FAQs on Salary Income

What is included in Income From Salary?

Income under the head Salaries includes, Wages, Annuity, Pension, Gratuity, Fees, Commission, Perquisites, Profits in lieu of or in addition to Salary or Wages, Advance of Salary, Annual accretion to the balance of Recognized Provident Fund, Transferred balance in Recognized Provident Fund, Contribution by Central Government or any other employer to Employees Pension Account, etc.

What is profits in lieu of Salary?

An employee sometimes receives bonus or commission or remuneration for something that he has done during the course of employment. This is included in the income from Salary as Profits in lieu of Salary.

What is meant by Perquisites?

As an employee you tend to receive certain benefits from your employer like rent free accommodation, motor car, interest free loans and advances etc. Such benefits received on account of employer-employee relationship are ‘perquisites’ or ‘perks’.

How are perquisites taxed?

The perquisites or perks received by an employee are valued in monetary terms as per the computation provided in Income Tax Act and Rules and such a value or amount is included in Income under the head ‘Salaries’. These are also included for the purpose of computation of TDS.

I have received non-monetary perquisites from the employer on the value of which he has paid tax. Do I need to include the amount of such tax in my Salary income?

No. The tax amount on such non-monetary perquisite is exempt u/s 10(10CC) of the IT Act.

What are allowances?

An allowance is a financial benefit allowed by the employer to an employee with a specific purpose attached to such amount of allowances. Some of such allowances are for incurring expenses in discharge of duties by the employee.

How are allowances taxed?

The allowances are taxed as Income under the head ‘Salaries’. These are also included for the purpose of computation of TDS.

Allowances are granted to the employees by the employer. These are neither due nor mandatory for the employer to give to employees. Then why are they taxed as income from SALARY?

Clause ( c) of section 15 includes Salary allowed in taxable income. The allowances are covered under this clause. (Sect. 15 & 17, Income Tax Act).

What is Pension and how is it taxed?

The pension is a periodical allowance or an amount of stipend received by a person on account of a past service or a particular merit of a person. The pension is actually a compensation for past service and is taxed as ‘Income from SALARY’.

What is Gratuity and how is it taxable?

Gratuity is given by the employers to their employees for the services rendered by them during the period of employment. It is usually paid at the time of retirement but it can be paid before also. An employee becomes eligible for gratuity only after completion of five years of service with employer. It is taxed as ‘Income from Salary’. However, the taxable amount of gratuity should be computed properly.

I am an employee of an Insurance Company. I am paid a commission or incentive on the business I bring to my company. How should this commission or incentive be treated?

Since in addition to Salary payable, you also receive incentive bonus/commission based on the insurance business brought by you, the additional income so derived during the course of and pursuant to the terms and conditions of the employment can be brought to tax only under the head ‘Salaries’, and not under ‘Business Income’.

How is Leave Travel Concession taxed?

If the employee is allowed a leave travel allowance or concession by his employer towards travel for himself and his family (includes spouse, dependent parents and siblings of the employee and his two children) in India, such an amount of allowance is exempt from tax. This is not allowed for travel outside India nor is it allowed beyond the actual expenses incurred by employee on his travel. The exemption can be availed only in respect of two journeys performed in a block of four calendar years.

What is the taxability of the Salary and pension received by UN employees in India?

Salaries received by employees of the UNO or any person covered under the UN (Privileges and Immunities) Act, 1947 as well as pension received by them from the UN will be exempt from income tax.

I receive a certain income from someone regularly at certain intervals. How do I determine whether it is income from Salary, other sources or business income?

An income can be taxed as income from Salary only when there is an employer-employee relationship. Your relation with the person paying income to you may be tested on the parameters: 1. Whether the payer is in complete control of your activity 2. Whether he controls how you carry it out, 3. Whether the payer has unquestioned right to control the manners and method of your activity and you have to obey him. If the answers to these questions are ‘YES’ then the income may be taxed as income from ‘Salary’, and if answer to any of these or all of these is’ NO’ then the income may not be taxed as income from ‘Salary’.

I am the Director of the company. Is my Salary received from company to be taxed as income from ‘Salary’?

A director of a company is not a servant but an agent inasmuch as the company cannot act in its own person but has only to act through directors who qua the company have relationship of an agent with the company. In this case, their income is taxable as income from ‘Other sources’. However, if the director is working to carry out certain functions for a company and the company can prove it on facts then he may be treated as employee of the company and his income may be taxed accordingly as income from ‘Salary’.

Is the income received by the Managing Director of the company to be taxed as Income from ‘Salary’?

Whether or not a managing director is a servant of the company apart from being a director can only be determined by the Articles of Association and the terms of his employment. If the company is itself carrying on the business in terms of its articles, and the managing director is employed to manage its affairs under the agreement, he could be dismissed or his employment could be terminated by the company if his work is not satisfactory, his income from the company deserves to be treated as income from ‘Salary’.

I am a professional tutor. Incidentally, I teach regularly at a school as per the offer made by them and I get paid as per my hours of teaching work. Is my income liable to be taxed as income from Salary?

No. On these facts there doesn’t exist an employer-employee relationship since you get paid for your services and time spent. The income may be liable to be taxed as business income.

Can the income of remuneration, commission and bonus received from a partnership firm by a partner be taxed as income from ‘Salary’?

No. It has to be treated as and taxed as income from Business and Profession.

Judges of High Court and Supreme Court are not subject to control about the manner and method of their work. How is their income treated?

The Salary of a Judge of a High Court and the Supreme Court is income and is taxable by Act of Parliament in the same manner as the income of any other citizen. It is true that such judges have no employer but that, ipso facto, does not mean that they do not receive salaries. They are constitutional functionaries. Articles 125 and 221 of the Constitution deal with salaries of such judges, and expressly state what the judges received are salaries. Hence, their income is treated as Income from ‘Salaries’.

