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MODULE - II
COMPUTATION INCOMES UNDER DIFFERENT HEADS
Salaries
Scheme of sections (15 to 17)
Salary due
Section 15 - Chargeability
Salary paid /allowed
Arrears of salary
Section 16 - Deductions
Entertainment allowance received
Professional tax
Components (9 Nos.)
Fully tax-free
Section 17 – Income from salary
Perquisites.
Always taxable
Taxable in specified
cases
Profits in lieu of salary
Compensation
Any payment
Payment
received under
key-man insurance Policy
any person before
Allowances
Entertainment allowance
employment
2. Foreign allowance
3. Medical allowance
4. Special allowance
5. Dearness allowance
6. House rent allowance
7. City compensatory allowance
8. Conveyance allowance
9. Travelling allowance
10.Transport allowance
11.Any other allowance
Amount due or
received from
joining
1.
with or after
cessation of
employment with
that person.
15(Chargeability): The following incomes are chargeable to tax under the head salary.
(i)
Any salary DUE from an employer or former employer, to an assessee, in the previous year, whether paid or
not.
(ii)
Any salary PAID or ALLOWED to him in the previous year by or on behalf of an employer or former employer;
though not due or before it becomes due to him.
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(iii)
Any ARREARS of salary paid or allowed to him in the previous year by or on behalf of an
employer or former employer; if not charged to income tax in an earlier previous year.
16(Deductions): 1. Deduction in respect of entertainment allowance received: Only Govt. employees are eligible for this deduction.
Least of the following will be allowed as deduction. (i) One fifth of basic salary (b) Rs. 5000 (c) Actual
entertainment allowance received.
2. Professional tax: Professional tax actually paid by the assessee.
17(Income from salary): (i)
Components of salary: 1 Wages 2.Annuity or pension 3.Gratuity 4. Fee, commission, perquisites, profits in lieu
of or in addition to salary 5. Advance salary (other than vehicle/housing loan) 5a. Any payment received by an
employee in respect of any period of leave not availed of by him. 6. Taxable portion of annual accretion to the
balance of a RPF. 7 Taxable portion of transferred balance to a RPF. 8. Contribution by Central Govt. to an
employee’s pension scheme.
(ii)
Perquisites: Perquisite means any casual emolument, fee or profit attached to an office or position, in addition
to salary.
Tax-free perquisites:
1. Free medical aid to the employee or to his dependent family members including reimbursement of medical expenses
and premium paid by employer on health insurance of employee. (Hospital must be a recognised public hospital in
India. If hospital is not owned by the employer or not a recognised one maximum exemption in this respect shall be Rs.
15,000. In the case of medical treatment from outside India, expenses of stay and treatment of the patient and stay
expenses of one attendant shall be exempted to the extent permitted by RBI. Expenditure on travel of patient and
attendant shall be exempted in the case of an employee whose GTI does not exceed Rs. 2 Lakhs. Medical facility
other than exempted medical facility is a perquisite taxable in specified cases only. But where the facility is in the nature
of an obligation of employee discharged by employer (Bill in the name of employee but payment made by employer), it
is a perquisite always taxable.
2. Free refreshments during working hours.
3. Free food given to employees during working hours in a remote area or in an offshore installation site as also free
or subsidised food given to all employees alike. Free food provided during working hours at office or work premises or
through non-transferable paid vouchers usable at eating joints up to an amount calculated @ Rs. 50 per meal will also
be exempted. Any excess shall be taxable in the hands of all employees as a fringe benefit. Any amount recovered from
the employee towards this perquisite also must be deducted.
4. Free refresher courses, education, training etc. to employees.
5. Free ration to personnel of armed forces.
6. Free telephone facility including mobile phone.
7. Employer’s contribution to staff group insurance scheme.
8. Employer’s contribution to employees’ personal accident policy, pension or deferred annuity scheme, superannuation
fund (not exceeding Rs. 1 Lakh in a year), RPF (Up to 12% of salary) etc.
9. Rent free house, conveyance facilities and allowances to High Court and Supreme Court judges.
10. Leave travel concession (Actual journey expenses only are allowed) if given twice in a block of 4 years.
11. Rent free house and allowances to M.Ps, M.L.As, Union misters etc.
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12. Scholarships to employees’ children.
13. Concession-interest or interest free loans to employees if the total amount of loan in a previous year does not
exceed Rs. 20000 or loan is taken for the medical treatment of specified diseases (Taxable value of interest free loan
from employer in any other case will be the sum equal to the interest computed at the rate charged per annum by SBI
as on the first day of the relevant previous year in respect of loan for the same purpose advanced by it. In the case of
concession interest loans, the difference between prescribed rate and actual rate charged is taken as perquisite value.
This is a fringe benefit and taxable in all cases.
