss to be carried forward and claimed in subsequent years.

Illustration

Suppose Mr. A has a business loss of ₹6,00,000 in Tax Year 2026–27. After permissible current-year adjustment of ₹1,50,000, ₹4,50,000 remains unabsorbed.

Particulars Amount (₹)
Business Loss 6,00,000
Less: Current-year eligible set-off (1,50,000)
Business Loss carried forward 4,50,000

In the following year, Mr. A earns business profit of ₹3,00,000:

Particulars Amount (₹)
Business Profit 3,00,000
Less: Brought-forward Business Loss (3,00,000)
Taxable Business Income Nil
Balance Loss carried forward 1,50,000
Management Notes

Loss under the head ‘Income from House Property’ [Sec. 110]

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Section 110 of the Income-tax Act, 2025 deals with the carry forward and set-off of loss under the head “Income from House Property.” Where such loss cannot be wholly adjusted against income of the relevant tax year under the applicable set-off provisions, the unadjusted amount may be carried forward to subsequent tax years. The carried-forward loss can be set off only against income from house property, subject to the prescribed conditions and time limit. This provision ensures that eligible unabsorbed house-property losses receive tax adjustment in future years.

1. Meaning of House Property Loss

A loss from house property arises when the deductions allowable while computing income from a house property exceed its taxable annual value. An important reason for such loss may be the deduction available for interest on borrowed capital, subject to the applicable provisions and limits. Where an assessee owns more than one property, income and loss from different house properties are first considered according to the applicable intra-head set-off rules. If the final computation under the head results in a loss, it may be adjusted in the current year to the extent permitted. The remaining unabsorbed amount is governed by Section 110.

2. Carry Forward of Unabsorbed Loss

Where a loss computed under Income from House Property cannot be wholly set off during the relevant tax year, Section 110 permits the remaining loss to be carried forward to subsequent tax years. The provision ensures that an eligible house-property loss is not permanently lost merely because sufficient taxable house-property income is unavailable in the year in which the loss arises. The carried-forward amount retains its character as a house-property loss and is governed by the specific restrictions prescribed under the Act. It can subsequently be adjusted only in the manner authorised by Section 110, thereby reducing eligible future house-property income.

3. Set-off in Subsequent Years

A house-property loss carried forward under Section 110 can be set off in a subsequent tax year against income chargeable under the head “Income from House Property.” It cannot be adjusted against salary, business income, capital gains or income from other sources merely because those incomes are available in the later year. This restriction distinguishes the treatment of carried-forward loss from certain current-year set-off rules. The amount set off in each subsequent year is limited to the available taxable income from house property. Any balance remaining after such adjustment may continue to be carried forward, provided the prescribed carry-forward period has not expired.

4. Period of Carry Forward

Under Section 110, an eligible unabsorbed loss from house property may be carried forward for eight tax years immediately succeeding the tax year for which the loss was first computed. During this period, the loss may be adjusted against available income under the head Income from House Property. If only part of the loss is absorbed in a particular year, the remaining eligible amount may continue to be carried forward within the prescribed period. After the expiry of the permitted period, any unadjusted balance cannot ordinarily be carried forward further. Therefore, maintaining proper year-wise records of losses and set-off is important for tax computation.

illustration

Suppose an assessee has a house-property loss of ₹4,00,000. Assume ₹2,00,000 is eligible for adjustment during the current year and the balance remains unabsorbed.

Particulars Amount (₹)
Loss under Income from House Property 4,00,000
Less: Current-year eligible set-off (2,00,000)
Loss carried forward under Section 110 2,00,000

If the assessee earns ₹1,50,000 from house property in the next year:

Particulars Amount (₹)

Income from House Property

 1,50,000

Less: Brought-forward House Property Loss

 (1,50,000)

Taxable House Property Income

 Nil

Balance Loss carried forward

 50,000
Management Notes

Introduction Inter Source adjustment (Intra-Head adjustment) [Sec. 108], Inter head adjustment [Sec. 109]

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The Income-tax Act, 2025 provides rules for set-off of losses to determine the taxable total income of an assessee. A loss arising from one source may, subject to prescribed restrictions, be adjusted against income from another source under the same head or against income under another head. Section 108 deals with inter-source or intra-head adjustment, whereas Section 109 deals with inter-head adjustment. These provisions prevent taxation merely on positive income while ignoring eligible losses. However, certain losses, such as capital losses, speculation losses and specified losses, are subject to special restrictions.