How is the remuneration received by Chief Ministers treated and taxed?

Pay and allowances received by the Chief Ministers are assessable as Salary and not as income from other sources, in view of the provisions of article 164 of the Constitution.

How is the remuneration received by MLAs/MPs/elected representatives is treated and taxed as?

The basic ingredient of employer-employee relationship is missing in the case of MLAs and MPs, as they are not employed by anybody, rather, they are elected by the public, forming their election constituencies, and it is consequent upon such election, that they acquire constitutional position, and discharge constitutional functions and obligations. They may be receiving remuneration after swearing in but that is not attracted by section 15 of the Income tax Act. Hence, remuneration received by MLAs/MPs/elected representatives is taxes as ‘Income from other sources’.

In the hospitality and entertainment Industry, customers often pay tips to waiters and artistes who often are employees of a certain organisation. Is this income by way of tips taxed as income from ‘Salary’?

Since the basic ingredients of employer-employee relationships are missing in this scenario, the income from tips is not to be taxed as income from Salary but is to be taxed as income from other sources. But if such tips are paid by an Employer to an Employee, this income is to be taxed as Income from ‘Salary’.

My employer paid me Salary for a part of the financial year but my services were rendered for the full year. Do I need to pay tax on the entire amount of Salary due to me from the employer?

Clause(a) of section 15 provides that any Salary due from an employer or a former employer to an assessee in the previous year whether paid or not, is chargeable to income-tax under the head ‘Salaries’. In other words, the Salary accrued or which becomes due need not be actually paid in order to make it chargeable income. What is relevant is whether the Salary is due to an employee from an employer. Income from ‘Salary’ is chargeable to tax on “due basis” or “receipt basis” whichever is earlier.

What is the tax treatment of amount of compensation received on Voluntary Retirement (VRS)

Compensation on account of VRS is taxable as profits in lieu of Salary as per section 17(3) of the Income Tax Act. But in case of VRS by employees of Government/Semi-Government/Local Authorities/PSUs etc, this compensation is exempt up to the amount of Rs. 500,000/-. However, no exemption under any other section for this amount is admissible to the taxpayer nor is he eligible to claim the benefits u/s 89(1) of the Act.

How is the VRS compensation computed?

The compensation of VRS is computed by the authority as per the scheme framed by that authority. It should meet following requirements:

i)The amount receivable on account of voluntary retirement of the employee does not exceed the amount equivalent to ‘three months’ salary for each completed year of service,

OR

ii)Salary at the time of retirement multiplied by the balance months of service left before the date of his retirement on superannuation.

I am entitled to the compensation from the employer on account of VRS in a particular year but have received the same in the succeeding years in instalments. When is it taxable?

In terms of section 15 and 17(3) the VRS compensation has accrued in the year in which your right to receive the same became crystallised. Therefore, the entire compensation will be taxable in the first year when it became due.

I am an employee of a Foreign Government working in India. Is my Salary paid by my employer i.e. Government, taxable in India?

Salary paid by a foreign Government to its employees serving in India is taxable under the head “Salaries” u/s 15 of the 1961 Act. The words ‘an employer’ occurring in clause (a) of that section are wide enough to include a foreign Government. But if you are not a citizen of India then you enjoy exemption on such income.

What is Leave Encashment?

Some employers allow the employees to accumulate leave in case the employee is not availing the admissible leave. This unavailed leave is eligible to be encashed in monetary terms by the employees from employer. This monetary encashment is called is Leave Salary or Leave Encashment Salary (Sec. 17, Income Tax Act)

Is leave encashment taxable as income from SALARY?

Yes. As per section 17(1) (va) of the Income Tax Act, leave encashment is taxable as income from ‘Salary’

I am the legal heir of a Government Servant who died in harness. I have received certain amount as leave Salary encashment upon his death, in the capacity of his legal heir. Is it taxable as income from Salary?

This receipt in the hands of the family is not in the nature of one from an employer to an employee. The deceased had no right or interest in this receipt. This payment is only by way of financial benefit to the family of the deceased Government servant, which would not have been due or paid had the Government servant been alive. In view thereof, the amount will not be liable to income-tax.

I am an employee of a Multinational Corporation and working in India. But my Salary is NOT paid in India but is paid outside India. Is my income from Salary taxable in India?

Salary accrues where the services are rendered even if it is paid outside India; Hence, the income received outside India against services rendered in India will be taxable in India. (Sec 15 & 9, Income Tax Act).

I am an employee of the Central/State Government in India. I am deployed on official duties outside India. Is my Salary paid to me in India taxable as income from Salary?

If a Citizen of India renders services outside India, and receives Salary from the Government of India, it would be taxable as Salary deemed to have accrued in India.

(Sec. 15 & 9, Income Tax Act)

The income received by me from my employer does not fit into any of the items specified in Section 15 and 17 of the IT Act. In that case, is my income still taxable as Salary income?

The definitions of various items specified in section 17 are exhaustive and comprehensive. They are also inclusive of the items which are not specified in any of the respective sections. Therefore, if the income received from the employer satisfies the criteria of receipt on account of ’employer-employee’ relationship, then the income qualifies as ‘Income from Salary’.

What is Tax Free Salary?

When the employer agrees to pay tax on the Salary paid to the employee without applying any cap on the amount of tax to be paid, it can be said to be a Tax Free Salary.

In case of Tax Free Salary, is the amount of income tax paid by the employer required to be included in the taxable income from Salary?

Yes. The amount of tax paid or payable by the employer must be included in the income from salaries.

My employer gives me tax allowance and does not pay my tax by himself. Do I need to include this allowance in my income from salaries?

Yes. It is a part of income from salaries.

