TAXATION

Part 1 : BASIC CONCEPTS : INCOME TAX ACT

Assessment Year (AY) [Sec.2(9)] – means the period starting from April 1 and ending
on March 31 of the next year. AY 2002-03 commences on April 1,2002 and will end on
March 31,2003 .

AY is the year in which the income of the previous year can be accurately assessed at the
rates prescribed by the relevant Finance Act.

Previous Year (PY) [Sec. 3] – Income earned in a year is taxable in the next year. The
year in which income is earned is known as the PY and the next year in which the income
is taxable is known as the assessment year.

Previous year is the financial year (FY) immediately preceding the assessment year (AY)
except in case of a newly set-up business / profession . In the case of a newly set-up
business/profession or as source of income newly coming into existence , the first PY is
the period commencing from the date of setting up of business/profession and ending the
immediately following March 31. Thus in such cases the first PY is a period of 12
months or less and can never exceed 12 months. The second and subsequent PYs are
always of 12 months each from April to March.

FY 2001 – 02 = AY 2002 - 03

Income earned by an individual during the PY 2001-02 is taxable in the immediately

following AY 2002-03 at the rates applicable for the AY 2002-03.

Circumstances when income of the PY is not taxable in the immediately following AY

or circumstances under which the income of the year is assessed, calculated and taxed
within the same year –
1. Income of non-resident from shipping
2. Income of persons leaving India either permanently or for a long period of time
3. Income of bodies formed for short duration
4. Income of a person trying to alienate his assets with a view to avoiding payment
of tax
5. Income of a discontinued business

These exceptions have been incorporated in order to ensure smooth collection of income
tax from the aforesaid tax payers who may not be traceable if tax is assessed in the
normal assessment manner.

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Assessee [ Sec. 2(7) ] means a person

1. by whom income-tax or any other sum of money is payable under the Act
2. on whom any proceeding under the Act has been taken for assessment of his income
or the amount of refund due to him.
3. who is assessable in respect of income or loss of another person
4. who is deemed to be an Assessee, or an Assessee in default under the provisions of
the Act.

Assessment is computation of taxable income and tax payable on the taxable income.

Person [Sec.2(31)] includes

1. An individual
2. A HUF ( Hindu Undivided Family )
3. A company
4. A firm
5. An association of persons or a body of individuals, whether incorporated or not
6. A local authority and
7. Every artificial juridical person not falling within any of the preceding categories
These are seven categories of persons chargeable to tax under the Act. The aforesaid is
definition is inclusive and not exhaustive. Therefore, any person , not falling in the
above-mentioned seven categories , may still fall in the four corners of the term “person”
and accordingly may be liable to tax under section 4.

Examples – Mumbai University Artificial juridical person

DCM Ltd. A Company
Mumbai Municipal Corporation A local authority
Taxmann Publications(P).Ltd. A Company
Housing Co-operative societies An association of persons
XY and Co. of X & Y A firm
A joint family of X, Mrs. X and sons A&B HUF
X & Y who are legal heirs of Z An association of
persons
( Z died in 1996 and X & Y carry on
his business without entering into
partnership)

INCOME – As per section 14, income of a person is computed under the following five
heads - Income from Salary
Income from House Property
Profits and Gains from business / profession

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Income from capital gains
Income from other sources

The aggregate income under these heads is termed as “gross total income”. Gross Total
Income is means the total income computed in accordance with the provisions of the Act
before making any deductions under Sections 80CCC to 80U.
What is regarded as “income” under the IT Act ?

Income as defined in Section 2(24) is inclusive and not exhaustive. Therefor the term
“income” not only includes those things which are included in the Section 2 (24) but also
includes such things which the term signifies, according to its general and natural
meaning.

The term “income” includes

1. Profits and gains

2. Dividends
3. Voluntary contributions received by a trust created wholly or partly for charitable
or religious purposes or by an institution established wholly or partly for such
purposes. Contributions to the corpus of the trust is not an income.
4. The value of any benefit or perquisites
i. in lieu of salary
ii. Obtained from a company by a Director or person who has
substantial interest in the company or by a relative of a director or
such person.
iii. Obtained by any representative assessee or beneficiary, or any
amount paid by the representative assessee for the benefit of the
beneficiary.
iv. arising from business or exercise of profession
5. Any special allowance or benefit specially granted to the assessee to meet his
expenses wholly, necessarily and exclusively for the performance of his duties.
6. Any allowance granted to the assessee either to meet his personal expenses at the
place where he performs his duties or to compensate him for the increased cost of
living.
7. Any Capital gains.
8. Profit arising out of settlement of Insurance claims
9. Winnings from lotteries, cross-word puzzles, horse races, card games and other
games of any sort.
10. any sum received by any taxpayer from his employees as contributions to any
fund for welfare of such employees
11. any sum received under a Keyman Insurance Policy including bonus.
12. any sum referred to in section 28 i.e. Business Income BSES PCI

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PRINCIPLES GOVERNING THE CONCEPT OF INCOME ( RD RID RAM

GLD PART RTS)

Regular and definite source – The term ‘income’ connotes a periodical monetary return
coming in with some sort of regularity or expected regularity from definite sources.

Different forms of Income – Income may be received in cash or in kind . When income
is received in kind, its valuation is to be made according to the rules prescribed in the IT
rules or otherwise on the basis of market value.

Receipts vs. Accrual – Income arises either on receipt basis or on accrual basis. Income
may accrue to a tax payer without its actual receipt or is deemed to accrue or arise to a
person without its actual accrual or receipt.

Illegal Income – The Income tax law does not make any distinction between income
accrued or arisen from a legal source or tainted with illegality.

Disputed Title – Income tax assessment cannot be held up or postponed merely because
of existence of a dispute regarding the title of the income.

Relief or reimbursement of expenses not treated as income – reimbursement of actual

traveling expenses to an employee is not an income.

Application of income vs. Diversion of income by overriding title – Where by an

obligation , the income is required to be applied to discharge the obligation after such
income reaches the assessee, the same is merely an “application of income’’ and is
chargeable to tax. Conversely, if the income is diverted before it reaches the assessee , it
is “diversion of income” and is not taxable.
Example – X & Y prepare an article for a magazine on the agreement that
remuneration will be shared equally. As per the practice of the magazine
publisher the entire remuneration is paid to the first author. X receives Rs.2000 as
the entire remuneration, a half of which later on paid by X to Y. The payment of
Rs.1000 by X to Y is diversion of income by overriding title . The taxable
income of X will be Rs. 1000. Any expenditure or investment by X out of his
income of Rs.1000 will be an application of income .

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Mutual benefit – A surplus arising to a mutual concern cannot be regarded as income

chargeable to tax. A body of individuals, raising contribution to a common fund for the
mutual benefit of the members, cannot be said to have earned an income when it finds
that it has overcharged members and some portion of the contribution raised may safely
be refunded.

Gifts – of personal nature is not income and hence not liable to income tax.

Loss - Income includes loss i.e. negative income , can be carried over for 8 years

Devaluation of currency – If any assessee receives extra money on account of

devaluation of currency , it is taxable.

Pin Money – received by wife for her dress / personal expenses and small savings made
by a woman out of money received from her husband for meeting household expenses is
not treated as her income.

Appropriation of payment between capital and interest – If principle amount is

returned then it is not taxable, but if appropriated against interest then it is taxable.

Revenue Receipts vs Capital Receipts - A revenue receipt is taxable as income unless

it is expressly exempt under the Act. On the other hand, a capital receipt is generally
exempt from tax unless it is expressly taxable.

Temporary and permanent Income – For the purpose of income-tax there is no

distinction between temporary and permanent income. Even temporary income is taxable.

Income should be Real and not fictional – A person cannot make a profit by trading
with himself or out of transfer of funds or assets from one pocket to another. Likewise
income cannot accrue or arise at the time of revaluation of assets.

Same income cannot be taxed Twice

Sports Award – In case of a sportsman, who is a professional, the award received by him
is in the nature of a benefit in exercise of his profession and, therefore, it is chargeable to
tax. In the case of a non-professional sportsman, the award received by him is in the
nature of a gift and/or personal testimonial and is not liable to tax.

CAPITAL RECEIPTS AND REVENUE RECEIPTS

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Receipts are of two types - capital receipts and revenue receipts. The distinction between
the two are that Capital receipts are exempt from tax unless they are expressly taxable
( for instance, capital gains are taxable u/s 45 even if they are capital receipts) and
revenue receipts are taxable , unless they are expressly exempt from tax ( for instance,
income exempt under section 10 ).

As the Act does not define these terms , one has to depend on the natural meaning of the
concepts as well as decide the cases.

Circulating capital and fixed capital – a receipt on account of circulating capital ( read
working capital) is a revenue receipt, whereas a receipt on account of fixed capital is a
capital receipt.

Receipt in the hands o the recipient is material – In order to determine whether a

receipt is capital or revenue in nature, one has to by its nature in the hands of the
recipient . The source from which the payment is made, has no bearing on the question.

Payer’s motive irrelevant - The motive of the payer is not relevant while deciding
whether the particular receipt is revenue or capital in nature.

Receipt in lieu of source of Income – A receipt in lieu of source of income is capital

receipt.
Example – compensation for loss of employment

A receipt in lieu of income is revenue receipt.

Example – compensation for temporary disablement.
Lump sum payment – Fact that the payment is lump sum, large or periodic in nature is
not relevant in determining the capital or revenue nature of the income

Nature of receipt under the company law irrelevant while deciding whether a receipt
is capital or revenue in nature.

Compensation measured by estimated profits – it is the quality of payment that is

decisive of the character of the payment and not the method of payment or its measure.
The mere fact that compensation is measured by estimated annual profits , it cannot make
the receipt as revenue receipt.

Income of wasting assets – Profits from a capital which is exhausted or consumed

during the process of realization is chargeable to tax. Example – Income from mines or
quarries is not realization of capital consumed but is chargeable to tax as revenue receipt.

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Disallowance to persons making payment - The fact that the amount paid is not
allowed as permissible deduction in the assessment of a person making payment, cannot
determine the character of receipt in the hands of the recipient.

