UNIT-1

Introduction
The income tax was introduced in India for the first time in 1860 by British rulers
following the mutiny of 1857. However on the recommendation of Law Commission and
Direct Taxes Enquiry Committee and in consultation with Law Ministry a bill was
framed. Income tax Act, 1961 is a comprehensive Act. This Act has been amended by
several amending Acts since 1961.

SCHEME OF INCOME TAX:

According to the Act income of a person is computed in five parts and each part
is known as “Head of income”. These heads are:

 Income under the head salaries; 

 Income from house property; 
 Profits and gains of business or profession; 
 Capital gains; 
 Income from other sources; 

The total of income computed under various heads is called „gross total income‟
of which deductions under Sec 80C to 80U are allowed. The resultant figure is called
„total income‟.

PERSON [SEC 2(31)]:

A. Individual
B. Hindu Undivided Family
C. Company
D. Firm
E. Association of Persons of Individuals
F. Local authorities
G. Artificial Juridical Persons

ASSESSMENT YEAR:
st
It means the period of 12 months commencing on the 1 day of April every
year. The assessment year is the financial year of the Govt. of India during which
income of a person relating to the relevant previous year is assessed to tax. At present
the assessment year 2016-2017 is going on.

PREVIOUS YEAR [SEC 3]:The previous year is the financial year preceding the
assessment year, it may be said that the year in which the income is earned is called the
previous year and the next year in which such income is computed and put to tax is known as
the assessment year. For e.g. income earned by the assessee in the previous year
2015-2016 is taxable in the assessment year 2016-2017

2
AGRICULTURAL INCOME [SEC 2(1A)]:
Agricultural Income Includes:

a. Any rent or revenue derived from agricultural land situated in India.

b. Any income from:
 Cultivation of agricultural land ; 
 A process carried on to make the produce or rent in kind marketable ; 
 From the sale of produce 
c. Income from agricultural property
E.g. Farm house
However the agricultural house property must be situated in the vicinity of the
agricultural land and must be used for agricultural purposes like farmer‟s residence,
cattle-shed, godown etc. Also the land must be subject to some tax levied by the state or
local government. If no tax is levied then the land should not be situated within municipal
limits or within 8 kms of the city limits. If the land is within municipal limits then the
population of the town should be below 10000.

PARTLY AGRICULTURAL AND PARTLY BUSINESS INCOME

Crop Agricultural income Business income

Growing and manufacturing tea 60% 40%
Rubber manufacturing business 65% 35%
Coffee grown and cured 75% 25%
Coffee grown, cured, roasted and 60% 40%
grounded
For other commercial crop if Market value of Balance amount
agricultural produce is used as raw produce
materials.

CAPITAL EXPENDITURE VS. REVENUE EXPENDITURE:

1. NATURE OF ASSESTS; any expenditure incurred to acquire a fixed asset or in

connection with installation of fixed asset is capital expenditure. Whereas any
expenditure incurred as price of goods purchased for resale along with other
necessary expenses incurred in connection with such purchases are revenue
expenses.
2. NATURE OF LIABLITY: A payment made by a person to discharge capital
liability is a capital expenditure.
Whereas, An expenditure incurred to discharge a revenue liability is revenue
expenditure.
3. NATURE OF TRANSACTION: If expenditure is incurred to acquire a source of
income it is capital expenditure.
Where as, an expenditure incurred to earn an income is revenue expenditure.
4. PURPOSE OF TRANSACTION: If the amount is spent on
increasing theearning capacity of an asset, it is capital expenditure.
Where as, anyexpenditure incurred on keeping an asset in running
condition is revenue expenditure.
5. NATURE OF PAYMENT IN THE HANDS OF PAYER: if expenditure is
3
incurred by an assessee as a capital expenditure, it will remain as capital expenditure

4
 even if the amount may be revenue receipt in the hands of receiver, whereas if the
nature of payment is in the hands of payer is of revenue nature , it will be a revenue
expenditure even if it is capital receipt in the hands of receiver.

RESIDENTIAL STATUS:
The residential status of a person can be classified into 3 categories;
1. Ordinary resident [OR]
2. Not ordinary resident [NOR]
3. Nonresident [NR]

RESIDENT [SEC 6(1)]:

Aperson will be resident of India if he satisfies any one of the following two
conditions;
1. He was in India for 182 days or more during the relevant previous year.
2. He was in India for 60 days or more during the relevant previous year and 365 days or
more during 4 previous years preceeding the relevant previous year.