1. Inter-Source Adjustment (Intra-Head Adjustment) [Section 108]

Section 108 deals with adjustment of loss from one source against income from another source falling under the same head of income. For example, a loss from one business may generally be adjusted against profit from another eligible business because both fall under Profits and Gains of Business or Profession. Similarly, eligible loss from one house property may be adjusted against income from another house property. However, the Act prescribes restrictions for certain losses. Capital loss, speculation business loss, specified business loss, race-horse loss and certain other losses can be adjusted only in the manner specifically permitted by the relevant provisions.

Illustration – Intra-Head Adjustment

Particulars Amount (₹)
Profit from Business A 4,00,000
Less: Loss from Business B (1,50,000)
Net Business Income after Section 108 Adjustment 2,50,000

Thus, the loss from Business B is adjusted against profit from Business A under the same head of income.

2. Inter-Head Adjustment [Section 109]

Section 109 provides for adjustment of an eligible loss under one head of income against income assessable under another head of income, after completing the intra-head adjustment under Section 108. For example, an eligible business loss may generally be adjusted against income under another permissible head, subject to statutory restrictions. However, certain losses cannot be freely adjusted across different heads. Capital losses are confined to capital gains, while losses from speculation business and other specified activities are governed by separate provisions. Further, the Act may restrict adjustment against salary income or prescribe monetary limits for particular losses. Unadjusted losses may be carried forward where permitted.

Illustration – Inter-Head Adjustment

Particulars Amount (₹)
Income from House Property 3,00,000
Income from Other Sources 1,00,000
Less: Eligible Business Loss (2,00,000)
Income after Inter-Head Adjustment 2,00,000

Sequence of Adjustment:

Step Adjustment Section
1

Loss against income from another source under the same head

 108
2

Remaining eligible loss against income under another head

 109
3

Unabsorbed eligible loss carried forward as permitted

Relevant carry-forward provisions
Management Notes

illustrations on Computation of Income from other Sources

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Illustration 1 – Dividend, Interest and Family Pension

Mr. A received dividend of ₹80,000, interest on securities of ₹60,000 and family pension of ₹1,20,000 during the tax year. Assume an allowable deduction of ₹30,000 from family pension under the applicable provisions.

Particulars Amount (₹)
Dividend Income 80,000
Interest on Securities 60,000
Family Pension 1,20,000
Less: Allowable Family Pension Deduction (30,000)
Taxable Family Pension 90,000
Income from Other Sources 2,30,000

Therefore, taxable Income from Other Sources = ₹2,30,000.

illustration 2 – Lottery Winnings

Ms. B won ₹5,00,000 from a lottery. She spent ₹20,000 on purchasing lottery tickets and ₹10,000 on other related expenses. Under Section 94, expenditure or allowance relating to lottery winnings is not deductible.

Particulars Amount (₹)
Gross Lottery Winnings 5,00,000
Less: Cost of Lottery Tickets Nil
Less: Other Related Expenses Nil
Taxable Income from Lottery 5,00,000

Therefore, ₹5,00,000 is taxable under Income from Other Sources. The ₹30,000 expenditure cannot be deducted.

illustration 3 – Interest on Securities

Mr. C received ₹1,50,000 as interest on securities held as investments. Assume he incurred ₹10,000 of expenditure that qualifies for deduction under the applicable provisions.

Particulars Amount (₹)
Gross Interest on Securities 1,50,000
Less: Eligible Deduction (10,000)
Taxable Interest Income 1,40,000

Thus, ₹1,40,000 will be included in Income from Other Sources, assuming the ₹10,000 expenditure satisfies all statutory conditions for deduction.

illustration 4 – Taxable Gift

Mr. D receives ₹90,000 in cash from a non-relative without consideration. Assume the receipt satisfies the statutory conditions for taxation and no exemption for a specified occasion or circumstance applies.

Particulars Amount (₹)
Money received without consideration 90,000
Less: Exempt amount Nil
Taxable Gift 90,000

Since the applicable conditions for taxation are satisfied, the taxable amount of ₹90,000 is included under Income from Other Sources.

illustration 5 – Letting of Machinery

Mr. E lets out machinery and receives ₹2,40,000 during the year. He incurs ₹20,000 on repairs, ₹10,000 on insurance and ₹30,000 as other expenditure. Assume all these expenses are specifically allowable under the applicable provisions.