14. Free education to employees’ children given by employer from his own resources provided the value of such benefit
does not exceed Rs. 1000 p.m. per child. (If value exceeds this limit or if the facility is provided to other household
members of the employee, it will become taxable in the hands of specified assesses. In such cases if the facility is
provided to the children of the employee, market cost of such education less (Rs. 1000 p.m. per child plus any
amount recovered from the employee) will be taken as the perquisite value. If education facility is provided to the
household members of the employee, market cost of such facility minus amount recovered from the employee will be
the perquisite value. If education facility is provided to the children or household members of the employee in an
institution other than that owned by the employer, actual expenditure incurred by employer in this respect less amount if
any, recovered from the employee will be the perquisite value). If the educational expenses of his children are met
by the employee but later reimbursed by the employer, or if school fees of family members of employee are directly
paid by the employer to the school, it is treated as an obligation of employee discharged by employer and therefore
taxable in all cases fully.
15. Facility of conveyance provided by employer from residence to place of employment and vice versa.
16. Lap tops and computers provided by employer for personal use of employee or any member of his household.
17. Residential accommodation located in a remote area provided to an employee working in an offshore site, project
execution site or mining site.
18. Periodicals and journals required for discharge of work.
19. Transfer (without consideration) of movable assets (other than cars, electronic items and computers) to employee
after using it for 10 or more years.
20. Tax on perks paid by employer.
21. Sale of goods manufactured by employer to employee at concession rate.
22. Perquisites and allowances to Govt. employees posted abroad.
23. Facility of holiday homes / guest houses maintained by employer, touring, travelling and holiday enjoyment made
available to all employees uniformly. These facilities if not uniformly provided to all employees shall be taxable as fringe
benefit in all cases. Actual expenditure incurred by the employer less amount recovered from employee towards this
facility will be the perquisite value. If these facilities are maintained by the employer himself, then, perquisite value will
be taken as the value at which similar facilities are offered by such other agencies.
24. Gift in kind by employer to employee or to the family members of the employee, if value is not more than Rs. 5000 in
the aggregate in a previous year. Gift in cash or gift cheques shall be fully taxable. In the case of gifts exceeding Rs.
5000 in the aggregate in a year, excess over Rs.5000 is taxable in the case of all assesses as a fringe benefit.
25. Recreational facilities.
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26. Value of shares or debentures given to employees free of cost under ESOP Scheme.
27. Any unauthorised use of benefits.
Perquisites taxable in all cases:
1. Rent free accommodation
2. Concession-rent accommodation
3. Obligations of employee discharged by employer (Examples are, club bill, hotel bill, medical bill, gas, electricity or
water bill of employee paid by employer, loan due from employee paid by employer, education expenses of employee’s
children paid by employer, income tax or professional tax of employee paid by employer, salary of personal attendant
appointed by employee paid by employer, legal expenses incurred to save or defend the employee).
4. Any amount expended by employer to affect a scheme of annuity or insurance on the life of the employee
5. Value of specified security or sweat equity shares allotted or transferred by employer or former employer to
employee.
6. Contribution to approved superannuation fund of the employee in excess of Rs. 1 lakh.
7. Fringe benefit/ amenity. (These include 1. Interest free / concession-interest loan 2. Use of movable assets other
than car, computer and phone 3. Transfer, without consideration, of movable assets. 4. Club facility. 5. Credit card
facility. 6. Gift/ Voucher/Token. 7. Travelling/ Touring/Accommodation. 8. Food/ Beverages.)
Perquisites taxable in specified cases only:
1. Motor car or any other automotive conveyance.
2. Gas, water, electricity
3. Education facility to the children of employee.
4. Sweeper, watchmen, gardener, personal attendant etc.
5. Transport facility provided by employer engaged in transport business.
6. Medical facilities.
7. Other perquisites not mentioned above.
In these cases the employer should provide the facility in kind. If the employer provides requisite cash for obtaining
these facilities, it shall be taxable always.
The specified cases are: 1. If provided by a company to its director employee 2. If provided by a company to one of its
employees having substantial interest in the company (Holding not less than 20% of the voting power) 3. If provided by
an employer to its employee whose total monetary emoluments under the head salary exceed Rs. 50,000 p.a.
(iii) Profits in lieu of salary: Profits in lieu of salary means an advantage or gain by receipt of payment by employee. It
mainly implies terminal benefits available to an employee.
1. Compensation due to or received by an assessee from an employer or former employer in connection with the
termination of employment or modification of the terms of employment.
2. Payment due to or received by an assessee (Not being a payment unconnected with the employment) from an
employer or former employer or from a provident fund or other fund, to the extent to which it does not constitute
assessee’s own contribution and interest thereon. All allowances come under profits in lieu of salary as per section
17(3)(2). An allowance may be defined as a fixed amount of money given periodically in addition to the salary for the
purpose of meeting some specific requirements connected with the service.
