INTRODUCTION

Computation of Income Tax

Regardless of the changes made by legislators since 1913, the basic formula for computing the

amount of tax owed has remained basically the same. To determine the amount of income tax

owed, certain deductions are taken from an individual's gross income to arrive at an adjusted

gross income, from which additional deductions are taken to arrive at the taxable income. Once

the amount of taxable income has been determined, tax rate charts determine the exact amount of

tax owed. If the amount of tax owed is less than the amount already paid through tax prepayment

or the withholding of taxes from paychecks, the taxpayer is entitled to a refund from the IRS. If

the amount of tax owed is more than what has already been paid, the taxpayer must pay the

difference to the IRS.

Calculating the gross income of restaurant employees whose income is partially derived from

gratuities left by customers has led to disputes with the IRS and employers over how much they

should contribute in federal insurance contribution act (fica) taxes. Although customers pay these

tips directly to employees, federal law deems the tips to have been wages paid by the employer

for FICA tax purposes. Employers are imputed to have paid large sums of money they never

handled and for which they no way of ascertaining the exact amount. The Supreme Court, in

United States v. Fior D'Italia, 536 U.S. 238, 122 S. Ct. 2117, 153 L. Ed. 2d 280 (2002), upheld

the IRS "aggregate method" of reporting tip income. Instead of requiring the IRS to make

individual determinations of unreported tips for each employee when calculating FICA tax, the

Court held that the IRS could make employers report their gross sales on a monthly statement to

1

help determine tip income. Employees also must report their tip income monthly on a form. The

IRS then uses these two pieces of information to calculate what the employer needs to contribute

in FICA tax.

Gross Income The first step in computing the amount of tax liability is the determination of gross

income. Gross income is defined as "all income from whatever source derived," whether from

personal services, business activities, or capital assets (property owned for personal or business

purposes). Compensation for services in the form of money, wages, tips, salaries, bonuses, fees,

and commissions constitutes income. Problems in defining income often arise when a taxpayer

realizes a benefit or compensation that is not in the form of money.

An example of such compensation is the fringe benefits an employee receives from an employer.

The Internal Revenue Code defines these benefits as income and places the burden on the

employee to demonstrate why they should be excluded from gross income. Discounts on the

employer's products and other items of minimal value to the employer are usually not considered

income to the employee. These benefits (which include airline tickets at nominal cost for airline

employees and merchandise discounts for department store employees) are usually of great value

to the employee but do not cost much for the employer to provide, and build good relationships

between the employee and the employer. As long as the value to the employer is small and the

benefit generates goodwill, it usually is not deemed to be taxable to the employee.

2

The value of meals and lodging provided to an employee and paid for by an employer is not

considered income to the employee if the meals and lodging are furnished on the business

premises of the employer for the employer's convenience (as when an apartment building owner

provides a rent-free apartment for a caretaker who is required to live on the premises). However,

a cash allowance for meals or lodging that is given to an employee as part of a compensation

package is considered compensation, and is counted as gross income. An employer's payment for

a health club membership is also included in gross income, as are payments to an employee in

the form of stock. An amount contributed by an employer to a pension, qualified stock bonus,

profit-sharing, Annuity,or bond purchase plan in which the employee participates is not

considered income to the employee at the time the contribution is made, but will be taxed when

the employee receives payment from the plan. Medical insurance premiums paid by an employer

are generally not considered income to the employee. Although military pay is taxable income,

veterans' benefits for education, disability and pension payments, and veterans' insurance

proceeds and dividends are not included in gross income.

Other sources of income directly increase the wealth of the taxpayer and are taxable. These

sources commonly include interest earned on bank accounts; dividends; rents; royalties from

copyrights, Trademarks, and Patents; proceeds from life insurance if paid for a reason other than

the death of the insured; annuities; discharge from the obligation to pay a debt owed (the amount

discharged is considered income to the debtor); recovery of a previously deductible item, which

gives rise to income only to the extent the previous deduction produced a tax benefit (this is

commonly referred to as the tax benefit rule and is most often used when a taxpayer has

recovered a previously deducted bad debt or previously deducted taxes); gambling winnings;

3

lottery winnings; found property; and income from illegal sources. Income from prizes and

awards is taxable unless the prize or award is made primarily in recognition of religious,

charitable, scientific, educational, artistic, literary, or civic achievement; the recipient was

chosen, without any action on his or her part, to enter the selection process; and the recipient is

not required to render substantial future services as a condition to receiving the prize or award.