EXCEPTIONS:
For the following 3 categories 60 days in two above [ 1 and 2 ] will be replaced by
182 days.
1. For an Indian citizen going abroad on a job approved by the central government.
2. In case of Indian citizens or persons of Indian origin who came to visit India.
3. In case of members of crew of Indian ship.

NOTE:
While calculating the number of days for stay in India, the day of departure must
be included.

ORDINARY RESIDENT [SEC 6(1) AND SEC 6(6)]:

For an individual to be an ordinary resident the following two condition u/s 6(6)
must also be fulfilled.
1. He was resident in India during 2 out of 10 previous years preceeding the previous
years.
2. He stays in India for atleast 730 days during 7 previous years preceeding the relevant
previous years.

NOT ORDINARY RESIDENT [SEC 6(1)BUT NOT SEC6 (6)]:

An individual will be a not ordinary resident if he fulfills any one of the following
two conditions:
1. He was a non-resident during 9 out of 10 previous years preceeding the relevant
previous years.
2. He stays in India for less than 730 days during 7 previous years preceeding the
relevant previous years.

5
4

6
NON-RESIDENT [SEC 2(30)]:
A person who fails to fulfill any one of the two conditions of the resident as per
SEC 6(1) is a non-resident.

INCIDENCE OF TAX:

Types of income OR NOR NR

1. Income Received or deemed to be
received in India [whether earned in T T T
India not].

2. Income earned in India whether received

in India or outside India . T T T

3. Income earned and received outside India

from a business or profession, controlled T T NT
or setup in India.

4. Income earned and received outside India

from any other source. T NT NT

5. Past untaxed income brought into India

during the relevant previous year. NT NT NT

T – Taxable, NT – Not Taxable.

 PROBLEM:
Q. MR.Bharath gives the following information:
th
1. For the first time he went to Japan on 10 Jan 2002 and came back to India
nd
on 22 June 2002.
th
2. On 30 Sept 2005, he went to England and came back to India after 90 days.
th
3. On 16 July 2008, he went to Srilanka and came back to India after 100 days.
nd
4. On 2 Dec 2010,he went Nepal for 85 days.
5. During the previous year, he was out of India for 180 days.
MR.Bharath submits the following details of his income for the
relevant previous year.
1. Salary Rs.80,000 received in Japan for work done in India.
2. Commission received in India for service in Srilanka Rs.1,40,000.
3. House rent for a house in Nepal received in India Rs.30,000.
4. Dividend from an England based company received in India Rs.75,000
5. Profit of a business situated in Japan brought to India Rs.5,00,000.
7
]

8
 Determine the residential status of MR.Bharath and also compute his total income tax.
ANS.
As given in the question MR.Bharath is out of India for 180 days in the relevant
previous year[2012-13],which means he was in India for rest of year i.e [365-
180=185days], so the assessee fulfills the basic condition under Sec 6(1).
ADDITIONAL CONDITION:
YEAR DAYS
2011-12 366
2010-11 280
2009-10 365
2008-09 265
2007-08 366
2006-07 365
2005-06 275
2004-05 365
2003-04 366
2002-03 281
TOTAL 3294
The assessee fulfills both the additional condition under SEC 6(6) that he should
stay in India for 2 out of 10 previous years immediately preceeding the relevant previous
year and the assessee should stay in India for a period of 730 days or more during the 7
years immediately preceeding the relevant previous year.
So the assessee is an ordinary resident.

 TOTAL INCOME: 
TYPE OF INCOME OR
1. Salary received in Japan for work done in India 85000

2. Commission received in India for work done in 1,40,000

Srilanka

3. House rent from a house in Nepal received in India 21,000

4. Dividend from an England based company received 75,000

in India

5. Profit of business situated in Japan brought into India 5,00,000

TOTAL 8,16,000
TOTAL INCOME OF THE ASSESSEE IS 8,16,000
Adjustment for house rent:
House rent - 30,000
- Standard deductions
30% of 30,000 - 9,000
Total income after adjustment = 21,000
9
6

1
0
 IMPORTANT QUESTIONS:

1. Give the meaning of Income Tax.

2. What is agricultural income?
3. What is previous year?
4. What is assessment year?
5. Who is an Assessee?
6. Define Person.
7. Who is deemed Assessee in default?
8. Mention any four canons of taxation.
9. Distinguish between capital and revenue expenses.
10. Give the basic conditions u/s 6(1) of Income Tax Act.
11. State the tax liability of an individual based on his residential status.
12. Who is a non resident individual?

