INTRODUCTION

Computation of Income Tax

Regardless of the changes made by legislators since 1913, the basic formula for computing the
amount of tax owed has remained basically the same. To determine the amount of income tax
owed, certain deductions are taken from an individual's gross income to arrive at an adjusted
gross income, from which additional deductions are taken to arrive at the taxable income. Once
the amount of taxable income has been determined, tax rate charts determine the exact amount of
tax owed. If the amount of tax owed is less than the amount already paid through tax prepayment
or the withholding of taxes from paychecks, the taxpayer is entitled to a refund from the IRS. If
the amount of tax owed is more than what has already been paid, the taxpayer must pay the
difference to the IRS.

Calculating the gross income of restaurant employees whose income is partially derived from
gratuities left by customers has led to disputes with the IRS and employers over how much they
should contribute in federal insurance contribution act (fica) taxes. Although customers pay these
tips directly to employees, federal law deems the tips to have been wages paid by the employer
for FICA tax purposes. Employers are imputed to have paid large sums of money they never
handled and for which they no way of ascertaining the exact amount. The Supreme Court, in
United States v. Fior D'Italia, 536 U.S. 238, 122 S. Ct. 2117, 153 L. Ed. 2d 280 (2002), upheld
the IRS "aggregate method" of reporting tip income. Instead of requiring the IRS to make
individual determinations of unreported tips for each employee when calculating FICA tax, the
Court held that the IRS could make employers report their gross sales on a monthly statement to
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help determine tip income. Employees also must report their tip income monthly on a form. The
IRS then uses these two pieces of information to calculate what the employer needs to contribute
in FICA tax.

Gross Income The first step in computing the amount of tax liability is the determination of gross
income. Gross income is defined as "all income from whatever source derived," whether from
personal services, business activities, or capital assets (property owned for personal or business
purposes). Compensation for services in the form of money, wages, tips, salaries, bonuses, fees,
and commissions constitutes income. Problems in defining income often arise when a taxpayer
realizes a benefit or compensation that is not in the form of money.

An example of such compensation is the fringe benefits an employee receives from an employer.
The Internal Revenue Code defines these benefits as income and places the burden on the
employee to demonstrate why they should be excluded from gross income. Discounts on the
employer's products and other items of minimal value to the employer are usually not considered
income to the employee. These benefits (which include airline tickets at nominal cost for airline
employees and merchandise discounts for department store employees) are usually of great value
to the employee but do not cost much for the employer to provide, and build good relationships
between the employee and the employer. As long as the value to the employer is small and the
benefit generates goodwill, it usually is not deemed to be taxable to the employee.

The value of meals and lodging provided to an employee and paid for by an employer is not
considered income to the employee if the meals and lodging are furnished on the business
premises of the employer for the employer's convenience (as when an apartment building owner
provides a rent-free apartment for a caretaker who is required to live on the premises). However,
a cash allowance for meals or lodging that is given to an employee as part of a compensation
package is considered compensation, and is counted as gross income. An employer's payment for
a health club membership is also included in gross income, as are payments to an employee in
the form of stock. An amount contributed by an employer to a pension, qualified stock bonus,
profit-sharing, Annuity,or bond purchase plan in which the employee participates is not
considered income to the employee at the time the contribution is made, but will be taxed when
the employee receives payment from the plan. Medical insurance premiums paid by an employer
are generally not considered income to the employee. Although military pay is taxable income,
veterans' benefits for education, disability and pension payments, and veterans' insurance
proceeds and dividends are not included in gross income.

