Tax

City compensatory allowance ( ₹300 × 9) 36,000 2,700 Entertainment allowance ( ₹500 × 9) 34,200 4,500 House rent allowance Less: Exempt (Note 1) 1,800 Gratuity (Note 2) Nil Pension for January 2018 Pension for February & March 2018 ( ₹2,500 × 2) 5,000 Commuted pension (Note 3) 5,000 Income from salary 53,333 2,07,333 Working note – 1. As per section 10(13A), house rent allowance will be exempt to the extent of minimum of the following three: (i) 50% of salary i.e. ₹54,000 (ii) Rent paid minus 10% of salary i.e. 5,000 – 1,200 = 3,800 × 9 = ₹34,200. (iii) HRA received ₹4,000 × 9 = ₹36,000 Therefore, ₹34,200 will be exempt. 2. Gratuity of ₹1,20,000 is fully exempt u/s 10(10) being the minimum of the following amounts: (i) ₹1,20,000 (ii) (12,000/2) × 24 = ₹1,44,000 (iii) ₹10,00,000 3. As Manas is receiving gratuity, commuted value of one-third of pension which he is normally entitled to receive will be exempt and the balance is taxable. 50% of the pension commuted is ₹1,60,000. Therefore, 100% would be ₹3,20,000 and 1/3rd would be ₹1,06,667. The balance of ₹53,333 is taxable. Answer-3 Manish is a resident but not ordinarily resident in India for the assessment year 2018-19. Income earned and received out of India is not chargeable to tax in India. Therefore, salary and perquisites received out of India for rendering service in New York is not deemed as income chargeable to tax in India u/s 9(1)(iii). For the assessment year 2018-19, taxable income of Manish will, therefore, be computed as follows: 90

Particulars ₹ Salary of 4 months of service in New York (not taxable) - Salary of 8 months of service in Delhi Bonus of 2016-17 2,20,000 Employer‘s contribution towards recognised provident fund in excess of 12% of 30,000 salary [ ₹4,000 x 12 – 12% of ( ₹1,20,000 + ₹2,20,000); salary of the entire previous 7,200 year will be taken, as the provident fund is maintained in Delhi] Free car facility in Delhi 58,000 Car allowance in New York(not chargeable as Manish is RNOR in India) - Rent free flat in Delhi (Note 1) Rent free flat in New York(not chargeable as Manish is RNOR in India) 54,000 Sale of computer - Pension from Gujarat Government ( ₹10,000 × 12] - Gross salary Less: Deduction u/s 16 1,20,000 Income from salary 4,89,200 Income from other sources Gross total income -- Less: Deduction u/s 80C (Note 5) 4,89,200 Total Income (rounded off) 2,10,000 Tax 6,99,200 Income tax 1,50,000 Add: Education cess (2% of tax) 5,49,200 Add: Secondary and higher education cess [1% of tax] Tax payable 22,340.00 Tax payable (rounded off) 446.80 223.40 23,010.20 23,010.00 Notes: 1. Salary for the purpose of valuation of rent-free flat at Delhi comes to ₹3,00,000 (i.e., ₹2,20,000 + pension of 8 months: ₹80,000). Lease rent of the flat is ₹1,12,000 (i.e., ₹14,000 x 8). As lease rent of the flat exceeds, 15% of salary, ₹45,000 (being 15% of salary) is taxable value of unfurnished flat. To this figure, rent of furniture is added to arrive at the valuation of furnished flat. Therefore, ₹54,000 (i.e., ₹45,000 + ₹9,000) is value of rent-free furnished flat provided in Delhi. 91

2. Salary, allowance or perquisite from UNO is not chargeable to tax. 3. Professional tax is deductible on payment basis. As professional tax is paid after the end of the previous year 2017-18, it is not deductible. 4. Perquisite in respect of sale of computer Cost of computer to the employer ₹ Less: Normal wear and tear for first year ending April 9, 2016 (50% of 62,000 ₹62,000) 31,000 Balance as on April 10, 2016 Less: Normal wear & tear for second year ending April 9, 2017 (50% of 31,000 ₹31,000) 15,500 Balance as on April 10, 2017 Less: Sale price paid by Manish 15,500 Balance 16,500 Nil 5. Deduction u/s 80C Gross qualifying amount ₹ Contribution to recognised provident fund Contribution to public provident fund 65,000 Payment of insurance premium to an American insurance company (subject 19,000 to maximum of 10% of sum assured) 30,000 Tuition fees of Manish's son ( ₹4,000 × 12) Investment in equity shares of a notified company engaged in maintaining an 48,000 infrastructure facility 26,000 Total Maximum permissible 1,88,000 Deduction u/s 80C 1,50,000 1,50,000 92