11
7

1
2
 UNIT:2
INCOMEFROM SALARIES

INTRODUCTION:

Assessee: PY:
Residential status: AY:
Particulars Amount Amount

 BASIC  XXX
 FEES  XXX
 COMMISSION  XXX
 INTERIM RELIEF  XXX
XXX
  PROFIT IN LIEU OF SALARY  XXX
 LEAVE ENCASHMENT 
XXX
 PENSION 
XXX
 ADVANCE SALARY 
XXX
 EMPLOYEES CONTRIBUTION
 TO PF 
 ALLOWANCE 
(i) DEARNESS ALLOWANCE[DA] XXX
(ii) HOUSE RENT ALLOWANCE[HRA]
XXX
(iii) EDUCATION ALLOWANCE
XXX
(iv) MEDICAL ALLOWANCE XXX
(v) ENTERTAINMENT ALLOWANCE
XXX
(vi) OTHER ALLOWANCES XXX
 PERQUISITES: 
(i) RENT FREE ACCOMODATION XXX
(ii) MOTOR CAR FACILITY XXX
XXX
(iii)REIMBURSEMENT OF EXPENSES
(iv) OTHER PERQUISITES XXX XXX
GROSS SALARY XXXXX

(-) DEDUCTIONS U/S 16

(i) Entertainment allowance XXX
(ii) Professional tax XXX XXXXX
NET INCOME FROM SALARY XXXXXX

13
8

1
4
LEAVE ENCASHMENT [SEC 10(10M)]:

NATURE OF LEAVE STATUS OF TAX TREATMENT

ENCASHMENT EMPLOYEE
1. DURING GOVT / NON GOVT FULLY TAXABLE
EMPLOYMENT

2.AT THE TIME OF

RETIREMENT / GOVT FULLY EXEMPTED
LEAVING JOB FROM TAX

3. AT THE TIME OF FULL OR OARTLY

RETIREMENT / NON GOVT EXEMPTED FROM TAX
LEAVING JOB

For a non govt. employee leave encashment at the time of retirement or leaving
the job is exempted from tax on the basis of least of the following:

1]. Period of earned leave (in months) to the credit of employee at the time of
retirement/leaving job (subject to a maximum of 1 month for every completed year of
service) * Average monthly salary.
2]. 10 * Average monthly
salary. 3]. Rs. 3,00,000
4]. Leave encashment received.

 AVERAGE MONTHLY SALARY MEANS = 

BASIC + DEARNES ALLOWANCE(if it forms part of salary) + COMMISSION (if

paid as a % of turnover) FOR A PERIOD OF 10 MONTHS IMMEDIATELY
PRECEEDING THE RETIREMENT

15
9

1
6
GRATUITY:
It is a retirement benefit given by the employer to employee for services rendered.

STATUS OF EMPLOYEE TAX TREATMENT

1. GOVT. EMPLOYEE FULLY EXEMPT FROM TAX UNDER
SEC 10(10)(I)

2. NON GOVT EMPLOYEE FULLY OR PARTLY EXEMPT FROM

COVERED BY PAYMENT OF TAX UNDER SEC 10(10)(II)
GRATUITY ACT 1972.

3. NOT COVERED OR NON GOVT FULLY OR PARTLY EXEMPT FROM

EMPLOYEE NOT COVERED BY TAX UNDER SEC 10(10)(III)
PAYMENT OF GRATUITY ACT 1972

COVERED BY GRATUITY ACT 1972 NOT COVERED BY GRATUITY ACT

1972
THE LIST OF THE FOLLOWING IS THE LIST OF THE FOLLOWING IS
EXEMPT ROM TAX EXEMPT FROM TAX

1. 15 DAYS SALARY (7 DAYS FOR 1. HALF MONTHS MONTHLY

EMPLOYEE OF SEASONAL AVERAGE SALARY FOR EACH
ESTABLISHMENT) BASED ON LAST COMPLETED YEAR OF SERVICE
DRAWN SALARY FOR EACH YEAR OF [15/30].
SERVICE [15/26].