Other sources of income directly increase the wealth of the taxpayer and are taxable. These
sources commonly include interest earned on bank accounts; dividends; rents; royalties from
copyrights, Trademarks, and Patents; proceeds from life insurance if paid for a reason other than
the death of the insured; annuities; discharge from the obligation to pay a debt owed (the amount
discharged is considered income to the debtor); recovery of a previously deductible item, which
gives rise to income only to the extent the previous deduction produced a tax benefit (this is
commonly referred to as the tax benefit rule and is most often used when a taxpayer has
recovered a previously deducted bad debt or previously deducted taxes); gambling winnings;
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lottery winnings; found property; and income from illegal sources. Income from prizes and
awards is taxable unless the prize or award is made primarily in recognition of religious,
charitable, scientific, educational, artistic, literary, or civic achievement; the recipient was
chosen, without any action on his or her part, to enter the selection process; and the recipient is
not required to render substantial future services as a condition to receiving the prize or award.
For example, recipients of Nobel Prizes meet these criteria and are not taxed on the prize money
they receive.

In some situations a taxpayer's wealth directly increases through income that is not included in
the determination of income tax. For example, gifts and inheritances are excluded from income
in order to encourage the Transfer of Assets within families. However, any income realized from
a gift or inheritance is considered income to the beneficiarymost notably rents, interest, and
dividends. In addition, most scholarships, fellowships, student loans, and other forms of financial
aid for education are not included in gross income, perhaps to equalize the status of students
whose education is funded by a gift or inheritance and of students who do not have the benefit of
such assistance. Cash rebates to consumers from product manufacturers and most state
Unemployment Compensation benefits are also not included in gross income.

Capital gains and losses pose special considerations in the determination of income tax liability.
Capital gains are the profits realized as a result of the sale or exchange of a capital asset. Capital
losses are the deficits realized in such transactions. Capital gains and losses are determined by
establishing a taxpayer's basis in the property. Basis is generally defined as the taxpayer's cost of
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acquiring the property. In the case of property received as a gift, the donee basically steps into
the shoes of the donor and is deemed to have the same basis in the property as did the donor.

The basis is subtracted from the amount realized by the sale or other disposition of the property,
and the difference is either a gain or a loss to the taxpayer.

Capital gains are usually included in gross income, with certain narrow exclusions, and capital
losses are generally excluded from gross income. An important exception to this favorable
treatment of capital losses occurs when the loss arises from the sale or other disposition of
property held by the taxpayer for personal use, such as a personal residence or jewelry. When a
capital gain is realized from the disposition of property held for personal use, it is included as
income even though a capital loss involving the same property cannot be excluded from income.
This apparent discrepancy is further magnified by the fact that capital losses on business or
investment property can be excluded from income. Consequently, there have been many lawsuits
over the issue of whether a personal residence, used at some point as rental property or for some
other income producing use, is deemed personal or business property for income tax purposes.

Taxpayers age 55 or older who sell a personal residence in which they have resided for a specific
amount of time can exclude their capital gains. This is a one-time exclusion, with specific dollar
limits. Consequently, if future, greater gains are anticipated, a taxpayer age 55 or older may

choose to pay the capital gains tax on a transaction that qualifies for the exclusion but produces
smaller capital gains.

GROSS TOTAL INCOME:

As per the Income Tax Act Income is Chargeable to tax under five heads, those being:
1)

Salaries

2)

Income from House Property

3)

Profits and Gains from Business or Profession

4)

Capital Gains.

How to Compute Total Income

Before filing return in the income tax department a statement showing computation of total
income is to be submitted along with the ROI. Here is given a brief presentation of Computation
of Total Income:

Particulars
a)

Income from Salaries

Basic Salary

xx

Taxable Allowances

xx

Taxable Value of Perquisites

xx

Gross Salary

xx

Less : Entertainment Allowance

xx

Professional Tax

b)

xx

Income From House Property

Gross Annual Value

xx

Less: Municipal Taxes paid

Annual Value

xx

Less: Deduction u/s 24

c)

xx

xx

xx

Profits and Gains of Business

or Profession
Net Profit as per P/L A/c

xxx

Add: Amount shown as expenses

but not allowed

xx
xxx

Less: Expenses allowed but not

claimed.

xx
xxx

Add: Incomes not shown in the P/L

A/c but taxable

xx
xxx

Less: Incomes shown in the P/L

A/c but not taxable

d)

xx

Capital Gains
Sale Consideration

xxx

Less: Expenses on transfer

Net Sale Consideration

xx
xxx

Less: Cost of acquisition/improve.