I have received a lumpsum amount as advance Salary or commuted pension or arrears of Salary or gratuity or leave encashment or family pension which would have been due in earlier years. How should it be treated for tax purposes?

In the event of receipt of a lumpsum amount of Salary or other such sums, the tax on the total income may be more than the tax on the normal income. To safeguard the taxpayer from this additional tax burden, benefit is provided in section 89(1) of the Act. It is available only in respect of income from Salary and income from other sources (family pension). It is not available when the taxpayer avails exemption from tax in respect of VRS compensation.

I have received the arrears of Salary through the Order of the Court. Am I eligible for the benefits u/s 89?

Yes. The section does not prescribe the modes of receipt of arrears or advance Salary. Once you have received it, the benefit is admissible to you.

Is the benefit u/s 89 admissible to the lumpsum amount received by way of leave encashment?

Yes. It is available as per CIRCULAR : NO. 431 [F. NO. 174/43/82-IT(A-II)], DATED 12-9-1985 of CBDT, New Delhi.

How should I communicate the benefits u/s 89 and the consequent rate of deduction of TDS to my employer?

You have to calculate the amount of tax after availing benefits of deduction u/s 89 of the Act and submit it to your employer in Form No.10E. (Rule 21A, Income tax Rules, 1962).

Is it necessary for my employer to deduct income tax from my Salary?

Yes. It is his duty as per law to deduct tax from the income paid to you by him. In case you think that you may not have any tax liability, you may inform your employer about your claims (including loss for setting off) and demonstrate that there is no tax liability in your hand for that particular year.

How do I inform my employer about my estimated tax liability of a particular assessment year?

As per Rule 26B, you may inform about your other incomes, your loss or TDS deducted somewhere else through a statement prepared with requisite proofs.

What is the rate of deduction of tax (TDS) in case of income from Salary?

There is no fixed rate of deduction in case of Salary income unlike other incomes or payments. However, the TDS is deducted considering the likely tax amount on your income as per the rates in force for that particular assessment year.

What will happen if I do not provided my PAN to my employer deductor?

Any person who is entitled to receive the amount (income) on which tax is deductible, must provide PAN to the deductor. If you have not provided your PAN then your employer may deduct tax from your income at higher of the rates in force or 20% of the income credited to your account.

Inadvertently, I have given wrong PAN to my employer deductor. What are the consequences?

The consequences of providing wrong PAN are identical to those of not providing the PAN.

Besides Salary income I have other income on which tax is not deductible. Do I need to inform my employer about this for deduction of tax?

You may inform your employer so as to enable him to determine the correct tax deductible from your income. In case you don’t provide these details to your employer, you may wish to pay advance tax on the income other than income from Salary.

I have capital loss in this year and I think my income from Salary may be reduced on account of that, should I inform my employer about the same?

Loss other than loss from house property is not eligible to be considered for set off against tax liability on the income from Salary. Hence the information would be irrelevant to the employer.

What is Certificate in Form No. 16?

The deductor of income tax is required to inform the deductee about the amount paid to deductee and the amount of tax deducted and deposited on behalf of the employee by the deductor. This information is provided by the deductor to the deductee through a certificate in Form No. 16.

Learn More about Form No. 16(Link)

What is Form No. 16A?

The certificate in Form No. 16 is issued by the employer in case of income from Salary. In respect of other types of incomes, certificate in Form 16A is issued.

What is Form No. 16B?

When a taxpayer sells an immovable property for a sale consideration more than Rs. 50 lakhs, the person purchasing is required to deduct tax at the rate of ONE percent of such sales consideration. After such deduction., the purchaser has to issue Form 16B to the seller indicating the details of such a transaction of immovable property.

What is Form No. 16C?

When a taxpayer pays rent more than Rs. 50000 per month to any person, he is required to deduct tax at the rate of 5% on such rent paid. After such deduction, the deductor is required to issue a certificate of deduction in Form No. 16C to the deductee.

Rules for Setting off losses Can there be a loss under the head ‘Salaries’?

No. There cannot be a loss under the head of ‘income from salaries’.

I have a loss under the head of ‘Short term capital gains’. Can I set it off against income from salaries?

No. It cannot be set off against income from salaries.

I have a loss under the head of ‘Long term capital gains’. Can I set it off against income from salaries?

No. It cannot be set off against income from salaries.

I have a loss under the head of ‘Income from business and profession’. Can I set it off against income from salaries?

No. It cannot be set off against income from salaries.

I have loss under the head ‘Income from House Property’. Can I set it off against income from Salaries?

Yes, it can be set off against income from salaries BUT only up to Rs. 2,00,000.

FAQs on Presumptive Taxation Scheme (PTS)

What is the meaning of presumptive taxation scheme?

For small taxpayers generating business income or professional income, the Income Tax Law provides a scheme whereby you don’t need to keep and maintain books of account, if you declare business profits or professional profits above certain fixed percentage. This scheme is called as Presumptive Taxation Scheme (PTS).

What is the legal framework of presumptive taxation scheme?

The presumptive taxation scheme is prescribed in following sections of Income tax Act

Section Eligible business covered
44AD Small business having a turnover of less than Rs.2 crores
44ADA Taxpayers engaged in any profession
44AE Small transporters having 10 or less vehicles

Who is eligible to take advantage of the presumptive taxation scheme of section 44AD?

1) Resident Individual.
2) Resident Hindu Undivided Family.
3) Resident Partnership Firm (not Limited Liability Partnership Firm).
4) A person who has “NOT” made any claim towards deductions under section 10A/10AA/10B/ 10BA or under sections 80HH to 80RRB in the relevant year.

Which businesses are NOT eligible for presumptive taxation scheme?