2. Rs 10,00,000 2. Rs. 10,00,000

3. ACTUAL GRATUITY RECEIVED 3. ACTUAL GRATUITY RECEIVED

NOTE: salary = Basic + DA NOTE: salary = same as leave encashment

(no bonus or commission or any other
allowance)

17
10

18
PROVIDENT FUND

SPF RPF URPF PPF

1. Employer’s Tax free In excess of 12% of Not taxable in the Not

contribution employees salary is year of contribution applicable
taxable

2. employee’s Qualifies Qualifies for Not taxable and Qualifies

contribution for deduction under does not qualify for for
deduction sec 80c deduction deduction
u/s 80c u/s 80c

3. Interest on Tax free In excess if 95% is Not taxable in the Tax free
provident taxable year in which the
fund amount is credited

SALARY =BASIC + D.A(if it forms part of salary) + COMMISSION (if paid as %

of turnover)

PENSION:
Pension is a periodical payment received by an employee from the past
employer. It is fully taxable as salaries. It is of two types
i] Commuted:- Lumpsum consideration instead of monthly
payment ii] Uncommuted: - Monthly payment
Uncommuted pension is fully taxable for both govt. and non-govt.
employees.
Commuted pension is fully exempt from tax for a govt. employee. Commuted
pension is fully or partly exempt from tax u/s 10(10A)(ii) for a non-govt. employee.

IF EMPLOYEE RECEIVES GRATUITY IF EMPLOYEE DOES NOT RECEIVE

Exemption is least of the following: Exemption is least of the following:

i). 1/3 of the total pension. i). 1/2 of the total pension.
ii). Actual pension received. ii). Actual pension received.

ALLOWANCES:
Allowance is a fixed quantity of money given by the employer to the
employee in addition to salary, for the purpose of meeting some particular requirements
connected with the services. It is taxable under section 15 “due” or “receipt” basis
whichever is earlier.

19
20
There are 3 categories of allowances.

I]. FULLY TAXABLE:

a). CCA- City Compensatory

Allowance b). DA- Dearness Allowance
c). Tiffin Allowance d).
Medical Allowance e).
Servant Allowance
f). OTA- Overtime Allowance
g). Marriage Allowance
h). Lunch Allowance

II]. PARTLY TAXABLE:

a). HRA- House Rent Allowance

b). EA- Entertainment Allowance
c). Special Allowance

III]. FULLY EXEMPT FROM TAX:

a). Foreign Allowance To Govt.

Employees b). Allowances From UNO
c). Allowances Paid To Judges Of High Court

 HOUSE RENT ALLOWANCE:

House rent allowance is U/S 10(13A).
The assesee can get deduction subject to the least of the following;
a). 40% of the salary and 50% of the salary for employees residing in METRO
CITIES. b). Excess of rent paid over 10% of salary
c). Actual HRA received

NOTE:
SALARY= same as leave encashment.

 ENTERTAINMENT ALLOWANCE(included in salaries and

then deducted){sec16(ii)}:-
The least or the following is exempt;
i). Rs. 5000 ii).
20% of salary
iii). Actual Entertainment Allowance received [EA]

NOTE: For a non-govt. employee entertainment allowance is fully taxable.

21
12

22
SPECIAL ALLOWANCES:

I]. OFFICIAL ALLOWANCES:

These allowances are fully exempt from tax to the exempt of actual
expenditure.
a). Transfer Allowance
b). Daily Allowance c).
Uniform Allowance d).
Helper Allowance

II]. PERSONAL ALLOWANCE:

These allowances are exempt from tax on the following
basis; a). Transport Allowance (Rs.800 p.m. is exempt from tax).
b). Children Education Allowance (it is exempt upto Rs.100 month,upto maximum of two
children )
c). Children Hostel Accommodation Allowance(exempt upto Rs.300/month,upto
maximum of two children
d). Running Flight Allowance(this allowance is paid to an employee of a transport system
to meet his personal expenditure provided he does not receive daily allowance). It is
exempt upto 70% of such allowance or Rs. 6000 whichever is lower.