Capital Gains
Less: Exemptions (if any)

e)

xxx

xx
xxx
xx

xxx

Income From Other Sources

Gross Total Income

Less: Deduction u/s 80CCC to 80U
Total Income

xx

xxx
xx
xxx

DEFINITIONS
ASSESSMENT YEAR
Assessment year means the period of twelve months starting from April 1 of every year and
ending on March 31 of the year. The period of assessment year is fixed by statute. Income of
previous year of an assessee is taxed during the following assessment year at the rates prescribed
for such assessment year by the relevant Finance Act.

ASSESSES
Assesses means a person by whom any tax or any other sum of money (i.e., penalty or interest) is
payable under the Act.

GROSS TOTAL INCOME

Income of a person is computed under the heads of Salaries, Income from house property, Profits
and gains of business or profession, Capital gains and Income from other sources. The aggregate
income under these five heads is termed as "gross total income".

TOTAL INCOME
Total income of an assessee is gross total income as reduced by amount deductible under various
sections.

ASSESSMENT
The classification of someone or something with respect to its worth

PREVIOUS YEAR

The year in which income is earned is known as previous year. It may be of 12 months or less
than that.
For e.g. Previous year in case of new business.
a) New Business is set up on 1st April 2009 - Previous Year: 1st April 2009 to 31st March 2010.
(of 12 Months)
b) New Busines is set up on 1st October 2009- Previous Year: 1st October2009 to 31st March
2010.(less than 12 months)
However, it is not mandatory that books of accounts are prepared on financial year basis i.e. 1st
April to 31st March.
But, still in this case one has to calculate the income earned during the financial year (Previous
year) for income tax purpose.

PERSON
An individual, agency, association, branch, corporation, estate, group, partnership, or other entity
or organization having legal rights and responsibilities separate from those of other entities
and/or of its owners or members. See also juridical person.

RECEIPT
Formal, written acknowledgment that something of value has been received.

INCOME
The flow of cash or cash-equivalents received from work (wage or salary), capital (interest or
profit), or land (rent).

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CHAPTER 3
INTRODUCTION OF SALARIES
The term "Salaries" includes remuneration in any form for personal service, under an expressed
or implied contract of employment or service. Section 17 of Income Tax Act defines salary to
include:Wages
Pensions or Annuities
Gratuities
Advance of Salary
Any cess, commission, perquisites or profits in lieu of or in addition to salary or wages
Any encashment of leave salary Any amount of credit to provident fund of employee to the
extent it is taxable. Therefore "Salary" includes basic salary, encashment of leave salary, advance
of salary, arrears of salary, various allowances such as dearness allowance, entertainment
allowance, house rent allowance, conveyance allowance and also includes perquisites by wayfree
housing, free car, free schooling for children of employees, etc.
The following are the essential conditions for income to be treated as salary income:There must be relation of employer and employee between the payer of income and receiver of
incomeSalary may be from more than one employerSalary may be received from not just the
present employer but also a prospective employer and in some cases even from a former
employer for example pension received from a former employerSalary income must be real and
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not fictitious there must an intention to pay and receive salary.Forgoing of salary ie if an
employee surrenders his salary to the central government, then the salary so surrendered will not
be treated as taxable income of the employee.Salary paid tax free - Tax free salary means the
salary on which income tax is borne not by the employee but by the employer. Tax free salary is
also taxable in the hands of the employee.Salary is taxable in the year of receipt or in the year of
earning of the salary income, whichever is earlier. i.e. if the salary has been received first, then it
will be taxable in the year of receipt. If it has been earned first but not yet received then it will be
taxable in the year of earning. Salary income is taxable in the hands of individuals only. No other
type of person such as a firm or HUF, companies can earn salary income.