The following businesses are not eligible for presumptive taxation scheme:

  • A person who is carrying on any agency business
  • A person who is earning income of commission or brokerage
  • Any business whose total turnover or gross receipts exceeds two crore rupees
  • Business of plying, hiring or leasing goods carriages referred to in sections 44AE

Can an insurance agent adopt the presumptive taxation scheme of section 44AD?

A person who is earning income in the nature of commission or brokerage cannot adopt the presumptive taxation scheme of section 44AD . Insurance agents earn income by way of commission. Hence, they cannot adopt the presumptive taxation scheme of section 44AD .

Can a person engaged in a profession adopt the presumptive taxation scheme of section 44AD?

No. He has to adopt the presumptive taxation scheme as given in section 44ADA and not in section 44AD.

Can a person whose total turnover or gross receipts for the year exceed Rs. 2,00,00,000 adopt the presumptive taxation scheme of section 44AD?

No, a person whose total turnover or gross receipts for the year exceed Rs. 2,00,00,000 cannot adopt the presumptive taxationscheme of section 44AD.

If I don’t opt for presumptive taxation scheme, how do I compute my taxable business income?

For the purpose of computing taxable business income in the above manner, the you have to maintain books of account of the business, and income will be computed by deducting expenses from receipts as follows:

Particulars Amount
Turnover or gross receipts from the business XXXXX
Less: Expenses incurred in relation to earning of the income (XXXX)
Taxable Business Income XXXXX

In case, you are claiming any deductions from the business income, the same needs to be deducted from the business income before arriving at taxable business income.

What is the manner of computation of taxable business income in case of a person adopting the presumptive taxation scheme of section 44AD?

In case of a person adopting the presumptive taxation scheme, the taxable business income shall be 8% or more of the turnover or gross receipts of the eligible business for the year. This rate shall be 6% for that portion of the turnover which is received through banking channels or other than cash.

Can I claim any further deductions from the income computed at 6% or 8% on a presumptive basis?

No. The income computed at the given rates shall be the final taxable income on which you have to compute tax and no further deductions are allowed from this income.

If I adopt the presumptive taxation scheme of section 44AD, then am I required to maintain books of account as per section 44AA?

No.

If I adopt the presumptive taxation scheme of section 44AD, then am I liable to pay advance tax in respect of income from business covered under section 44AD?

In this case you are required to pay advance tax once, i.e. on or before 15th March of a financial year. However, any amount paid by way of advance tax on or before 31st day of March shall also be treated as advance tax paid during the financial year ending on that day.

What will happen if I don’t pay advance tax?

If you fail to pay the advance tax by 15th March of previous year, you will be liable to pay interest as per section 234C.

What will happen if I opt for presumptive taxation scheme (PTS) for small business but I declare the profit at lesser percentage of turnover/receipts than that mandated as per the PTS (i.e. I declare profits at a rate lesser than 8%)?

You can not opt for PTS if you are declaring profits at a rate lesser than the mandated rate. In such case, you need to maintain the books of account and get them audited from a Chartered Accountant and based on report of such audit you have to declare income when filing returns.

If I adopt the PTS for a small business initially, and then opt out of PTS in any of the subsequent five years, what will be the consequences?

Once you opt for PTS then you have to continue with it for the next five years if your turnover is less than 2 crore rupees. Even after having a turnover of less than 2 crores in any of the subsequent five years if you declare profits lesser than 8% (or 6%), then it is considered as withdrawal from PTS and you are barred from availing PTS for next five years from the assessment year in which you had withdrawn from PTS.

Who is eligible to take advantage of the presumptive taxation scheme of section 44ADA?

Any person resident in India, engaged in the following professions and having a turnover or Rs.50 lacs or less is eligible to take advantage of PTS.

  • Legal
  • Medical
  • Engineering or architectural
  • Accountancy
  • Technical consultancy
  • Interior decoration
  • Any other profession as notified by CBDT

As a professional, I adopt the PTS. How should I compute my taxable business income?

As a professional, if you adopt PTS, then your taxable income shall be 50% of your turnover or receipts. For example, if you have received receipts of, or your annual turnover is Rs.48 lacs, then you must declare taxable profits at 50% of such turnover i.e Rs.24 lacs.

After adopting PTS and computing my taxable income at the rate of 50% of my receipts, can I claim any deductions from such taxable income?

No. The income computed at the given rate shall be the final taxable income on which you have to compute tax and no further deductions are allowed from this income.

If I adopt the presumptive taxation scheme of section 44AD, then am I liable to pay advance tax in respect of income from business covered under section 44AD?

You are not required to pay advance tax in all the four quarters of a financial year but you are required to pay advance tax only once i.e. on or before 15th March of a financial year. However, any amount paid by way of advance tax on or before 31st day of March shall also be treated as advance tax paid during the financial year ending on that day.

What will happen if I don’t pay advance tax?

If you fail to pay the advance tax by 15th March of the previous year, you will be liable to pay interest as per section 234C.

What will happen if I opt for presumptive taxation scheme (PTS) for profession but I declare the profit at lesser percentage of turnover/receipts than that mandated as per the PTS (i.e. I declare profits at a rate lesser than 50%)?

You cannot opt for PTS if you are declaring profits at a rate lesser than the mandated rate. In such case, you need to maintain the books of account and get them audited from a Chartered Accountant and based on the report of such audit, you have to declare income in the income tax return.

What is presumptive taxation scheme (PTS) for transporters?

The PTS is available for persons who are engaged in the business of transport (plying and hiring) through goods vehicles and own 10 or lesser number of vehicles. In such cases, the taxable income shall be computed as follows:

  • In case of Heavy Goods Vehicle (the gross vehicle weight exceeds 12 tons) the taxable income shall be Rs. 1,000 per ton of gross vehicle weight for every month or part of a month during which the heavy goods vehicle is owned by the assessee in the previous year.
  • In case of vehicles other than heavy goods vehicle, the income shall be Rs. 7,500 for every month or part of the month during which the goods carriage is owned by the assessee in the previous year.