PERQUISITES:
PERQUISITES EXEMPTED FOR ALL EMPLOYEES:-
a). Free medical facility or reimbursement of medical expenditure for treatment
from a private or unrecognized hospital is exempt from tax upto Rs.15000/annum.
b). Free refreshments supplied by the employer to employee during office hours is
exempt from tax ,free meal is exempt from tax upto Rs.50/meal.
c). Free education provided by the employer from its own resources is exempt
from tax upto 1000/month/child.
d). Free recreational facilities provided by employer to the employee is fully
exempt from tax.
e). Provision of telephone at residence including the mobile phone given by the
employer to the employee to be used for official duties is fully exempt from tax.
f). Cost of refresher course attended by the employee and higher education
expenses in India or abroad is fully exempt from tax.
g). Transfer of movable assets without any consideration to the employee is fully
exempted from tax provided such moveable assets have been used by the employer for
the past 10 years.
h). Interest free loan given to the employee (provided the total amount of loan
does not exceed Rs.20,000) is exempt from tax. If the loan exceeds Rs.20000 then the
interest or concessional interest is taxable on the basis of SBI rate of interest.
i) Gifts in kind of value exceeding Rs.5000 only is taxable. Cash/cheque gifts
fully taxable..
j)RENT FREE ACCOMODATION [RFA]:
a). For govt. employees the value of RFA is based on the amount determined as
per govt. rules. In case it is a furnished accommodation 10% of the original cost if
furnitures or hire charges will be added to the amount as per govt. rules.
23
13

24
 b). For a non-govt. employee the taxable value of perquisite is determined as per
the following rule: --
Population of city as per Where accomodation is Where accomodation is
2001 census where owned by the employer taken on lease/rent by
accomodation is the employer.
provided.

More than 25 lakhs 15% of the salary Amount of rent

paid/payable or 15% of
salary which ever is less.

More than 10 lakhs but 10% of salary Amount of rent

not less than 25 lakhs paid/payable or 15% of
salary which ever is less.

Less than 10 lakhs 7.5% of the salary Amount of rent

paid/payable or 15% of
salary which ever is less.

If the accommodation is the furnished accomodation then 10% of cost

of assets or furnitures or hire charges will be added to the above value.

NOTE: For the purpose of RFA BAS

Salary = BASIC +DA (if it is a part of salary for the purpose of computing
retirement benefits)+ COMMISSION +BONUS+FEES+ALL TAXABLE
ALLOWANCES+LEAVE ENCASHMENT RECEIVED DURING THE
RELEVANT PREVIOUS YEAR+ANY OTHER MONETARY PAYMENT.

k)HOTEL ACCOMODATION:
Hotel accomodation is provided to the employee and is taxed in the
following manner:
a). It is provided for a total period of less than 15 days in the relevant previous year it is
fully exempt from tax.
b). If it is provided beyond 15 days it is taxable in the following
manner i). 24% of the salary
ii). Hotel bill payable by the employer whichever is less.

l) CONCESSIONAL RENT ACOMODATION:

The taxable value will be calculated as below:
Find out the value if accomodation as if it is RFA. [Less]
the concessional rent paid by the employee

m)OBLIGATION OF EMPLOYEE MET BY EMPLOYER:

If any bill is issued in the name of the employee but the amount is paid by the
employer it is fully taxable as follows:
A]. LIC premium of the employee.
25
B]. Gas, electricity and water bill.

14

26
C]. Domestic servant‟s salary who is employed by the employee
D]. Club or telephone bill in the name of the employee it is fully taxable.

n)MOTOR CAR FACILITY:

MOTOR CAR FACILITY

CAR OWNED BY THE EMPLOYER CAR OWNED BY THE EMPLOYEE

Expenses paid expenses paid by expenses paid expenses paid

By employer employee by employer by employee
1 2 3
not taxable

 USEAGE OF CAR:

A. Fully official purpose.

B. Fully private purpose
C . Partly official and partly private purpose.
{1A}- EXEMPT FROM TAX
{1B}- THE TAXABLE VALUE OF PERQUISITE IS THE AGGREGATE OF THE
FOLLOWING:
 10% of the cost of car or actual hire charges. 
 Running and maintenance expenditure 
 Chauffeurs salary. 

