Tax

Add: Education Cess @ 2% 220 Tax on total income (including arrears) (C) 11,220 Total Income excluding arrears 1,40,000 Tax on ₹1,40,000 4,000 Add: Education Cess @ 2% Tax on total income (excluding arrears) (D) 80 Difference between C & D 4,080 Relief u/s 89 (I – II) II 7, 140 Tax payable for A.Y. 2020-21 ( ₹26,520 – ₹1,180) 1,180 25,340 Answer-14 (i) The eligible exemption u/s 10(13A) in respect of house rent allowance received would be least of the following: (a) Actual house rent allowance (HRA) received ₹ ₹ (b) Excess of rent paid over 10% of basic salary 1,20,000 1,80,000 Rent paid (15,000 × 12) 18,000 1,62,000 Less:10% of basic pay (i.e. 10% of ₹1,80,000) 90,000 (c) 50% of salary (i.e. 50% of ₹1,80,000) Least of the above is ₹90,000. The house rent allowance received by Mr. Khanna would be exempt to the extent of ₹90,000 u/s 10(13A). The balance of ₹30,000 is includible in his total income. (ii) Perquisite value in respect of concessional accommodation As per rule 3(1), where the accommodation is taken on lease or rent by the employer, the actual amount of lease rental paid or payable by the employer or 15% of salary, whichever is lower, as reduced by the rent, if any, actually paid by the employee is the value of the perquisite. (a) Actual rent paid by the employer = 15,000 × 12 = 1,80,000 (b) 15% of salary = 15% of basic pay plus special allowance = 15% of ₹3,00,000 = ₹45,000 Lower of the above is ₹45,000, which should be reduced by the rent of ₹60,000 paid by the employee (i.e. 5,000 × 12 = 60,000). The perquisite value is, therefore, nil. 101

(iii) We have to see the cash flow from both the options to find out which is more beneficial. ₹₹ Option 1: HRA Cash inflows [Basic Pay + HRA + Special Allowance] 4,20,000 Less: Cash outflows: Rent paid 1,80,000 Tax (See Working Note 1 below) NIL 1,80,000 Net cash flow 2,40,000 Option 2: Concessional accommodation Cash inflows [Basic Pay + Special Allowance] 3,00,000 Less: Cash outflows: Rent recovery 60,000 Tax (See Working Note 2 below) nil 60,000 Net cash flow 2,40,000 Since the net cash flow in both the option is equal, Mr. Khanna should opt for any one of the option. Working Notes – ₹ 1. Computation of tax under Option 1 (HRA): 1,80,000 Salary: 30,000 Basic Pay 1,20,000 HRA (taxable) 3,30,000 Special allowance 50,000 Total salary 2,80,000 Less Standard Deduction 16(ia) 1,500 Taxable salary 1,500 Tax on ₹2,80,000 NIL Less: Rebate u/s 87A NIL NIL Add: H & Education cess @ 4% Tax payable (including education cess) 2. Computation of tax under Option 2 (Concessional accommodation) 1,80,000 Salary: Basic Pay 102

Special allowance 1,20,000 Concessional accommodation Nil Gross salary Less Standard Deduction U/S 16(ia) 3,00,000 Tax on ₹2,50,000 50,000 Less: Rebate u/s 87A NIL NIL Add: Education cess @ 4% Tax payable (including education cess) nil nil nil Answer-15 Computation of total income of Mr. X for A.Y.2020-21 Particulars ₹ ₹ ₹ 54,000 2,25,000 Income from Salaries 54,000 36,000 18,000 Basic salary ( ₹25,000 × 9 months) 36,000 House rent allowance 1,12,500 4,00,000 93,750 Actual amount received 3,06,250 Less: Exemption u/s 10(13A) 70,000 Least of the following 3,15,000 (i) HRA actually received 2,45,000 (ii) Rent paid in excess of 10% of salary ( ₹6,500– ₹2,500) × 9 months (iii) 50% salary Gratuity 4,00,000 Actual amount received Less: Exemption u/s.10(10)(iii) 3,06,250 Least of the following 10,00,000 (i) Actual amount received (ii) Half month average salary for each year of completed service (1/2 × 24,500 × 25) (iii) Statutory limit Leave encashment Actual amount received Less: Exemption u/s.10(10AA) Least of the following 103

(i) Actual amount received 3,15,000 4,06,750 2,45,000 50,000 (ii) 10 months average salary (24,500 × 10) 3,06,250 Nil (iii) Cash equivalent of unavailed leave calculated on the basis 3,00,000 3,56,750 of maximum 30 days for every year of actual service rendered to the employer from whose service he retired 22,500 1,00,000 (see note 2 below) 40,000 2,56,750 37,500 (iv) Statutory limit 337.5 337.5 Gross Salary NIL Less Deduction U/S 16(ia) NIL NIL Profits and gains of business or profession Business loss of ₹80,000 to be carried forward as the same cannot be set off against salary income. Gross Total income Less: Deduction u/s.80C RPF PPF NSC Total income Tax on total income Less: Rebate u/s 87A Add: Health & Education cess @ 4% Tax payable Tax payable (rounded off) Note: The leave entitlement of Mr. X as per his employer’s rules is not given in the question. It is assumed that the leave entitlement of Mr. X as per his employer’s rules is 30 days credit for each year of service. Since Mr. X had accumulated 15 days per annum during the period of his service, he would have availed/taken the balance 15 days leave every year. Leave entitlement of Mr. X on the basis of 30 days for every year of = 30 days/year × 25= 750 actual service rendered by him to the employer days Less: Leave taken /availed by Mr. X during the period of his service = 15 days/year × 25= 375 days Earned leave to the credit of Mr. X at the time of his retirement 375 days Cash equivalent of earned leave to the credit of Mr. X at the time of his = 375 × 24,500 /30= retirement ₹3,06,250 104

Answer-16 Computation of taxable income and tax liability of Smt. Savita Rani for A.Y. 2020-21 Particulars ₹ ₹ Income from salary 91,800 5,40,000 15,000 1,44,000 Basic salary (45,000 × 12) 5673.60 72,000 7,495.00 DA (12000 × 12) 9,720 6,000 House Rent allowance (full taxable) 7,71,720 50,000 Employer’s contribution to RPF in excess of 12% is taxable as salary 7,21,720 income. 30,000 28,368 12% of salary is ₹82,080. Employer’s contribution is 15% of (salary plus 7,80,088 50% of D.A.), which is ₹91,800. 1,06,800 Excess contribution is ( ₹91,800 – ₹82,080) 6,73,288 Perquisite in respect of interest free loan (See Note 1 below) 5673.60 ₹1,50,000 × 8%× ½ 41,484.00 Gross Salary 1,886.00 Less Deduction U/S 16(ia) 49,044.00 Taxable Salary 49,040.00 Income from house property (of which Smt. Savita Rani is the deemed owner) – See Note 2 below Long term Capital Gain: Gross Total Income Deduction U/s.80C – in respect of RPF contribution Deduction U/s.80D – Medi claim Total Income Income tax payable on long term capital gains: (i) 20% on ₹28,368 or (ii) 10% of ₹74,950 (u/s.112) Tax on long term capital gain – whichever is less Income tax payable on income other than LTCG (i.e. ₹6,73,288–28,368) i.e. ₹6,44,920 Add: H & EC @4% Total tax payable Total tax payable (rounded off) 105

Notes: 1. The rate of interest charged by SBI as on 1.4.2017 in respect of car loan is assumed at 8%. 2. As per section 27, any property transferred to the minor child without adequate consideration would be deemed to be the property of the assessee. Therefore, the income from house property of ₹30,000 (computed) is to be assessed in the hands of Smt. Savita Rani. Answer-17 Computation of taxable income of Ramesh for the assessment year 2020-21 Particulars ₹₹ Income from salary Basic pay: April to June(10,000 × 3) 30,000 Basic pay: July to November (12,000 × 5) 60,000 Dearness allowance @ 50% basic pay 45,000 Transport allowance ₹1500×8 12,000 Gratuity (i) Statutory limit ₹10,00,000 1,38,000 (ii) Half month average salary ₹8,100 × 20 yrs = 1,62,000 285,000 (iii) Actual amount received = ₹3,00,000 50,000 Least of the above is exempt. Balance is taxable Less deduction u/s 16(ia) Income from House property: Self-occupied – ALV Nil Less: Interest on monies borrowed u/s.24 24,000 Income from house property Income from other sources: Fixed deposit interest (24,000) Gross total income 18,000 2,29,000 Note 1: Average salary of 10 months preceding the date of retirement is to be computed: 60,000 Basic pay 10,000 × 6 48,000 Basic pay 12,000 × 4 1,08,000 Total 54,000 Add: 50% DA – eligible for retirement benefits 1,62,000 106