For example, recipients of Nobel Prizes meet these criteria and are not taxed on the prize money

they receive.

In some situations a taxpayer's wealth directly increases through income that is not included in

the determination of income tax. For example, gifts and inheritances are excluded from income

in order to encourage the Transfer of Assets within families. However, any income realized from

a gift or inheritance is considered income to the beneficiary—most notably rents, interest, and

dividends. In addition, most scholarships, fellowships, student loans, and other forms of financial

aid for education are not included in gross income, perhaps to equalize the status of students

whose education is funded by a gift or inheritance and of students who do not have the benefit of

such assistance. Cash rebates to consumers from product manufacturers and most state

Unemployment Compensation benefits are also not included in gross income.

Capital gains and losses pose special considerations in the determination of income tax liability.

Capital gains are the profits realized as a result of the sale or exchange of a capital asset. Capital

losses are the deficits realized in such transactions. Capital gains and losses are determined by

establishing a taxpayer's basis in the property. Basis is generally defined as the taxpayer's cost of

4

acquiring the property. In the case of property received as a gift, the donee basically steps into

the shoes of the donor and is deemed to have the same basis in the property as did the donor.

The basis is subtracted from the amount realized by the sale or other disposition of the property,

and the difference is either a gain or a loss to the taxpayer.

Capital gains are usually included in gross income, with certain narrow exclusions, and capital

losses are generally excluded from gross income. An important exception to this favorable

treatment of capital losses occurs when the loss arises from the sale or other disposition of

property held by the taxpayer for personal use, such as a personal residence or jewelry. When a

capital gain is realized from the disposition of property held for personal use, it is included as

income even though a capital loss involving the same property cannot be excluded from income.

This apparent discrepancy is further magnified by the fact that capital losses on business or

investment property can be excluded from income. Consequently, there have been many lawsuits

over the issue of whether a personal residence, used at some point as rental property or for some

other income producing use, is deemed personal or business property for income tax purposes.

Taxpayers age 55 or older who sell a personal residence in which they have resided for a specific

amount of time can exclude their capital gains. This is a one-time exclusion, with specific dollar

limits. Consequently, if future, greater gains are anticipated, a taxpayer age 55 or older may

5

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

smaller capital gains.

GROSS TOTAL INCOME: 

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

1)    Salaries

2)    Income from House Property

3)     Profits and Gains from Business or Profession

4)     Capital Gains.

How to Compute Total   Income

Before filing return in the income tax department a statement showing computation of total

income is to be submitted along with the ROI. Here is given a brief presentation of   Computation

of Total Income:

6

 

      Particulars

a)      Income from Salaries

Basic Salary                                          xx

Taxable Allowances                              xx

Taxable Value of Perquisites                 xx

          Gross Salary                                           xx

Less : Entertainment Allowance            xx

           Professional Tax                                    xx                     xx

 

 b)      Income From House Property

Gross Annual Value                              xx

Less: Municipal Taxes paid                      x

            Annual Value                            xx

Less: Deduction u/s 24              xx                                 xx

 

 c)      Profits and Gains of Business

or Profession

      Net Profit as per P/L A/c                      xxx

      Add: Amount shown as expenses

               but not allowed                                xx

                                                                    xxx

      Less: Expenses allowed but not

7

                claimed.                                          xx       

                                                                   xxx

      Add: Incomes not shown in the P/L

               A/c but taxable                                xx

                                                                   xxx

      Less: Incomes shown in the P/L

               A/c but not taxable                          xx                                xxx

 

d)      Capital Gains

Sale Consideration                                xxx

Less: Expenses on transfer                        xx

Net Sale Consideration             xxx

Less: Cost of acquisition/improve.             xx

            Capital Gains                            xxx

Less: Exemptions (if any)                          xx                                xxx

  

e)      Income From Other Sources                                                         xx

 

Gross Total Income                                                               xxx

Less: Deduction u/s 80CCC to 80U                                              xx

            Total Income                                                              xxx

8

DEFINITIONS

ASSESSMENT YEAR

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

ASSESSES

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

GROSS TOTAL INCOME

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

TOTAL INCOME

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

ASSESSMENT

The classification of someone or something with respect to its worth

PREVIOUS YEAR

9

The year in which income is earned is known as previous year. It may be of 12 months or less than that.