Insurance receipt – A receipt under a general insurance policy may be a capital receipt
if it pertains to capital assets or it may be a revenue receipt if the policy pertains to a
circulating asset. Courts have maintained a distinction between insurance against loss of
goods and insurance against loss of profits. The latter is fully taxable. Taxability of the
amount paid by an insurance company depends upon the nature of the payment and the
purpose of insurance. Where insurance is carried out for goods in which the business
deals then the same is a revenue receipt even if for loss of goods. Any payment being
accretion from business , the excess or surplus accruing for any reason may be nothing
but profits. Where however payment is made by way of insurance for loss of goods in
which the assessee does not carry on any business , then the accrual would not be arising
from business and hence not taxable under the act.

Exchange rate fallout:

If by virtue of change in the exchange rate of a currency, excess amounts realized by an

assessee engaged in the business of exporting goods, the excess amount is treated as
revenue receipt. On the other hand if foreign currency is kept as an investment or to
acquire a capital asset, the profit made due to change in the rate of exchange of the
currency is a capital receipt.

Subsidies:

If the purpose of a subsidy is to help the assessee to set up a business or complete a

project the money must be treated as having been received for capital purpose. But if
money is given to the assessee for assisting him in carrying out the business operation
and the money is given only after and conditional upon commencement of production,
such subsidy must be treated as assistance for the purpose of trade and is a revenue
receipt.

The above-mentioned are a few principles, which serve as a guiding light to determine
the nature of the receipt as per the act. a dividing line between the capital and revenue
nature of receipts does exist but at times it becomes difficult to draw one. Therefore a
decision will have to be taken in each case in the light of the facts and the surrounding
circumstances.

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CAPITAL AND REVENUE EXPENDITURE

Capital expenditures are not deductible under section 37(1).

Acquisition of fixed costs vs. Routine expenditure – capital expenditure is incurred in

acquiring, extending or improving a fixed asset, whereas revenue expenditure is incurred
in the normal course of the business.

Several Previous years vs. One previous year - Capital expenditure produces benefits
for several years whereas revenue expenditure is consumed within a previous year.

Improvement vs. maintenance – Capital expenditure makes improvements in earning

capacity of a business. Revenue expenditure, on the other hand, maintains the profit
making capacity of a business.

Non-recurring vs. recurring – Usually capital expenditure is a non-recurring outlay,

whereas revenue expenditure is a normally recurring type.

Lump sum payment vs. Periodic Payment – has no importance in determining the
nature of the expenditure.

Part 2 : RESIDENTIAL STATUS AND ITS EFFECT ON TAX INCIDENCE

Tax incidence on an assessee depends on his residential status. For instance, whether an
income, accrued to an individual outside India, is taxable in India depends upon the
residential status of the individual. Similarly, whether an income earned by a foreign
national in India (or outside India) is taxable in India, depends on the residential status of
the individual, rather than on his citizenship. Therefore, determination of the residential
status of a person is very significant in order to find out
his tax liability.

Factors considered for deciding the residential status of an individual –

1. Different taxable entities

 An individual
 A HUF
 A firm or an association of persons
 A joint stock company
 Every other person

2. Different residential status

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 Resident
i. A resident and ordinarily resident (ROR), or
ii. A resident but not ordinarily resident (RNOR)
 Non-Resident (NR)

However, a Resident individual or a HUF has to be either

• A resident and ordinarily resident (ROR), or
• A resident but not ordinarily resident (RNOR)
• A non-resident (NR)

All other assessee – a joint stock company, a firm or an association of persons and
every other person can either be resident in India or non-resident in India

3. Residential status for each previous year

Residential status of an assessee is to be determined in respect of each previous year
as it may vary from previous year to year.

4. Onus of proof of residential status lies on the assessee

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Determining Residential status of an individual ( Sec 6 )

An individual is categorized as –

 Group 1 – an Indian citizen who leaves India for the purpose of employment or
as a member of the crew of an Indian Ship.

 Group 2 – an Indian citizen or PIO (who is abroad) who comes on a visit to India
during the previous year.

 Group 3 – an individual other than those mentioned in category 1 & 2

Residential Status Determination of an Individual ( Sec 6)

An individual may be 1) Non-resident

2) Resident
2a. Resident and Ordinarily Resident (ROR)
2b. Resident but Not Ordinarily Resident (RNOR)

To determine the residential status –

Step 1 – Determine whether the individual is resident or Non-resident in India
Step 2 – If resident, then determine whether he is ROR or RNOR

BASIC CONDITIONS to test as to when the individual is Resident in India.

Under section 6(1)– an individual is said to be resident in India in any PY, if he satisfies
at least one of the following conditions –

1. Presence in India during the PY is 182 days or more

2. Presence in India during the PY is 60 days or more and 365 days or more during the
4 years preceding the relevant PY.

ADDITIONAL CONDITIONS to test as to when a resident individual is ROR in

India –
Under Section 6(6), a resident individual is treated as ROR in India if he satisfies the
following two additional conditions –

1. If he has been resident in India in at least 9 out of 10 previous years immediately

preceding the relevant PY
2. if he has been in India for a period of 730 days or more during 7 years immediately
preceding the relevant PY.

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Rules of Residence

G R O U P - 1 & 2 G R O U P - 3

P r e s e n c P e r e i n s e I n n d c P i e a r e i n s e I n n dP c i rea e i s n e I n n c dP e i r a e i n s e I n n d c i ea
d u r in g t h d eu r P i n Y g < t h d 1 e u 8 r P 2 i n Y dg >a t a hy= n s e1 d 8 P 2 < Y 1 d < 8 a 6a 2 y n0 s d d a <a y y1 s s 8 d2 u d
A N D < 3 A 6 N 5 D d >a =y s 3 d6
im m e d i a i m t e m l y e p d r ei a c t ee

N R R E S I D E NN RT N R R E S I D E N

1 . R e s id e n t in I n d ia in a 1 t l e. Ra s e t s 9 i d o e u n tt
im m e d ia t e ly p r e c e e d in gim t h m e e r d e i la e t v e al y
2 . P e r s e n c e o f a t l e a s t 72 3. 0P e d r a s y e s n i c n e
7 y e a r s im m e d i a t e ly p r e7 c y e e d a i n r sg it m h em

S a t i s S f ya t bi s o f yt h o 1n e& o 2 r n o n e S o a f t i 1s S f y &a t b i 2s o f y t h o

R O R R N O R R O R R N O R

Residential Status Determination of HUF [ Sec 6(2)]

Similar to that of an Individual . If the control and Management of the affairs of a HUF is
–

Wholly in India – Resident

Partly in India and partly outside India – Resident
Wholly out of India – Non-resident

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A resident HUF is ROR in India if karta or manager of the family satisfies the following
two additional conditions –

1. If he has been resident in India in at least 9 out of 10 previous years immediately

preceding the relevant PY
2. if he has been in India for a period of 730 days or more during 7 years immediately
preceding the relevant PY.

Residential Status Determination of Firm or Association of Persons

[ Sec 6 (4) ]

If the control and Management of the affairs are –

Wholly in India – Resident

Partly in India and partly outside India – Resident
Wholly out of India – Non-resident

Residential Status Determination of a Company [ Sec 6 (3) ]

An India Company is always resident in India. A foreign company is resident in India

only if, during the PY, control and management of its affairs is situated wholly in India.

If the control and Management of the Indian Company Foreign

Company
affairs of the Company are –

Wholly in India Resident Resident

Partly in India and partly outside India Resident Non-Resident
Wholly out of India Resident Non-Resident

Residential Status Determination of every other person [ Sec 6 (4) ]

If the control and Management of his affairs are –

Wholly in India – Resident

Partly in India and partly outside India – Resident

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Wholly out of India – Non-resident

INCIDENCE OF TAX or SCOPE OF TAX ( Sec 5 )

Under the Act, incidence of tax on a taxpayer depends upon his residential status and also
on the place and time of accrual or receipt of income.

ROR RNOR NR
Income received or deemed to be received in India, Taxable Taxable Taxable
whether accrued in India or outside India
Income accruing or arising or deemed to accrue or Taxable Taxable Taxable
arise in India, whether received in India or outside
India
Income received and accrued outside India from a Taxable Taxable Non-
business controlled in or a profession set up in India Taxable
Income received and accrued outside India from a Taxable Non- Non-
business controlled from outside India or a Taxable Taxable
profession set up outside India
Income (not being from a business / profession ) Taxable Non- Non-
received and accrued outside India Taxable Taxable
Income earned and received outside India in 1998- Non- Non- Non-
99 but later on remitted to India in 2001-02 Taxable Taxable Taxable

• First two incomes are chargeable to tax in India in respect of all the assessees
irrespective of their residential status.
• The tax incidence is highest in case of ROR, as income accruing in any part of the
world attracts incidence to tax in India.
• The tax incidence is the lowest in case of non-resident, as only that income which is
accrued or received or deemed to accrue or deemed to be received in India is liable to
tax.
• In the case of an RNOR taxpayer, income is received and accrued outside India is
taxable in India only if it is derived from a business or profession controlled or set-up
in India.

Part 3 : INCOME UNDER THE HEAD SALARIES AND ITS COMPUTATION

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Sections 15,16 and 17 of the Act deal with the computation of income under the head
salaries. While arriving at the tax incidence of an employee, one has to keep in view the
provisions of the sections 7, 9 , 10, 88 and 89(1) etc.

Salary is defined as the remuneration given by the employer to the employee for services
rendered by the employee, whether the terms of the service is in writing or oral.
Employer may be an individual, firm, association of persons, company, corporation,
Central Government, State Government, public body or a local authority. Employer may
be operating in India or abroad. The employee may be a full time or a part time
employee.

Payment received by an individual other than his employer cannot be termed as salary
and , consequently such payment is not chargeable to tax under the head Salaries. Such
payments may be chargeable under the head “Profits and gains of business or profession”
or under the head “Income from other sources”.

Under Section 17(1) salary is defined to include the following –

1. Wages
2. Any annuity or pension
3. Any fees, commission, perquisites or profits in lieu of or in addition to any salary or
wages
4. Any advance salary
5. Any payment received by an employee in respect of any period of leave not availed
by him
6. The portion of the annual accretion in any PY to the balance at the credit of an
employee participating in a recognised PF to the extent it is taxable
7. Transferred balance in a recognised provident fund to the extent it is taxable.