Average salary: 1,62,000/10 16,200 Half month average salary 16,200 / 2 8,100 Answer-18 ₹ ₹ Computation of taxable income of Shri Hari for the A.Y. 2020-21 2,40,000 72,000 Particulars 24,000 Basic salary (20,000 × 12) 14,400 Dearness allowance @ 30% Transport allowance Nil (Deduction under Transport allowances are abolished ) Nil Motor car maintenance borne by employer (36,000 – 1,800 x 12) Nil Expenditure on accommodation while on official duty not a perquisite and hence not chargeable to tax Nil Loan from recognized provident – not chargeable to tax Value of lunch provided during working hours (assumed all meals for less Nil than ₹50/meal) 3,31,200 Residence telephone bill –not taxable 50,000 Computer provided in the residence of employee by the employer – not chargeable to tax (Rule 3(7)(vii)) 3,200 Gross Salary 2,78,000 Less Deduction u/s 16(ia) 3,200 Less: Deduction under chapter VI-A Nil Deduction u/s.80Din respect of medical insurance premium paid by cheque Premium paid in cash not eligible for deduction Taxable income Answer-19 Foregoing of salary – Waiver by an employee of his salary is foregoing of salary. Once salary accrues, subsequent waiver does not absolve him from liability to income-tax. Surrender of salary – If any employee surrenders his salary to the Central Government under the Voluntary Surrender of Salaries (Exemption from Taxation) Act, 1961, the surrendered salary would not be included in computing his taxable income, whether he is a private sector/public sector or Government employee. 107

Answer-20 In the case of Mr. X, it becomes an obligation which the employee would have discharged even if the employer did not reimburse the same. Hence, the perquisite will be covered u/s 17(2)(iv) and will be taxable in the hands of Mr. X. This is taxable in the case of all employees. In the case of Mr. Y, it cannot be considered as an obligation which the employee would meet. The employee might choose not to have a domestic servant. This is taxable only in the case of specified employees covered by section 17(2)(iii).Hence, there is no perquisite element in the hands of Mr. Y. Answer-21 Computation of taxable income of Mr. Vignesh for the Assessment Year 2020-21 Particulars ₹ 5,52,000 Income under the head “salaries” 82,800 Salary [ ₹46,000 × 12 ] 2,000 24,000 Medical facility[ in the hospital maintained by the company exempt] Nil Rent free accommodation 12,000 10,000 [Rule 3(1) ] – 15% of salary is taxable Use of dining table for 4 months [ ₹60,000 × 10 /100 × 4 /12] Valuation of perquisite of interest on loan [Rule 3(7)(i)] – assumed 9% is taxable which is to be reduced by actual rate of interest charged i.e. [ 9% - 5% = 4%] Gift given on the occasion of wedding anniversary ₹4,750 not liable to tax Perquisite on sale of dining table cost 60,000 Less: Depreciation on straight line method @ 10% for 3 years 18,000 W.D.V 42,000 Less: Amount paid by the assessee 30,000 Purchase through credit card – not being a privilege but covered by section 17(2)(iv) Original cost of car 2,50,000 Less: Depreciation from 16.7.16 to 15.7.2017 @ 20% 50,000 2,00,000 Less: Depreciation from 16.7.2017 to 15.7.18 @ 20% on WDV 40,000 Value as on 14.07.2019 - being the date of sale to employee 1,60,000 108

Particulars 80,000 ₹ Less: Amount received from the assessee on 14.07.2017 80,000 Gross salary ₹ 7,62,800 Computation of taxable income 5,000 ₹ NIL 7,62,800 Particulars 1,500 50,000 Income from salaries Nil Less Deduction u/s 16 (ia) 6,500 Income from other sources 90,000 7,19,300 (i) Interest on fixed deposit with a company 10,000 (ii) Income from specified mutual fund exempt u/s 10(35) 1,00,000 (iii) Interest received by minor daughter (3,000 -1500) 6,19,300 (iv) Income from UTI received by a handicapped minor son (Assuming 36,360.00 1,454..40 that the disability is of the nature specified in section 80 U, section 37,814.40 64(1A) is not applicable - exempt U/s.10(35) 37,810.00 Gross total income Less: Chapter VI-A deductions Section 80 C – PPF & ICICI bonds Section 80 CCC – LIC Total Income Tax on above income of ₹6,69,300 Add: Health & Education cess @ 4% Total tax liability Total tax liability (R/o) Note: It is presumed that the housing loan was availed on 1.4.2019. 109

Answer-22 ₹ ₹ Computation of Total Income of Mrs. Lakshmi for A.Y. 2020-21 15,000 6,00,000 Particulars 7,200 2,40,000 Income from salary 1,00,000 Basic salary 15,000 1,50,000 Dearness allowance 3,00,000 30,000 Bonus 12,000 Commission (calculated as percentage of turnover) 3,25,000 7,800 Entertainment allowance 70,000 Children’s hostel allowance (See Note 1) 1,81,200 Less: Exemption (300 x 12 x 2) 13,79,000 Rent free unfurnished accommodation (Refer working Note 1) 50,000 Excess contribution to PF by employer (Refer working Note 2) Gross salary 1,50,000 Less Deduction u/s 16(ia) 10,000 Less: Deduction u/s.80C 11,69,000 LIC 58,450 PF 11,10,550 Deduction u/s.80CCC in respect of LIC pension fund 1,45,665.00 5,826.60 Deduction limited to ₹1,50,000 as per Sec.80CCE 1,51,491.60 Deduction u/s 80D 1,51,490.00 Total income before deduction u/s.80G Deduction u/s 80G: Limited to 10% of total income ₹1,16,900. Deduction @ 50% Total income Tax on total income Add: Education cess @ 3% Total tax liability Total tax liability (rounded off) 110

Working Notes: 6,00,000 1. Value of rent free unfurnished accommodation 2,40,000 1,00,000 Basic salary 1,50,000 Dearness allowance 30,000 Bonus 7,800 Commission @ 1% of turnover 11,27,800 Entertainment allowance 1,69,170 Children’s hostel allowance 70,000 Gross Salary 15 % of salary 3,00,000 Actual rent paid by the company 1,18,800 The least of the above is chargeable perquisite. 1,81,200 2. Employer’s contribution to P.F. in excess of 12% of salary Employer’s contribution Less: 12% of salary, DA & commission - 12% of ₹9,90,000 111

MULTIPLE CHOICE QUESTIONS 1. Mr. J is working with ABC Ltd. He joined the service on 1/1/2014 in the grade of ₹10,000 – which increase by ₹1000 on every completed yea. The Company gives him DA @ 25% of Basic Salary. He works in the sales department and has made sale of ₹20 lakhs for which company gives him a commission of 1%. The Company also gives him a bonus of ₹5,000 in the month of September. He also receives various Allowances of ₹6,000 pm and various perquisites which have the money value of ₹4,000 pm. Calculate Gross Salary for the AY 2020-2021. (a) 3,70,000 (b) 3,77,000 (c) 3,77,500 (d) 4,00,000 Answers questions (2 to 4) from the following information Mr. J is an employee of Haryana Government and gets salary of ₹8,000 pm. He receives Entertainment Allowance of ₹2,000 pm and DA of 100% of Basic Salary. Haryana Government has imposed Professional Tax upon him of ₹100 pm. On 15/3/2020 he has paid this amount for current year as well as for the next year in advance. 2. Deduction for entertainment allowance would be? (a) 24,000 (b) 5,000 (c) 19,200 (d) 18,000 3. Calculate his taxable salary for the AY 2020-2021 i.e. PY 2019-2021. (a) 2,08,600 (b) 2,16,000 (c) 2,11,000 (d) 2,09,000 4. Deduction for professional tax would be? (a) 1,200 (b) 2,400 (c) 3,600 (d) 2,500 Answer questions (5 to 6) from the following information Mr. J is a Non- Government employee receiving monthly salary of ₹4,500, monthly DA of ₹700 and monthly Entertainment Allowance of ₹600. He has paid ₹100 pm as Professional Tax. 5. Deduction for entertainment allowance would be? (a) zero (b) 10,800 (c) 7,200 (d) 5,000 6. Calculate his taxable salary . (b) 63,400 (a) 69,600 (d) 68,400 (c) 64,600 112