Particulars Amount (₹)
Income from letting of machinery 2,40,000
Less: Repairs (20,000)
Less: Insurance (10,000)
Less: Other allowable expenditure (30,000)
Taxable Income 1,80,000

Therefore, taxable Income from Other Sources = ₹1,80,000.

illustration 6 – Comprehensive Computation

Mr. F has the following receipts during the tax year:

Particulars Amount (₹)
Dividend 1,00,000
Interest on Securities 75,000
Family Pension 1,50,000
Lottery Winnings 2,00,000
Taxable Gift 80,000

Assume an allowable family-pension deduction of ₹30,000 and no other deduction.

Computation

Particulars Amount (₹)
Dividend Income 1,00,000
Interest on Securities 75,000
Family Pension 1,50,000
Less: Family Pension Deduction (30,000)
Taxable Family Pension 1,20,000
Lottery Winnings 2,00,000
Taxable Gift 80,000
Income from Other Sources 5,75,000

Hence, Mr. F’s Income from Other Sources is ₹5,75,000. The lottery income remains included in the total, although its tax treatment/rate may be governed by special provisions.

Management Notes

Specific Disallowance [Sec. 94]

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Section 94 of the Income-tax Act, 2025 specifies amounts that are not deductible while computing income chargeable under the head “Income from Other Sources.” It operates notwithstanding the deductions otherwise available under Section 93. The section specifically disallows personal expenses, certain interest payable outside India where applicable tax has not been paid or deducted, and salary payable outside India without the required tax payment or deduction. It also applies specified business-income disallowance provisions to Income from Other Sources and restricts deductions against lottery, crossword puzzle, race, gambling and betting winnings. Thus, it prevents deduction of specified inadmissible expenditure.

1. Personal Expenses

Under Section 94(1)(a), any personal expenses of the assessee are specifically disallowed while computing income under the head Income from Other Sources. Personal expenditure refers to expenses incurred for the assessee’s private or personal purposes rather than for earning taxable income. Even though Section 93 permits certain expenditure incurred wholly and exclusively for earning income, personal expenditure cannot be claimed as a deduction. Therefore, expenses relating to personal consumption, household requirements or other private purposes cannot reduce taxable income from other sources. The purpose of this provision is to ensure that only genuine income-earning expenditure satisfying the statutory conditions is considered for deduction.

2. Interest Payable Outside India

Under Section 94(1)(b), interest chargeable under the Act and payable outside India is not deductible if the required tax has neither been paid nor deducted under Chapter XIX-B. Therefore, where an assessee incurs interest expenditure payable to a person outside India, compliance with the applicable tax-deduction requirements becomes important for claiming the deduction while computing Income from Other Sources. If the prescribed tax is not deducted or paid, the interest expenditure is specifically disallowed under Section 94. This provision supports compliance with tax withholding obligations relating to payments made outside India and prevents deduction where the statutory tax requirements remain unfulfilled.

3. Salary Payable Outside India

Section 94(1)(c) provides that a payment chargeable under the head “Salaries”, when payable outside India, is not deductible unless the required tax has been paid or deducted under Chapter XIX-B. Accordingly, an assessee claiming such salary expenditure against income from other sources must comply with the applicable tax withholding requirements. Where the prescribed tax has not been paid or deducted, the salary payment becomes inadmissible as a deduction for computing taxable income. The provision therefore connects deductibility of specified foreign salary payments with tax-deduction compliance. Its purpose is to ensure proper collection of tax before allowing the expenditure to reduce taxable Income from Other Sources.

4. Application of Certain Business Disallowances

Under Section 94(2), the provisions of Sections 29, 35(b)(i) and 36 also apply while computing Income from Other Sources in the same manner as they apply while computing Profits and Gains of Business or Profession. Consequently, expenditure otherwise connected with earning income from other sources may still become inadmissible where it falls within these specified disallowance provisions. This creates consistency between the computation rules applicable to business income and Income from Other Sources for specified expenses or payments. Therefore, an assessee cannot claim a deduction merely because expenditure satisfies the general conditions of Section 93; the relevant specific disallowance provisions must also be examined.