Who is eligible to take advantage of the PTS of section 44AE and which business is eligible for the PTS under section 44AE?

Everyone i.e. Individual, Firm, HUF, Company, etc. can take advantage of the presumptive taxation scheme of section 44AE and all business are also eligible for it.

Can a person who owns more than 10 goods vehicles adopt the presumptive taxation scheme of section 44AE?

As per the presumptive taxation scheme of section 44AE, income of a taxpayer will be computed at the rate of Rs. 7,500 per goods vehicle per month and in such a case the taxpayer can claim any further deductions from the presumptive income declaration.

  • As per the PTS of section 44AE, no expenses shall be allowed or disallowed. The income computed at the presumptive rate will be the final taxable income.
  • However, in case of the taxpayer being a partnership firm opting for the presumptive taxation scheme, deduction can be claimed on account of remuneration and interest paid to partners (computed as per the Income-tax Act) from the income computed at the presumptive rate.
  • No separate deduction on account of depreciation is available. However, the written down value of any asset used in such business shall be calculated as if depreciation as per section 32 is claimed and has actually been allowed.

If a person adopts the presumptive taxation scheme of section 44AE, then is he required to maintain books of account as per section 44AA?

No

If I adopt the presumptive taxation scheme of section 44AE, then am I liable to pay advance tax in respect of income from business covered under section 44AE?

Yes. In case of PTS for transporters advance tax needs to be paid in all quarters and not only in last quarter unlike the PTS for section 44AD and 44ADA.

FAQs on Capital Gain

What is Capital Gains Account Scheme?

If you have a profit from sale of a residential house and you have not invested such profits before filing return of income or before due date of RoI, then such an amount of capital gains needs to be deposited in the Capital Gains Account Scheme before due date of RoI and whenever the assessee purchases a new residential house, this amount can be withdrawn with permission from the Assessing Officer.

Can I claim exemption u/s 54EC & 54EE along with section 54?

Yes. You can claim exemption under all these sections together, but you have to exhaust exemption under section 54 first, since it doesn’t have a ceiling limit which is present in the other two.

Is the exemption valid in case of residential house purchased outside India?

No. The section specifically mentions that the new asset being a residential house must be acquired in India.

Can exemption can be claimed u/s 54 and 54F when capital gains from transfer of multiple properties are invested in a single residential property?

If other conditions as regards time limit etc. are fulfilled, exemption under section 54 is allowable where capital gains arising from sale of two residential houses are invested in a single residential house.

My capital gain is worked out at an amount more than actual profit I earned in the sale of my asset because of application of section 50C of the Income tax Act. Am I eligible for exemption of such deemed capital gains in entirety?

Yes. Where capital gain is assessed on notional basis under section 50C, whatever amount is invested in new residential house within prescribed period under section 54F would get benefit of deduction irrespective of fact that funds from other sources are also utilized for new residential house.

FAQs on Income from House Property - I

What is the meaning of “Income from house property”?

When you own a property, which may be a building, flat, house, bungalow, gala, factory building or a shop, it may or may not yield a rental income. Such income which you have received or could have received if the property was given on rent is subject to tax. This income is categorized under the head ‘Income from House Property’.

When can I have income from house property?

Three conditions are necessary to bring income under the head, ‘Income from House Property’:

  1. There must be a property consisting of building or building with a connected land. The building means bungalow, shops, gala, flat, apartments, factory building, farm house etc.
  2. The property must be owned by you. If not owned through a registered ownership, you must be eligible to receive the income from such property.
  3. The property must NOT be used by you for the purposes of business or profession owned by you

What is the meaning of ‘House Property’?

‘House Property’ implies ‘a building or buildings with lands connected thereto’. It means that it should be a superstructure which is capable of occupation, and the building must be the most prominent part of the said property comprising of land and building. Where the property comprises a mere vacant land or site, the income from that will not be brought under the head ‘Income from house property’ but will be assessed as income from ‘other sources’.

What is the meaning of self-occupied property (SOP)?

A self-occupied property is the one which is used by the person for his own residential purpose. If the person owns more than one self-occupied property, then only one property will be treated as self-occupied and the other will be considered as the property which is deemed to be let out. Accordingly, income from house property shall be determined for both these properties.

I own the property and I have not given the property on rent. It is vacant. I don’t earn income from this property? Can there be a taxable income from such property?

Yes. As per the Income tax law, if there is a property, there will be income. This income may be NIL or negative or positive. But there shall be income computed. The only exception to this rule is that ‘the property is occupied by the owner for the purpose of his business.’ Once there is a house property, the income from the same has to be computed as per the applicable provisions. This may result in NIL income or loss or taxable positive income.

Based on this principle, the taxation of house property is different for ‘Self Occupied Property’, ‘Vacant Property’ and ‘Let out Property’.

I have rented a property from someone and since I could not occupy that property or could only partly occupy, I have sub-let the property to a third party in exchange for a receipt of income. Is this receipt taxed as house property income?

The income or receipt can be taxed as ‘income from house property’ only when you own the property. This property is not owned by you and you are not entitled to legally receive income from such property. You are the tenant in the said property. Hence, the income received by you from sub-letting or partly sub-letting this property cannot be taxed as Income from House Property, but has to be taxed under ‘Income from other sources.’

I am not the owner of the land on which I have constructed the house. But as per municipal records, the house is in my name. Is the income taxable in my hands?

You need not be the absolute owner of the house property. It will suffice if you are the beneficial owner and are entitled to receive the income from such house property. This income is liable to be taxed in your hands as income from house property.

Can rental income on a property be taxed in the hands of a person who is not a registered owner of the property?