Answer questions (7 to 9) from the following information Mr. J was employed since 1st July 2002 in an establishment. His salary was fixed at ₹14,800 in the grade of ₹14,000- ₹400 - ₹22,000 w.e.f.1/7/2013. He got the benefit of 15% of salary as DA which is treated as forming part of the salary for the retirement benefits. He retired on 1/2/2020 and received ₹3,40,000 as a Gratuity from his employer. 7. Calculate his income under the head ‘Salary’ for the AY 2020-2021 if He is a Central government employee. (a) 1,96,420 (b) 5,36,420 (c) 3.36,000 (d) Income is not Taxable 8. Calculate his income under the head ‘Salary’ for the AY 2020-2021 if He is an employee of organization where Payment of the Gratuity Act applies (a) 3,24,000 (b) 4,36,420 (c) 3,42,424 (d) 1,46,004 9. Calculate the amount of gratuity exempt if he is not covered under payment of gratuity act? (a) 1,36,571 (b) 1,57,361 (c) 1,36,157 (d) 1,57,136 Answer questions (10 to 11) from the following information Mr. J was employed with ABC Ltd for last 23 years and 7 months and gets retired from that employer on15/5/2001 and he received Gratuity of ₹2,75,000 out of which ₹75,000 was exempt from tax. Thereafter, he joined the services of XYZ Ltd. Mr. J retires from XYZ Ltd. on 15/2/2020 and receives Gratuity of ₹3,15,000. From XYZ Ltd. he was receiving Basic Salary of ₹15,000 pm and DA of ₹3,500 pm out of which ₹2,000 pm was included in Salary for the Retirement benefits. He was in service of XYZ Ltd. for 16 years and 5 months. 10. Calculate the amount of gratuity exempt? (a) 10,00,000 (b) 1,36,000 (c) 3,15,000 (d) 75,000 11. Calculate taxable salary in hands of Mr. J. (a) 3,73,250 (b) 3,74,150 (c) 3,37,250 (d) 3,25,073 Answer questions (12 to 13) from the following information Mr. J retires from the services of Central Government on 31/3/2020 after doing the services of 37 years. He was getting the Basic Salary of ₹25,000 pm and DA of 10% of Basic Salary. He was given Entertainment Allowance of ₹1,000 pm and he was paying Professional Tax of ₹200 pm to Maharashtra Government. On retirement he has been given Gratuity of ₹10 lakhs. His pension was fixed at ₹11,000 pm out of which he has got 40% commuted to receive ₹7,92,000. 113

12. Calculate the exempted amount of commuted pension? (a) 2,97,000 (b) 2,79,000 (c) 7,92,000 (d) 7,29,000 13. Calculate his taxable salary for the AY 2020-2021. (a) 3,34,600 (b) 3,33,600 (c) 3,21,400 (d) 3,34,700 14. Mr. J is a Central Government employee working for a Basic Salary of ₹10,000 pm and DA of ₹2,000 pm. He retires on 31/12/2019 and Government gives him Gratuity of ₹3,00,000. At retirement his pension is fixed at ₹3,500 pm. On the date of retirement he commutes 40% of his pension and received ₹2,52,000. Calculate taxable salary for the AY 2020-2021. (a) 1,43,100 (b) 1,14,300 (c) 1,42,400 (d) 1,41,300 Answer questions (15 to 16) from the following information Mr. J is working in Indian Army getting Basic Salary of ₹7,500 pm and DA ₹2,500 pm. He gets various Allowances of ₹2,000 pm. In an encounter with terrorist he died on 1/1/2020. Government announces to give pension of ₹3,000 pm. 15. Calculate the taxable income of Mr. J (b) 1,04,100 (a) 1,14,120 (d) 1,08,000 (c) 1,41,000 16. Calculate the taxable income of Mrs.J (b) 9,000 (a) 7,500 (d) 6,000 (c) nil Answer questions (17 to 19) from the following information. Mr. J is working with PQR Ltd. getting a salary of ₹8,500 pm and DA is of ₹1,500 pm. He gets a Bonus of ₹2,000 in October 2019. In a road accident he died on 1/12/2019 and his employer has determined his pension of ₹4,500 pm which is given to his wife Mrs. J. Mrs. J is also working with PQR Ltd. getting salary income of ₹10,000 pm. 17. Calculate taxable salary of Mr.J (b) 78,000 (a) 80,000 (d) 11,700 (c) 77,100 114

18. Calculate taxable salary of Mrs.J (b) 1,22,000 (a) 1,20,500 (d) 1,20,000 (c) 1,21,000 19. Calculate taxable income of Mrs.J (b) 1,32,000 (a) 1,23,000 (d) 1,20,000 (c) 1,33,000 Answer questions (20 to 21) from the following information. Mr. J retired from the services from 1/11/2019 after serving for 18 years and 9 months. At the time of his retirement he was entitled to salary ₹5,000 pm, DA @20% of salary (60% of which forms part of Salary for the retirement purposes). On retirement he received a sum of ₹1,20,000 as Gratuity. He was entitled to a pension of ₹2,500 pm w.e.f 1/11/2019 and he got 60% of his pension commuted and received a sum of ₹1,50,000 as commuted pension. Compute his taxable salary for the AY 2020-2021. 20. Compute taxable salary if salary becomes due on last day of month. (a) 1,81,230 (b) 148,267 (c) 1,83,267 (d) 1,38,267 21. Compute taxable salary if salary becomes due on first day of next month. (a) 1,88,267 (b) 1,88,000 (c) 1,87,240 (d) 1,88,000 22. Mr. J retired from the services of ABC Ltd w.e.f 1/1/2020 after serving for 16 years and 7 months. At the time of the retirement he received ₹50,000 as Leave Encashment for un availed leave of 300 days. He was entitled to 40 days leave for each completed year of services. He was getting the Salary of ₹5,000 pm at the time of the retirement. He has received an increment of ₹500 w.e.f 1/7/2019. Compute the amount of leave encashment exempt from tax. (a) 24,200 (b) 22,400 (c) 24,000 (d) 20,400 115

1.(c) ANSWERS 17.(a) 2.(b) 18.(d) 3.(a) 9.(d) 19.(b) 4.(b) 10.(b) 20.(c) 5.(a) 11.(a) 21.(a) 6.(d) 12.(c) 22.(b) 7.(a) 13.(a) 8.(c) 14.(b) 15.(d) 16.(c) 116

SOLUTIONS Q1. Calculation of Gross Salary of Mr. J for the AY 2020-2021, i.e. PY 2019 – 20. Basic Salary ( ₹15,000 x 9) + ( ₹17,000 x 3) ₹1,86,000 Dearness Allowance 25% of ₹1,86,000 ₹46,500 Commission (1% of ₹20 lakhs) ₹20,000 Bonus ₹5,000 Allowances ( ₹6,000 X 12) ₹72,000 Perquisite ( ₹4,000 X 12) ₹48,000 Gross Salary ₹3,77,500 Calculation of Basic Salary ₹10,000 As on 1/1/2014 pm As on 1/1/2015 As on 1/1/2016 ₹11,000 As on 1/1/2017 pm As on 1/1/2018 As on 1/1/2019 ₹12,000 As on 1/1/2020 pm ₹13,000 pm ₹14,000 pm ₹15,000 pm ₹17,000 pm Q2. Calculation of deduction of Entertainment Allowance ₹24,000 ₹19,200 Deduction is Least of ₹5,000 Actual amount received 20% of salary, i.e., 20% of ₹96,000 Maximum limit of Q3. Calculation of Taxable Salary for the AY 2020-2021. Basic Salary ( ₹8,000 x 12) ₹96,000 Entertainment Allowance ( ₹2,000 x 12) ₹24,000 117

DA ( ₹100% of B.S.) ₹96,000 ₹2,16,000 Gross Salary Working note Less: 16 (ii) Entertainment Allowance ( ₹100 x 12 x 2) ₹5,000 Less: 16 (iii) Professional Tax paid ₹2,400 ₹2,08,600 Taxable Salary ₹50,000 Less Standard Deduction 16(ia) ₹ 1,58,600 Taxable salary ₹54,000 Q6. Calculation of Taxable Salary for the AY 2020-2021. ₹8,400 ₹7,200 Basic Salary ( ₹4,500 X12) ₹69,600 DA ( ₹700 X12) Entertainment Allowance ( ₹600 X12) Gross Salary Less Professional tax paid 16(iii) ₹1,200 Less Standard Deduction 16 (ia) ₹50,000 ₹18,400 Q7. Calculation of Basic Salary of Mr. J. ₹14,800 ₹15,200 1/7/2013 ₹15,600 1/7/2014 ₹16,000 1/7/2015 ₹16,400 1/7/2016 ₹16,800 1/7/2017 ₹17,200 1/7/2018 1/7/2019 If Mr. J is a Central Government employee: Calculation of Taxable Salary Basic Salary ( ₹16,800 X 3 ) + ( ₹17,200 X ₹1,70,800 7) DA ₹25,620 Gratuity 15 % of ₹1,70,800 Less: Exempt u/s 10(10) Nil Taxable Salary ₹3,40,000 ₹1,96,420 ₹3,40,000 Q8. If Mr. J is covered under the Payment of Gratuity Act, 1972: Calculation of Taxable Salary 118