The basis of charge of Salary Income as per Section 15 is

1. Any salary due from an employer (or former employer) to an assessee in the PY,
whether actually paid or not;
2. Any salary paid or allowed to him in the PY by or on behalf of an employer (or
former employer), though not due or before it became due;
3. Any arrears of salary paid or allowed to him in the PY by or on behalf of an employer
(or former employer), if not charged to income – tax for any earlier previous year.

In other words, the following are taxable during the PY 2001-02 –

1. Salary which becomes due during 2001-02, although it is received in a subsequent
year.
2. Salary which is received during 2001-02 , but which will become due in a subsequent
year.

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3. Any arrears of salary received during 2001-02, although it pertains to one of the
earlier years .

Features of Salary

Salary from former employer, present employer or prospective employer –

Remuneration received (or due) during the PY is chargeable to tax under the head
“Salaries” irrespective of the fact whether it is received from a former , present or
prospective employer.

Salary from more than one source – If an individual receives salary from more than
one employer during the same PY (may be due to change of employment or due to
employment with more than one employer simultaneously), salary from each source is
taxable under the head “Salaries”.

Salary Income must be real and not fictitious.

Foregoing Salary – Section 15 taxes salary on “due” basis even if it is not received. If,
therefore, an employee forgoes his salary, it does not mean that salary so foregone is not
taxable as such voluntary waiver or foregoing is an application of income.

Surrender of salary - If an employee opts to surrender his salary to the Central

Government under section 2 of the Voluntary Surrender of Salaries Act, 1961, the salary
so surrendered would be exempt from tax.

Salary paid tax-free – If salary is paid tax-free by the employer, the employee has to
include in his taxable income not only salary received but also the amount of tax paid by
the employer. It does not make any difference whether tax is paid under terms of contract
by the employer or voluntarily.

Voluntary Payments – Salary, perquisites or allowance may be given as a gift to an

employee, yet it would be taxable. The Act does not make any difference between
gratuitous payment and contractual payment.

Salary is taxable on “due” or “receipt” basis whichever is earlier – Salary is

chargeable to tax either on “due” basis or on “receipt” basis whichever is matures earlier.
For instance, if salary of 2002-03 is received in advance in 2001-02, it is included in the
total income of PY 2001-02 on “receipt” basis. On the other hand, if salary which has
become due in 2000-01 and is received in 2001-02 , is included in the total income of the
PY 2000-01 on “due” basis.

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Accounting method of the employee is not relevant as salary chargeable to tax is on

“due” basis or “receipt” basis, whichever matures earlier.

Place of accrual of salary Income [ Section9(1)]

U/s 9(1)(ii),
• Salary in respect of service rendered in India is deemed to accrue or arise in India
even if it is paid outside India or it is paid or payable after the contract of employment
in India comes to an end.
• Pension paid abroad is deemed to accrue in India, if it is paid in respect of services
rendered in India .
• Leave salary paid abroad in respect of leave earned in India is deemed to accrue or
arise in India.

U/s 9 (1) (iii)

Salary paid by the Indian Govt. to an Indian national serving abroad is deemed to accrue
or arise in India. However, allowances and perquisites are exempt from tax u/s 10(7).

Salary includes WPPPL i.e.

W – wages, pension, annuity, gratuity, commission
P – perquisites or value of perquisites
P – PF contribution
P – profit in lieu of salary
L – Leave salary

Leave Salary – Encashment of leave by surrendering leave standing to one’s credit is

known as leave salary.

Government Non-government employee

employee
During continuity of Taxable Taxable
employment
At the time of Sec 10(10AA)(i) Sec 10(10AA)(ii)
retirement or leaving Exempt from tax Exempt from tax to the extent of
employment . Section minimum of the following –
10(10AA) 1. Actual leave encashment received
2. 10 months’ average salary , or
3. Rs.2,40,000

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 Salary for the purpose of leave salary is BCD i.e. Basic, Commission and DA
 Average salary means average of salary drawn during the period of 10 months
immediately preceding the retirement/superannuation
 Provisions of Sec. 10(10AA) is applicable for employees taking voluntary retirement
from service by way of resignation
 Salary paid to legal heirs of the deceased employee in respect of privileged leave
standing to the credit of such employee at the time of his/her death is not taxable.

Gratuity [Sec. 10(10)]

Gratuity is a retirement or a gratuitous payment generally payable at the time of

cessation of employment and on the basis of duration of service.

Tax treatment
Government employees Fully exempt from tax u/s 10(10)(i)
Employees covered by Exempt from tax to the extent of minimum of the following –
the Payment of 1. 15 days’ salary based on salary last drawn fro every
Gratuity Act 1972 completed year of service or part thereof in excess of six
months.
2. Rs. 3,50,000 . or
3. Actual gratuity received
Gratuity in excess of the aforesaid limits is taxable.

 Salary means basic and DA, does not include any bonus,
commission, HRA, overtime wages and any other
allowance.
 Salary of 15 days is calculated by dividing salary last
drawn by 26 days.
Any other employee Exempt from tax to the extent of minimum of the following –
1. half month’s average salary for each completed year of
service.
2. Rs. 3,50,000 . or
3. Actual gratuity received.

 Completed years of service means any fraction of the year

will be ignored. Example – for a person completing 30
years 11 months and 29 days, the period of service will be
considered as 30 years.
 Salary includes basic and DA and excludes all other
allowances and perquisites.
 Average salary means average of salary drawn during the

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period of 10 months immediately preceding the
retirement/superannuation.

Pension [Sec. 17(1)(ii)

Pension is a periodical payment received by an employee after his retirement and is taxed
as salary. Pension received from UNO is not taxable.

Un-commuted pension is taxable.

Commuted pension is a lump sum payment in lieu of periodical payment. Mr. X gets
Rs.2000 as pension. As per service rules he commutes 25% for Rs.60,000 and gets
balance 75% i.e. Rs.1500 by way of monthly pension. The commuted pension of
Rs.60,000 is taxable as under –

 Government employee - Fully exempt u/s 10(10A)(i)

 Non-government employee –
 in case the employee receives gratuity then amount exempted is
1/3 of commuted value of full pension.
 In case the employee does not receive gratuity then the amount
exempted is ½ of commuted value of full pension.
Example – Mr. X retires from M/s BAC Co. Ltd. on 30.06.2001. He gets pension of Rs.
2000/month upto 31.01.2002. Effective 01.02.02, he gets 60% commuted for Rs. 40,800.
Calculate taxable amount.

Un-commuted pension is fully taxable and commuted pension is partly taxable.

Un-commuted pension for the period 30.06.01-31.01.02 i.e 7 months

Rs.14,000
Un-commuted pension for the period 01.02.02-31.03.02 i.e 40% of 2000x2 Rs.
1,600
Total un-commuted pension chargeable to tax Rs.15,600

Commuted value of 60% of usual pension Rs.40,800

Commuted value of full pension ( Rs.40800 x 10/6)
Rs.68,000

If X does not receive gratuity

Amount exempted is 1/2 of commuted value of full pension (1/2 x 68000)
Rs.34,000

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Amount chargeable to tax (40,800 – 34,000) Rs.
6,800

If X receives gratuity
Amount exempted is 1/3 of commuted value of full pension (1/3 x 68000)
Rs.22,667
Amount chargeable to tax (40,800 – 22,667)
Rs.18,133

Retrenchment Compensation [Sec.10(10B)]

Compensation received is exempt from tax to the extent of the lower of the following-
1. An amount calculated in accordance to the provisions of Sec. 25F(b) of the IDA-
1947; or
2. Such amount as notified by the Govt. i.e Rs.5,00,000 eff. 31.12.96 , or
3. The amount received.
Under the said Act, compensation is equal to 15 days average pay for every completed
years of service or any part thereof in excess of six months.
Compensation in excess of aforesaid limit is taxable as salary or profit in lieu of salary.

VRS Compensation [Sec.10(10C)]

Compensation is exempt from tax if following conditions are satisfied-

1. Compensation is received at the time of voluntary retirement or separation
2. It applies to an employee who has completed 10 years of service or 40 years of
age (not applicable to employees of a public sector company)
3. It applies to all employees including workers and executives of a company
excepting Directors.
4. VRS is drawn to result in downsizing manpower.
5. VRS is offered under government approved scheme.
6. Vacancies caused by the VRS is not to be filled up or the retiring employees be
inducted in another company belonging to the same management.
7. The amount receivable on VRS does not exceed the amount equivalent to 3
month’s salary for each completed year of service or salary at the time of
retirement multiplied by the balance months of service left.

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VRS exemption limit – Minimum of the three given below
1. Actual VRS received
2. Rs.5,00,000
3. 3 month’s salary for each completed year of service or salary at the time of
retirement multiplied by the balance months of service left.
Any amount in excess of the aforesaid limits is chargeable to tax.

Profits in lieu of Salary [Sec.17(3)]

Includes the following –

1. The amount of any compensation due to or received by an assessee from his
employer or former employer or in connection with the termination of his
employment.
2. The amount of any compensation due to or received by an assessee from his
employer or former employer at or in connection with the modification of the
terms and conditions of employment.
3. Any payment due or received by an assessee from his employer or former
employer except the following :
a. Gratuity exempted u/s.10(10)
b. HRA exempted u/s 10(13A)
c. Commuted pension exempted u/s 10(10A)
d. Retrenchment compensation exempted u/s 10(10B)
e. Payment from an approved Superannuation Fund u/s 10(13)
f. Payment from statutory PF or PPF
4. Any sum received under a Keyman insurance policy.
5. Any amount received prior to employment or after cessation employment.

ALLOWANCES

House Rent Allowance (HRA) [ Sec. 10(13A) and rule 2A]

Exemption in respect of HRA is regulated by rule 2A and is the least of the following –

1. The actual HRA received

2. The excess of rent paid over 10% of salary
3. An amount equal to 50 % of salary where the residential house is located in metro
cities or 40 % of salary for other cities.
Salary for this purpose means BCD i.e Basic, Commission and DA

Exemption is denied where an employee lives in his own house, or in a house for which
he does not pay any rent or pays rent which does not exceed 10% of his salary.