The income or receipt can be taxed as ‘income from house property’ only when you own the property and you are entitled to legally receive income from such property.

I have transferred my house property to my spouse through a gift. We are living together and not separated. In whose hands will income from the house property be taxed?

In such a case, you shall be the owner of the house property and hence the income shall be taxed in your hands. (Section 27(i) of the I T Act)

I have transferred my house property to my spouse as per the terms of the agreement of living separately from each other. In whose hands will the income from the house property be taxed?

As per section 27(i) of the IT Act, your spouse shall be the owner of the house property and hence the income shall be taxed in her/his hands, since the property stands transferred in connection with an agreement to live apart.

I have transferred my house property to my minor child who is not married. In whose hands will the income from the house property be taxed?

As per section 27(i) of the IT Act, you shall be the owner of the house property and hence the income shall be taxed in your hands.

How is income from a house property as per the Income tax Act different from the ‘rental income’ received from house property?

The rental income is received by a person against renting out of his property. The computation of income from house property is NOT solely dependent on this rental income. If you are not receiving rental income, it does not mean that there will be no income from House Property. The Income from house property is computed as per the relevant provisions of the Income tax Act after certain deductions from the rental income received by the person.

How is the income from house property computed?

The income from house property is computed after making certain deductions to the annual value or annual lettable value of the property. The first and most important step is the computation of annual value (AV) or (ALV) of the said property. The steps for computation of net income from house property are:(img)

What is meant by the annual value of the property?

This is the term used in the Income tax Act for computation of income from house property. It is the amount which can be yielded from the property in a year as income, as rent, service charges, etc. This is the starting point for computation of ‘income from house property’. This base value is used to make relevant additions/subtractions and then to compute the ‘income from house property’. The annual value of the property is actually the gross annual value (GAV) stated in the above example.

Under which head is the rental income from a shop charged to tax?

Shop being a building, rental income received from a shop is charged under Income from House Property.

What is the Annual Lettable Value (ALV) of the property? How is it computed?

  • This is the amount for which a particular property is expected to be given on rent in a particular year OR an amount of potential rent. This is also known as ‘fair value of rent’, ‘expected amount of rent’, etc.
  • It is computed as annual value or Gross Annual Value (GAV) in case of the property which is vacant throughout the year.
  • It is higher of the following:
    • Municipal value of the property–It is the value of the property mentioned in the municipal tax receipts or the value against which the municipal tax is determined.
    • Standard Rent – In case the property is controlled by Rent Control Act, then the standard rent is determined as per this Act.
    • Fair Rent – This is the amount of rent which is expected to be received by the owner of the property considering the amount of rent received on nearby similar properties.

How to compute the gross annual value (GAV) of the property which is vacant only for some time during the year?

In such a case, the GAV of the property shall be the annual expected rent from the property. The annual expected rent of the property shall be computed in following manner, depending on whether or not the property is governed by The Rent Control Act:

Does not fall under Rent Control Act Falls under Rent Control Act
Rent as per municipal valuation (A) Rent as per municipal valuation (A)
Fair amount of rent (B) Fair amount of rent (B)
Expected Rent (C) = Higher of (A) or (B) Expected Rent (C) = Higher of (A) or (B)
Standard Rent (D)
Gross Annual Value = Expected Rent (C) Gross Annual Value = Higher of (C) or (D)

Thus, in case of a property not falling under Rent Control Act, the expected rent from a property shall be the Gross Annual Value of the property.

FAQs on Income from House Property - II

How do I compute income from self-occupied property?

The gross annual value of the self-occupied property is ZERO or NIL. Accordingly, the standard deduction at 30% of the annual value shall also be ZERO or NIL. Therefore, the amount of interest paid by the person against home loan shall be the loss from house property which can be set off against income under any other head or carried forward to next assessment year.

Particulars Amount
Gross Annual Value Nil
Less: Municipal taxes paid by the assessee Nil
Net Annual Value (NAV) Nil
Less: Deduction u/s 24
1. Standard deduction at 30% of NAV Nil
2. Interest on borrowed capital (xxxx)
Income from House Property (It’s generally a loss) ( – )xxxx

What will be the tax implications if I occupy more than one property for my residence? Can I treat all these properties as self-occupied and compute income from them at NIL or Zero?

If the person has owned more than one self-occupied property, only one of them will be treated as self-occupied & the others will be treated and taxed as deemed to be let-out properties. The taxpayer can claim GAV as ‘Nil’ only for the one house property that he would consider as SOP (any 1 house of his choice). Other properties will be treated as deemed to be let-out & income from the same will be calculated accordingly. In such cases, the house whose income is computed at a higher value would be taken as Self Occupied Property (SOP).

I own two houses. One is a farmhouse that I visit on weekends and the other is in the city that I and my family live in. Is it correct to treat both these residences as self-occupied?

No. In such a case, one of the houses of which the income is higher as compared to the other, shall be treated as a self-occupied house, while the other would be treated as a deemed let out. For the latter, the annual value shall be taken as the higher of the municipal value and the amount of rent it is expected to yield.

How do I compute income from a property which is self-occupied for part of the year and let out for part of the year?

Such a property will be treated as been let-out throughout the year and income will be computed accordingly. However, while computing the taxable income in case of such a property, actual rent will be considered only for the let-out period.

I have received possession of a house in October 2018. Thus I have held the property only for a period of six months. This property was not given on rent and was vacant. I must compute the expected amount of rent that I might have received if the property would have been given on rent. The expected rent is Rs.10,000/- per month. Then annual value of my property shall be Rs.60,000/-. Is this correct?

No. In case of the property which is considered as deemed let out, the annual value of the property is to be computed for the entire year and not for the part of the year. Therefore, the annual value of the property shall be Rs.120,000/-.