LESS:- ANY AMOUNT COLLECTED FROM THE EMPLOYEE

{1C}- THE TAXABLE VALUE OF PERQUISTE IS DETERMINED AS FOLLOWS:

 When cc of the car does not exceed 1600cc then it is Rs. 1800 p.m. + Rs.900 p.m.
 for driver salary. 
 When the car exceeds 1600cc then it is Rs.2400 p.m. + Rs.900 p.m. for driver salary 

{2A}- IT IS NOT TAXABLE.

{2B}- THE TAXABLE VALUE OF PERQUISITE IS THE AGGREGATE OF
THE FOLLOWING:
 10% of thecosts of car or the actual hire charges. 
27
 Driver‟s salary. 

15

28
{2C}- THE TAXABLE VALUE OF PERQUISITE WILL BE DETERMINED AS
FOLLOWS:
 When the car less than 1600cc then it is Rs.600 p.m. + Rs.900 p.m. for driver salary. 
 When the car is more than 1600cc then it is Rs.900 p.m. + Rs. 900 p.m. or driver
salary. 

{3A}- IT IS NOT TAXABLE.

{3B}- THE TAXABLE VALUE OF PERQUISITE IS THE ACTUAL EXPENSES
INCURRED BY THE EMPLOYEE (-) ANY AMOUNT COLLECTED FROM
THE EMPLOYEE.
{3C}- THE TAXABLE VALUE OF PERQUISTE IS DETERMINED AS FOLLOWS:
 When cc of the car does not exceed 1600cc then it is Rs. 1800 p.m. + Rs.900 p.m. for
 driver salary. 
 When the car exceeds 1600cc then it is Rs.2400 p.m. + Rs.900 p.m. for driver
salary 

PROBLEM
Mrs. Ragini is an employee of State Bank Of India and she gives the following
information for computing her taxable salary for A.Y 2016 -2017

i. Basic salary Rs.12,500-500-18,000 from 1/01/200

ii. D.A is 15% of basic
iii. Entertainment allowance Rs.250 per month
iv. Bonus Rs.4000
v. Children education allowance for 3 children Rs.200 per child per month
vi. Travelling expenses Rs.15,000 (actual amount spent is 14,000 )
vii. She and her family took medical treatment in private hospital. And the bank has
reimbursed Rs.25,000 for this expenditure
viii. The Bank provided her accommodation by deducting Rs.1000 per month from her
salary. But the bank is paying rent of Rs.5000 per month to the land lord of the
house. Furniture costing Rs.30,000 is also provided by the bank
ix. The employee and the employer contributes 15% of her salary and D.A towards
SPF. The interest on SPF is Rs.3,300 @ 10% during the year.
x. During the bank has paid her employment tax of Rs.2000, income tax Rs.8000
and Health insurance premium Rs.1500 .

29
16

30
 Solution:

Computation of taxable salary

Assessee: Mrs.Ragini PY: 2015-16
Residential status: ordinary resident AY: 2016-17
Basic (Note1) _ 1,75,500

Bonus _ 4000

Employee‟s contribution to SPF(tax free for govt employee) _ _

Interest on SPF (tax free for govt employee) - -

Allowance:
 DA 26,325

 Children Education Allowance(200*12*3)

(-) Deduction (100*12*2)  4,800


 Entertainment Allowance(250*12)  3,000

 Travelling Allowance 
1,000
Perquisites:
 Reimbursement of medical

expenses (-) exempt upto 15,000 

10,000

 Concessional rent accommodation(Note 2) 
 19,245
 Employment tax paid by employer 
 2,000
 Income tax paid by employer 
 8,000
 Health insurance(tax free) 
_
GROSS SALARY (- ---
----------------
)Deductions u/s (16): 253870
Professional Tax
Entertainment tax
TAXABLE SALARY 2000
3000
248870

31
17

32
Note 1: Basic salary for the previous year is-
From 01.01.2007 to 31.12.2015 ( 14500*9 )= Rs.130500
From 01.01.2015 to 31.03.2016 (15000*3 ) = Rs. 45000
Total basic salary Rs.175500.