For e.g. Previous year in case of new business.

a) New Business is set up on 1st April 2009 - Previous Year: 1st April 2009 to 31st March 2010. (of 12 Months)

b) New Busines is set up on 1st October 2009- Previous Year: 1st October2009 to 31st March 2010.(less than 12 months)

However, it is not mandatory that books of accounts are prepared on financial year basis i.e. 1st April to 31st March.

But, still in this case one has to calculate the income earned during the financial year (Previous year) for income tax purpose.

PERSON

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

RECEIPT

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

INCOME

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

10

CHAPTER 3

INTRODUCTION OF SALARIES

The term "Salaries" includes remuneration in any form for personal service, under an expressed

or implied contract of employment or service. Section 17 of Income Tax Act defines salary to

include:-

Wages

Pensions or Annuities

Gratuities

Advance of Salary

Any cess, commission, perquisites or profits in lieu of or in addition to salary or wages

Any encashment of leave salary Any amount of credit to provident fund of employee to the

extent it is taxable. Therefore "Salary" includes basic salary, encashment of leave salary, advance

of salary, arrears of salary, various allowances such as dearness allowance, entertainment

allowance, house rent allowance, conveyance allowance and also includes perquisites by wayfree

housing, free car, free schooling for children of employees, etc.

The following are the essential conditions for income to be treated as salary income:-

There must be relation of employer and employee between the payer of income and receiver of

incomeSalary may be from more than one employerSalary may be received from not just the

present employer but also a prospective employer and in some cases even from a former

employer for example pension received from a former employerSalary income must be real and

not fictitious there must an intention to pay and receive salary.Forgoing of salary ie if an

11

employee surrenders his salary to the central government, then the salary so surrendered will not

be treated as taxable income of the employee.Salary paid tax free - Tax free salary means the

salary on which income tax is borne not by the employee but by the employer. Tax free salary is

also taxable in the hands of the employee.Salary is taxable in the year of receipt or in the year of

earning of the salary income, whichever is earlier. i.e. if the salary has been received first, then it

will be taxable in the year of receipt. If it has been earned first but not yet received then it will be

taxable in the year of earning. Salary income is taxable in the hands of individuals only. No other

type of person such as a firm or HUF, companies can earn salary income.

Encashment of Leave Salary

Encashment of leave salary is fully taxable in the year of receipt in the hands of the employee.

However, when encashment of leave salary is received at the time of termination from

employment on account of retirement or superannuation, etc, from the total leave salary

encashment received, certain exemptions are made available to the employee. According in the

case of a Central or State Government employee, the amount of leave salary encashment

received as per service rules at the time of termination of employment is fully exempt from

income tax.

12

DEFINITIONS

“Salary” is the remuneration received by or accruing to an individual, periodically, for service

rendered as a result of an express or implied contract. The actual receipt of salary in the previous

year is not material as far as its taxability is concerned.

Salary is chargeable to tax on “due” or “receipt” basis whichever is earlier. Income will be

chargeable under the head ‘salaries’, it is vital that there must be the existence of  “employer-

employee” relationship between the payer and the payee. For instance, The salary received by a

partner from his partnership firm carrying on a business is not chargeable as “Salaries” but as

“Profits & Gains from Business or Profession” Pension received by an assessee from his former

employer is taxable as “Salaries” whereas pension received on his death by members of his

family (Family Pension) is taxed as “Income from other sources”.