I have rented out a part of my house property and I stay in another part of the same house property. In such case, how will the income be computed?

In this case, the two parts of the house shall be considered as independent house properties or taxable units.

  • The part in which you are staying shall be treated as a self-occupied property and the income shall be computed accordingly.
  • The part which is given on rent shall be treated as a let-out property and income shall be computed as income from let out property.
  • This can be applied to multiple units of a house property

For construction or buying a house, I have borrowed loans from friends and relatives and not borrowed home loan from bank. I am paying interest on such loans but not in the form of EMIs. Can I claim deduction on account of such interest paid?

Yes, as the source of the loan does not matter. However, the loan must be taken and utilized for purchase, construction, acquisition, renovation or repair of the house property. The person from whom loan is taken and to whom interest is paid must be in India and he must be liable for tax on such interest paid by you to him.

While computing income chargeable to tax under the head “Income from house property” in case of a let-out property, how much interest on housing loan can be claimed as deduction?

In case of a let-out property, there is no limit on the quantum of interest which can be claimed as deduction while computing income from house property.

I have given my shop on rent and I also facilitate services like providing of computers and other ancillary services to the tenant. I receive rent from the tenant which includes service charges. How should it be brought to tax?

In such cases, the best approach would be to bifurcate the rent amount into two categories —‘rent’ and ‘service charges’. The amount of rent received is to be charged as Income from House Property and the amount of service charges received is to be treated as ‘Income from other sources’.

My spouse and I jointly own a house in which both of us have invested equally from individual and independent sources. Can we split the rental income received between the two of us to be taxed in individual hands?

Yes, Rental Income received by each co-owner can be taxed proportionately and taxed in the hands of both independently as per your share in the said property.

I have received rent due for the past period in the current financial year. How do I offer it to tax?

If you recover any rent that was not previously realized, then such unrealized rent shall be taxed in the year in which such income is realized by you (whether or not you are the owner of that property in that year) after deducting a sum equal to 30% of such unrealized rent. ​

I have paid property tax for the past years in this year. Can I claim deduction for entire amount of property tax paid?

Yes. You can claim deduction for entire amount of property tax paid. The deduction on account of property tax is on a payment basis and not on the basis of charging year of such property tax.

FAQs on Long Term Bonds (54EC)

What are the types of long term assets specified for benefits u/s 54EC of the Act?

The long term assets specified under section 54EC of the Act are any bonds redeemable after three years issued by REC and NHAI.

Who can claim benefits under section 54EC of the Income tax Act?

Any class of taxpayers satisfying the conditions therein is eligible for the benefits u/s 54EC of the Income tax Act. Unlike section 54 and 54F which are applicable to only individual and HUF assessees, the benefits under this section are available to all classes of persons.

I have sold a building used for business which was depreciable and the depreciation is claimed by me on the same. Am I eligible for benefits under section 54EC?

Yes. If you have held the asset beyond a period of three years, you are eligible to claim benefits even though the depreciation on the same was claimed by you. This view is supported by numerous decisions of higher judiciary.

Is there a ceiling limit on the amount of exemption to be claimed under section 54EC of the Act?

Yes. From Assessment Year 2015-16 onward, this limit is capped at Rs. 50 lakhs.

What is the time limit within which I have to make investments in the specified long term asset?

You have to invest in the specified long term asset within a period of 6 months from the date of sale of original asset.

Is this benefit available against Short Term Capital Gains?

No. This benefit can only be claimed against long term capital gains.

Can I borrow loans against my investments in REC and NHAI bonds (specified assets)

Yes, you can borrow loans on the security of these assets, but you may not use the exemption u/s 54EC of the Act and income from Long Term Capital Gains will be taxed in the year in which you have borrowed such loans.

I have made investments in REC/NHAI bonds but the date of issue of bonds by REC/NHAI is beyond six months. Am I eligible?

The eligiblity for the benefits depends upon the date of payment by you towards investments in REC/NHAI bonds and date of receipt of such payments by REC/NHAI. If they have received your payments within a period of six months, you are eligible for the benefits under section 54EC.

I wanted to invest in REC/NHAI bonds but they are not available in market at this time and hence I am not able to invest my funds. What to do?

If bonds of assessee’s choice are not available throughout period of six months as provided under section 54EC, time to invest in bonds would get automatically extended till bonds are available in market; and assessee can purchase same and claim exemption under section 54EC accordingly.

Is it possible to invest more than Rs.50 lakhs in the REC/NHAI bonds?

No. After amendment in the Finance Act (No.2) 2014, it is not possible to invest more than Rs.50 lakhs for benefits under section 54EC of the Act. But you may consider investment u/s 54F or 54.

Is Capital Gains Account Scheme applicable for exemptions u/s 54EC of the Act?

No. It is applicable only to benefits under sections 54 and 54F

Can I claim benefits u/s 54EC, 54 and 54F at the same time?

The benefits of exemption u/s 54EC can be clubbed with those under either section 54 or 54F but not both.

What if I redeem the bonds issued by REC/NHAI before the period of three years after investment?

In that case, the income from long term capital gains shall be taxed in the Assessment Year in which such redemption is done

If I sell my asset situated outside India, can I claim exemption u/s 54EC

Yes, provided you invest the amount in three year bonds issued by REC/NHAI.

Want to know more about REC/NHAI Bonds?

How much can you invest?

You can invest a minimum of Rs. 10,000 and a maximum of Rs. 50 lakh. The face value is Rs. 10,000 per bond, so you can buy up to 500 bonds.

What is the Interest rate on such bonds?

Currently, an interest rate (coupon rate) of 6%, payable annually, is being offered on this bond annually on 1st April and final interest is payable at the time of maturity.

What is the tenure of this bond?