Basic Salary ( ₹16,800 X 3 ) + ( ₹17,200 x ₹1,70,800 7) DA ₹25,620 Gratuity 15 % of ₹1,70,800 Less: Exempt u/s 10(10) ₹1,46,004 Taxable Salary ₹3,40,000 ₹3,42,424 ₹1,93,996 Least of the following amount of Gratuity is exempt from tax ₹3,40,000 ₹10,00,000 (a) Actual amount received ₹1,93,996 (b) Maximum limit of (c) 15/26 x Salary x 17 years = 15/26 x ₹19,780 x 17 years Q9. Least of the following amount of Gratuity is exempt from tax ₹3,40,000 ₹10,00,000 (a) Actual amount received ₹1,57,136 (b) Maximum limit of (c) 15/30 x Avg. Salary x 16 years = 15/30 x ₹19,642 x 16 years Calculation of Average Salary 17,200 + 2,580 19,780 17,200 + 2,580 19,780 Jan 17,200 + 2,580 19,780 Dec 17,200 + 2,580 19,780 Nov 17,200 + 2,580 19,780 Oct 17,200 + 2,580 19,780 Sep 17,200 + 2,580 19,780 Aug 16,800 + 2,520 19,320 July 16,800 + 2,520 19,320 Jun 16,800 + 2,520 19,320 May Average salary is 1,96,420 / 10 =19,642 Apr Q10. Not Covered under Gratuity Act---Least of the following amount of gratuity is exempt from tax (a) Actual amount received ₹3,15,000 (b) Maximum limit of ₹10,00,000 less (c) 15/30 x Avg. Salary x 16 years = 15/30 x ₹17,000 x ₹75,000 , i.e., 16 years ₹9,25,000 ₹1,36,000 119

Calculation of Average Salary Average salary is BS + DA(R) + Commission on % basis of turnover Jan 15,000 + 2,000 + 0 17,000 Dec 15,000 + 2,000 + 0 17,000 Nov 15,000 + 2,000 + 0 17,000 Oct 15,000 + 2,000 + 0 17,000 Sep 15,000 + 2,000 + 0 17,000 Aug 15,000 + 2,000 + 0 17,000 July 15,000 + 2,000 + 0 17,000 Jun 15,000 + 2,000 + 0 17,000 May 15,000 + 2,000 + 0 17,000 Apr 15,000 + 2,000 + 0 17,000 Average salary 17,000 X 10 / 10 17,000 Q11. Calculation taxable Salary of Mr. J ₹1,57,500 ₹36,750 Basic Salary ( ₹15,000 x 10.5) DA ( ₹3,500 X 10.5) ₹1,79,000 Gratuity ₹3,73,250 Less: Exempt u/s 10(10) ₹3,15,000 Taxable Salary ₹1,36,000 ₹71,250 Q12. Calculation of Taxable Salary ₹23,750 Calculation of Un-commuted pension ₹19,000 Q13. Calculation of Taxable salary of Mr. J ( ₹7,500 x 9.5 Basic Salary month) ₹1,14,000 DA ( ₹2,500 x 9.5 month) Allowance ( ₹2,000 x 9.5 Taxable Salary month) Q14. Computation of Total Income Q15. Calculation of Mrs. J’s Income 120

Q16. Calculation of Taxable income of Mrs. J Q17. 20-21 Calculation of Total Income of Mr. J Calculation of Total Income of Mrs. J Income from Salary ₹80,000 Income from Salary ₹1,20,000 Income from House Property Nil Income from House Nil Property Income from PGBP Nil Income from PGBP Nil Income from Capital Gain Nil Income from Capital Nil Gains Income from other Nil Income from other Sources sources Family pension ( ₹4500 × 4) ₹18,000 Total income ₹80,000 Less: exempt ₹6,000 ₹1,32,000 Lower of the following is exempt: (a) Limit ₹15,000 (b) 1/3 of ₹18,000 ₹6,000 Total Income Q20. Calculation of Taxable Salary when salary gets due on the last day of the month Q21. Calculation of Taxable Salary when salary gets due on the first day of the next month Not Covered under Gratuity Act—Least of the following amount of Gratuity is exempt from tax Q22. Leave Encashment exempt from Tax is least of Calculation of salary Salary =Basic Salary + DA (for the retirement purposes) + Commission on % basis of turnover Dec ₹5,000 + 0 + 0 ₹5,000 Nov ₹5,000 + 0 + 0 ₹5,000 Oct ₹5,000 + 0 + 0 ₹5,000 Sept ₹5,000 + 0 + 0 ₹5,000 Aug ₹5,000 + 0 + 0 ₹5,000 July ₹5,000 + 0 + 0 ₹5,000 Jun ₹4,500 + 0 + 0 ₹4,500 May ₹4,500 + 0 + 0 ₹4,500 April ₹4,500 + 0 + 0 ₹4,500 121

March ₹4,500 + 0 + 0 ₹4,500 Average salary is ₹5,000 x 6 + ₹4,500 x 410 ₹4,800 Calculation of Unavailed leave Company’s data As per Income tax rules 40 30 Leave allowed 16 16 Completed year of Job 640 480 Total leave 340 340 Leave availed 300 140 Leave Unavailed 122

Sub-Section 2.2 Income from House Property Learning Objectives After studying this unit, you would be able to understand –  when income is chargeable under the head “Income from house property”  what are the conditions to be satisfied for income to be chargeable under this head.  what is composite rent and what is the tax treatment for the same.  how to determine annual value of different categories of house property  the tax treatment for unrealized rent  what are the admissible deductions from annual value  what are the inadmissible deductions while computing income from house property  how to compute income from house property for different categories of house property  what is the tax treatment on recovery of unrealized rent and arrears of rent  what is meant by co-ownership and what is the tax treatment in respect of the same.  who are the deemed owners of house property  the cases where income from house property is exempt from tax. 2.2.1. Basis of Charge and Applicability – Section 22 (i) Property should consist of any building or land appurtenant thereto. (a) Buildings include not only residential buildings, but also factory buildings, offices, shops, godowns and other commercial premises. (b) Land appurtenant means land connected with the building like garden, garage etc. (c) Income from letting out of vacant land is, however, taxable under the head “Income from other sources”. (ii) Assessee must be the owner of the property (a) Ownership includes deemed ownership (see section 27) (b) The assessee must be the owner of the house property during the previous year. It is not material whether he is the owner in the assessment year or not. (iii) The property may be used for any purpose, but it should not be used by the owner for the purpose of any business or profession carried on by him. 123

2.2.2. Self-occupied and Let out House Property A self-occupied property means a property which is occupied throughout the year by the taxpayer for his residence or for his own use. A self-occupied property means a property which is occupied throughout the year by the owner for his residence. Thus, a property not occupied by the owner for his residence cannot be treated as a self- occupied property. However, there is one exception to this rule. If the following conditions are satisfied, then the property can be treated as self-occupied and the annual value of a property will be \"Nil\", even though the property is not occupied by the owner throughout the year for his residence: (a) The taxpayer owns a property; (b) Such property cannot actually be occupied by him owing to his employment, business or profession carried on at any other place and he has to reside at that other place in a building not owned by him; (c) The property mentioned in (a) above (or part thereof) is not actually let out at any time during the year; (d) No other benefit is derived from such property. Let out Property: A property is considered to be let out when the owner passes on the right of its occupancy or usage to another person against a consideration (rent). 2.2.3. Determination of Gross and Net Annual Value – Section 23 Particulars ₹ ₹ Gross Annual Value (see para 2.5 for detailed discussions) xxx Less: Municipal taxes paid during the year by the assessee xxx xxx Annual Value (also called Net Annual Value) xxx xxx Less: Deductions u/s 24 xxx (a) Standard deduction @ 30% of NAV xxx (b) Interest on borrowed capital Income from House Property Property Taxes (Municipal Taxes) (1) Property taxes are allowable as deduction from the GAV subject to the following two conditions: (a) It should be borne by the assessee (owner); and (b) It should be actually paid during the previous year. 124

(2) If property taxes levied by a local authority for a particular previous year is not paid during that year, no deduction shall be allowed in the computation of income from house property for that year. (3) However, if in any subsequent year the arrears are paid, then the amount so paid is allowed as deduction in computation of income from house property for that year. (4) Thus, we find that irrespective of the previous year in which the liability to pay such taxes arise, the deduction in respect of such taxes will be allowed only in the year of actual payment. 2.2.4. Deductions from Income from House Property – Section 24 30% of NAV is allowed as Deduction u/s 24(a) (a) This is a flat deduction and is allowed irrespective of the actual expenditure incurred. (b) In case annual value is nil or negative, the assessee will not be entitled to deduction of 30%. (c) Any expenditure incurred in respect of property shall not be allowed under any provision of the Act. Interest on borrowed capital is allowed as deduction u/s 24(b) (a) Interest payable on loans borrowed for the purpose of acquisition, construction, repairs, renewal or reconstruction can be claimed as deduction. (b) Interest payable on a fresh loan taken to repay the original loan raised earlier for the aforesaid purposes is also admissible as a deduction. (c) Interest relating to the year of completion of construction can be fully claimed in that year irrespective of the date of completion. (d) Interest payable on borrowed capital for the period prior to the previous year in which the property has been acquired or constructed, can be claimed as deduction over a period of 5 years in equal annual instalments commencing from the year of acquisition or completion of construction. Number of years taken to complete the construction, etc. is irrelevant. (e) There is no ceiling on interest deduction u/s 24(b) except in case of self-occupied property (discussed later on). Because of interest deduction there could be loss under head Income from House Property which could be set-off against other incomes of the assessee. (f) Deduction u/s 24(b) for interest is available on accrual basis. Therefore interest accrued but not paid during the year can also be claimed as deduction. (g) Interest on unpaid interest is not deductible. Amendments made by the Finance Act, 2019 The Finance Act, 2019 has amended Section 23(4) to provide that 125