13

BASIS OF CHARGE: [Section 15]

As per Section 15, salary consists of the following:

a. any salary due from an employer or a former employer to an assessed in the

previous year, whether actually paid or not;

b. any salary paid or allowed to him in the previous year by or on behalf of an

employer or a former employer, though not due or before it became due;

c. Any arrears of salary paid or allowed to him in the previous year by or on behalf

of an employer or a former employer, if not charged to income-tax for any earlier

previous year.

d. Once salary is taxed on due/receipt basis, it will not be taxed again on

receipt/falling due, as the case may be.

e. Any salary, bonus, commission or remuneration, by whatever name called, due to

or received by, a partner of a Firm from the firm is not regarded as salary under

this head.

f. The assessed can claim relief u/s 89(1) for arrears or advance salary.

g. Loan from employer is not salary. Hence, advance salary is taxable, while

advance against salary is not.

14

PERQUISITES

Employer and Employee relationship between the payer and payee.

CHARGEABILITY

Salary is chargeable to tax on "due" or "receipt" basis whichever is earlier.

As per Sec. 17(1), salary includes the following:

Wages

Any annuity or pension

Any gratuity

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

or wages

Any advance of salary

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

availed by him

The portion of the annual accretion in any previous year to the balance at the

credit of an employee participating in a recognized provident fund to the extent it

is taxable

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

15

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

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

DEDUCTIONS FROM SALARY {SECTION 16}

1. Entertainment Allowance {Section 16(ii)

Only Government servant can claim the following deduction —

1. Rs 5000/-

2. 1/5th of salary (20% of salary) [Salary = Basic Pay]

3. Actual entertainment allowance received during the F.Y.

2. Professional Tax or Tax on Employment {Section 16(iii)

Professional tax paid by an employee is allowed as deduction from his Salary income

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

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

by the employer will first be included in salary (in case of all employees whether

specified or not) as perquisite & then the same amount is allowed as deduction u/s

16(iii) from gross salary.

Note: If an employee has paid Profession Tax of more than one year in a particular year then

entire Profession Tax so paid is allowed as deduction.

16

ALLOWANCES

Allowances Fully taxable in all cases:

1. City Compensatory Allowance

2. Fixed Medical Allowance

3. Tiffin/Lunch/Dinner/Refreshment Allowance

4. Servant Allowance

5. Dearness Allowance

6. Project Allowance

7. Overtime Allowance

8. Interim Allowance

9. Any Other Cash Allowance

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

The least of the following is exempt —

1. 40% of salary [50% if house situated at Mumbai, Kolkata or Chennai]

2. HRA actually received in respect of the period during which the accommodation

is occupied

3. Rent Paid – (Salary x 10%)

17

Salary = Basic + Dearness Allowance (if part of retirement benefit) + Commission (fixed % of

turnover)

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

Basic Salary 15,000 Wages

Dearness Allowances 5,000

Perquisites 3,000

Professional tax paid 900

Name Of Assessee: Mr X

Statement Of Income From Salary

Particulars Rs Rs

Basic Salary 80,000

DA 25,000

Perquisites 50,000

Wages 40,000

Less: Deductions U/S 17

Entertainment Allowances NIL

Professional tax 10,000

Income From Salary 1,80,000

CHAPTER 4

18

INTRODUCTION OF HOUSE PROPERTY

Generally, only real income is taxable under the Income Tax Act. Where the law provides for

adopting notional figure as the basis of computation, it is possible that notional income also gets

taxed in view of such specific provision. For example, perquisite in respect of interest free loan

calculated at a specified rate of interest results in notional income being taxed as part of salary.

Similarly, Section 50C provides for adoption of guideline value of an immovable property as the

consideration if the real sale consideration is lesser than such value. On account of this provision,

it is possible that a notional capital gain may get taxed. On the same basis, there are certain

situations under this head of income, which renders notional income taxable.

An assessee may be taxed on a notional income in the case of let out property if fair rent exceeds

actual rent. Again, where an assessee owns more than one house property for self-occupation

purposes, the annual value of only one such house shall be taken as nil and in respect of the other

properties income shall be computed on a notional basis by deeming such properties as let out

and by adopting fair rent as the gross annual value. The computation becomes easier if the

student identifies the category of the house property for which computation is sought to be made

and then proceeds to apply the respective methodology. The Provisions relating to this head of

income can be divided into three segments as follows :

19

SECTIONS 22 TO 27

Chargeability Sec. 22

Deemed Owner Sec. 27

Computation of Income

Sec. 23 to 25

Special Provisions

Sec. 25AA, 25B and 26

Although the nomenclature of this head of income uses the words “House Property”, the

chargeability does not confine to buildings which are residential house properties. It extends to

even other buildings such as offices, shops, godowns and other commercial premises.