Dearness allowance – Fully taxable. House rent allowance – Partially taxable. City compensatory allowance – Fully
taxable. Conveyance allowance – Excess over actual amount spent is taxable. Foreign allowance – Fully exempted.
Entertainment allowance – Taxable but eligible for deduction. Travelling allowance – Excess over actual amount spent
is taxable. Medical allowance – Fully taxable. Special allowances – Special allowances are of two types. (i) Those,
which are granted to meet expenses wholly, necessarily and exclusively incurred in the performance of duties. U/s
10(14) such allowances are exempted to the extent to which they are actually expended in the performance of duties.
(ii) Those which are granted to meet the personal expenses of the assessee. These are exempt up to a specified limit.
For example, Children’s education allowance- Exempted, if received in India, up to Rs. 100 per child per month up to a
maximum of two children. Allowance to meet education expenses (hostel expenses) of children – Exempted, if received
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in India, up to Rs. 300 per child per month up to a maximum of two children. Transport allowance – Exempted up to
Rs.800 p.m. (In the case of blind / handicapped employees maximum Rs. 1600 p.m. Flight allowance – 70% of the
allowance received or Rs.6000 per month whichever is less.
3. Any payment received under key-man insurance policy.
4. Any amount due to or received from any person before his joining any employment with that person or after cessation
of his employment with that person.
Note: - Key-man insurance policy is a policy taken on the life of one person by another person in whose organisation the
insured plays a key role. Premium paid on such policy is chargeable as business expense by the person who has taken
the policy. If the policy sum is made payable to the insured up on maturity the same shall be chargeable to tax in the
hands of the insured as salary (precisely, profits in lieu of salary) and if it is made payable to the person who has taken
the policy it is taxable under ‘Profits and gains of business or profession’. If the maturity value is made payable to any
person other than the employer and employee, the same shall be taxable under ‘Other sources’.
VALUATION OF PERQUISITES
Rent free accommodation
In the case of Govt. employees, license fee determined by the Govt. in accordance with Govt. rules will be the perquisite
value. Here it is immaterial whether the house is owned by Govt. or hired. If the house is furnished 10% p.a.of the cost
of furniture or actual hire charges as the case may be should be added with the above value. If any amount is recovered
from the employee towards the house that should be deducted from the value to reach at the perquisite value of
concession- rent accommodation. In the case of other employees, if the house is owned by the employer valuation is
made as follows. For houses situated in cities with a population exceeding 25 Lakhs as per the 2001 census, @ 15% of
salary in respect of period of occupancy of house will be the perquisite value. For houses situated in cities with
population exceeding 10 Lakhs, but not exceeding 25 Lakhs, @ 10 % of salary in respect of period of occupancy of the
house will be the value.7.5% of salary in respect of period of occupancy will be the perquisite value in the case of other
cities. If the employer hires house, 15% of salary or actual rent paid whichever is less is the perquisite value, in all cities.
Here also if the house is furnished 10% of cost of furniture or actual hire charges will be added with the valuation. If any
amount is recovered from the employee towards the rent of the house the same should be reduced from the value.
In case employer provides accommodation (Govt. or other) to the employee in a hotel, valuation will be done in the
following manner. Where accommodation is provided on the transfer of employee and the period of stay does not
exceed 15 days, perquisite value is nil. In any other case, 24% of salary for the previous year in respect of the period of
stay in hotel or actual bill paid to the hotel whichever is less is the perquisite value. From this value, if any amount is
recovered from the employee that should be reduced.
Where on account of transfer from one place to another an employee is provided with an accommodation at the new
place of posting and retains the accommodation at the old place, perquisite value of house will be calculated for one
house, which has lower value. This benefit shall be available for a maximum period of 90 days. If he continues to
occupy both the houses after the expiry of 90 days, the value of perquisite shall be charged for both the houses with
effect from the day 90 days are over.