Where there are more than two residential houses, which are in the occupation of the owner for his residential purposes than he may exercise an option to treat any two of the houses to be self- occupied. The other’s houses will be deemed to be let out and the annual value of such house(s) will be determine as per section 23(1)(a) that is the sum for which the property might reasonably be accepted to let from year to year. In other words, the annual value of two self-occupied houses opted by the assessee can be taken as NIL. The Finance Act, 2019 has amended section 24(b) to provide that- Where the assessee has opted for two houses to be treated as self-occupied, the deduction of amount of interest shall be in aggregate of Rs.30000 (in case property is made after five years starting from initial construction) or Rs.200000 (when property is made within 5 years) as the case may be, whether assessee has opted for one residential house or two residential houses to be self-occupied. Thus the aggregate of the amount of deduction of interest in the case of first and second self – occupied house shall not exceed Rs.200000. Annual Value of house property held as stock-in-trade which was not let-off during the whole of the previous year [Section 23(5)]: Amendment made W.e.f A.Y 2020-21 The Finance Act , 2019 has amended Section 23(5) as to extend the period of one year earlier to two years if the property is treated as stock-in trade in PY. Thus the annual value of the house property consisting of any building or land appurtenant thereto if held as stock-in-trade shall be taken as NIL for the period upto two years from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority. Earlier the exception was for one year from the date of completion of construction. Mr. J ownsa house property the details of which are as below:- Municipal Valuation ₹1,00,000 Fair Rental ₹1,12,000 Standard Rent ₹90,000 Actual Rent Received ₹11,000 per month Municipal Taxes ₹15,000 Municipal Taxes paid 40% of the above Repairs charges for the property ₹10,000 Insurance Premium ₹7,500 Mr. J has borrowed an amount of ₹5,00,000 @ 10% per annum from HDFC on 1st April 2014 and construction of the property was completed in April 2016. Calculate the income from house property for the PY 2019-2020. 126

Solution Calculation of House Property Income Less GAV 132000 MT 6000 Less NAV 126000 Less 24(a) 37800 Income 24(b) 70000 u/h HP 18200 Pre -construction interest 1/4/2014 31/3/2016 500000 x 10% x 2 = 100000/5 = 20000 Current Period:500000 x 10% = 50000 Total Interest 70000 Gross Annual Value – Section 23 Case A: Where the property is let out throughout the previous year Where the property is let out for the whole year, then the GAV would be the higher of – (a) Annual Letting Value (ALV) {also called expected rent} and (b) Actual rent received or receivable during the year (i.e. actual rent on accrual basis) Notes:  The ALV is the higher of fair rent (FR) and municipal value (MV), but restricted to standard rent (SR).  ALV cannot exceed standard rent (SR) but it can be lower than standard rent, in a case where standard rent is more than the higher of MV and FR.  Municipal value is the value determined by the municipal authorities for levying municipal taxes on house property.  Fair rent means rent which similar property in the same locality would fetch. In case fair rent is not provided in the examination, then assume fair rent equals to actual rent per month and then solve accordingly.  The standard rent is fixed by the Rent Control Act.  From the GAV computed above, municipal taxes paid by the owner during the previous year is to be deducted to arrive at the NAV. Case B: Where let out property is vacant for part of the year Where let out property is vacant for part of the year and owing to vacancy, the actual rent is lower than the ALV, then the actual rent received or receivable will be the GAV of the property. 127

Illustration-1 Compute NAV in the following cases assuming municipal taxes paidare ₹5,000 in each case. Case 1. House is let out @ 20000 pm. If FR is 30000 pm; MV is 36000 pm; SR is 28000 pm and period of vacancy is 3 months. Case 2. Assume in (1) house is Let out at 40000 p.m. Case 3. Assume in (1) above house is let out at 30000 p.m. Case 4. Assume in (1) above that house is let out at 40000 p.m. and remained vacant for 10 months. Case 5. Assume in (1) above house is let out at 28000 p.m. and was vacant for 3 month. Case 6. Assume in (1) above house is let out at 24000 p.m. and was vacant for 3 month. Solution Case 1 Expected rent 336000 276000 Case 2 Less: Loss of vacancy 60000 180000 Case 3 Actual Rent 276000 Case 4 GAV 336000 5,000 Case 5 Less: Municipal taxes paid 120000 2,71,000 NAV Expected rent 336000 216000 Less: Loss of vacancy 90000 360000 Actual Rent 360000 GAV 336000 5,000 Less: Municipal taxes paid 400000 3,55,000 NAV Expected rent 336000 246000 Less: Loss of vacancy 84000 270000 Actual Rent 270000 GAV 5,000 Less: Municipal taxes paid 2,65,000 NAV Expected rent Nil Loss of vacancy 80000 Actual Rent 80000 GAV 5,000 Municipal taxes paid 75,000 NAV Expected rent 252000 Loss of vacancy 128

Case 6 Actual Rent 336000 252000 GAV 72000 252000 Municipal taxes paid 5,000 NAV 2,47,000 Expected rent Loss of vacancy 264000 Actual Rent 216000 GAV 264000 Municipal taxes paid 5,000 NAV 2,59,000 Case C: In case of self-occupied property or unoccupied property (a) Where the property is self-occupied for own residence or unoccupied throughout the previous year, its Annual Value will be Nil. (b) The benefit of exemption of two self-occupied house is available only to an individual/HUF. (c) The expression “Unoccupied property” refers to a property which cannot be occupied by the owner by reason of his employment, business or profession at a different place and he resides at such other place in a building not belonging to him. (d) No deduction for municipal taxes is allowed in respect of such property. Deduction of Interest u/s 24(b) in respect of two self-occupied property where annual value is nil Conditions Interest deduction – maximum limit  Loan taken on or after 01/04/1999, & ₹2,00,000  Loan taken for purchase or construction, &  Purchase/construction is completed within 5 years from ₹30,000 the end of the financial year in which the loan was taken If any of the conditions stated above does not fulfilled, like:  Loan taken before 01/04/1999  Loan taken for repair, renewal or reconstruction  Purchase/construction gets completed after 5 years Note: Limit of ₹2,00,000 or ₹30,000 shall be applied on the interest amount inclusive of 1/5th of the accumulated interest of pre-construction period. Case D: Where a house property is let-out for part of the year and self-occupied for part of the year 129

(a) If a single unit of a property is self-occupied for part of the year and let-out for the remaining part of the year, then the Expected Rent or (ALV) for the whole year shall be taken into account for determining the GAV. (b) The ALV for the whole year shall be compared with the actual rent for the let out period and whichever is higher shall be adopted as the GAV. (c) However, property taxes for the whole year is allowed as deduction provided it is paid by the owner during the previous year. Illustration-2 Mr. J owns a house in Hyderabad, Municipal value of the property is ₹90,000. During the PY, the property was self-occupied for 3 months and let-out for ₹10,000 p.m. from July onwards. The tenant vacated on31st December and the property remained vacant during January and February. From March again it was let out for ₹11,000 p.m. Municipal taxes paid are ₹2,000. Solution: Calculation of NAV - PLO/ PSO House MV 90000 SO 3 months LO 6+1 months Vacant 2 months Rent 10000 x 6 60,000 11000 + 11000x 1 71000 GAV 90,000 Less: Municipal taxes 2,000 NAV 88,000 Case E: In case of deemed to be let out property (a) Where the assessee owns more than two properties for self-occupation, then the income from any two such properties, at the option of the assessee, shall be computed under the self-occupied property category and its annual value will be nil. (b) The other self-occupied/unoccupied properties shall be treated as “deemed let out properties”. (c) This option can be changed year after year in a manner beneficial to the assessee. (d) In case of deemed let-out property, the ALV shall be taken as the GAV. The question of considering actual rent received/receivable does not arise. Consequently, no adjustment is necessary on account of property remaining vacant or unrealized rent. 130

Municipal taxes actually paid by the owner during the previous year can be claimed as deduction. J owns three houses properties, which are situated in three different cities. All the house properties are meant for self-occupation of the assesses. The particulars of the house properties are as under. Municipal valuation Property A Property B Property C Fair rent 1,00,000 1,20,000 1,40,000 Standard rent 1,40,000 1,50,000 1,60,000 Municipal taxes paid 1,30,000 1,60,000 1,50,000 Interest on money borrowed 30,000 20,000 80,000 (on purchase/construction of house property) 35,000 20,000 15,000 Ground rent due Land revenue due 5,000 — 8,000 — 6,000 — Compute the income under the head House Property by making assumption in such a manner that the tax liability of J is minimum. Solution: Calculation of House Property Income assuming all houses are let out ABC GAV 130000 150000 150000 Less MT 30000 20000 80000 NAV 100000 130000 70000 24(a) 30000 39000 21000 24(b) 35000 20000 15000 House Property Income 35000 71000 34000 Various combinations to calculate House Property Income Option I A SO (35000) SO (20000) B DLO 34000 (21000) C 35000 SO (20000) House Property Income SO (15000) Option II A DLO 0 B C House Property Income 131