20

 

2.1       DEFINITION THE HEAD ( Section 22)

The income from Houses, Building, Bungalows, Godowns etc. is to be computed and assessed to

tax under the head “ INCOME FROM HOUSE PROPERTY” . The income under this  head is

not based upon the actual income from the Property but upon Notional Income or the Annual

Value of the Building.

Income is taxable under this head “Income from House Property” if the following 3 conditions

are satisfied :

Condition-1 :    The property should consists of any building or lands appurtenant thereto.

Condition-2 :    The assessee should be owner of the property.

Condition-3 :    The Property should not be used by the owner for the purpose of any business or

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

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

property.

21

INCOME CHARGEABLE REAL & NOTIONAL

This is the only head of income, which taxes notional income (except under some circumstances

under capital gains, income from other sources). The taxability may not necessarily be of actual

rent or income received but the potential income, which the property is capable of yielding.

Accordingly, if a person owns a property which is laying vacant, notional income with respect to

such property may be liable to tax even though the owner may not have received any income

from such property. Further, if the property is let out and the rent received is less than the

potential rent which the property is capable of yielding, tax would be payable on the rent which

the owner is capable of getting and not on the actual rent (Refer heading – "Determination of

annual value"). Though the head of chargeability of the income is Income from house property

what is charged under this head not only the income from house (dwelling) but all income arising

out of letting of building. In other words Sections 22 to 27 are wholly silent as to the purpose for

which a building or a house property is to be used. This head of income can be aptly described as

income from properties.

CHARGEABILITY U/S 22

a. What is chargeable under this head?

Annual value of property consisting of any building or land appurtenant thereto except

such property which is used by assessed for the purpose of business and profession. If the

building is used by the assessed for the purposes of his business or profession, no

notional income from such building can be assessed to tax under the head "Income from

22

house property" and no deduction on account of notional rent is available to the assessed

while computing the income under the head "Income from business or profession".

b. In whose hand such income is taxable?

Income from house property is taxable in the hands of owner/deemed owner of the

property. Owner is a person who is entitled to receive income from property in his own

right. Income is chargeable in the hands of person even if he is not a registered owner.

Rental income from sub-letting of property acquired on monthly tenancy basis or on lease

for a period of less than twelve years may be taxable either as "Income from business or

profession", where such letting is the business of the assessed or taxable as "Income from

other sources". This would depend upon facts of each case.

PROPERTY OWNED BY CO-OWNERS (SECTION 26)

Where property consisting of buildings and lands appurtenant thereto is owned by two or more

persons and their respective shares are definite and ascertainable, such persons shall not be

assessed as an A.O.P. (Association of Persons) but the share of each person in the income from

the property as computed under sections 22 to 25 (i.e., income from house property) shall be

included in his total income.

Owner includes deemed owner u/s 27 as under:

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

married daughter. However, if the transfer is under an agreement to live apart, such

transfer to the spouse would not be covered.

23

— Holder of impartial estate shall be deemed to be owner of all the properties

comprised in the estate

— A member of a co-operative society, company or other association to whom a

building is allotted or leased under a house building scheme of society, company or

other association as a case may be.

— A person who is allowed to take or retain possession of any building or part thereof

in part performance of a contract of the nature referred to in section 53A of the

Transfer of Property Act,1882 (4 of 1882).

— A person who acquires any lease rights of not less than twelve years (excluding any

rights by way of a lease from month to month or for a period not exceeding one

year)

Official assignee can be treated as owner for the purpose of section 22 except when the receiver

is appointed by court.