5. Winnings from Lotteries, Gambling, etc.

Under Section 94(4), no deduction for expenditure or allowance is permitted while computing income from lotteries, crossword puzzles, races including horse races, card games, gambling, betting or other games of any sort. Consequently, expenditure incurred for earning such winnings cannot generally be deducted from the taxable amount. The provision effectively requires the specified winnings to be considered without reducing them by related expenditure or allowances. However, Section 94(5) provides an exception for an assessee who is the owner of horses maintained for running in horse races, in computing income from that activity. Thus, specified casual winnings are subject to strict deduction restrictions.

Management Notes

Dividend [Sec. 2(40)]

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Under Section 2(40) of the Income-tax Act, 2025, the term “Dividend” has an inclusive meaning and covers not only ordinary dividends distributed by a company but also certain specified distributions and payments treated as dividend by law. It broadly includes distribution of accumulated profits involving release of company assets, distribution of debentures or deposit certificates in specified circumstances, distributions on liquidation or reduction of capital, and certain loans or advances to specified shareholders or concerns. The provision also contains exclusions for prescribed transactions. The purpose of this definition is to identify company distributions that are treated as dividend income for taxation purposes.

1. Distribution involving Release of Company Assets

Dividend includes any distribution by a company of its accumulated profits where such distribution involves the release of all or any part of the company’s assets to its shareholders. The distribution need not necessarily be made in cash; transfer or release of property or other assets representing accumulated profits may also fall within the definition. The amount is treated as dividend to the extent that the company possesses accumulated profits as determined under the applicable provisions. This rule prevents companies from avoiding dividend taxation merely by distributing assets instead of cash. Therefore, both the substance and nature of the distribution to shareholders are relevant.

2. Distribution of Debentures or Deposit Certificates

The definition of dividend also covers specified distributions by a company to its shareholders through debentures, debenture-stock or deposit certificates, where the statutory conditions are satisfied. In the case of a company having preference shareholders, certain distributions of bonus shares to such shareholders may also come within the inclusive definition. Such distributions are treated as dividend to the extent they represent the company’s accumulated profits. The provision recognises that a company may distribute economic benefits to shareholders through instruments other than ordinary cash dividends. Consequently, the legal form of the distribution does not necessarily prevent it from being treated as taxable dividend income.

3. Distribution on Liquidation of Company

Where a company goes into liquidation and distributes assets to its shareholders, the distribution may be treated as dividend to the extent attributable to the company’s accumulated profits, subject to the conditions and exclusions contained in Section 2(40). Liquidation ordinarily involves realisation and distribution of the company’s assets after satisfying its liabilities. The provision separates the portion representing accumulated profits from other amounts representing the shareholder’s capital interest. Only the amount falling within the statutory definition is treated as dividend. Therefore, taxation of a liquidation distribution depends upon the nature of the amount distributed and the extent to which it represents accumulated profits.

4. Distribution on Reduction of Capital

A company may undertake a reduction of share capital and distribute money or other assets to its shareholders. Under Section 2(40), such distribution may be treated as dividend to the extent that it represents the company’s accumulated profits, subject to the prescribed conditions and exclusions. The provision ensures that accumulated profits distributed through reduction of capital do not escape dividend treatment merely because the payment is described as a return of capital. However, the entire amount distributed on capital reduction is not automatically treated as dividend. The character of the distribution and the portion attributable to accumulated profits must be determined under the statutory rules.

5. Loans or Advances to Specified Shareholders

Section 2(40) also treats certain loans or advances made by a closely held company as dividend where the prescribed conditions are satisfied. Broadly, this may apply to payments made to a shareholder having the required substantial interest, or to a concern in which such shareholder has the prescribed interest. The amount is generally treated as dividend only to the extent of the company’s accumulated profits. Certain payments made in the ordinary course of a money-lending business and other specified transactions may be excluded. This deemed-dividend provision prevents accumulated company profits from being distributed to specified shareholders in the form of loans instead of dividends.

Management Notes

Sum Received under a Life Insurance Policy [Sec. 92(2)(l)]

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Under Section 92(2)(l) of the Income-tax Act, 2025, certain sums received under a life insurance policy, including amounts allocated by way of bonus, are chargeable under the head “Income from Other Sources” where the receipt is not exempt under the applicable provisions. The taxability mainly depends upon the nature of the policy, premium payable, amount received and statutory exemption conditions. Where the prescribed exemption is available, the receipt remains exempt; otherwise, the taxable income is determined according to the Act.

