Deemed Income in Income Tax
Deemed income refers to amounts that the Income Tax Act treats as taxable income even though they may not represent actual cash receipts — common examples include notional rent under Section 23, stamp-duty value under Section 50C, and gifts under Section 56(2).
Indian income tax law contains several deeming provisions that attribute income to a taxpayer not on the basis of actual receipt but on the basis of a notional or imputed figure. These provisions prevent tax avoidance through under-reporting of transactions.
Section 23 deals with deemed rental income from house property. If a taxpayer owns more than one self-occupied property, only one can be treated as self-occupied (and shown as nil income); the remaining properties are deemed to be let out at their expected rental value — the higher of the market rent and the municipal valuation — even if they are actually vacant. This 'notional rent' is taxed as income from house property. Finance Act 2019 extended relief to two self-occupied properties, meaning a third property still attracts notional rent.
Section 50C applies to the transfer of land or building. If the actual sale consideration is lower than the stamp-duty value (circle rate value as determined by the state government), the stamp-duty value is deemed to be the full value of consideration for computing capital gains. A tolerance band of 10% was later introduced — if the actual consideration is within 10% of the circle rate, no deeming applies. This prevents artificial undervaluation in property sale agreements.
Section 56(2)(x) is the gift taxation provision. If an individual receives a sum of money exceeding ₹50,000 without adequate consideration, the entire amount (not just the excess) is deemed as income from other sources. The same applies to immovable property received below stamp-duty value (where the difference exceeds ₹50,000) and movable property received at inadequate consideration. Certain transfers between specified relatives, through inheritance, or on marriage are exempt.
Section 56(2)(viib), the so-called 'angel tax' provision, deems the excess of share premium over the fair market value of shares issued by a closely-held company as income of the company. This has been a contentious area for startups.
Understanding deemed income is critical because taxpayers often unknowingly attract tax liability — for example, leaving a second flat vacant without declaring notional rent, or receiving a gift from a non-relative exceeding ₹50,000.