Motor car. (Taxable in specified cases only)
If the car is owned / hired by the employer (running and maintenance expenses also met by the employer) and is used
exclusively for official use, perquisite value nil. If car is used exclusively for personal purposes, actual running and
maintenance expenses including driver’s salary incurred by the employer + depreciation @10% p.a. of cost will be the
perquisite value. (No depreciation if the car is a hired one). Amount if any recovered from employee must be deducted
from this value. If car is used both for official and personal purposes and the running and maintenance expenses are
met by the employer, for a car up to and including 1.6 ltr. capacity, Rs.1800 p.m. and for car exceeding 1.6 ltr. capacity
Rs.2400 p.m. will be the perquisite value. Rs. 900 p.m. must be added with this if a driver is also provided by the
employer. In this case, if the running and maintenance expenses attributable to the personal use of the car are met by
the employee himself, for a car up to and including 1.6 ltr. capacity, Rs.600 p.m. and for car exceeding 1.6 ltr. capacity
Rs.900 p.m. will be the perquisite value. Rs. 900 p.m. must be added with this if a driver is also provided by the
employer. If car is owned by the employee and expenses attributable to its official use are paid or reimbursed by the
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employer, perquisite value nil. Where the reimbursement of expenses is wholly related to personal use, the actual
amount of expenditure paid or reimbursed by the employer will be the perquisite value. Where the reimbursement of
expenses is related partly to personal use and partly to official use, actual expenditure minus Rs.2400 p.m + Rs 900 p.m
towards driver’s salary will be the perquisite value for a big car and actual expenditure minus Rs.1800 p.m + Rs 900 p.m
towards driver’s salary will be the perquisite value for a small car. In case any other automotive owned by employee and
used by him both for personal and official purposes and the expenses are met by the employer, actual expenditure in
this respect minus an amount equal to Rs. 900 per month will be the perquisite value.
Gas, water, electricity (Taxable in specified cases only)
Where employer makes the supply of these from resources owned by him, perquisite value shall be taken at the
manufacturing cost per unit incurred by him. Where employer arranges these facilities from an outside agency,
perquisite value shall be the actual amount paid by employer to the supplying agency. In both these cases whatever
amount recovered from the employee towards these services should be deducted. If the electricity, gas or water
connection is in the name of the employee and employer makes payment it is a perquisite taxable in all cases as
obligation of employee discharged by employer. Actual amount is taxable.
Sweeper, gardener, watchman, personal attendant (Taxable in specified cases only)
If employee appoints and employer pays these persons, full amount paid shall be taxable in the hands of all employees.
If employer appoints these persons and wages are paid by employer perquisite value will be the actual amount
expended by employer. If any payment is made by employee towards the salary of these persons the same should be
deducted. If an employer provides a rent free house (Owned by employer) to his employee, expenses (including
gardener’s salary) incurred by the employer on maintenance of garden and ground attached to the house is not taxable
separately.
Transport facility (Taxable in specified cases only)
Free/ concessional tickets provided for the private journey of employee or his family members by an employer engaged
in transport business is a perquisite taxable in specified cases. The value at which the facility is offered by the employer
to outsiders will be the perquisite value in such cases. Amount, if any, recovered from the employee must be deducted
from that value.
Use of movable assets
It is a fringe benefit, always taxable. Perquisite value is taken as 10% p.a. of the actual cost of the asset, if the asset
belongs to the employer. If the asset is one hired by the employer, actual hire charges payable by him will be the
perquisite value. Any amount recovered from the employee towards this perquisite must be deducted from the value
determined. However, if the asset was one used by the employer for more than 10 years, perquisite value to be taken
as nil.
Transfer of movable asset
Transfer of movable assets by employer to the employee after using for 10 or more years is fully tax free. Otherwise it is
a perquisite always taxable as Fringe. The perquisite value is taken as the W.D.V. of the asset minus amount
recovered from the employee, if any. W.D.V. is to be ascertained by taking rate of depreciation at 50% in the case of
electronic items, and 20% in the case of cars, for each completed year (Using W.D.V. method of depreciation in both
cases). In the case of other assets depreciation is to be taken at 10% for each completed year, on straight lime method.
Credit card facility
This is a perquisite taxable in the hands of all employees as fringe benefit. Actual expenditure incurred by the employer
in this regard, less amount if any recovered from employee will be the perquisite value.
Club/ health club facility
This is a perquisite taxable in the in the hands of all employees as fringe benefit. Actual expenditure incurred by the
employer in this regard less, amount if any recovered from employee will be the perquisite value. However, if the facility
is wholly meant for official purpose, perquisite value is nil.
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Sweat equity shares allotted
The FMV of shares or securities thus issued will be taken as the perquisite value. In the case of issue at concessional
price, FMV of such shares less, amount recovered from the employee towards value will be the perquisite value.
Any other benefit
The value of any other benefit, amenity, right or privilege provided by employer to the employee is determined on the
basis of cost to the employer.
COMPUTATION OF TAXABLE AMOUNT OF SOME OTHER PAYMENTS FORM PART OF SALARY
1. Gratuity
Gratuity received by all Govt. employees and employees of local authorities are fully tax-free. Gratuity paid under the
Payment of Gratuity Act 1972 is tax free subject to the following limits.
(i) Actual gratuity received (ii) 15 days (7 days in the case of seasonal factories) wages for every completed year of
service or part thereof in excess of 6 months, calculated on the basis of the salary last drawn. (iii) Rs. 350000
(10,00,000 w.e.f 24.5.10) whichever is less. Wages here mean basic wages plus D.A. but nothing else. While computing
15 days wages denominator must be 26.