NOTE: 2
Salary for concessional rent accommodation
Basic – 1, 75, 500
Bonus - 4,000
Children education allowance – 4,800
Entertainment allowance - 3,000
Travelling - 1,000
1, 88, 300
RFA will be:
15/100 *1, 88, 300 = 28, 245
Or
5000*12 = 60000
Whichever is less 28245
(+) 10% of furniture – 3,000
31,245
(-) rent paid by the employee – 12,000
19,245 is the value of concessional furnished
accommodation

IMPORTANT QUESTIONS:
1. Briefly explain the income tax provisions ofvarious provident funds.
2. Briefly explain the tax treatment of leave encashment.
3. Explain the Income tax rules regarding Gratuity.
4. What are the rules for pension according to the IT Act.

33
 UNIT – 3 Income from house property:
Conditions to be fulfilled for an income to be taxed under this heading:
  There should be a building and / a land appurtenant thereto (adjacent or attached) . 
  The assessee must be the owner of the property. 
 The property must not be used by the assessee for his or her own business
or profession. 

Deemed owner:

In the following cases a person is treated as the deemed owner:

a) In case the property is transferred an individual to his / her spouse
without adequate consideration. The transferor will be the
deemed owner.
b) In case the house property is constructed by a co-operative society and
the flats or houses are given to the members then the member is the
owner.
c) In case any property is acquired under power of attorney .The holder of
such power is the deemed owner.
d) In case a self acquired property is converted into HVF property .The
transferor is the deemed owner.
e) In case of impartiblyestate of HVF the holder is the deemed owner.

Exempted Income from House Property:

I. House property income used for agricultural property.

II. House property income of a charitable trust.
III. House property income of a trade union.
IV. House property income of a politician property.
V. House property income of a local authority.
VI. House property income of a educational institution and
hospital.
VII. House property income of a approved scientific research
association.
VIII. Annual value of any one palace of an ex-ruler. IX.
House property used for own business or profession.
X. One self occupied house property.

Categories of house property:-

I. Let out house property for residential commercial purpose.

II. Self occupied house property for residential purpose.
III. Deemed to be let out.
34
IV. Partly let out and partly self occupied.
19

35
 Computation of taxable income from let out House property (HP)

Gross Annual Value (GAV) Xx

x
(-) municipal taxes paid by assessee during the P.Y.
xxx
Net Annual Value (NAV)
(-) deduction U/S 24:- xxx
a) Standard deduction @ 30% of NAV Xxx
b) Interest on borrowed capital (for house) xxx
xxx
Income from house property
xxx

Computation of Gross Annual Value(GAV):-

Step Particulars Selection Amt(Rs)

Municipal Rental Value (or)

Fair rental value whichever is higher
Notional rent xxx
Notional rent (0r)
Standard rent whichever is lower
Expected rent xxx
Expected rent(or)
Actual rent whichever is higher
GAV before vacancy period loss xxx
(-)vacancy period loss _
------------------
GROSS ANNUAL VALUE -
xxxxxxxxxxxx
x

Actual rent = annual rent –unrealized rent received – cost of common facilities.
Municipal rental value:-
The municipal corporation conducts periodical survey of house properties in their local
limits for the purpose of levying taxes. The value thus determined by the municipality is
called municipal rental value.
Fair rental value:-
Fair rental value refers to the rent of a similar type of the house in the house in the some
locality
Standard rent:-
The rent fixed under the rent control act is called standard rent.
Vacancy period:-
It refers to the rent for the period during which the let out house property has remained
vacant in the relevant previous year.
36
20

37
PROBLEM:
1. Calculate GAV from the following particulars.

Annual rent Rs.8500 per month

Municipal value Rs.65000 per annum
Fair rental value RS.69000 per annum
Standard rent Rs. 55000 per annum
The assessee could not realise one month rent and the house also remained
vacant for 3 months during the previous year 2015-16.