INCOME FROM PROPERTIES UNDER THE PERVIEW OF THE HEAD "INCOME

FROM HOUSE PROPERTY"

24

a. Predominantly, only income from letting out of building or land appurtenant thereto is

taxable under the head "Income from house property". Accordingly, if letting out is of a

bungalow along with the garden surrounding it, the income of the entire bungalow along

with land appurtenant thereto; i.e., the garden would be taxed under this head. If the

letting out is only of the vacant land, the rent received from such letting out of land is not

taxable under the head "Income from house property". It may be taxable under the head

"Income from business or profession" if the business of the assessed is to let out land or

may be taxable as "Income from other sources" if letting out of land is not the business of

the assessed. Further if composite rent is received for property as well as services and

amenities, the annual value of such property is assessable under section 22 and profits

arising from services and amenities is chargeable to tax under section 28; i.e., business

income or under section 56; i.e., income from other sources.

b. Rental income from letting out of residential and commercial buildings is covered under

this head of income. Where property constitutes stock in trade of business or where

business of assessed is to let out house property, income is covered under the head profits

and gains of Business & Profession. Further if letting out is subservient to the main

business the annual value will not be chargeable u/s. 22 rather it will be chargeable under

profits and gains of Business & Profession.

c. Where an assessed let machinery, plant or furniture and also buildings, and the letting out

of buildings is inseparable from the letting of the machinery, plant or furniture, the

income from such letting, if it is not chargeable to tax under the head "Income from

business or profession" would be taxable under the head "Income from other sources" .

25

— Refer Section 56(2) (iii). The Humble Supreme Court has in the case of Shamburg

Investments (P.) Ltd. vs. CIT (2003) 263 ITR 143 (SC) held that income from letting out would

be taxable under the head "Income from house property" primarily on the ground that letting of

building was a primary object with additional right to use furniture, etc.

DETERMINATION OF ANNUAL VALUE

For determining the annual value, one has to first determine the gross annual value (GAV) which

is the higher of :

a. The sum for which the property might reasonably be expected to let from year to

year. In cases of properties where Standard rent has been fixed, such sum cannot

exceed the standard rent fixed (Refer Sheila Hashish vs. CIT [1981] 7 Taxman 1

(SC) & Amole Ram Kholo vs. CIT [1981] 7 Taxman 51 (SC)). However where

property let was vacant during the whole or part of the previous year and rent

actually received or receivable is less than expected rent, then rent actually

received or receivable is taken as GAV.

b. Where property is actually let out and the rent received or receivable is more than

the amount determined in (a) above, the annual value would be the actual rent

received.

Note: Following amounts are not added to the GAV

Amount of municipal tax realized from tenant

26

Notional interest on amount received towards ‘rent/security deposit’ from

the tenant

Repairs carried out by the tenant.

ANNUAL VALUE TO BE TAKEN AS ‘NIL’ IN CERTAIN CASES

a. The annual value of a property which is in occupation of the owner for the purposes of

his residence would be considered to be nil if he does not derive any other benefit from

the said residential house. If the owner has more than one house for the purposes of his

residence, the annual value of any one of such houses, at his option, would be considered

to be nil. Notional income of other residential houses would be liable to tax. In such case

owner may choose to consider the annual value nil (for computation purposes) in respect

of the one property at his option.

b. Similarly, if the assessed is owner of only one residential house which he is unable to

occupy on account of his employment, business or profession carried on at any other

place and on account of which he has to reside at that other place in a building not owned

by him, the annual value of such house shall be nil.

DETERMINATION OF NET ANNUAL VALUE (NAV)

27

The following amounts are required to be reduced while determining the net annual value :

a. Any taxes levied by any local authority, which are liable to be paid by the owner,

only on actual payment thereof during the previous year; and

b. The unrealizable rent subject to satisfaction of conditions prescribed under Rule 4.

Amount of unrealized rent shall be equal to the amount of rent payable but not

paid by a tenant of the assessed and so proved to be lost and irrecoverable where,

—

the tenancy is bona fide

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

to vacate the property

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

assessed

The assessed has taken all reasonable steps to institute legal proceedings

for the recovery of the unpaid rent or satisfies the Assessing Officer that

legal proceedings would be useless. 

UNREALISED RENT REALISED SUBSEQUENTLY — SEC. 25AA

28

The entire amount of unrealized rent received in the PY shall be chargeable to tax in the

year in which such amount is received. (The deduction u/s 23/24 shall not be allowed if

the unrealized rent pertaining to period up to AY 2001-02 & deduction u/s 24(1)(x) in

respect thereof was allowed in earlier years.)

Unrealized rent received subsequently is chargeable to tax even if the house property is

not owned by the assessed in the year of such recovery.