In the case of non-Govt. employees and employees of statutory corporations, least of the following 3 limits will be
exempted from actual gratuity received and the rest is taxed.
(i) Actual gratuity received (ii) ½ month salary for each completed year of service calculated on the basis of the average
salary for 10 months immediately preceding the month of retirement. (iii) Such limit as the Central Govt. may specify.
Present limit is Rs.350000 (10,00,000 w.e.f 24.5.10).Salary here means basic salary plus commission on sales received
by the employee if such commission is payable to the employee at a fixed percentage of sales achieved by him, but
excludes all other items. If D.A is taken for computation of service benefits that also will form part of salary.
2. Commutation of pension
Amount received by Govt. employees, employees of local authorities, public sector undertakings and statutory
corporations are fully tax-free. In the case of other employees – (i) if the employee receives gratuity, the commuted
value of 1/3rd of the pension will be exempted. (ii) If the employee receives no gratuity, the commuted value of ½ of the
pension will be exempted.
3. Encashment of earned leave
Amount received by encashment of earned leave by employees who are in service is fully taxable. Amount received by
Govt. employees by the encashment of earned leave at the time of retirement is fully tax-free. In the case of other
employees, of the total amount received least of the following is exempted and the rest is taxed. (i) Cash equivalent of
leave due at average salary (Earned leave entitlement for exemption cannot exceed 30 days for every year of service).
(ii) Actual amount received (iii) 10 months average salary (Average salary for this purpose means average salary for 10
months immediately preceding the retirement. Salary here means salary plus D.A and commission on sales.) (iv) Rs.
300000.
4. Retrenchment compensation
Least of the following 3 are exempted and the balance is taxed. (i) Actual amount of compensation received (ii) Such
amount not being less than Rs.500000 as the Central Govt. may specify in this behalf (iii) An amount calculated in
accordance with the provisions of section 25 F (b) of the Industrial Disputes Act (An amount equivalent to 15 days
average pay for every completed year of continuous service or any part thereof in excess of 6 months). Average pay
means, where employee receives monthly salary, average of last 3 months; where employee receives weekly salary,
average of last 4 completed weeks; and where employee receives daily wages, average of last 12 full working days.
5. Payment on voluntary retirement
Any payment received by an employee at the time of his voluntary retirement under VRS shall be exempted to the
extent of least of the following.
1. Amount equivalent to three months salary for each completed year of service
2. Salary at the time of retirement multiplied by the balance months of service left before the date of his retirement
3. Amount actually received
4. Rs. 5,00,000
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6. House rent allowance
Least of the following 3 limits are exempted and the rest is taxed. (i) Actual HRA received (ii) 2/5 th of salary (1/2 of
salary if the house is at Mumbai, Kolkatha, Delhi or Chennai). (iii) Excess of rent paid over 10% of salary. Salary here
means basic salary unless otherwise stated plus commission on sales achieved by the employee.
7. Annual accretion
Taxable annual accretion will consist of (i) Excess of employer’s contribution to RPF over 12% of employee’s salary
and (ii) Excess of interest credited to RPF over 9.5% p.a, on the balance standing to the credit of the employee. Salary
here means basic salary plus D.A that enters into salary plus commission on sales achieved by the employee.
8. Transferred balance
The balance of URPF, which is transferred to RPF, is called transferred balance. Taxable portion of transferred balance
will be the aggregate of annual accretions chargeable to tax for each year of existence of the URPF deeming it to be
RPF from the very beginning.
Note: - When final payment is made from an URPF, that part of the balance consisting of employer’s contribution and
interest thereon will be included in salary in the year of payment.
Note: - In the following cases, salary includes commission (Earned by the employee as a specified percentage of turn
over achieved by him) for the purpose of computation.
1. Valuation of rent free house (Commission paid monthly or on the basis of turn over, both are taken). 2. Computation
of taxable amount of gratuity (In the case of non-Govt. employees and employees of statutory corporations). 3.
Calculation of taxable HRA. 4. Calculation of taxable annual accretion. 5. Calculation of taxable amount of earned leave
encashed.
TAX IMPLICATIONS OF PROVIDENT FUNDS
The components of a P/F account balance are the following. (i) Own contribution to the fund (ii) Employer’s contribution
(In the case of contributory P/F) and (iii) Interest on the balance of P/F account. Own contribution to SPF, RPF, and
PPF qualifies for deduction u/s 80C without any limit. Contribution to an URPF does not qualify. Employer’s contribution
to SPF is wholly exempted from income tax and that to a RPF is wholly exempted up to 12% of employee’s salary. Any
excess over 12% will be included (Taxable annual accretion) in salary. Employer’s contribution to an URPF is not
included in salary. Interest on P/F account balance is wholly exempted from tax in the case of SPF and PPF. In the case
of RPF interest credited over 9.5% rate p.a will be taxable (Annual accretion), under salary. In the case of URPF interest
on own contribution is taxed under the head “Other sources”. Interest on employer’s contribution is ignored for the time
being. Amount received on refund of balance from SPF and PPF is wholly exempted from tax. In the case of RPF also it
is fully exempted but subject to certain conditions. In the case of URPF, of the total amount received, employer’s
contribution and interest thereon will be included under the head ‘salary’ in the year of refund.