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Mode of computation of exemption u/s 10(13A) –the amount of exemption in respect to

HRA received by an employee depends upon :
1. “salary” of the employee
2. HRA
3. Rent paid; and
4. The place where the house is taken on rent.

Example – Mr. X resides in Chennai and gets Rs.60,000 p.a. as basic salary. He receives
Rs.10,000 p.a. as HRA. Rent paid by him is Rs.8,000 p.a. Find out taxable HRA

Out of the Rs.10,000 received as HRA, the minimum of the following will be exempted
from tax-

1. The actual HRA received – Rs. 10, 000, or

2. The excess of rent paid over 10% of salary – Rs.2,000 ( 10% of 60,000 – 8,000),
or
3. Residential house located at Chennai. Hence 50 % of Salary is Rs.30,000.
Rs.2,000 being the least is exempt from tax and hence the amount of taxable HRA is
Rs.8,000.
If Mr. X reside in a non-metro city , then also the amount of exemption will remain the
same as 40% of salary is Rs. 24,000 and is more than the excess rent paid over 10% of
salary.

Example- Mr. X resides in a metro city and gets a salary of Rs.1,00,000 p.a. and HRA of
Rs15,000 p.a.. Rent paid in different years are Rs.6,000, Rs.10,000, Rs.15,000 and
Rs.20,000. Calculate the taxable HRA.

Year Year Year Year 4

1 2 3
The actual HRA received 15,00 15,00 15,00 15,00
0 0 0 0
The excess of rent paid over 10% of salary NIL NIL 5,000 10,00
(Rs.10,000-rent paid) 0
Residential house located at metro. Hence 50 % of 50,00 50,00 50,00 50,00
Salary - 0 0 0 0
Taxability - Exempted NIL NIL 5,00 10,00
Taxable HRA 15,00 15,00 0 0
0 0 10,00 5,00
0 0

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When a person does not receive any HRA, but rent is paid by him, then U/s 80GG
benefits given are to the extent of least of the following –

1. 25 % of Salary
2. The excess of rent paid over 10% of salary
3. Rs.2,500 /- per month.

Example – Salary paid lump sum to Mr. X is Rs.1,00,000. Rent paid by him in 4 years is
Rs.10,000, Rs.15,000, Rs. 5,000 and Rs. 20,000. Calculate how much of the salary is
taxable and how much is exempted .

Year 1 Year Year 3 Year 4

2
25 % Salary 25,000 25,00 25,000 25,00
0 0
Excess rent paid over 10% NIL 5,000 NIL 10,00
salary i.e Rs.10,000 0
Rs.2,500 p.m. 30,000 30,00 30,000 30,00
0 0
Taxability NIL 5,000 NIL 10,00
Exempt 1,00,00 95,00 1,00,00 0
0 0 0 90,00
Taxable amount 0

Entertainment allowance [Sec.16(ii)] is first included in the salary income and

thereafter a deduction is given based on the following –

Government employee (Central or State) Non-Government employee

The least of the following is deductible from Entertainment allowance is not deductible
salary from the AY 2002-03 onwards
1. Rs.5,000
2. 20% of basic salary, or
3. actual amount of entertainment
allowances received.
Salary excludes any allowance, benefit or other perquisites.

Special allowances prescribed as exempt u/s10(14) and are never taxable

1. When exemption depends upon actual expenditure by the employee

a. Traveling allowance or transfer allowance

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b. Conveyance allowance
c. Daily allowance
d. Helper allowance
e. Research allowance
f. Uniform allowance

2. When exemption does not depend upon expenditure

a. Special compensatory (Hill Areas) allowance
b. Border area allowance
c. Tribal area/scheduled area allowance – Rs.200 p.m. in
MP,TN,UP,WB,Karnataka,Tripura, Assam, Bihar and Orissa.
d. Allowance for transport employees. The amount of exemption is 70% of
allowance or RS.6,000 p.m. whichever is lower.
e. Children Education allowance – exempt is limited to Rs.100 p.m. per child
subject to a maximum of two children.
f. Hostel expenditure allowance – exempt is limited to Rs.300 p.m. per child
subject to a maximum of two children.
g. Transport allowance- exempt upto Rs.800 p.m. and Rs.1600 p.m.
foremployees who are blind or orthopaedically handicapped.
h. High altitude allowance – exempt upto Rs.1060 p.m. for altitudes of 9000’
– 15000’ or Rs.1600 p.m. for altitude above 15000’.

3. Allowance to Government employees outside India [Sec.10(7)] – fully exempt

4. Allowance to High Court and Supreme Court Judges – fully exempt.
5. Allowance received from UNO – fully exempt.

Taxable Allowances are – CCA, Dearness Allowance, Tiffin allowance, Fixed medical
allowance, Servant allowance, Lunch allowance and Overtime

PERQUISITES are casual emoluments or benefit attached to an office or position in

addition to salary or wages .

Perquisites are taxable under the head “Salaries” only if they are –
 Allowed by an employer to his employee
 Allowed during the continuance of employment
 Directly dependant upon service
 Resulting in the nature of personal advantage to the employee
 Derived by virtue of employee’s authority.

Perquisites are included in the salary income only if they are received by an employee
from his employer (former, present or prospective). Perquisites received from a person

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other than employer, are taxable under the head “Profits and gains of business or
profession” or “Income from other sources”.

“Perquisites” as defined in the Section 17(2) of the Act includes the following items –
1. The value of rent free accommodation provided by the employer to the employee.
2. The value of any concessional accommodation provided by the employer to the
employee.
3. The value of any benefit provided free of cost or at concessional rate to a
specified employee.
4. Any sum paid by the employer in respect of any obligation on part of the
employee, for which the payment would have been payable by the employee.
5. Individual insurance premium paid by the employer
6. The value of any other fringe benefits or amenity as may be prescribed.

A specified employee is one who –

a. who is a director
b. who has substantial interest or voting power in the company i.e. minimum
20%.
c. to whom the conditions (a) & (b) do not apply and whose income under
the head salaries exclusive of the benefits exceeds Rs.50,000. For the AY
2002-03 this limit is Rs.1,00,000.

Types of perquisites - Never taxable

Always taxable
Taxable only at the hands of the specified employee.

Never taxable perquisites

1. Provisions of medical facilities
2. Refreshments provided by the employer during working hours in office premises
3. Free meal provided by the employer during working hours not exceeding Rs.50
per meal
4. Free meals provided during working hours in a remote area or an offshore
installation.
5. Amount spent on employee training or refresher management courses.
6. Goods (manufactured by the employer) sold to the employee at concessional rate.
7. Perquisites allowed outside India by the Govt. to an Indian citizen serving abroad.
8. Employer’s contribution to staff group insurance scheme.
9. Leave travel concession
10. Free telephones including mobile phones
11. Payment of annual premium by the employer on personal accident policy effected
by him on his employee.
12. Reimbursement of expenses in respect of car – the amount exempted is
Engine Engine

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capacity<=1600 cc capacity>1600 cc
Owned by the employee Rs.1200 p.m. Rs.1600 p.m.
and used for both official
and personal use
Driver Rs.600 p.m. Rs.600 p.m.
13. Free educational facility provided in an institute owned/maintained by the
employer to the children of the employee provided the cost / value does not
exceed Rs.1000 p.m. per child with no limit on children.
14. Interest free/concessional loan not exceeding Rs.20,000
15. Gift-in-kind upto Rs.5,000 in a year
16. Computer/Laptop given (not transferred) to an employee for official/personal use.
17. Transfer of a movable asset (other than computer, electronic items, car ) without
consideration to an employee by the employer after using it for a period >=
10years.
18. Accommodation provided in a remote area.
19. Accommodation provided on transfer of an employee in a hotel for not
exceeding15 days in aggregate.
20. Interest free loan for medical treatment of the nature given in Rule 3A.
21. Initial fees paid by the employer for acquiring corporate membership of a club.
22. Use of health club, sports or similar facility provided uniformly to all employees
by the employer.
23. Periodical and journals
24. Rent-free official residence provided to a Judge of High Court or Supreme Court.
25. Rent-free furnished residence (including maintenance thereof) provided to an
official of the Parliament, a Union Minister ora Leader of the Opposition in
Parliament.
26. Conveyance facility to cover the journey between office and residence.
27. ESOPs
28. Tax on perquisites-in-kind paid by the employer (effective AY 2003-04) .

Always Taxable Perquisites [ 15 Nos. - AMCLCC GLAS OMLET ]

1. Accommodation 9. Accommodation, traveling ,

2. Movable Assets touring
3. Car 10. Servant
4. Loan (interest free or at concessional 11. Other perquisites
rate) 12. Medical facilities
5. Credit Card 13. Lunch and refreshment
6. Club Expenditure 14. Education
7. Gas, Electricity and Water 15. Transport
8. Leave Travel Concession

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1. Accommodation – includes a house, flat, farm house (or part thereof),
accommodation in a hotel, motel, service apartment, guest house.

 Rent-free unfurnished accommodation [Rule 3(1)] – for the purpose of

valuation of the perquisite, employees are divided as -
Central or State Government employees - The perquisite value is equal
to the licence fee which would have been determined by the Central or the
State Government

Private sector employees and other employees –

City Accommodation Accommodation is
owned by the taken on lease or rent
employer by the employer
Population > 4 10 % of Salary for Actual amount of lease
lakhs as per 1991 the period of rent paid
census occupation or
Population < 4 7.5% of Salary for 10% of Salary,
lakhs as per 199i the period of whichever is lower
census occupation
Salary for this purpose is Basic + DA + Commission + All other
cash allowances (Bonus, Fees, all taxable allowances and any
money payment)

 The value of all perquisites for the period April 1,2001 to September
30, 2001 may, at the option of the assessee, be computed according to
the rules applicable up to March 31,20021.
 The above are not applicable to accommodation provided in remote
area.
 When on transfer, an employee is provided with accommodation at the
new place of posting , the value of the perquisite shall be determined
with reference to only one such accommodation which has the lower
value for a period not exceeding 90 days and thereafter the value of the
perquisite shall be charged for both such accommodation.

 Rent-free furnished accommodation – First presume that the

accommodation is un-furnished and then work out the valuation as explained
above. Then add –
 10 % p.a. of the original cost of furniture, if furniture is owned by the
employer.
 actual hire charges paid or payable, if furniture is hired by the
employer.