Solution:-

Computation of GAV
Assessee: P.Y:
Residential status:
A.Y:
step Particulars selection amount

1. Municipal rental value 65,000

or
Fair rental value 69,000
Notional rent 69,000
2. Notional rent 69,000
or
Standard rent 55,000
Expected rent 55,000
3. Expected rent 55,000
or
Actual rent(8,500*12)-8500 93,500
GAV before vacancy period loss 93,500
(-)vacancy period loss(8,500*3) 25,500

GAV 68,000

Interest on borrowed capital:-

It has two parts:
a. Interest for current previous year(2012-13) which is fully exempt, and
b. Interest for the pre-construction period (PCP) which is allowed in five equal
annual instalments starting from the previous year in which construction was
completed.
Where, PCP (Pre-construction period)
st
It starts on the date of borrowing the loan up to repayment of loan or 31
march immediately prior to the date of completion of construction, whichever
is earlier.

38
39
Computation Of Income Of a Self Occupied House Property.

GAV Nil
(-)Municipal tax -
NAV Nil
(-)Deduction u/s 24
a. Standard deductions nil
b. Interest on borrowed capital xxx xxx
Income from house property xxx

NOTE:-
1. The maximum interest on loan is Rs.1,50,000 if the following conditions are satisfied
th
a. If the loan is borrowed on or after 11 April(99) i.e.1/4/99
b. The loan is taken for construction or acquisition of house property.
c. The construction is complete within 3years from the end of the previous year
in which loan was taken.
2. The maximum (ceiling) interest on loan is Rs.30,000. If the following conditions
are satisfied:
a. The loan is taken before 1/4/1999.
b. The loan is taken for the purpose of repair renewal or reconstruction of the house.
3. There is no limit on the interest on loan for a let – out house property.

Partly let –Out , partly self occupied house property

  Period :- 
Where a house is self occupied for a part of the year and let out for the
remaining part of the year. Then the benefit of self- occupied house
property will not be available and the entire house will be treated as
completely let out throughout the year. 



  Portion:- 
Where a house property consists of two or more residential units (different
floors) then one of them will be treated as self occupied house property
throughout the year and the remaining units will be treated as let out house
property. 

40
22

41
 PROBLEM
1. Mr. Kishore is the owner of three houses. From the following particulars of his
property compute taxable income from house property for the A.Y 2016-17

particulars House1 House2 House3

1 year of construction 1996 2000 2002

2 purpose Let out to Self Let out for a
a bank occupied residence
3 actual rent received 30,000 pa ------- 24,000 pa
4 municipal value 32,000 28,000 30,000
5 municipal tax paid
by the owner 1,200 1,000 3,000
6 municipal tax paid
by the tenant 2,000 ----- ------
7 interest on loan
taken for renewal
ofthe house Nil 7,000 5,000

Solution:-
House 1(let out)
GAV
Municipal value 32,000
Fair rental value -----------
 Notional rent 32,000

Notional rent 32,000

Standard rent -------
 Expected rent 32,000
Expected rent 32,000
Actual rent 30,000
GAV 32,000

Computation of Income from HOUSE 1 (let out to bank):

GAV = 32,000
(-) municipal tax 1,200
NAV 30,800
(-) Deductions U/S 24
i)Standard deduction [30,800*30\100] 9,240
ii) Interest on borrowed capital -------- 9240
Taxable income from House1 let out 21,560

42
23

43
House 2 self occupied

GAV nil
(-)Municipal tax ------
NAV nil
(-)Deduction u/s 24
a) Standard Deduction -----
b) Interest on
borrowed capital 7,000 -----------
Income from self occupied house property ( 7,000)

House 3 let out

GAV
Municipal value 30,000
Fair rental value --------
 Notional rent 30,000
Notional rent 30,000
Standard rent -------
 Expected rent 30,000
Expected rent 30,000
Actual rent 24,000
GAV 30,000

Computation of income fromHouse 3(let out for residence)

GAV 30,000
(-)Municipal tax 3,000
NAV 27,000
(-)Deductions u/s 24
i)Standard deduction
[27,000*30/100] 8,100
ii)Interest on Borrowed capital 5,000 13100
Taxable income from House 3 let out 13,900
Taxable Income from House Property is
House 1 21,560
House 2 (7,000)
House 3 13,900
Total Taxable Income from H.P 28,460

IMPORTANT QUESTIONS:

1. What is municipal valuation, fair rent, standard rent?

2. What is Annual value?
3. What is pre-construction period?
4. What is composite rent?
5. Elaborate the provision and condition of interest on borrowed capital for a self-
occupied as well as a let out house property.
6. Give examples of exempted income from house property.
44
7. What is expected rent?

45
46
47