ARREARS OF RENT RECEIVED S. 25B

Where any arrears of rent is received which was not taxed earlier, such rent shall be assessed

under the head "Income from house property" in the year in which such arrears are received i.e.

taxable on receipt basis. The arrears would be taxable under this head irrespective of the fact

whether the assessed is the owner of the buildings in the year in which such arrears are received.

A deduction of 30% on account of repairs on the arrears of rent received would be allowed in the

year in which such arrears are taxable.

COMPUTATION OF INCOME FROM HOUSE PROPERTY IN NUT SHELL

29

Particulars Type of Property

 Let-Out Property u/s. 23(1)

Self-Occupied House Property u/s. 23(2)

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

  Amt. Rs.Amt. Rs.

Amt. Rs.

Amt. Rs.

Amt. Rs.

Amt. Rs.

(i) Reasonably Expected Rent XXX NIL XXX

(ii) Actual rent received or receivable

XXX NIL NIL

Gross Annual Value (GAV) XXX

1. (i) or,

2. (ii)>(i), then (ii) or,

3. (ii)<(i) due to vacancy then (ii) NIL XXX

Less Municipal Taxes paid to local authority by the owner

(XXX)  NIL(XXX)

1. Net Annual Value(NAV) XXX NIL XXX

Less: Deduction u/s. 24

(a) 30% of NAV XXX  NILXXX

(b) Interest on loans as allowed XXXXXX

XXX

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

(XXX)

A. Income from House Property (1-2)

  XXX(XXX)

XXX

30

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

XXX  NIL NIL

C. Add Arrears of Rent Received

XXX NIL NIL

Less: 30% of arrears of Rent

(XXX)  

—————

XXX NIL NIL NIL NIL

Total Income from HP(A+B+C XXX XXX XXX

31

DEDUCTIONS ALLOWED WHILE COMPUTING INCOME UNDER THIS HEAD

The following deductions shall be allowed from the annual value u/s. 24:

a. 30% of the annual value as computed.

b. Interest paid/payable on borrowed capital acquired for the purpose of acquisition,

construction, repairs, renewals or reconstruction of house property subject to

conditions and limits as mentioned herein after.

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

would be deductible in five equal installments starting from the year in

which property is acquired or constructed.

32

For Example ;

Mr. Rajan constructed a house property for which he borrowed a loan of Rs.2 lakhs at 12% per

annum on 1.10.1999. The house property has been let-out for Rs.20,000 per month. Municipal

taxes paid during the previous year is Rs.7,000. Repairs incurred Rs.12,500. Insurance

premium due for the year but outstanding is Rs.1,500. Collection charges incurred is Rs.100

per month.

Name Of Assessee: Mr Z

Statement Of Income From House Property

Computation of income from house property for the assessment year 2013-14

Particulars Amount AmountRs. Rs.

Gross Annual Value 2,40,000Less : Municipal taxes paid 7,000

Net Annual Value 2,33,000Less : Deduction u/s 24(i) 30% of Net Annual Value 69,900(ii) Interest on Loan 24,000 93,900

Income from House Property 139,100

33

Computation of total income & tax liability

Computation Of Tax Liability Of Mr. X For A.Y 13-14

Income From Hose Property Rs. 1,39,100 , Income From Salary 1,80,000

He received accured interst on NSC was Rs. 3,000 He also contributed in PPF was Rs10,000

He spend Rs.35,000 on his handicapped dependent brother.

Name Of Assessee: Mr Z

Computation Of Total Income

P.Y 2012-2013 A.Y 2013-2014

 Particular Rs RsIncome From House Property   1,39,100Income From Other Source Rs. 2,64,500.   1,80,000Gross Total Income   3,19,100(-) Deduction Under Chapter VI A    1. Sec 80C: Specified Investment    Accured int on NSC 3,000  Contribution to PPF 10,000 -130002. Sec 80DD: Handicapped Dependent Relative   -50000Net Taxable Income   2,56,100

,

Computation Of Tax Liability

  RsTax on Rs. 2,56,100 5610

34

(+) Education cess & HSC@3% 168.3Tax liability 5778.3

Bibliography

http://en.wikipedia.org

www.google.co.in

35