Encashment of Leave Salary

Encashment of leave salary is fully taxable in the year of receipt in the hands of the employee.
However, when encashment of leave salary is received at the time of termination from
employment on account of retirement or superannuation, etc, from the total leave salary
encashment received, certain exemptions are made available to the employee. According in the
case of a Central or State Government employee, the amount of leave salary encashment
received as per service rules at the time of termination of employment is fully exempt from
income tax.

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DEFINITIONS
Salary is the remuneration received by or accruing to an individual, periodically, for service
rendered as a result of an express or implied contract. The actual receipt of salary in the previous
year is not material as far as its taxability is concerned.
Salary is chargeable to tax on due or receipt basis whichever is earlier. Income will be
chargeable under the head salaries, it is vital that there must be the existence of employeremployee relationship between the payer and the payee. For instance, The salary received by a
partner from his partnership firm carrying on a business is not chargeable as Salaries but as
Profits & Gains from Business or Profession Pension received by an assessee from his former
employer is taxable as Salaries whereas pension received on his death by members of his
family (Family Pension) is taxed as Income from other sources.

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BASIS OF CHARGE: [Section 15]

As per Section 15, salary consists of the following:
a. any salary due from an employer or a former employer to an assessed in the
previous year, whether actually paid or not;
b. any salary paid or allowed to him in the previous year by or on behalf of an
employer or a former employer, though not due or before it became due;
c. Any arrears of salary paid or allowed to him in the previous year by or on behalf
of an employer or a former employer, if not charged to income-tax for any earlier
previous year.
d. Once salary is taxed on due/receipt basis, it will not be taxed again on
receipt/falling due, as the case may be.
e. Any salary, bonus, commission or remuneration, by whatever name called, due to
or received by, a partner of a Firm from the firm is not regarded as salary under
this head.
f. The assessed can claim relief u/s 89(1) for arrears or advance salary.
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g. Loan from employer is not salary. Hence, advance salary is taxable, while
advance against salary is not.
PERQUISITES
Employer and Employee relationship between the payer and payee.
CHARGEABILITY
Salary is chargeable to tax on "due" or "receipt" basis whichever is earlier.
As per Sec. 17(1), salary includes the following:

Wages

Any annuity or pension

Any gratuity

Any fees, commissions, perquisites or profit in lieu of or in addition to any salary

or wages

Any advance of salary

Any payment received by an employee in respect of any period of leave not

availed by him

15

The portion of the annual accretion in any previous year to the balance at the
credit of an employee participating in a recognized provident fund to the extent it
is taxable

Transferred balance in a recognized provident fund to the extent it is taxable

Contribution by the Central Government or any other employer to the account of

an employee under a pension scheme referred to in Sec. 80CCD

DEDUCTIONS FROM SALARY {SECTION 16}

1. Entertainment Allowance {Section 16(ii)
Only Government servant can claim the following deduction
1. Rs 5000/2. 1/5th of salary (20% of salary) [Salary = Basic Pay]
3. Actual entertainment allowance received during the F.Y.
2. Professional Tax or Tax on Employment {Section 16(iii)
Professional tax paid by an employee is allowed as deduction from his Salary income

Deduction is available in the year in which professional tax is actually paid.

If Profession Tax is reimbursed by the employer, then Profession Tax reimbursed

by the employer will first be included in salary (in case of all employees whether
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specified or not) as perquisite & then the same amount is allowed as deduction u/s
16(iii) from gross salary.
Note: If an employee has paid Profession Tax of more than one year in a particular year then
entire Profession Tax so paid is allowed as deduction.
ALLOWANCES
Allowances Fully taxable in all cases:
1. City Compensatory Allowance
2. Fixed Medical Allowance
3. Tiffin/Lunch/Dinner/Refreshment Allowance
4. Servant Allowance
5. Dearness Allowance
6. Project Allowance
7. Overtime Allowance
8. Interim Allowance
9. Any Other Cash Allowance
House Rent Allowance (HRA) [Sec. 10(13A) and Rule 2A]
The least of the following is exempt
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1. 40% of salary [50% if house situated at Mumbai, Kolkata or Chennai]