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Furniture includes radio sets, television, refrigerator, a/c and other household
appliances.

In case of accommodation provided in Hotel (applicable from April 1, 2001) -

the perquisite is valued at
 24% of salary paid or payable for the PY, or
 actual charges paid or payable , whichever is lower for the period of stay.
Hotel accommodation provided is not chargeable to tax in case
 Period of stay in aggregate is less than 15 days
 It is provided on an employees’ transfer from one place to another.

 Accommodation provided at concessional rate – Valuation will be made as if

the employee had been provided rent-free accommodation and the amount so
computed will be reduced by the rent payable by the employee.

2. Movable Assets - used by the employee (or any member of his household )
owned by the employer or hired by the employer is valued at 10% per annum of the
actual cost of such assets or the amount of rent paid or payable by the employer.

In case of movable assets sold by an employer to its employee at nominal price – the
valuation is the actual cost less depreciation for each completed year at rates as given
below. It is taxable in the hands of the employee. Depreciation rates are :

i. Electronic items / computers – 50 % WDV

ii. Motor Car – 20 % WDV
iii. Any other – 10 % SLM

Example – An employer sold the following assets to an employee on 01.01.02

Car Computer Fridge
Purchased Date 15.5.99 15.5.99 15.5.99
Purchased Price 6,96,000 1,17,000 40,000
Sale Price to employee 2,10,000 24,270 1,000

Answer –
Car Computer Fridge
Depreciation rate 20% WDV 50% WDV 10% SLM

Value on 15.5.99 6,96,000 1,17,000 40,000

Less Depreciation amt. 1,39,200 58,500 4,000
Value on 14.5.00 5,56,800 58,500 36,000

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Less Depreciation amt. 1,11,360 29,250 4,000
Value on 14.5.01 4,45,440 29,250 32,000

Less Sale value 2,10,000 24,270 1,000

Taxable value of
the perquisite 2,35,440 4,980 31,000

The taxable value of the perquisite in case of Computer is Rs.4980 which is less than
Rs.5000 and hence may be treated as gift resulting in not chargeable to tax.

3. Car – valuation of perquisites in respect to motor car and other modes of

conveyance
provided to employees is categorized as –
 Car owned by the employee
 Car owned or hired by the employer
 Motor cycle, scooter or any other conveyance is provided by the employer
 Employee owns automotive conveyance (other than car) and R&M charges are
met or reimbursed by the employer.

Situation Perquisite Valuation Eff.

01.04.02
Car 1. R&M expenses met by Not taxable
owned by the employee
the
employee 2. R&M expenses are met
or reimbursed by the Not taxable
employer
 If the car is used
wholly for official use. Actual expenditure of the
employer is taxable
 If the car is used
wholly for private use. Portion of the expenditure for
private use is taxable
 If the car is used for
both official and private
use.

Situation Perquisite Valuation

Eff. 01.04.02

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Car owned 4. R&M expenses met by the
or hired by employee
the  If the car is used Not taxable
employer wholly for official use.

 If the car is used 10% of the depreciable value is

wholly for private use. taxable at the hands of the
employee.
 If the car is used
for both official and Engine cap. <1.6L
private use >1.6L__
Rs.400/mth.
Rs.600/mth.
Add Rs. 600 p.m. for driver if
5. R&M expenses are met or driver is provided
reimbursed by the
employer
 If the car is used
wholly for official use Not taxable

 If the car is used

wholly for private use. Actual R&M expenses + driver
remuneration + 10% p.a. of
cost of the car to the employer.
 If the car is used
Engine cap. <1.6L
for both official and
>1.6L__
private use
Rs.1200/mth.
Rs.1600/mth.
Add Rs. 600 p.m. for driver if
driver is provided.
Motor  If the car is used wholly for Not a perquisite
cycle, official use
scooter or No specific rule.
any other  If the car is used wholly for
conveyance private use.
is provided No specific rule.
by the  If the car is used for both
employer official and private use

Employee  If the car is used wholly for Not a perquisite

owns official use
automotive Actual expenditure incurred by

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conveyance  If the car is used for both the employer as reduced by
(other than official and private use Rs.600 p.m. is taxable
car) and
R&M
charges are
met or
reimbursed
by the
employer.

Example – Determine the value of perquisite in respect of motor car in the following
situation for the AY 2002-03 on the assumption that income of X under the head
“Salaries”(excluding non-monetary benefits) is (a) Rs.1,00,001 and (b) Rs. 1,00,000

Case 1: X owns a car which is wholly used for personal purposes. R&M expenses of
Rs.7860 is
being met by his employer.
Case 2 : Employer provides his own car for personal use of X. R&M expenses of
Rs.60000 is met
by the employer. WDV of the car on 01.04.01 is Rs.60,800, cost of the car to the
employer
is Rs.1,80,000 and a sum of Rs.1,800 is recovered from X.
Case 3 : Car (1200 cc) owned by the employer is provided to X . Mntnc. Expenditure of
Rs.46,000
(depreciation of car : Rs.15,000 ; salary of driver : rs.18,000; and running
expenditure of Rs.13,000) is met by the employer. Car is partly used for official
purposes (70%) and partly for personal use(30%). A sum of RS.1800 is recovered
from X.
Case 4: Car owned by the employer is provided to X. Car is wholly used for personal
purposes and
R&M expenses is met by X. The cost of the car to the employer is RS.2,46,000.
Case 5 : Car(1800cc) owned by the employer is provided to X. R&M Expenses including
driver’s
salary of Rs.48,000 is paid by the employer. Car is partly used for official and
partly for personal use. No log book is maintained and hence difficult to work out
expenditure towards private use. X pays Rs.250 p.m. for using the car.
Case 6 : Car(1800cc)is owned by X is used partly for official use and partly for personal
use.
Expenditure of RS.40,000 which includes driver’s salary of Rs. 12,000 is incurred
by the employer.

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Answer – In case the income under the head “Salaries” of X is Rs.1,00,000, then taxable
perquisite in all the cases NIL as he is a low-paid employee for the AY 2002-03.

In case the income under the head “Salaries” for the AY 2002-03 is Rs.1,00,001 then
–
 Case 1 : Taxable perquisite is Rs.7860 i.e. actual amount of expenditure incurred by
the employer.
 Case 2 : Actual R&M expenses + driver remuneration + 10% p.a. of cost of the car
to the employer - amount recovered from X (Rs.60,000+10% of 1,80,000 – Rs.1,800
= Rs.76,200).
 Case 3 : Rs. 1200 per month in respect of car and Rs.600 per month in respect of
driver. The
amount recovered from X is not deductible [(Rs.1200+Rs.600) x 12 months =
Rs.21,600].
 Case 4 : Depreciation on car i.e. 10 % of Rs.2,46,000 = Rs.24,600
 Case 5 : As engine capacity is >1.6 L, Rs.1600 per month on account of car and
Rs.600 per
month on account of driver is taxable in the hands of X. The amount recovered from
X is not deductible. [ (Rs.1600+Rs.600) x 12 = Rs.26,400 ].
 Case 6 : Amount chargeable to tax is Rs.40,000 – ( Rs. 1600 x 12 for the car and
Rs.600 x 12 for driver ) = Rs. 13,600.

4. Loans and advances (interest free or at concessional rate of interest)

In respect loan (interest free or at concessional rate) availed by the employee for
acquiring a house or conveyance and not repairs thereof , the taxable perquisite is the
amount equal to simple interest at 10% calculated on the maximum outstanding
monthly as reduced by the interest, if any , actually paid by him.

In the following cases the loan is not chargeable to tax –

 If loan is made available for medical treatment in respect of the diseases
specified in Rule 3A.
 Where the loan amount does not exceed in the aggregate of Rs.20,000.
Maximum outstanding monthly balance means the aggregate outstanding balance for
each loan as on the last day of each month.

5. Credit Card – The amount of expenses including membership fess and the annual
fees incurred by the employee or any member of his household, which is charged to a

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credit card, including any add-on card, provided by the employer shall be taken as a
perquisite chargeable to tax in the hands of the employee.

It is not chargeable in the hands of the employee if the expenses incurred are wholly
and exclusively for official purposes and the following conditions are satisfied –
 Complete details of expenditure is maintained by the employer
 It is certified by the employee that such expenditure was incurred wholly and
exclusively for performing official duties.
 The supervising authority of the employee gives a certificate for such
expenditure.
 The employee incurs an expenditure on entertainment and claims that the
same has been wholly and exclusively for performing his duties.

6. Club Expenditure – incurred by the employer (including annual or periodical fee) in

a club on behalf of the employee (or any member of his household) is chargeable to
tax in the hands of the employee. The amount is reduced by the amount, if any, paid
or recovered by the employee.

This perquisite is not chargeable to tax in the hands of the employee in the event –
 Where the employer has obtained corporate membership of the club.
 It is not chargeable in the hands of the employee if the expenses incurred are
wholly and exclusively for official purposes and the following conditions are
satisfied –
o Complete details of expenditure is maintained by the employer
o It is certified by the employee that such expenditure was incurred
wholly and exclusively for performing official duties.
o The supervising authority of the employee gives a certificate for such
expenditure.
o The employee incurs an expenditure on entertainment and claims that
the same has been wholly and exclusively for performing his duties.

7. Gas, Electricity and Water provided free of cost

Taxable on the following basis –

 Purchased by the employer from outside agency – perquisite valued at amount
equal to the amount paid by the employer to the outside agency.
 Supplied out of own source – the value of the perquisite would be determined on
the basis of manufacturing cost per unit incurred by the employer.
 Amount charged from the employee – where employee is paying any amount in
respect of such services, the amount so paid shall be deducted from the value so
arrived at.