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Income from house property
Scheme of sections (22 to 27)
Section 22 – Chargeability
Let-out house
Section 23 - Annual value.
Self-occupied house
Section 24 – Deductions (2 Nos.)
House partly self-occupied and partly let-out or self occupied for
part of the p.y and let-out for part of the previous year
Section 25 – Amounts not deductible
Section 25 A - Unrealised rent realised
Section 25B – Arrears of rent
Section 26 – Property owned by co-owners
Section 27 – Deemed owners of house property
22(Chargeability): The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the
owner, other than such portions of such property as he may occupy for the purpose of any business or profession
carried on by him, the profits of which are chargeable to income tax, shall be chargeable to income tax under the head
income from house property.
Note: - House property used by the assessee for his own business or profession is not taxable under this head, if the
income from such business is chargeable to income tax. If the income of the business is not taxable, being an exempted
income, the income from house property is taxable under house property. If the income from business is not taxable,
being less than the taxable limit, no tax is computed on this house property income.
23 (Annual value): The subject matter of computing income under the head house property is the “annual value” of the property. Annual
value does not mean the rent derived or the rental value. Even if the property is not let-out the notional rent or fair rent
receivable is taken as its annual value. A property can be let-out at a rent lower than its reasonable rent, but annual
value will be its reasonable value. Accordingly, the Gross annual value of a house may be the highest of the following.
Municipal rental value
Actual rental value
Fair rental value (Notional rent or rent of similar houses in the same locality)
Real rental value i.e., Defacto rent received.
Defacto rent means the amount of rent received, adjusted in respect of tenant’s obligations undertaken by the owner
and owner’s obligations undertaken by the tenant. For example, if the owner meets tenant’s obligations like
service/maintenance of lift, water pump, lighting of stairs, gardener’s wages etc. it should be deducted from rent
received. Like that, if tenant undertakes to renovate the building, a reasonable amount should be added with rent
received towards this.
But where the rent is fixed under the Rent Control Act of the state concerned, the Gross annual value cannot exceed the
standard rent so fixed (But it can be less than standard rent) except when the Real rental value is higher than the
Standard rental value. In such a situation the annual value may be determined as explained below.
Step 1. Find out the higher value of the two; FRV and MRV. Compare that with SRV and take the lower of the two as
Expected Rental Value (ERV).
Step 2. Find out the higher of the two; RRV and ERV. Take it as the Gross Annual Value.
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From the Gross Annual Value, municipal taxes and taxes levied by local authorities including service taxes like water
tax, fire tax, educational cess etc. is deducted. Only that part of the tax actually paid by the owner of the house can be
deducted. It is immaterial to which previous year the tax belongs. Balance is called Net Annual Value.
Annual value of let-out house
As per sub-section (1) of section 23 annual value of a let-out house is (a) the sum for which the property might
reasonably be expected to let from year to year or (b) where the property or any part of the property is let and the actual
rent received or receivable by the owner in respect thereof is in excess of the sum referred to in (a), the amount so
received or receivable or (c) where the property or any part of the property is let and was vacant during the whole or any
part of the previous year and owing to such vacancy the actual rent received / receivable by the owner in respect thereof
is less than the reasonable rent as per clause (a), the amount so received or receivable.
Explanation: - For the purpose of clause (b) or clause (c) the amount of actual rent received or receivable by the owner
shall not include the amount of rent the owner cannot realise, i.e. unrealised rent.
Note: - Unrealised rent is allowed to deduct subject to the following conditions.
Tenancy is bona fide.
The defaulting tenant has vacated or steps have been taken to evict him from the premises.
The defaulting tenant should not be in occupation of any other property of the assessee.
The assessee has taken reasonable step to institute legal proceedings.
The amount of unrealised rent should have finally settled as irrecoverable.
The implications of the contents of section 23(1) with its explanation may be explained as under.
 Where there is unrealised rent or / and shortfall in rent due to vacancy of let out house, determining the Gross
annual value as per the general rule, i.e., Expected rental value or Actual rental value whichever is higher,
requires some modifications with respect to such unrealised rent or vacancy.
 Where there is unrealised rent, actual rent always means amount of rent actually received excluding the amount
of unrealised rent. When there is vacancy, after determining GAV, deduction must be made towards vacancy.
 If a house property let out for full previous year remained vacant for full previous year, its Gross annual value is
taken as nil.