Option III A SO (35000) DLO 71000 B SO (15000) (21000) C House Property Income Answer is Option I because it has the least house property income. Case F: In case of a house property, a portion let out and a portion self-occupied (a) Income from any portion or part of a property which is let out shall be computed separately under the “let out property” category and the other portion or part which is self-occupied shall be computed under the “self-occupied property” category. (b) There is no need to treat the whole property as a single unit for computation of income from house property. (c) Municipal valuation/fair rent/standard rent, if not given separately, shall be apportioned between the let-out portion and self-occupied portion on reasonable basis. (d) Property taxes, if given on a consolidated basis can be bifurcated as attributable to each portion or floor on a reasonable basis. Illustration-3 Mr. J owns a House. The Municipal value of the house is ₹80,000. He paid ₹18,000 as local taxes during the year. He uses this house for his residential purposes but lets out half of the house at ₹3,000 p.m. with effect from 1/4/2019. Compute the annual value of the house. Solution: Calculation of NAV GAV LO ½ SO ½ Less MT 40000 Nil NAV 9000 Nil 31000 Nil Note: For the purpose of computing GAV, ALV (Annual Letting value) or expected rent shall always be considered for the whole year except in two cases: (a) House property is purchased/ constructed during the year. (b) House property is sold during the year. In these cases, ALV shall be considered for the period of ownership only. 132

Notional Income Instead of Real Income Thus, under this head of income, there are circumstances where notional income is charged to tax instead of real income. For example –  Where the assessee owns more than two house properties for the purpose of self- occupation, the annual value of two properties, at the option of the assessee, will be nil and the other properties are deemed to be let-out and income has to be computed on a notional basis by taking the ALV as the GAV.  In the case of let-out property also, if the ALV exceeds the actual rent, the ALV is taken as the GAV. Mr. J has let out a property on a rent of ₹9000 pm. Fair rent of the property is ₹10000 p.m. Whereas municipal value is ₹8000 P.m. J paid municipal taxes @10% during the previous Year. Construction of the house was completed on 25/2/16 with the help of a loan of ₹8,00,000 @12% raised on 1-4-11. Half of the loan was repaid on 31/3/14 and rest is still outstanding. Compute Mr. J’S income from house property for the assessment year 2020-21. Solution: Gross Annual value 1, 20,000 Less Municipal taxes 9600 Net annual value 110400 24 (a) 33120 148320 24(b) 115200[67200+48000] Income from HP (37920)Loss Interest for pre-construction period: 800,000 *12 *36 month [1-4-11 to 31-03-14] = 288000 *400000*12*12 month [31-03-14 to 31-03-15] = 48000 336000 1/5th of 336000 = (67200) to be allowed in 5 installments. Interest for Post Construction Period - 4L @ 12% = 48000 Interest will be aggregated from the date of borrowing till the previous year prior to the previous year in which the house is completed and till the date of completion of construction. Special Provisions Unrealised Rent – Explanation to Section 23 The amount of rent which the owner cannot realize shall be equal to the amount of rent payable but not paid by a tenant of the assessee and so proved to be lost and irrecoverable were a. The tenancy is bona fide; 133

b. The defaulting tenant has vacated, or steps have been taken to compel him to vacate the property; c. The defaulting tenant is not in occupation of any other property of the assessee; d. The assessee has taken all responsible steps to institute legal proceedings for the recovery of the unpaid rent or satisfies the Assessing officer that legal proceeds would be useless. The amount of actual rent received or receivable by the owner shall not include the amount of rent which the owner cannot realise. Following points may be noted in this regard:  Unrealised rent shall be subtracted from actual rent, and then balance actual rent shall be compared with ALV to compute GAV.  Unrealised rent of a particular year shall be subtracted from actual rent of that year only. As per the income tax return form, unrealized rent has been shown as deduction from gross annual value ( i.e after taking expected rent or actual rent whichever is higher).It is therefore, recommended that unrealized rent should be deducted after computation of Gross annual Value. The particular so far residential house are given below. Mr. Sunil furnishes the following particulars in respect of house property owned by him in Mumbai. Municipal Value : Rs.2, 30,000 Fair Rent : Rs. 2, 50,000 Actual Rent (per month) : Rs.22000 Municipal Taxes paid during the year: Rs.20000 The tenant vacated the property on 31.10.2019 and thereafter the property was let out for Rs.25000 per month. Mr. Sunil could not realize the rent for the month of September and October. Compute the annual value of the property for the AY 2020-21 Solution: a. Municipal Value : Rs.2, 30,000 b. Fair Rent : Rs.2, 50,000 c. Actual Rent (22000*7+ 25000*5): Rs.2.79, 000 Gross Annual Value : Rs.2, 79,000 Less: Unrealized rent : Rs. 44,000 Less: Municipal Tax : Rs. 20,000 Net Annual Value : Rs. 2, 15,000 134

Recovery of Unrealized Rent and Arrears of Rent – 25A UR AR Taxable as income of the previous year in which he recovers the unrealized rent. Taxable as income of the year in which Taxable in the hands of the assessee whether he is the he receives the arrears of rent. owner of that property or not. Taxable in the hands of the assessee 30% of amount to be allowed as deduction. whether he is the owner of that property or not. Unrealised rent means the rent which has been deducted from actual rent in any previous year for 30% of the amount of arrears shall be determining annual value. allowed as deduction. Arrears of rent is in respect of rent not charged to income-tax for any previous year. Mr. J has received a sum of ₹15000 from a defaulted tenant during July 2017 out of the unrealized rent of ₹25,000 due from him. Mr. J had claimed the unrealized rent of ₹25000 for the AY 2012-13 which the Assessing Office fully allowed as deduction u/s.24. Incidentally, Mr. J had sold his property during March 2017. Advice him about the chargeability of the amount of ₹15000 realized from the defaulted tenant. What will be your answer if the Assessing Officer had allowed only ₹10000 as deduction instead of ₹25000. Solution: (a) Even if assesses is not an owner recovery of URR is taxable u/h HP. Therefore [ ₹15,000 – ₹4500} 10,500 shall be taxable u/h HP. (b) Rs15000 shall not be taxable. Mr. J let out a house to Mr. K on 1/4/2012 @ ₹3000p.m.for five years upto 31/3/2017.After the expiry of five years, Mr. K refused to vacate the house. Hence, Mr. J filed a suit to get the house vacated and incurred expenses ₹1,000 in this connection. Later on Mr. J agreed to renew the tenancy for five years w.e.f.1/4/2017 if Mr .K pays him rent @ ₹4000p.m. K agreed to it and paid the arrears of rent from1/4/2017 to 31/3/2019, On 1/6/2019. Mr. J paid the following amount during the PY House tax ₹6000; Insurance premium ₹800; Ground rent of ₹500 and interest of ₹50000 Find out the income from house property for PY 2019-2020. Solution: Calculation of House Property Income GAV 48000 Less MT 6000 Less NAV 42000 24(a) 12600 24(b) 50000 135

House Property Income (20600) Add: Arrear of rent 96000 67200 46600 Less:30%u/s25B 28800 Income from house property Property Owned by Co-owners – Section 26 Where the house property owned by co-owners is let out, the income from such property shall be computed as if the property is owned by one owner and thereafter the income so computed shall be apportioned amongst each co-owner as per their specific share. Where the house property owned by co-owners is self-occupied by each of the co-owners, the annual value of the property of each co-owner will be Nil and each co-owner shall be entitled to a deduction of ₹30,000 / ₹2,00,000, as the case may be, u/s 24(b) on account of interest on borrowed capital. “Owner of house property” defined – Section 27 (Deemed owner) Situation Deemed owner Property transferred by an individual (husband/wife) to his spouse Individual (i.e. transferor) Exceptions (i.e. spouse shall be the owner in following cases):  Transfer for adequate consideration  Transfer in connection with an agreement to live apart (e.g. divorce)  Transfer before marriage (e.g. fiancée) Note: Individual shall be deemed to be the owner forever except in case relationship of husband & wife ceases to exist or in case of death of individual. Property transferred by an individual (father/mother) to his minor Individual child (i.e. transferor) Exceptions (i.e. child shall be the owner in following cases):  Transfer for adequate consideration  Married daughter Note: Individual shall be deemed to be the owner forever except in case minor attains majority or in case daughter gets married. Importable estate Holder Flat in co-operative society, company, housing society, etc. Member A person who is allowed to take or retain possession of any building Person in or part thereof in part performance of a contract of the nature possession referred to in section 53A of the Transfer of Property Act, 1882 If building is leased out for a period of 12 years or more. Lessee 136