2. HRA actually received in respect of the period during which the accommodation
is occupied
3. Rent Paid (Salary x 10%)
Salary = Basic + Dearness Allowance (if part of retirement benefit) + Commission (fixed % of
turnover)

Compute the income from Salary for the following information of Mr.Z for A.Y 13-14
Basic Salary 15,000

Wages

Dearness Allowances 5,000

Perquisites 3,000
Professional tax paid 900
Name Of Assessee: Mr X
Statement Of Income From Salary

Particulars

Rs

Rs

Basic Salary

80,000

DA

25,000

Perquisites

50,000

18

Wages

40,000

Less: Deductions U/S 17

Entertainment Allowances

NIL

Professional tax

10,000

Income From Salary

1,80,000

CHAPTER 4
INTRODUCTION OF HOUSE PROPERTY
Generally, only real income is taxable under the Income Tax Act. Where the law provides for
adopting notional figure as the basis of computation, it is possible that notional income also gets
taxed in view of such specific provision. For example, perquisite in respect of interest free loan
calculated at a specified rate of interest results in notional income being taxed as part of salary.
Similarly, Section 50C provides for adoption of guideline value of an immovable property as the
consideration if the real sale consideration is lesser than such value. On account of this provision,
it is possible that a notional capital gain may get taxed. On the same basis, there are certain
situations under this head of income, which renders notional income taxable.
An assessee may be taxed on a notional income in the case of let out property if fair rent exceeds
actual rent. Again, where an assessee owns more than one house property for self-occupation
purposes, the annual value of only one such house shall be taken as nil and in respect of the other
properties income shall be computed on a notional basis by deeming such properties as let out
and by adopting fair rent as the gross annual value. The computation becomes easier if the
student identifies the category of the house property for which computation is sought to be made

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and then proceeds to apply the respective methodology. The Provisions relating to this head of
income can be divided into three segments as follows :

SECTIONS 22 TO 27
Chargeability Sec. 22
Deemed Owner Sec. 27
Computation of Income
Sec. 23 to 25
Special Provisions
Sec. 25AA, 25B and 26
Although the nomenclature of this head of income uses the words House Property, the
chargeability does not confine to buildings which are residential house properties. It extends to
even other buildings such as offices, shops, godowns and other commercial premises.

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2.1

DEFINITION THE HEAD ( Section 22)

The income from Houses, Building, Bungalows, Godowns etc. is to be computed and assessed to
tax under the head INCOME FROM HOUSE PROPERTY . The income under this head is
not based upon the actual income from the Property but upon Notional Income or the Annual
Value of the Building.
Income is taxable under this head Income from House Property if the following 3 conditions
are satisfied :
Condition-1 :

The property should consists of any building or lands appurtenant thereto.

Condition-2 :

The assessee should be owner of the property.

Condition-3 :

The Property should not be used by the owner for the purpose of any business or

profession carried on by him, the profits of which are chargeable to Income Tax.

The Annual Value of a House Property is taxable as income in the hands of the owner of the

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property.

INCOME CHARGEABLE REAL & NOTIONAL

This is the only head of income, which taxes notional income (except under some circumstances
under capital gains, income from other sources). The taxability may not necessarily be of actual
rent or income received but the potential income, which the property is capable of yielding.
Accordingly, if a person owns a property which is laying vacant, notional income with respect to
such property may be liable to tax even though the owner may not have received any income
from such property. Further, if the property is let out and the rent received is less than the
potential rent which the property is capable of yielding, tax would be payable on the rent which
the owner is capable of getting and not on the actual rent (Refer heading "Determination of
annual value"). Though the head of chargeability of the income is Income from house property
what is charged under this head not only the income from house (dwelling) but all income arising
out of letting of building. In other words Sections 22 to 27 are wholly silent as to the purpose for
which a building or a house property is to be used. This head of income can be aptly described as
income from properties.