1. Meaning of Sum Received under Life Insurance Policy

A sum received under a life insurance policy generally includes amounts received on maturity, surrender or other specified events, together with any bonus allocated under the policy. Section 92(2)(l) brings the taxable portion of such receipts under Income from Other Sources where the amount is not exempt under the relevant provisions of the Act. The entire amount received is not necessarily taxable because the law provides a specific computation mechanism for determining income. Further, amounts satisfying the prescribed life-insurance exemption conditions remain outside taxable income. Therefore, the nature of the policy and applicable statutory conditions must be examined before determining tax liability.

2. Taxability of Amount Received

The amount received under a life insurance policy becomes taxable under Section 92(2)(l) when the receipt does not qualify for exemption under the applicable provisions. Taxability may arise where the policy fails to satisfy prescribed conditions relating to the premium, sum assured, date of issue or other statutory requirements. In such cases, the taxable component is generally assessed under Income from Other Sources rather than treating the whole receipt automatically as taxable income. The amount included in income is determined according to the specific computation provisions of the Act. Thus, examination of the policy terms and availability of exemption is essential before calculating taxable income.

3. Amount Received on Death of Insured Person

A sum received under a life insurance policy on the death of the insured person is generally given favourable tax treatment, subject to the provisions and conditions contained in the Income-tax Act, 2025. Such death benefits are distinguished from ordinary maturity or surrender receipts because payment arises due to the insured person’s death. Where the applicable exemption conditions are satisfied, the amount received by the nominee or legal heir, including eligible bonus, is not included in taxable income. Consequently, Section 92(2)(l) principally becomes relevant to those life-insurance receipts that are not otherwise exempt and therefore require taxation under Income from Other Sources.

4. Bonus Received under the Policy

A life insurance policy may provide an additional amount in the form of a bonus along with the basic policy proceeds. For income-tax purposes, the bonus forms part of the amount received under the policy and its tax treatment generally follows the treatment applicable to the underlying insurance receipt. Where the policy proceeds satisfy the conditions for exemption, the qualifying bonus is also generally covered by that exemption. However, where the policy proceeds are taxable, the bonus is considered while determining the relevant receipt for tax purposes. Therefore, the taxability of bonus depends primarily upon whether the life insurance proceeds qualify for statutory exemption.

5. Computation of Taxable Income

Where a sum received under a life insurance policy is taxable, the income component is determined according to the specific computation rule applicable to such receipts. Broadly, the taxable amount is based on the sum received, including applicable bonus, after reducing the eligible premium or consideration paid for the policy to the extent permitted and not previously claimed as a deduction elsewhere. This approach seeks to tax the income element rather than simply treating every rupee of policy proceeds as income. The resulting amount is included under Income from Other Sources and becomes part of the assessee’s total income for the relevant tax year.

Management Notes

Interest on Securities [Sec. 92(2)(e)]

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Under Section 92(2)(e) of the Income-tax Act, 2025, interest on securities is chargeable under the head “Income from Other Sources” where it is not taxable as business income. It generally represents interest earned by an assessee from investments in Government securities, bonds, debentures and other interest-bearing securities. Such interest is included in taxable income according to the applicable provisions and method of accounting. The tax treatment depends upon the nature of security, ownership and character of investment.

1. Meaning of Interest on Securities

Interest on securities refers to interest income earned by an assessee from investments in specified securities issued by the Government, companies or other entities. It may include interest on Government securities, bonds, debentures and similar debt instruments. Where such securities are held as investments and the interest is not taxable under the head profits and gains of business or profession, the income is generally chargeable under “Income from Other Sources.” The amount taxable is determined according to the applicable provisions of the Income-tax Act, 2025. Thus, interest on securities constitutes an important category of investment income taxable in the hands of the recipient.

2. Government Securities

Interest received from Government securities represents income earned on securities issued by the Central Government, State Governments or other eligible governmental authorities. Such securities may carry a fixed or otherwise specified rate of interest payable periodically to the holder. Where the securities are held as investments, and the interest is not chargeable as business income, the amount is taxable under Income from Other Sources in accordance with Section 92(2)(e). The taxable amount is determined according to the applicable accounting and tax provisions. Government securities are generally regarded as debt instruments, and the interest earned by the holder constitutes taxable income unless specifically exempted.