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8. Leave Travel Concession in India [Sec.10(5)]

 Journey may be performed while in service or after retirement – the amount exempt
u/s 10(5) is the value of any travel concession or assistance received or due to the
assessee :
o From his employer for himself and his family in connection with his
proceeding on leave to any place in India.
o From his employer or former employer for himself and his family in
connection with his proceeding to any place in India after retirement from
service after termination of his service.
 Exemption cannot be more than expenditure
 Family means the spouse, children of the individual and parents / brothers/sisters of
the individual who are wholly dependant upon him.
 Only two journeys in a block of 4 years is exempt commencing from 1986. The
blocks are –
o 1986 – 1989 (i.e. January 01, 1986 to December 31,1989)
o 1990 – 1993 (i.e. January 01, 1990 to December 31,1993)
o 1994 – 1997 (i.e. January 01, 1994 to December 31,1997)
o 1998 – 2001 (i.e. January 01, 1998 to December 31,2001)
 “Carry over concession” – If an assessee has not availed LTC during any specified
four-year block periods on one of the two permitted occasions ( or on both
occasions), exemption can be claimed in the first calendar year of the next block , but
in respect of only one journey.
 No exemption can be claimed without performing any journey and incurring expenses
thereon.
 Exemption shall not be available for more than two children after October 1,1998.
 Exemption is strictly limited to the expenses on air fare, rail fare, bus fare only. No
other
expenses like scooter charges, portage etc will qualify for exemption.
 Exemption is available in respect of the shortest route.

Exemption as prescribed by the Board- conditions prescribed by the Board

Different Situations
 Where journey is performed by air
Amount exempted if journey is performed
on or after 01.10.1997
 Air economy fare of the national carrier
by the shortest route or the amount
spent, whichever is less.

 Where journey is performed by rail  A/c first class fare by the shortest route

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or
the amount spent, whichever is less.
 Where places of origin of journey and
destination are connected by rail and  A/c first class fare by the shortest route
journey is performed by any other or
mode of transport the amount spent, whichever is less.

 Where origin and destination ( or part

thereof) are not connected by rail

 Where recognised public transport

exists  First class or deluxe fare by the shortest
route or the amount spent whichever is
 Where no recognised public transport less.
exists  A/c first class fare by the shortest
route(as if the journey had been
performed by rail) or the amount
actually spent, whichever is less.

9. Accommodation, Traveling, Touring

Taxable in the hands of the employee on the following basis –

10. Servant
The value of any benefit to the employee resulting from the provision by the employer of
services of a sweeper, a gardener, a watchman or a personal attendant, shall be the actual
cost to the employer. The actual cost would be the total amount of salary paid or payable
less any amount paid by the employee for such services.

If an employer provides a rent-free accommodation (owned by the employer) to his

employee, expenses incurred by the employer for maintaining the garden and the ground
attached to the house is not taxable separately.

Domestic servant allowance given to an employee is always chargeable.

11. Other Perquisites

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A benefit or amenity not included in any of these described shall be valued at the cost to
the employer where the employer pays for the benefit or amenity. Otherwise, it would be
valued at the amount the employee could reasonably be expected to pay to acquire such
benefit or amenity from the market.

12. Medical facilities

The following shall not be treated as taxable perquisites –
 Medical facility at employer’s hospital
 Medical facility at Government’s Hospital – Reimbursement of expenditure incurred
by the employee on medical treatment of self and family.
 Treatment of prescribed disease in an approved hospital – Payments made directly
by the employer or reimbursement to the employee for treatment of self and family in
respect to prescribed disease in an approved hospital.
 Mediclaim Insurance – Group medical insurance obtained by the employer for his
employees or reimbursement of mediclaim insurance premium.
 Medical facility in private clinic – Reimbursement of medical expenses incurred by
the employee not exceeding Rs.15000 per annum.
 Medical facilities out-side India – Any expenditure incurred by the employer or
expenses reimbursed to the employee is subject to following conditions-

Perquisites not chargeable to tax Conditions to be satisfied

Medical treatment of self and Expenditure shall be excluded from
family out-side India perquisites only to the extent permitted
by RBI
Cost on travel of the employee/any Expenditure shall be excluded from
member of his family/one attendant perquisites only in cases the gross income
who accompanies the patient for computed before including the said
treatment outside India expenditure is < Rs.2 Lakhs.
Cost of stay abroad of the Expenditure shall be excluded from
employee/any member of his perquisites only to the extent permitted
family/one attendant who by RBI
accompanies the patient for
treatment outside India

13. Lunch and refreshment

Any lunch allowance, dinner allowance or refreshment allowance is given to an
employee, it is always chargeable to tax. However, the perquisites is not chargeable to tax
in following cases –

 Tea or snacks provided during office hours.

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 Free meals during working hours provided in remote area ( located 40 Kms away
from a town having population not exceeding 20,000) or in an offshore
installation.
 Free meals provided by the employer during office hours at office or through non-
transferable paid vouchers not exceeding the value of Rs.50 per meal.

14. Education
Basis of valuation –
 Training of employees – Amount spent for providing free education facilities to ,
and training of employees is not taxable.
 Fixed education allowance for children – Tax exemption is to the extent of
Rs100 per month per child for a maximum of two children. An additional
exemption is available in respect of allowance granted to meet hostel expenditure
at the rate of Rs. 300 per month per child for a maximum of two children.
 School fees paid by the employer directly to the school is a taxable perquisite.

15. Transport
The value of any benefit or amenity provided to the employee or his family free of cost or
at concessional rate by any undertaking engaged in carriage of passenger or goods shall
be valued at the prevailing market rate . Any amount if paid by the employee shall be
deducted while valuating.

PERMISSIBLE DEDUCTIONS FROM SALARY [Sec. 16]

The income chargeable under the head “Salaries” is computed after making the
following deductions –
 Standard deduction
 Entertainment allowance
 Professional tax

Standard Deduction – for the AY 2002-03 [Sec. 16(i)]

Salary Income Standard Deduction
Upto Rs. 1,50,000 1/3 of Gross salary or Rs.30,000 whichever is
Rs. 1,50,001 to Rs. less.
3,00,000 Rs.25,000
Rs. 3,00,001 to Rs. Rs.20,000
5,00,000 Nil
More than Rs.5,00,000

Taxable value of salary, allowances, perquisites is eligible for standard deductions.

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If salary is received during the PY from more than one employer, the amount of standard
deduction as specified above remains same.
Standard deduction at the above rate is available for pension income

Entertainment Allowance [Sec. 16(ii)]- is first included in the salary and is thereafter a
deduction is allowed . (explained above)

Professional Tax [Sec. 16(iii)] - levied by a State under article 276 of the constitution is
allowed as deduction.

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Part 4 : INCOME UNDER THE HEAD “INCOME FROM HOUSE PROPERTY”

The scope of income charged under this head is defined by Section 22, while
computation of income is governed by Section 23 to 27.

Basis of charge – Under the Act, the Annual Value (AV) of a property, consisting of any
buildings or lands appurtenant thereto, of which the assessee is owner, is chargeable to
tax under the head “Income from house property”.

Rental income is taxable under the head “Income from house property” if the following
conditions are satisfied –
1. The property should consist of any buildings or land appurtenant thereto
2. The assessee should be the owner of the property.
3. The property should not be used by the owner for the purpose of any business or
profession carried by him, the profits of which are chargeable to income tax.
Incidence of tax u/s 22 is attracted only if the assessee is the owner of the house property
which means legal owner as well as deemed owner. The owner may be an individual ,
firm, company, co-operative society or association of persons.

INCOME FROM SUBLETTING IS NOT TAXABLE U/S 22 – Mr. X, owner of a house

property lets out the same to Mr. Y @ Rs.10,000 /month on rent. Mr. Y sublets it to Mr.Z
@Rs.40,000 /month, then rental income of X is chargeable u/s 22. Since Y is not the
owner, his income is not taxable u/s22, but is taxable u/s 28 or as income from other
sources u/s 56.

DEEMED OWNER – Sec. 27 provides for the following persons to be treated as the
deemed owners for the purpose of charging tax on annual value under the head “Income
from house property”. 5 people are considered as deemed owners –
1. An individual who transfers his house property to his or her spouse without
adequate consideration or as a settlement to live apart .
2. An individual who transfers his house property to a minor child.
3. The holder of impartial estate i.e. which cannot be partitioned.
4. A member of co-operative society, company or other association of persons to
whom a building or part thereof is allotted or leased under a house building
scheme of the society.
5. An individual who occupies a place for 12 years or more .

Applicability of Section 22 in certain typical cases –

1. House property in a foreign country - A resident assessee is taxable u/s 22 in respect
of AV of a property located in a foreign country. A RNOR or a NR is chargeable u/s
22 in respect of income form house property situated abroad, provided income is
received in India during the PY. The AV will be computed as if the property is
situated in India.

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2. Disputed ownership pending in a court of law – the decision regarding ownership
rests with IT Department.
3. Property held as stock-in-trade – chargeable u/s 22.
When property income is not charged to tax –

1. Income from farm house [sec.2(1A)(c) read with sec.10(1)]

2. Annual value of any one palace of an ex-ruler [sec.10(19A)]
3. Property income of a local authority [sec.10(20)]
4. Property income of an authority constituted for the purpose of planning, development
or improvement of cities, towns and villages [sec.10(20A)]
5. Property income of an approved scientific research association [sec.10(21)]
6. Property income of a games association [sec.10(23)]
7. Property income of an educational institution and hospital [sec.10(23C)]
8. Property income of a trade union [sec.10(24)]
9. Property income in the case of a person resident of Ladakh [sec.10(26A)]
10. House property held for charitable purposes [sec.11]
11. Property income of a political party [sec.13A]
12. Property used for own business or profession [sec.22]
13. One self-occupied property [sec. 23(2)]

Basis of Computing income from let out house property

Gross Annual Value (GAV) xxxxxxx

Less : Municipal Taxes xxxxxxx
_______
Net Annual Value (NAV) xxxxxxx

Less : Deductions u/s 24

 Standard deductions xxxxxxx
 Interest on borrowed capital xxxxxxx

Income from house property xxxxxxx

Gross Annual Value (GAV) - Though tax under the head “Income from house
property” is a tax on income, yet it is not a tax upon rents but upon inherent capacity of a
building to yield income.
GAV depends on the following seven factors –
1. Municipal Value (MV)
2. Fair Rent (FR)
3. Standard Rent (SR)
4. Annual Rent (AR) – rent of the PY if there is no vacancy or
unrealized rent.

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5. Unrealized Rent (UR)
6. Loss of rent because of vacancy.
7. Actual Rent Received/Receivable (ARR) – after excluding unrealised
rent and rent pertaining to vacancy.