 If a house property let out for full previous year remained vacant for part of the previous year and the actual rent
received or receivable for the let out period is more than the Expected rental value, the actual rent received or
receivable shall be the Gross annual value.
 If a house property let out for full previous year remained vacant for part of the previous year and the actual rent
received or receivable for the let out period is less than the Expected rental value due to such vacancy, the
actual rent received or receivable shall be the Gross annual value.
 If the actual rent received or receivable is less than the Expected rental value due to a cause other than
vacancy (For example, the house comes into existence only after few months in the previous year and hence
the actual rent received is less than the Expected rental value), the above rule is not be applicable. Then
Expected rental value or Actual rent received whichever is higher will be the Gross annual value.
 In case there is unrealised rent, Gross annual value is to be determined as per the rules explained above. But
the amount of actual rent for comparison must be the actual amount of rent received excluding amount of
unrealised rent.
 In case there is vacancy period as well as unrealised rent, the Gross annual value is to be determined as per
the rules explained above. But amount of actual rent for comparison must be actual amount of rent received
excluding unrealised rent minus actual amount of rent not received due to vacancy.
Note: - In the case of a house which came into existence after some months in the previous year, comparison of values
must be based on a common period. All values (MRV, SRV, ARV etc.) for 10 months or for 12 months and the like.
Some illustrations are given below to elucidate these points.
 Actual rent Rs. 12000 p.m. Municipal valuation Rs. 180000. Then, G.A.V is Rs. 180000.
 Fair R.V Rs. 500000. Let out @ Rs. 50000 p.m. Then G.A.V. is Rs. 600000.
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M.R.V Rs. 240000. Let out @ Rs. 30000 p.m. from July 2010. For the months of April, May and June 2010, the
property was vacant. Then, G.A.V is Rs. 270000, the actual rent. Even though the property was vacant for three
months the actual rent is not less than the fair rent.
M.R.V Rs. 90000. Let out @ Rs. 7500 p.m. Tenant vacated the house on 30.9.10. For the months of October
2010 to January 2011 the flat was vacant. In February 2011 again let out @ Rs. 10000 p.m. Then, G.A.V is Rs.
65000. The ARV Rs.65000 (7500 x 6 + 10000 x 2) is less than ERV (Rs.90000) due to vacancy. If house were
not vacant for 4 months, the ARV would be Rs.95000.
M.R.V Rs.60000. Let out @ Rs. 12500 p.m. from April 2010. Interest free rental advance collected from tenant
Rs.30000.Due to financial difficulties of the tenant, no rent is received since June 2010. Attempts to evict the
tenant did not fructify. Rental advance Rs. 30000 has been adjusted towards rent due for June, July and partly
for August. The balance amount of rent is not realisable. Tenant vacated on 31st March 2011. Here, G.A.V is
Rs.60000. Actual rent Rs. 55000 (12500 x 2 + Advance 30000) is less than E.R.V. (Rs. 60000). It is not due to
vacancy. The house was occupied throughout the year. Therefore, E.R.V Rs. 60000, being the higher value
compared to A.R.V is taken as G.A.V.
M.R.V Rs. 120000. The house was self-occupied during April, May, June and July 2010 and let out since then
@ Rs. 8000 p.m. Here, G.A. V is Rs. 120000. A.R.V Rs. 64000 (8000 x 8) is less than E.R.V (Rs. 120000). It is
not due to vacancy. Therefore the higher value of A.R.V and E. R. V is taken as G.A.V.
F.R.V Rs. 96000.Let out from August 2010 @ Rs. 15000 p.m. During May, June and July 2010 the house was
vacant. In April 2010 it was self-occupied. Here, G.A.V is Rs. 120000. Despite vacancy for 3 months, A.R.V
(Rs. 15000 x 8 = 120000) is more than E.R.V.
M.R.V. Rs.60000. Let out to a company @ Rs. 6000 p.m. Due to some Court proceedings against the tenant
the house was sealed and no rent was received throughout the year 2010-11. Liquidator has been approached
for the recovery of rent. Here, G.A.V is Rs.72000. The rent is not finally decided as unrealisable and therefore
not deductible from the actual rent as per the explanation to Section 23(1). The house was also not vacant
during the year. Hence E.R.V or A.R.V whichever is higher is taken as G.A.V.
F.R.V. Rs.200000. Let out @ Rs. 20000 p.m. Tenant vacated the house in February 2010. Since then the
property remained vacant. Here, G.A.V is nil because A.R.V.is nil during the year due to vacancy. Municipal
taxes and interest on loan if any, paid during the year can be claimed as loss. Deduction for repairs is not
available since net annual value is nil.
M.R.V. Rs. 84000. During the year, house was self -occupied for 2 months and let out @ Rs.9000 p.m. from
June 2010 onwards. Tenant vacated on 30th November 2010 and the house remained vacant during December
and January. From February onwards again it was let out for Rs.10000 p.m. Here G.A.V. is Rs. 74000. A.R.V.