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CHARGEABILITY U/S 22
a. What is chargeable under this head?
Annual value of property consisting of any building or land appurtenant thereto except
such property which is used by assessed for the purpose of business and profession. If the
building is used by the assessed for the purposes of his business or profession, no
notional income from such building can be assessed to tax under the head "Income from
house property" and no deduction on account of notional rent is available to the assessed
while computing the income under the head "Income from business or profession".
b. In whose hand such income is taxable?
Income from house property is taxable in the hands of owner/deemed owner of the
property. Owner is a person who is entitled to receive income from property in his own
right. Income is chargeable in the hands of person even if he is not a registered owner.
Rental income from sub-letting of property acquired on monthly tenancy basis or on lease
for a period of less than twelve years may be taxable either as "Income from business or
profession", where such letting is the business of the assessed or taxable as "Income from
other sources". This would depend upon facts of each case.
PROPERTY OWNED BY CO-OWNERS (SECTION 26)
Where property consisting of buildings and lands appurtenant thereto is owned by two or more
persons and their respective shares are definite and ascertainable, such persons shall not be
assessed as an A.O.P. (Association of Persons) but the share of each person in the income from

23

the property as computed under sections 22 to 25 (i.e., income from house property) shall be
included in his total income.
Owner includes deemed owner u/s 27 as under:

Transfer to spouse without adequate consideration or to a minor child not being a

married daughter. However, if the transfer is under an agreement to live apart, such
transfer to the spouse would not be covered.
Holder of impartial estate shall be deemed to be owner of all the properties
comprised in the estate
A member of a co-operative society, company or other association to whom a
building is allotted or leased under a house building scheme of society, company or
other association as a case may be.
A person who is allowed to take or retain possession of any building or part thereof
in part performance of a contract of the nature referred to in section 53A of the
Transfer of Property Act,1882 (4 of 1882).
A person who acquires any lease rights of not less than twelve years (excluding any
rights by way of a lease from month to month or for a period not exceeding one
year)
Official assignee can be treated as owner for the purpose of section 22 except when the receiver
is appointed by court.

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INCOME FROM PROPERTIES UNDER THE PERVIEW OF THE HEAD "INCOME

FROM HOUSE PROPERTY"
a. Predominantly, only income from letting out of building or land appurtenant thereto is
taxable under the head "Income from house property". Accordingly, if letting out is of a
bungalow along with the garden surrounding it, the income of the entire bungalow along
with land appurtenant thereto; i.e., the garden would be taxed under this head. If the
letting out is only of the vacant land, the rent received from such letting out of land is not
taxable under the head "Income from house property". It may be taxable under the head
"Income from business or profession" if the business of the assessed is to let out land or
may be taxable as "Income from other sources" if letting out of land is not the business of
the assessed. Further if composite rent is received for property as well as services and
amenities, the annual value of such property is assessable under section 22 and profits
arising from services and amenities is chargeable to tax under section 28; i.e., business
income or under section 56; i.e., income from other sources.
b. Rental income from letting out of residential and commercial buildings is covered under
this head of income. Where property constitutes stock in trade of business or where
business of assessed is to let out house property, income is covered under the head profits
and gains of Business & Profession. Further if letting out is subservient to the main
business the annual value will not be chargeable u/s. 22 rather it will be chargeable under
profits and gains of Business & Profession.