Impact: Impact of the same is that in case lessee sub-lets the same property further, such income shall be computed as per provisions of Income from House Property only and not as per Income from Other Sources. Special Cases (i) Where property is held by the assessee as stock-in-trade of a business – Annual value of house property will be charged under the head “Income from house property”. (ii) Where the assessee is engaged in the business of letting out of property on rent – Annual value of house property will be charged under the head “Income from house property”. (iii) Letting out is supplementary to the main business (a) Where the property is let out with the object of carrying on the business of the assessee in an efficient manner, then the rental income is taxable as business income, provided letting is not the main business but it is supplementary to the main business. (b) In such a case, the letting out of the property is supplementary to the main business of the assessee and deductions/allowances have to be calculated as relating to profits/gains of business and not relating to house property. (c) E.g. letting out properties to employees, letting out property to bank branch (iv) Composite Rent Meaning of composite rent: The owner of a property may sometimes receive rent in respect of building as well as – 1. other assets like say, furniture, plant and machinery. 2. for different services provided in the building, for e.g. – (a) Lifts; (b) Security; (c) Power backup; The amount so received is known as “composite rent”. Tax Treatment of Composite Rent (1) Where composite rent includes rent of building and charges for different services (lifts, security, etc.), the composite rent is has to be split up in the following manner – (a) the sum attributable to use of property is to be assessed u/s 22 as income from house property; (b) the sum attributable to use of services is to charge to tax under the head “Profits and gains of business or profession” or under the head “Income from other sources”. 137

(2) Where composite rent is received from letting out of building and other assets (like furniture) and the two lettings are not separable – (a) If the letting out of building and other assets are not separable i.e. the other party does not accept letting out of buildings without other assets, then the rent is taxable either as business income or income from other sources; (b) This is applicable even if sum receivable for the two lettings is fixed separately. (3) Where composite rent is received from letting out of buildings and other assets and the two lettings are separable – (a) If building is let out along with other assets, but the two lettings are separable i.e. letting out of one is acceptable to the other party without letting out of the other, then income from letting out of building is taxable under “Income from house property”; (b) Income from letting out of other assets is taxable as business income or income from other sources; (c) This is applicable even if a composite rent is received by the assessee from his tenant for the two lettings. Note: Rent attributable to services, assets, etc. shall be subtracted from actual rent, and balance actual rent shall be compared with ALV to compute GAV. 138

SUMMARY 1. Rent of building (residential or commercial) taxable under this head. 2. Assessee must be the owner 3. If used for business or let out to employees, then PGBP head shall apply 4. Income = GAV – municipal taxes = NAV – standard deduction @ 30% - interest on borrowed capital 5. Municipal taxes on actually paid basis 6. Interest on accrual basis = RPY interest + 1/5th of preconstruction interest. 7. Section 23 – GAV = Annual Letting Value/Expected Rent (Fair Rent or Municipal Value, whichever is higher, but restricted to standard rent) or Actual rent, whichever is higher. 8. ALV shall always be of full year & actual rent shall be of period actually let out. Unrealised rent shall be subtracted from actual rent and balance actual rent shall be compared with ALV to determine GAV. 9. Self-occupied house = NAV shall be NIL. Interest deduction limited to ₹2,00,000 (inclusive of 1/5th of pre-construction interest) 10. More than two self-occupied house = except two house, all other shall be deemed to be let out. 11. Arrears of rent – standard deduction allowed. Recovery of unrealised rent – standard deduction allowed 12. Co-ownership – in case of self-occupied house, interest deduction of ₹2,00,000 allowed to each co-owner. 13. Section 27 – Deemed owner – transferors to spouse or minor child. 139

PRACTICE QUESTIONS Question-1 Mr. Kalpesh borrowed a sum of ₹30 lakhs from the National Housing Bank towards purchase of a residential flat. The loan amount was disbursed directly to the flat promoter by the bank. Though the construction was completed in May, 2019, repayments towards principal and interest had been made during the year ended 31.3.2020. In the light of the above facts, state: (i) Whether Mr. Kalpesh can claim deduction u/s 24 in respect of interest for the assessment year 2020-21; (ii) Whether deduction u/s 80C can be claimed for the above assessment year, even though the construction was completed only after the closure of the year. Question-2 Mr. X owns one residential house in Mumbai. The house is having two units. First unit of the house is self-occupied by Mr. X and another unit is rented for ₹8,000 p.m. The rented unit was vacant for 2 months during the year. The particulars of the house for the previous year are as under: Standard rent ₹1,62,000 p.a. Municipal valuation ₹1,90,000 p.a. Fair rent ₹1,85,000 p.a. Municipal tax 15% of municipal valuation Light and water charges ₹500 p.m. Interest on borrowed capital ₹1,500 p.m. Lease money ₹1,200 p.a. Insurance charges ₹3,000 p.a. Repairs ₹12,000 p.a. Compute income from house property of Mr. X for the A.Y. Question-3 Mrs. Indu, a resident individual, owns a house in U.S.A. She receives rent @ $ 2,000 per month. She paid municipal taxes of $ 1,500 during the financial year 2019-20. She also owns a two storied house in Mumbai, ground floor is used for her residence and first floor is let out at a monthly rent of ₹10,000. Standard rent for each floor is ₹11,000 per month. Municipal taxes paid for the house amounts to ₹7,500. Mrs. Indu had constructed the house by taking a loan from a nationalised bank on 20.6.2015. She repaid the loan of ₹54,000 including interest of ₹24,000. The value of one dollar is to be taken as ₹60. Compute total income from house property of Mrs. Indu. 140

Question-4 Mr. Ramesh owns a house property which is let out. During the previous year ending 31.3.2020 he receives (i) arrears of rent of ₹30,000 and (ii) unrealised rent of ₹20,000. You are requested to (a) state, how they should be dealt with as per the provisions of the Act, and (b) compute the income chargeable under the head “Income from house property”. Question-5 Pritam occupied two flats for his residential purposes, particulars of which are as follows: Municipal valuation Flat 1 Flat 2 Fair rent ₹ ₹ Fair rent under Rent Control Act 90,000 45,000 Municipal taxes paid 1,20,000 40,000 Fire Insurance 80,000 Interest payable on capital borrowed for purchase of flat Not 10% available 1,000 40,000 10% 600 Nil Income of Pritam from his proprietary business - Pritam warehousing corporation is ₹6,50,000. Determine the taxable income and tax liability for the assessment year 2020-2021, on the assumption that he contributes ₹80,000 towards the public provident fund. You are informed that Pritam could not occupy Flat 2 for two months commencing from December 1, 2019 and that he has attained the age of 59 on 23rd August, 2019. Question-6 Mr. Rahul Jadav furnishes the following particulars relating to his house properties and other incomes and expenditure for the year 2019-20: (i) First House: This house is taken by him on lease for 10 years which is let to a tenant, for his residence, at a monthly rent of ₹2,400. 141

He has incurred the following expenses during this year: ₹1,000pm ₹200pm Lease rent ₹200pm Salary of Durban Interest on loan taken to pay for the acquisition of the lease (ii) Second House: This house was constructed by him in 2005, but was transferred to his wife in 2009 out of love and affection. He, however, continues to stay in this house with his wife till date. He has taken a loan for the construction of this house for which interest of ₹6,000 becomes due for the year, but had not been paid by him. He has paid repair expenses of ₹1,000 during the year. (iii) Taxable income from business for this year amounts to ₹64,000. Compute gross total income of Mr. Rahul Jadav for the assessment year 2020-2021. Question-7 Ram owned a house property at Madras which was occupied by him for the purpose of his residence. He was transferred to Bombay in June, 2019 and therefore he let out the property with effect from 1st July, 2019 on a monthly rent of ₹3,000. The corporation tax payable in respect of the property was ₹6,000 of which 50% was paid by him before 31.3.20. Interest on money borrowed for the construction of the property amounted to ₹20,000. Compute the income from house property for the assessment year 2020-21. 142

ANSWERS Answer-1 (a) Interest on borrowed capital is allowed as deduction u/s 24(b) Interest payable on loans borrowed for the purpose of acquisition, construction, repairs, renewal or reconstruction of house property can be claimed as deduction u/s 24(b). Interest payable on borrowed capital for the period prior to the previous year in which the property has been acquired on constructed, can be claimed as deduction over a period of 5 years in equal annual instalments commencing from the year of acquisition or completion of construction. It is stated that the construction is completed only in May, 2018. Hence, deduction in respect of interest on housing loan cannot be claimed in the assessment year 2018-19. (b) Clause (xviii) of section 80C is attracted where there is any payment for the purpose of purchase or construction of a residential house property, the income from which is chargeable to tax under the head ‘Income from house property’. Such payment covers repayment of any amount borrowed from the National Housing Bank. However, deduction is prima facie eligible only if the income from such property is chargeable to tax under the head “Income from House Property”. During the assessment year 2018-19, there is no such income chargeable under this head. Hence, deduction u/s 80C cannot be claimed for A.Y. 2018-19. Answer-2 ( ₹) ( ₹) Computation of Income from house property for A.Y. 2020-21 95,000 Particulars 92,500 A. Rented unit (50% of total area – See Note 1 below) 81,000 81,000 Step I - Computation of Annual letting Value Municipal valuation ( ₹1,90,000 x ½) 96,000 Fair rent ( ₹1,85,000 x ½) Standard rent ( ₹1,62,000 x ½) Annual letting value is higher of Municipal valuation and fair rent, but restricted to standard rent Step II - Actual Rent Rent receivable for the whole year ( ₹8,000 x 12) Step III – Computation of Gross Annual Value 143