Rs. 74000 (9000 x 6 + 10000x2) is less than E.R.V. (84000) due to vacancy. If it were not vacant during
December and January, A.R.V. would be Rs.92000 (9000 x 8 + 10000 x 2).
In illustration 10 above, suppose the MRV is Rs. 120000. Then G.A.V is Rs.120000. Here, A.R.V (Rs.74000) is
less than E.R.V. (Rs. 120000). But it is not due to vacancy because; even if the house were not vacant A.R.V
(Rs.92000) would be less than E.R.V.
Annual value of self-occupied house
As per sub-section (2) of section 23, where the property consists of a house or part of a house which –
a) is occupied by the owner for his own residence or
b) could not be occupied by the owner because of his employment, business or profession at another place
and he resides at that other place in a building not belonging to him,
the annual value shall be taken to be nil, provided it is not actually let out during any part of the previous year and no
other benefit is derived there from.
If a building consists of more than one independent floor or unit, exemption u/s 23 (2) is granted in relation to the selfoccupied one only. Likewise, if the assessee retains more than one house as self-occupied, in respect of any one of
those houses, at his option, he can claim this exemption. Other house (s) will be deemed to be let out and tax is
computed accordingly.
Annual value of house partly self-occupied and partly let-out or self-occupied for a part of the previous year and let-out
for part of the previous year
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As per sub-section (3) of section 23, in determining the annual value of a house in the above situations the fair rent
attributable to the self occupied portion or period should be excluded. The municipal tax and loan interest attributable to
the self-occupied part or period cannot be deducted.
24(Deductions): Only two deductions are permitted from annual value.
1. Standard deduction @ 30% of net annual value. This is a mandatory deduction. But self-occupied houses are not
eligible for this deduction.
2. Interest on loan taken for the purpose of house property due or actually paid in the previous year. Loan interest
pertaining to a period prior to the previous year in which the house has been constructed can be deducted in five equal
instalments beginning with the previous year in which the house was constructed. In the case of self-occupied house
property interest on loan taken for construction, acquisition, repair, renewal or renovation can be deducted subject to a
maximum amount of Rs.30000 (including one instalment of pre-construction interest paid, if any) in a year. But if loan
was taken for construction or acquisition of house property (does not include repair and renewal) after 31.3.99 and if
construction or purchase was completed within 3 years from the end of the financial year in which loan is taken,
maximum deduction shall be Rs.150000 in a year.
Note: - Interest on mortgage of house property is not an allowable deduction unless the amount was borrowed for the
purpose of the house property.
In the case of both self-occupied and let-out house properties, loss can be set-off intra-head and inter-head. Balance
can be carried forward for 8 years and set-off against house property income.
25(Amounts not deductible): If any interest is payable outside India, it cannot be deducted unless tax has been deducted at source or there is a
person in India who may be treated as the agent of the recipient of the interest.
25 A (Unrealised rent realised):As per section 25 A, any unrealised rent later recovered shall be deemed as the income of the year in which it is
recovered. However, no deduction is allowed out of such income.
25B (Arrears of rent): If any arrear of rent is received during the previous year, which has not already been assessed, it shall be liable to tax in
the previous year even if the assessee is not the owner of the building in that previous year. However, from such
amount 30% shall be allowed as standard deduction.
26(Property owned by co-owners): Where two or more persons own the property and their respective shares are definite and ascertainable, the share of
each person should be included in his total income and they should not be assessed as an association of persons. If a
jointly owned property is let on hire, the taxable income from that property will be apportioned among the co-owners in
their respective shares in the property and the same shall form part of their individual taxable income. If co-owners own
a self-occupied house, they shall be individually entitled to claim exemption u/s 23(2) for their respective portions.
27(Deemed owners of house property): A person in the following cases is deemed to be the owner of house property, though not owner.
1. An individual who transfers otherwise than for adequate consideration any house property to his or her spouse, not
being transfer in connection with an agreement to live apart or to a minor child not being a married daughter, shall be
deemed to be the owner of the house property so transferred.
2. The holder of an impartible estate shall be deemed to be the individual owner of all the properties consisted in that
estate.
3. A member of a co-operative society to whom a building or part thereof is allotted or leased under a house-building
scheme of the society shall be deemed to be the owner of the building or part thereof.
4. A person who is allowed to take/retain possession of any building in part performance of a contract of the nature
referred to in section 53A of the Transfer of Property Act shall be deemed to be the owner of that building.
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5. An allottee of an apartment in a multi-storied building or a holder of a power of attorney shall be deemed to be the
owner of that building.
6. Where a person takes land on lease and constructs a house upon it, the lessee shall be the owner of the house.
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