25

c. Where an assessed let machinery, plant or furniture and also buildings, and the letting out
of buildings is inseparable from the letting of the machinery, plant or furniture, the
income from such letting, if it is not chargeable to tax under the head "Income from
business or profession" would be taxable under the head "Income from other sources" .
Refer Section 56(2) (iii). The Humble Supreme Court has in the case of Shamburg
Investments (P.) Ltd. vs. CIT (2003) 263 ITR 143 (SC) held that income from letting out would
be taxable under the head "Income from house property" primarily on the ground that letting of
building was a primary object with additional right to use furniture, etc.
DETERMINATION OF ANNUAL VALUE
For determining the annual value, one has to first determine the gross annual value (GAV) which
is the higher of :
a. The sum for which the property might reasonably be expected to let from year to
year. In cases of properties where Standard rent has been fixed, such sum cannot
exceed the standard rent fixed (Refer Sheila Hashish vs. CIT [1981] 7 Taxman 1
(SC) & Amole Ram Kholo vs. CIT [1981] 7 Taxman 51 (SC)). However where
property let was vacant during the whole or part of the previous year and rent
actually received or receivable is less than expected rent, then rent actually
received or receivable is taken as GAV.
b. Where property is actually let out and the rent received or receivable is more than
the amount determined in (a) above, the annual value would be the actual rent
received.
26

Note: Following amounts are not added to the GAV

Amount of municipal tax realized from tenant

Notional interest on amount received towards rent/security deposit from

the tenant

Repairs carried out by the tenant.

ANNUAL VALUE TO BE TAKEN AS NIL IN CERTAIN CASES

a. The annual value of a property which is in occupation of the owner for the purposes of
his residence would be considered to be nil if he does not derive any other benefit from
the said residential house. If the owner has more than one house for the purposes of his
residence, the annual value of any one of such houses, at his option, would be considered
to be nil. Notional income of other residential houses would be liable to tax. In such case
owner may choose to consider the annual value nil (for computation purposes) in respect
of the one property at his option.
b. Similarly, if the assessed is owner of only one residential house which he is unable to
occupy on account of his employment, business or profession carried on at any other
place and on account of which he has to reside at that other place in a building not owned
by him, the annual value of such house shall be nil.

27

DETERMINATION OF NET ANNUAL VALUE (NAV)

The following amounts are required to be reduced while determining the net annual value :
a. Any taxes levied by any local authority, which are liable to be paid by the owner,
only on actual payment thereof during the previous year; and
b. The unrealizable rent subject to satisfaction of conditions prescribed under Rule 4.
Amount of unrealized rent shall be equal to the amount of rent payable but not
paid by a tenant of the assessed and so proved to be lost and irrecoverable where,

the tenancy is bona fide

the defaulting tenant has vacated, or steps have been taken to compel him
to vacate the property

the defaulting tenant is not in occupation of any other property of the

assessed

The assessed has taken all reasonable steps to institute legal proceedings
for the recovery of the unpaid rent or satisfies the Assessing Officer that
legal proceedings would be useless.

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UNREALISED RENT REALISED SUBSEQUENTLY SEC. 25AA

The entire amount of unrealized rent received in the PY shall be chargeable to tax in the
year in which such amount is received. (The deduction u/s 23/24 shall not be allowed if
the unrealized rent pertaining to period up to AY 2001-02 & deduction u/s 24(1)(x) in
respect thereof was allowed in earlier years.)

Unrealized rent received subsequently is chargeable to tax even if the house property is
not owned by the assessed in the year of such recovery.

ARREARS OF RENT RECEIVED S. 25B

Where any arrears of rent is received which was not taxed earlier, such rent shall be assessed
under the head "Income from house property" in the year in which such arrears are received i.e.
taxable on receipt basis. The arrears would be taxable under this head irrespective of the fact
whether the assessed is the owner of the buildings in the year in which such arrears are received.
A deduction of 30% on account of repairs on the arrears of rent received would be allowed in the
year in which such arrears are taxable.

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COMPUTATION OF INCOME FROM HOUSE PROPERTY IN NUT SHELL

Particulars

Type of Property
SelfOccupied
Let-Out Property
House
u/s. 23(1)
Property u/s.
23(2)
Amt. Rs.