Reasonable Expected Rent (ER) - is deemed to be the sum for which the property might
reasonably be expected to be let out from year to year.
Expected Rent = maximum of MV & FR subject to maximum of SR

GAV is determined as follows –

Step 1 – Determine ER ie. Maximum of MV and FR subject to maximum of SR .

ER of a property is taken as the GAV if steps 2 & 3 are not applicable
Step 2 – When ARR (after excluding unrealised rent and rent pertaining to vacancy)> ER,
then ARR (after excluding unrealised rent and rent pertaining to vacancy) =
GAV
Step 3 – When ARR < ER  only because of vacancy, then ARR=GAV
and  partly because of vacancy and partly because of other
factors, then (ER - loss due to vacancy) = GAV
 only because of factors other than vacancy, then
ER=GAV

Under the newly inserted section 23(1)(b), the old concept of “annual rent” has been
removed. The new provision provides that where the property or any part of the property
is let out and the actual rent received or receivable (excluding unrealised rent and rent
pertaining to vacancy) is more than the expected rent , then the amount so received or
receivable shall be the gross annual value.

Problem 1 X, Y, Z. A & B separately own the following properties –

Rs. In ‘000
X Y Z A B
MV 10 10 10 10 105
5 5 5 5
FR 10 10 10 10 107
7 7 7 7
SR NA 88 88 13 135
5
ARR ( no unrealizable rent) 10 11 85 11 96
2 0 2
Period of the PY in months 12 12 12 12 12

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Period during which the property remains Nil Nil Nil Nil Nil
vacant

Compute the GAV.

Answer -

X Y Z A B
Step ER = higher of MV 107 88 88 10 107
1: & FR subject to 7
maximum of SR
Step ARR(after excluding NA as 11 NA as 11 NA as
2: unrealised rent and ARR<ER 0 ARR<ER 2 ARR<ER
rent pertaining to
vacancy)> ER, then
ARR (after excluding
unrealised rent and
rent pertaining to
vacancy) = GAV
Step NA as the house does
3: not remain vacant - - - - -
Gross Annual Value 107 11 88 11 107
0 2
Problem 2 – Find out the GAV in the following cases for the AY 2002-03
Rs. In ‘000
X Y Z
MV 95 60 60
FR 96 54 55
SR 94 78 79
ARR ( no unrealizable rent) 93 10 78
6
Answer -
X Y Z
Step ER = higher of MV & FR subject to 94 60 60
1: maximum of SR
Step ARR(after excluding unrealised rent and NA as 106 78
2: rent pertaining to vacancy)> ER, then ARR<ER
ARR (after excluding unrealised rent and
rent pertaining to vacancy) = GAV
Step NA as the house does not remain vacant
3: - - -
Gross Annual Value 94 106 78

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Problem 3 - X owns a house property , MV – Rs. ,1 45,000 ; FR – Rs.1,36,000; SR –
Rs.1,24,000. It is let out throughout the PY at Rs.8,000/month upto 15.11.2001 and at
RS.14,000/month thereafter. The property is transferred by X to Y on 31.01.2002. Find
out the GAV in the hands of X for the AY 2002-03.
Answer – GAV in the hands of X

MV from 01.04.2001 to 31.01.2002 (1,45,00012x10) 1,20,833

FR from 01.04.2001 to 31.01.2002 (1,36,00012x10) 1,33,333
SR from 01.04.2001 to 31.01.2002 (1,24,00012x10) 1,03,333
ARR (8,000 x 7.5 + 14,000 x 2.5 ) 95,000
Step ER = higher of MV & FR subject to 1,03,333
1: maximum of SR
Step ARR(after excluding unrealised rent and NA as
2: rent pertaining to vacancy)> ER, then ARR<ER
ARR (after excluding unrealised rent and
rent pertaining to vacancy) = GAV
Step NA as the house does not remain vacant
3: -
Gross Annual Value in the hands of X 1,03,333

GAV in the hands of Y

MV from 01.02.2002 to 31.03.2002 (1,45,00012x2) 24,167
FR from 01.02.2002 to 31.03.2002 (1,36,00012x2) 22,667
SR from 01.02.2002 to 31.03.2002 (1,24,00012x2) 20,667
ARR (14,000 x 2 ) 28,000
Step ER = higher of MV & FR subject to 20,667
1: maximum of SR
Step ARR(after excluding unrealised rent and 28,000
2: rent pertaining to vacancy)> ER, then
ARR (after excluding unrealised rent and
rent pertaining to vacancy) = GAV
Step NA as the house does not remain vacant
3: -
Gross Annual Value in the hands of Y 28,000
Problem No. 4- Find out the GAV in case of the following properties let out throughout
the PY for assessment year 2002-03
Rs. In ‘000
X Y Z A B
MV 60 60 60 11 112
2
FR 68 68 68 11 117

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7
SR 62 62 70 11 115
5
AR 66 66 72 12 110
0
Unrealised rent of the PY 2 6 5 50 40
Answer –

X Y Z A B
ARR (Actual rent received / receivable) 64 60 67 70 70
Step ER = higher of MV & FR subject to 62 62 68 11 115
1: maximum of SR 5
Step ARR(after excluding unrealised rent 64 NA NA NA NA
2: and rent pertaining to vacancy)> ER,
then ARR (after excluding
unrealised rent and rent pertaining to
vacancy) = GAV
Step NA as the house does not remain NA NA NA NA NA
3: vacant
Gross Annual Value 64 62 68 11 115
5

Problem 5– Find out the GAV in the case of the following properties for the assessment
year 2002-03. There is no unrealised rent.

X Y Z A B C D
MV 60 61 60 80 80 14 140
0
FR 65 66 64. 78 78 15 150
5 0
SR 59. 59 63 85 76 12 120
5 0
AR 72 57 72 72 NA 96 144
Property remains vacant ( in 1 1.5 5 3 12 10 10
number of months)
Unrealised rent Nil Nil Nil Nil Nil Nil Nil
Loss due to vacancy 6 7.12 30 18 - 80 120
5

Answer –
X Y Z A B C D

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ARR (Actual rent received / receivable) 66 49.87 42 54 Nil 16 24
5
Step ER = higher of MV & FR subject 59. 59 63 80 76 120 120
1: to maximum of SR 5
Step ARR(after excluding unrealised 66 NA NA NA NA NA NA
2: rent and rent pertaining to
vacancy)> ER, then ARR (after
excluding unrealised rent and rent
pertaining to vacancy) = GAV
Step If property remains vacant (refer NA 51.87 42 62 NIL 40 24
3: notes) 5
Gross Annual Value 66 51.87 42 62 NIL 40 24
5

Notes - Case X – As ARR > ER , Step 2 is applicable and Step 3 is not applicable
If ARR<ER
 only because of vacancy, then ARR = GAV,
 partly because of vacancy and partly because of other factors,
then (ER - loss due to vacancy) = GAV
 only because of factors other than vacancy, then ER=GAV

Case Y - Here ARR is less than ER by Rs. 9,125 (i.e. 59000-49875). This is
because of Loss of vacancy (Rs.7125) and other factors (Rs.2000).
Hence GAV =ER-Loss due to vacancy=59000-7125=51875

Case Z - Here ARR is less than ER by Rs.21000 and loss due to vacancy is
Rs.30000 and hence ARR=GAV.

Case A – Here ARR is less than ER by Rs.26000. This is because of loss due to
vacancy of Rs. 18000 and other factors amounting to Rs.8000. Hence GAV = ER-
Loss due to vacancy i.e. 80000-18000=Rs. 62000.

Case B – Rent collected is zero. This entire loss is due to vacancy, hence GAV is
zero.

Case C - Here ARR is less than ER by Rs.104000. This is because of loss due to
vacancy of Rs. 80000 and other factors amounting to Rs.24000. Hence GAV =
ER-Loss due to vacancy i.e. 120000-80000=Rs. 40000.

Case D – Here ARR is less than ER by Rs.96,000. The loss due to vacancy is
Rs120000 and hence GAV=ARR ie. Rs.24,000.

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Income from House Property

Chargeability – Section 22
Annual value (AV) of property consisting of buildings and lands appurtenant thereto
of which assessee is owner is income from house property
Provided property not used by the owner for the purposes of business or profession
carried on by him
After reducing the deduction allowable u/s 24

Basis of charge
Hence, basis of charge is annual value (AV) which is the inherent capacity of the
property to earn income
Notional basis
AV is amount for which the property might reasonably be expected to let from year to
year

Buildings and lands appurtenant

Building includes office building, godown, storehouse, warehouse, factory, shops,
cinema halls etc.
A market place having shops, buildings, godowns and open space, garden, compound is
property consisting of buildings and land appurtenant thereto
Independent and commercial income from land appurtenant the building

Owner
Meaning
Person providing funds
Includes legal owner e.g. trustee, executor etc.
Ownership in respect of superstructure enough
Conveyance and registration
Disputed ownership
Freehold and leasehold rights included
Deemed ownership – section 27

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Deemed ownership – section 27

Gift to spouse
Gift to a minor child
Holder of impartible estate
Member of a co-operative society
Person in possession of property
Person having a right by way of lease for a period not less than 12 years

User
HP may be for residential or commercial purposes
Excludes HP:
Used for own business
Let out on temporary suspension of activities
Letting subservient to main business
Letting accompanied by incidental services or facilities i.e. composite rent
Letting inseparable from letting of other assets
HP in a foreign country – taxability

Annual value – Section 23(1)(a)

AV = Gross AV – Municipal taxes paid
Reasonable letting value i.e. Notional rent
Municipal value
Fair rent
But limited to Standard rent under Rent Control Act (The owner cannot be expected
to get a rent higher than this)
OR
Actual rent received / receivable
Higher of the two

Categories of properties
HP let throughout the year
HP let but vacant for whole or any part of the year
HP let for part of the year and SOP for own residence for remaining part of the year
SOP for residence

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1.HP let throughout the year
2.HP let but vacant for whole or any part of the year

AV =
RLV (for full year)
or
Actual rent received / receivable (for full year)
whichever is higher

AV =
RLV for full year
or
Actual rent received / receivable (for part of the year)
whichever is higher
However, if vacant and due to vacancy, RR is lesser, then such lesser rent received
is AV

3. HP let for part of the year and SOP for own residence for remaining part of the year

AV =
RLV for full year
or
Actual rent received / receivable (for part of the year)
whichever is higher

In 1, 2 and 3, the unrealised rent (as per rules) is to be reduced from RR

Section 24 – Deductions
for 1, 2 and 3 (Exhaustive)
Statutory deduction @ 30 % of NAV
Interest on borrowed capital:
for acquisition, construction, repairs, renewal or reconstruction
Nexus between borrowing and acquisition etc.
Deduction on accrual basis
Meaning of borrowing – wider
Pre-acquisition interest
Interest on interest

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4. SOP for residence

1 SOP
AV = Nil unless actually let during P.Y. or some other benefit derived by the owner
More than 1
For 1 SOP (at his option) AV = Nil
Others (as per 1)
Option can be changed
2 HP v. 2 units

SOP for residence – Deductions u/s 24

Interest on borrowed capital:
Capital borrowed before 1.4.1999 for acquisition, construction, repairs, renewal or
reconstruction - Max. Rs. 30k
Capital borrowed after 1.4.1999 for repairs or renewal or reconstruction -
Max.Rs. 30k
Capital borrowed after 1.4.1999 for acquisition or construction which is completed
within 3 years of the end of F.Y. in which capital was borrowed -Max. Rs.
150k

SOP for residence – Deductions u/s 24 – continued and 25

No other deductions
Not even municipal taxes
Interest payable outside India
Recovery of unrealised rent taxable net of 30 % in the year of receipt irrespective of
whether owner of that HP or not in that P.Y.