The NHAI /REC bond can be fully redeemed at maturity after three years. You cannot transfer these bonds in another person’s name. Also, it is a non-negotiable financial instrument, hence one should not expect to get money by keeping the bond as a security against any loan or advance, since this is not permitted.

What is the risk in this investment?

The bond comes with minimum risk and does not need daily monitoring. Moreover, you do not need to pay a commission to get the bond. The bond also comes with AAA/stable rating by Crisil Ltd and AAA(Ind)/(Affirmed) by Fitch.

How is the interest earned on these bonds taxed?

There is no tax deductible at source on the interest paid by these bonds. But the interest earned on these bonds is taxable. You will need to pay tax on the interest income as advance tax.

Can the bonds be owned jointly?

Yes, this bond can be held in the name of a single holder as well as jointly. Keep in mind that even if you make separate applications, individually or jointly, the aggregate investment should not exceed Rs. 50 lakh, or both of you may lose the benefit under section 54EC. You will be able to avail a nomination facility on these bonds.

FAQ related to residential property (54)

What is the purpose of giving exemption from tax u/s 54 of the Income tax Act?

The purpose of provisions of section 54 is to provide relief to the taxpayer, who might like to shift residence from one place to another for variety of reasons, as may be thought proper by the taxpayer. It is not intended to provide exemption to the taxpayer, who is residing somewhere else, and acquires some other residential building, retains it, so as to allow it to become long-term asset, and then sell it.

Who can claim exemption u/s 54 of the Act?

The taxpayer being an individual or HUF who has gained profit from selling a residential house and who has invested sale proceeds from sale of such a residential house, in the purchase or construction of a residential house can claim the benefit.

What is the position in case of a sale of a house owned by a firm but which was occupied by partners for residential purposes?

The firm can not claim the benefit u/s 54. However, if the property owned by a firm was ocupied by partners for residence and on dissolution of the firm, partners sell their share of the property, they may exercise the option of benefit under this section.

What does the ‘appurtenant land’ in section 54 mean?

The benefit under this section is applicable in case of profit from sale of a residential house with appurtenant land. This means the ‘house’ has the prominent weight-age. If the land exists so as to serve the purpose of residential house, then it is an appurtenant land, like verandah, garden, or compound which exists so as to serve the purpose of a residential structure. In case an insignificant residential quarter exists on a large open plot, the said structure does not qualify for the purpose of a residential house within the meaning of sec. 54 of the Act.

What is the time limit for purchase of a new residential house from the time of sale of original house?

In order to be eligible for the benefit under this section the NEW house must be purchased within a period of ONE year BEFORE or TWO years AFTER the sale of original asset.

What is the time limit for construction of a new residential house from the time of sale of original house?

In order to be eligible for the benefit under this section the NEW house must be constructed within a period of THREE years AFTER the sale of original asset.

Can I start the construction of a NEW residential house before I sell my existing house?

GST-Calendar-Jan-2020-taxbuddy-comIn this case, you will NOT be eligible for exemption under section 54 of the Act.

I have demolished my old residential house and given the plot for development to a developer to construct a residential complex out of which I will receive some apartments. Am I eligible for exemption?

No. Since you have demolished the said building yourself and what you sold is actually your rights in the land, you may not be eligible for benefits under section 54 of the Act.

I have sold my residential house and invested the entire proceeds in purchase of a new house from a builder for which an agreement to sale is registered. However, the builder has not given possession of the flat. Am I eligible for benefits?

Yes. The key condition is utilization of sale proceeds for investment in a new residential house. If you could demonstrate that the delayed possession is beyond your control and you have paid substantial amounts to the builder, you are eligible for benefits u/s 54 of the Act.

Can I include the cost of the plot on which I am constructing a new house in computing exemption benefits?

Yes. As per CBDT Circular 667 (dated 18.10.1993), the cost of the plot purchased for construction of a new house can be included for computation of benefits u/s 54 of the Act.

I am getting the house constructed from builder/contractor. Am I eligible for exemption?

Yes. The taxpayer himself may not be required to construct the house.

I have purchased a flat from the builder through an agreement to purchase. The payments are being done as per the stage of construction. I have not received the possession of the said flat within two years and I have not registered a sale deed for purchase of a new flat/house from the builder. Am I eligible?

Yes. Agreement to purchase coupled with substantial payments is enough for claim of exemption. The date of possession is more important than the date of sale deed or purchase deed. However, if possession is beyond your control, you can claim so before the Assessing Officer (AO).

I have sold my house to a builder in exchange for a new house in a different building. There was no exchange of money or cash in the transaction. Am I eligible for benefits?

Yes. The word ‘purchase’ in section 54 ordinarily means buying for a price or equivalent of price by payment in kind or adjustment towards an old debt or for other monetary consideration. There is no stress in the section on ‘cash and carry’.

I have invested the sale proceeds of a residential house in purchase of a house in the name of me and my wife. Am I eligible for the benefits?

Section 54 does not explicitly state that the purchase to be made or the construction to be put up by the taxpayer should be in the name of the taxpayer. What is material is the investment of the sale consideration in acquiring the residential premises or constructing a residential premises. Once the sale consideration is invested in the above manner, the taxpayer would be entitled to the benefit conferred on him under this provision.

FAQs on interest income and TDS thereon

Is the TDS deductible on the amount of interest paid by the partnership firm to the partner?

No. Section 194A has exempted specifically such payments from the TDS liability.

Is the TDS deductible on the amount of interest paid by the Co-operative society to its members or other co-operative societies?

No. Section 194A has exempted specifically such payments from the TDS liability.

I am having bank accounts in different branches of the same bank. The interest amount in any one of the branches does not exceed Rs. 10000. Is the TDS deductible from the amount of interest income?

As per section 194A of the Act, the core banking solutions of the banks and societies have to be taken into account for considering whether the TDS has to be applied or not.