Amt.
Rs.

Amt Amt.
. Rs. Rs.

Deemed to
be Let-Out
Property u/s.
23(4)
Amt Amt.
. Rs. Rs.

(i) Reasonably Expected Rent

XXX

NIL

XXX

(ii) Actual rent received or

receivable

XXX

NIL

NIL

Gross Annual Value (GAV)

XXX

NIL

XXX

1. (i) or,
2. (ii)>(i), then (ii) or,
3. (ii)<(i) due to vacancy then
(ii)
Less Municipal Taxes paid to
local authority by the owner

(XXX)

NIL

(XXX
)

1. Net Annual Value(NAV)

XXX

NIL

XXX

Less: Deduction u/s. 24

(a) 30% of NAV

XXX

NIL

XX
X

(b) Interest on loans as allowed

XXX

XX

XX
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2. Total Deductions (a)+(b)

(XXX)

(XXX
)

(XXX
)

A. Income from House Property

(1-2)

XXX

(XXX
)

XXX

B. Add
Unrealised
Rent
Received subject to conditions of
deduction u/s. 23/24

XXX

NIL

NIL

C. Add Arrears of Rent Received XXX

NIL

NIL

(XXX)
Less: 30% of arrears of Rent

Total Income from HP(A+B+C

XXX

XXX

NIL

NIL

XXX

NIL

NIL

XXX

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DEDUCTIONS ALLOWED WHILE COMPUTING INCOME UNDER THIS HEAD

The following deductions shall be allowed from the annual value u/s. 24:
a. 30% of the annual value as computed.
b. Interest paid/payable on borrowed capital acquired for the purpose of acquisition,
construction, repairs, renewals or reconstruction of house property subject to
conditions and limits as mentioned herein after.

Interest for the period prior to acquisition or construction of the premises

would be deductible in five equal installments starting from the year in
which property is acquired or constructed.

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For Example ;
Mr. Rajan constructed a house property for which he borrowed a loan of Rs.2 lakhs at 12% per
annum on 1.10.1999. The house property has been let-out for Rs.20,000 per month. Municipal
taxes paid during the previous year is Rs.7,000. Repairs incurred Rs.12,500. Insurance
premium due for the year but outstanding is Rs.1,500. Collection charges incurred is Rs.100
per month.
Name Of Assessee: Mr Z
Statement Of Income From House Property

Computation of income from house property for the assessment year 2013-14
Particulars
Gross Annual Value
Less : Municipal taxes paid
Net Annual Value
Less : Deduction u/s 24
(i) 30% of Net Annual Value
(ii) Interest on Loan
Income from House Property

Amount
Rs.

69,900
24,000

Amount
Rs.
2,40,000
7,000
2,33,000

93,900
139,100
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Computation of total income & tax liability

Computation Of Tax Liability Of Mr. X For A.Y 13-14
Income From Hose Property Rs. 1,39,100 , Income From Salary 1,80,000
He received accured interst on NSC was Rs. 3,000 He also contributed in PPF was Rs10,000
He spend Rs.35,000 on his handicapped dependent brother.
Name Of Assessee: Mr Z
Computation Of Total Income
P.Y 2012-2013
Particular
Income From House Property
Income From Other Source Rs. 2,64,500.
Gross Total Income
(-) Deduction Under Chapter VI A
1. Sec 80C: Specified Investment
Accured int on NSC
Contribution to PPF
2. Sec 80DD: Handicapped Dependent Relative

A.Y 2013-2014
Rs

3,000
10,000

Rs
1,39,100
1,80,000
3,19,100

-13000
-50000
34

Net Taxable Income

2,56,100

,
Computation Of Tax Liability
Rs
Tax on Rs. 2,56,100
(+) Education cess & HSC@3%
Tax liability

5610
168.3
5778.3

Bibliography
http://en.wikipedia.org
www.google.co.in

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