Co-owners

Co-owners v. AOP v. Partnership

SOP
Each co-owner gets interest deduction upto the max. limit indicated
Let out
1st compute income and then distribute amongst co-owners
Negative AV / Loss from HP
AV negative only when M.T. paid are more than GAV
Loss
SOP – 30k / 150k
LOP / DEEMED LOP – No restriction

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1) R owns six houses in Delhi, details of which are as under:

Particulars I II III IV V VI__

Municipal Value 20000 24000 36000 42000 48000 45000
Fair Rental Value 24000 24000 40000 42000 50000 50000
Standard Rent N.A. 24000 50000 30000 N.A 48000
Actual Rent/
Annual Rent 18000 36000 48000 36000 54000 42000

Compute the gross annual value of the above houses.

2) X owns three houses in Delhi, particulars of which are as under :

(Amount in Rupees.)
Particulars I House II House III House
Rs. Rs. Rs. .
Date of completion 1.1.1991 1.1.1993 1.8.1991
No. of residential units 2 1 3
Municipal value 120000 72000 60000
Fair Rental Value 150000 75000 75000
Standard rent 130000 80000 72000
Rent per unit p.a. 70000 84000 21000
Municipal taxes 12000 (1) 8000 60000 (2)
(1) Due but not paid for last year paid in this year and Rs. 9000 of current year due
but not paid
(2) It includes Rs. 54000 paid as advance for next 9 years

Compute the annual value of the above three houses for the assessment year 2003-04.

3) Municipal value of a house is Rs. 90000, Fair rent, Rs. 14000, Standard rent Rs.
120000. The house property has been let for Rs. 12000 p.m. and was vacant for one
month during the previous year 2002-03. Municipal taxes paid during the year were
Rs. 40000. Compute the annual value for assessment year 2003-04.

4) Take problem no. 3. Assume the property was vacant for 3 months. Determine the
annual value for the assessment year 2003-04.

5) R has a house property in Delhi whose Municipal Value is Rs. 100000 and the Fair
Rental Value is Rs. 120000. It was self-occupied by R. from 1.4.02 to 31.7.02. W.e.f.
1.8.2002 it was let out at Rs. 9000 p.m. Compute the annual value of the house
property for the assessment year 2003-04 if the municipal taxes paid during the year
were Rs. 20000.

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6) Take problem no. 5. Determine the annual value assuming that the standard rent is
fixed at Rs. 108000.

7) R furnishes the following particular in respect of a house property owned by him in

Delhi.
Rs.
Municipal value 200000
Fair rent 240000
Actual rent (per month) 21000
Municipal tax paid during the year 20000

The tenant vacated the property on 1.11.02 and thereafter the property remained
vacant.

8) The assessee took a loan of Rs. 300000 on 1.4.99 from a bank for construction of a
house on a piece of land he owns in Delhi. The loan carries an interest @ 20% p.a.
The construction is completed on 15.6.2002. The entire loan is still outstanding.
Compute the interest allowable for the assessment year 2003-04.

9) R owns a house property in Delhi. From the particulars given below compute the
income from house property for the assessment year 2003-04.
Rs.
Municipal value 200000
Fair rent 252000
Standard rent 240000
Actual rent (p.m.) 23000
Municipal taxes 20% of municipal value
Municipal taxes paid during the year 50% of tax levied
Expenses on repairs 20000
Insurance premium 5000

R has borrowed a sum of Rs. 1000000 @ 12% p.a. on 1.7.99 and the construction of
the property was completed on 28.2.2002

10) R has a house property in Delhi whose particulars are as under:

Rs.
Municipal value 300000
Standard rent 312000
Municipal taxes paid 50000
Interest on money borrowed for acquiring the house after 1.4.99 60000
Period of occupation for own residence 2 months
Actual rent for 10 months 35000 p.m.

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Compute the income from house property for assessment ear 2003-04.

11) Take problem No. 10. What will be the answer if standard rent is not applicable?

12) R owns 3 house properties situated in Delhi. The particulars of the houses are as
under:
House I House II House
III

Municipal value 100000 150000

200000
Fair Rent 140000 180000
240000
Standard Rent 120000 200000 ----
Actual rent (p.m.) 12000 17500 ----
Period of vacancy Nil 1 month 6 months
Municipal taxes for the year 20% of M.V. 40000
50000
Municipal tax paid during the year 20000 80000
30000

Compute the income under the head house property of all the 3 properties.

13) Assessee has one house property at Vasant Kunj in Delhi. He stays with his family in
this house. The rent of similar property in the neighborhood is Rs. 56000 p.a. The
municipal valuation is Rs. 28000. Municipal taxes paid in respect of the property are Rs.
5000 (including Rs. 1000 for an earlier year). The house was constructed in 1998 with a
loan of Rs. 1200000 taken from HDFC. The yearly instalment of repayment of loan is
Rs. 230000 which includes Rs.168000 as interest. Compute the income from house
property for assessment year 2003-04.

(b) What would be the deduction on account of interest if the loan was taken on or after
1.4.99 and the property was completed in December 1999?

14) X has two houses, both of which are self-occupied. The particulars of the houses are
as under:
1st House 2nd House
(Rs.). (Rs.)
Municipal Value 60000 90000

Fair Rental Value 72000 120000

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Standard rent --- 100000
Date of completion 1.1.1992 1.10.1992
Municipal taxes 10% paid during paid during
the year the year

Suggest which house should be opted by X to be assessed as self-occupied so that his

tax liability is minimum.

15) Take problem No. 14. What will be your answer if in case of house II, the interest
on money borrowed for repair of the property during the current year is Rs. 40000.

16) Three brothers A, B and C having equal share are co-owners of a house property
consisting of six identical units, the property was constructed on 31st May, 1992.
Each of them occupies one unit for his residence and the other three units are let out
at a rent of Rs. 5000 p.m. per unit. The Municipal Value of the house property is Rs.
300000 and the Municipal Taxes are 40% of such municipal Value, which were paid
during the year. The other expenses were as follows:
Rs.
(1) Repairs 20000
(2) Collection charges 5000
(3) Insurance Premium (paid) 11000
(4) Interest payable on loan taken for construction of house 120000

One of the let out units remained vacant for three months during the year. A could not
occupy his unit for six months as he was transferred to Mumbai. He does not own any
other house. The other income of A, B and C are Rs. 50000; Rs. 60000; and Rs.
70000 respectively.

Compute the income under the head “Income from House Property” and the total
income of the three brothers for Assessment Year 2003-04.

17) R borrowed a sum of Rs.300000 on 1.6.1998 on interest @ 12% p.a. to construct

house property in Delhi. As the house property was still under construction, he
borrowed another sum of Rs. 200000 on 1.4.1999 @ 12% p.a. The property was
completed on 31.8.1999 and it was self occupied w.e.f 1.9.1999. The fair rent of
the house is Rs. 10000 p.m. R has paid Rs. 2000 as insurance premium for
insuring the house property.
(a) Compute the income under the head income from house property for the
Assessment year 2003-04
(b) What would be income if the amount borrowed on 1.4.1999 was Rs.
1200000 instead of Rs. 200000?

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18) R has a house property situated in Delhi, which consists of two units. Unit A has 60%
floor area, whereas Unit B has 40% floor area. Unit A was self-occupied by R for 8
months and w.e.f. 1.12.2002 it was let out for Rs. 10000 p.m. However this unit
remained vacant for March 2003. Unit B was also meant for self-occupied but it was
also let. Unit B has remained vacant for February & March 2003. The other
particulars of the house property were as under:
Rs.
Municipal taxes paid 40000
Insurance premium 4000
Interest on money borrowed 20000

Compute income from house property for the assessment year 2003-04.

19) R has a house property situated in Delhi. From the following particulars submitted to
you. Compute the income from house property for the assessment year 2003-04.
Rs.
Municipal valuation 90000
Fair rent 110000
Standard rent 100000
The house property was let out w.e.f 1.4.2002 for Rs. 8000 p.m. which was vacated
by tenant on 30.9.2002. It remained vacant for 2 months. W.e.f. 1.12.2002, it was let
out for Rs. 11000 p.m.

Municipal taxes paid 20% of municipal valuation

Insurance premium paid Rs. 3000
Interest on money borrowed for purchase of house property Rs. 30000

20) R owns a house property in Delhi which is let out for Rs. 10000 p.m. The municipal
value of which is Rs. 100000. The taxes are 10% of the municipal valuation R paid
during the previous year municipal tax of 6 years which relate to past 5 years as well
as for the current year. The other expenses of the property were as under: -

Rs.
Repairs 5000
Insurance premium 2000
Interest for purchase of house 11000
Ground rent due 2000
The house remained vacant for one month during the year

Compute income of R from house property for the assessment year 2003-04.

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