3. Interest on Debentures

Debentures are debt instruments generally issued by companies or other entities for raising borrowed funds. The issuer pays interest to debenture holders at the rate and intervals specified in the terms of issue. Where an assessee holds debentures as an investment, the interest received or receivable is generally chargeable under the head Income from Other Sources, provided it is not taxable as business income. The taxable amount is determined according to the applicable provisions and the assessee’s recognised method of accounting. Interest on debentures is distinct from dividend because the holder is a creditor of the issuer, rather than an owner merely by holding debentures.

4. Interest on Bonds

Interest earned from bonds is another important form of interest income covered by the provisions relating to securities. Bonds may be issued by governments, companies, financial institutions or other authorised entities to raise borrowed funds. The bondholder normally receives interest according to the rate and payment terms attached to the instrument. Where bonds are held as investments, and the interest does not constitute business income, such interest is generally taxable under Income from Other Sources. The amount chargeable to tax depends upon the terms of the bond and applicable provisions. Any specific exemption or special treatment available under the Act is separately considered.

5. Basis of Taxability

Interest on securities is taxable according to the applicable provisions governing Income from Other Sources and the recognised method of accounting. Depending upon the circumstances, income may be considered on the basis of interest received or accrued during the relevant tax year. Where securities constitute stock-in-trade of a business, the interest may instead be taxable under profits and gains of business or profession. Therefore, the purpose and manner in which securities are held are important for determining the appropriate head of income. Any deduction specifically permitted in computing such income may be claimed, while expenditure not authorised by the Act remains inadmissible for tax purposes.

Computation of Interest on Securities [Section 92(2)(e)]:

Interest on securities taxable under Income from Other Sources may be computed as follows:

Particulars Amount (₹)
Gross Interest on Securities XXX
Add: Tax deducted at source, if interest is received net of tax XXX
Grossed-up Interest XXX
Less: Eligible deductions specifically allowable under the Act (XXX)
Taxable Interest on Securities XXX

illustration

Suppose an assessee earns ₹60,000 as gross interest on securities and eligible expenditure allowable under the Act is ₹5,000.

Particulars Amount (₹)
Gross Interest on Securities 60,000
Less: Eligible Deduction (5,000)
Taxable Interest on Securities 55,000

Therefore, ₹55,000 will be included under the head “Income from Other Sources”, assuming the stated ₹5,000 expenditure qualifies for deduction under the applicable provisions.

Management Notes

Family Pension- Gift [Sec. 92(2)(m)]

indiafreenotesby indiafreenotes0

Under Section 92(2)(m) of the Income-tax Act, 2025, specified receipts relating to family pension and gifts are chargeable under the head “Income from Other Sources”, subject to the applicable provisions. Family pension is generally an amount received by the legal heirs or family members of a deceased employee after the employee’s death and is taxable in the recipient’s hands, with the prescribed deduction available under the Act. Gifts, including specified sums of money or property received without or for inadequate consideration, may also become taxable where statutory conditions and thresholds are satisfied. However, prescribed relatives and specified circumstances may qualify for exemption.

1. Family Pension

Family pension means a regular amount received by the family members or legal heirs of a deceased employee after the employee’s death. It is generally taxable under the head “Income from Other Sources” because it is received by the family member and not by the employee who rendered the services. The recipient is entitled to a prescribed deduction from family pension while computing taxable income, subject to the conditions and limits specified under the Income-tax Act, 2025. The balance amount, after allowing the applicable deduction, is included in the recipient’s total income and taxed according to the applicable tax provisions.

2. Gift

A gift may consist of money, movable property or immovable property received by a person without consideration or for inadequate consideration. Under the Income-tax Act, 2025, specified gifts may be taxable under “Income from Other Sources” when the prescribed conditions and monetary thresholds are satisfied. The taxable amount depends upon whether the gift consists of money, movable property or immovable property and whether adequate consideration has been paid. However, gifts received from specified relatives or on prescribed occasions and circumstances, such as marriage, inheritance or under a will, may qualify for exemption. Thus, only specified taxable gifts are included in income.

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