Actual rent received owing to vacancy ( ₹96,000 – ₹16,000) 80,000 Since, owing to vacancy the actual rent received is lower than the annual letting value, the actual rent received is the Gross Annual Value Gross annual value 19,725 80,000 Less: Municipal taxes (15% of ₹95,000) 9,000 14,250 Net Annual value 65,750 Less: Deductions u/s 24 (i) 30% of net annual value 28,725 (ii) Interest on borrowed capital ( ₹750 x 12) 37,025 Taxable income from let out portion (9,000) B. Self-occupied unit (50% of total area – See Note 1 below) Nil 28,025 Annual value 9,000 Less: Deduction u/s 24 Interest on borrowed capital ( ₹750 x 12) Income from house property Notes: (1) It is assumed that both the units are of identical size. Therefore, the rented unit would represent 50% of total area and the self-occupied unit would represent 50% of total area. (2) It is assumed that the municipal taxes have been paid by the owner during the year. (3) No deduction will be allowed separately for light and water charges, lease money paid, insurance charges and repairs. Answer-3 Computation of Income from House Property of Mrs. Indu for the Assessment Year 2020-21 Particulars ( ₹) ( ₹) House property in USA GAV– Rent received (treated as fair rent) 14,40,000 ($2000 p.m. x ₹60 per USD x 12 months) 90,000 Less: Municipal taxes paid ($1500 x ₹60 per USD) 144

Net Annual Value (NAV) 13,50,000 Less: Deduction u/s 24 4,05,000 9,45,000 30% of NAV House property In Mumbai (Let-out portion - First Floor) Gross Annual Value Standard Rent ( ₹11,000 x 12) (taken as ALV in the absence of information relating to municipal value and fair rent) 1,32,000 Actual Rent received ( ₹10,000 x 12) 1,20,000 1,32,000 3,750 Less: Municipal taxes paid (50% of ₹7,500) 1,28,250 Net Annual Value (NAV) Less: Deduction u/s 24 30% of NAV 38,475 Interest on housing loan (50% of ₹24,000) 12,000 50,475 77,775 Income from House property in Mumbai (Self-occupied portion - Ground Floor) Gross Annual Value Nil Nil Less: Municipal taxes Nil Net Annual Value (NAV) Less: Deduction u/s 24 30% of NAV Nil 12,000 Interest on housing loan (50% of ₹24,000) (12,000) 10,10,775 Income from House property Alternative Answer: If it is assumed that the rent received also represents the fair rent, the annual letting value would be ₹1,20,000. Accordingly, the Income from house property would be computed. Answer-4 As per provisions of section 25A, arrears of rent and unrealized rent will be charged to tax as income from house property in the previous year in which such rent is received, after deducting a sum equal to 30% of such amount. The taxability shall be there whether Mr. Ramesh remains as the owner of the property in the concerned year or not. In this case, it shall be taxed as income from house property in the year of receipt of such arrear rent. 145

Computation of income from house property 30,000 Arrears of rent 9,000 Less: Deduction @ 30% of ₹30,000 21,000 14,000 Add: Unrealised rent received (20,000 – 6,000) 35,000 Income from house property Answer-5 As per the amendment in Finance Act,2019 section 23(4) , a person is allowed to have two properties as self-occupied. Pritam has occupied both his properties as for own residential purpose, thus his both the properties are treated as self-occupied. For self-occupied property GAV is NIL. Taxable income will, therefore, be determined as under: Gross annual value (Self occupied property) NIL Less: Municipal taxes (10% of 45000) NIL Net annual value NIL Less: Deductions u/s 24 @ 30% NIL Income from Flat 2 NIL Flat 1 (self-occupied property) Annual value u/s 23 Nil Less: Interest on borrowed capital (Note) 40,000 Income from house property (40,000) Computation of Taxable income 6,50,000 Income from proprietary business (40,000) Income from house property 6,10,000 Gross Total income 80,000 Less: Deduction u/s 80C in respect of PPF contribution 5,30,000 Total income 18,500 Tax payable on ₹5,30,000 (12,500 + 6,000) 740.00 Add: Health & Education cess @ 4% 19,240.00 Tax payable 19,240.00 Tax payable (R/o) 146

Note: It is assumed that the capital was borrowed for purchase of property after 1-4-1999. Answer-6 Computation of total income of Rahul Jadav for the assessment year 2020-21 Particulars ( ₹) ( ₹) Nil (A) Income from House property (i) First House: Not assessed under this head as Mr. Rahul Jadav is not the owner of this house – it is assessed under the head “Income from other sources [Note-1] (ii) Second House: Self-occupied hence ALV Nil Less: Deduction u/s 24 in respect of interest on monies 6,000 borrowed Income from house property (6,000) (B) Income from business 64,000 Taxable business income 28,800 (C) Income from other sources: 12,000 16,800 12,000 Rent received from first house ( ₹2400 X 12) 2,400 70,000 Less: Actual expenses incurred 2,400 Lease rent Salary to Durban Interest on loan borrowed ₹200pm Total income Note: (1) As Mr. Jadav has taken the first house on lease, he is not treated as owner of this house for the purpose of charging income under the head income from house property. (2) As second house is transferred to his wife without adequate consideration and without any agreement to live apart, Mr. Yadav is treated as deemed owner of the property as per section 27(i) for the purpose of charging income under the head income from house property. 147

Answer-7 9,900 36,000 20,000 3,000 Ram’s income from house property will be computed as under:- 33,000 Annual rental value ₹3,000 X 12 29,900 Less: Corporation tax paid 3,100 Annual value Less: Deduction u/s 24 @ 30% Interest on monies borrowed Income from house property 148

MULTIPLE CHOICE QUESTIONS 1. Mr. J has takena house on rent and sublets the same to Mr. A. Income of Mr. J from such house property shall be taxable under the head: (a) income from house property (b) income from other sources (c) income from salary (d) shall not be taxed at all 2. Mr. J owns a house property which has fair rent of ₹1,50,000, standard rent ₹1,20,000 and actual rent of ₹1,30,000. Municipal taxes paid during the previous year for the past 7 years is ₹1,40,000. The annual value shall be: (a) ₹20,000 (b) Nil (c) ₹10,000loss (d) None of the above 3. Deduction u/s 24(a)of statutory deduction under the head House Property is (a) 35% of NAV (b) 30% of NAV (c) 25% of NAV (d) 40% of NAV 4. Municipal tax shall not include: (b) Scavenging tax (a) House tax (d) Water tax (c) State government tax 5. A house property whose fair rent is ₹1,20,000 is vacant throughout the previous year. Municipal taxes paid for the house property are ₹20,000. Its net annual value will be: (a) ₹1,20,000 (b) Nil (c) ₹1,00,000 (d) ( ₹20,000) loss 6. Under the head of house property (a) Income from building is taxable (b) Income from land is taxable (c) Income from building and land which is attached to building is taxable (d) None of the above 7. Deduction for the Interest on Capital Borrowed in covered under: (a) 24(a) (b) 24(c) (c) 24(b) (d) None of above 8. Can there be negative NAV: (b) No (a) Yes 149

9. The maximum amount of deduction of Interest on borrowed capital in case of one house which is self-occupied shall be (loanwastakenon15/12/1999) (a) ₹50,000 (b) ₹2,00,000 (c) ₹30,000 (d) ₹1,50,000 10. Any person who has taken loan before 1/4/1999 for purchase or construction of the house which is self-occupied, maximum deduction for the interest shall be: (a) ₹1,20,000 (b) ₹30,000 (c) ₹2,00,000 (d) ₹1,50,000 11. In the above question if the loan is taken for repairs, renovation, reconstruction, addition or alteration then interest allowed shall be: (a) ₹20,00,00 (b) ₹30,000 (c) ₹45,000 (d) None of the above Solve Q12 and Q13 from the following information Mr. J borrowed ₹5,00,000 @12% p.a. on 1/4/2015 for construction of house property which was completed on2/4/2019. The amount of loan is still unpaid. 12. What will be the deduction of interest for AY2020-2021. (a) ₹30,000 (b) ₹96,000 (c) ₹1,08,000 (d) ₹2,40,000 13. What will be the deduction of interest for AY2020-2021 property is self-occupied: (a) ( ₹1,08,000) (b) ₹96,000 (c) ₹30,000 (d) ₹2,40,000 14. Treatment of unrealized rent is given under section: (a) Explanation to 23 (2) (b) Explanation to 23 (1) (c) Both (a) and (b) (d) None of the above 15. Mr. J was allowed deduction of unrealized rent to the extent of ₹40,000 in the past although the total unrealized rent was ₹60,000. He is able to recover from the tenant ₹45,000 during the AY on account of such unrealized rent. He is liable for tax on: (a) ₹45,000 (b) Nil (c) ₹24,000 (d) ₹17,500 16. Unrealized rent realized subsequently then its tax treatment is given under section: (a) section 25AC (b) section 25AB (c) section 25A (d) section 26 150