Answer-4 Excluding Including A. Tax payable for A.Y. 2018-19 arrears of arrears of salary ( ₹) salary ( ₹) Computation of tax 6,00,000 6,00,000 Current year salary Add: Arrears of salary --- 15,000 Gross Total income Less: Deduction under chapter VI-A -u/s 80C – P.P.F. 6,00,000 6,15,000 Contribution Total income 50,000 50,000 Income tax thereon Add: Education cess @ 3% (includes 1% SHEC) 5,50,000 5,65,000 Tax payable 22,500 25,500 675 765 B. Tax payable for A.Y. 2003-04 23,175 26,265 Computation of tax Excluding Including Current year income arrears of arrears of Add: Arrears of salary salary ( ₹) salary ( ₹) Total income Income tax thereon 66,000 66,000 Add: Surcharge @ 2% Tax payable -- 15,000 C. Relief u/s. 89 66,000 81,000 Particulars 2,200 5,200 (i) Tax payable on arrears in A.Y. 2018-19: Tax on income including arrears 44 104 Less: Tax on income excluding arrears (ii) Tax payable on arrears in A.Y. 2003-04: 2,244 5,304 Tax on income including arrears Less: Tax on income excluding arrears ₹ ₹ 3,090 93 26,265 3,060 23,175 5,304 2,244

Particulars ₹₹ 30 Relief u/s. 89 (i.e. excess tax payable in A.Y.2003-04 for arrears) D. Tax payable for A.Y. 2018-19 after relief u/s. 89 ₹ 26,265 Particulars Income tax payable on income including arrears 30 Less: Relief u/s. 89 as per workings (C) above 26,235 Tax payable Answer-5 ₹ Computation of income under the head ―Salaries‖ for the A.Y.2018-19 1,35,000 Particulars 27,000 Salary ( ₹15,000 × 9) 3,600 Dearness allowance ( ₹3,000 × 9) 13,500 City compensatory allowance ( ₹400 × 9) 9,000 Entertainment allowance ( ₹1,500 × 9) 16,000 House rent allowance [See Note 1] 65,000 Pension ( ₹8,000 + ₹4,000 × 2) 2,69,100 Commuted pension ( ₹1,95,000 – ₹1,30,000) [See Note 3] Gross salary Nil Less: Deduction u/s 16 [See Note 5] 2,69,100 Income from salary Note: 1. As per section 10(13A), house rent allowance will be exempt to the extent of minimum of the following three amounts: (i) 50% of salary i.e. ₹67,500. (ii) Rent paid minus 10% of salary i.e., ₹5,500 – ₹1,500 = ₹4,000 × 9 = ₹36,000 (iii) HRA received ₹5,000 × 9 = ₹45,000 Therefore, out of ₹45,000, ₹36,000 will be exempt and the balance ₹9,000 will be included in Gross Salary. 2. Gratuity of ₹95,000 is fully exempt u/s 10(10)(iii), being the minimum of the following amounts: (i) Actual gratuity received, i.e., ₹95,000 94

(ii) Half month‘s average salary for every completed year of service i.e. 15,000 × 16 /2 = 1,20,000 (iii) Notified limit i.e., ₹10,00,000 3. As Raman is receiving gratuity, one-third of commuted pension will be exempt and the balance would be taxable. 50% of the pension commuted is ₹1,95,000. Therefore, 100% would be ₹3,90,000 and one-third of the same would be ₹1,30,000. The taxable portion of the commuted pension would be ₹65,000 (i.e. ₹1,95,000 - ₹1,30,000). 4. Since employer‘s contribution to recognized provident fund is less than 12% of salary, it is not taxable. Accumulated balance of the recognized provident fund received is exempt from tax, since Raman has rendered continuous service of more than five years. 5. Deduction u/s 16(ii) in respect of entertainment allowance can be claimed only by Government employees. Therefore, Raman is not eligible for any deduction in respect of entertainment allowance received by him. Answer-6 Computation of Total Income of Ramesh for the Assessment Year 2018-19 Particulars Amount Amount ( ₹) ( ₹) Basic salary 90,000 Bonus 4,000 Special allowance 25,000 House rent allowance 13,500 Less: Exempt (See Note 1) 1,800 11,700 2,76,000 2,200 Employer's contribution towards recognised provident fund in excess of 12% of salary (i.e., ₹13,000 -12% of ₹90,000) Gratuity Less: Exempt (See Note 2) 1,96,154 79,846 Uncommuted pension [ ₹900 + (30% of ₹900 x 2)] 1,440 Commuted pension 25,000 Less: Exempt (See Note 3) 11,905 13,095 Free use of deluxe bus by Ramesh and family members 5,000 Tour expenses of Mrs. X 18,500 Gross salary 2,50,781 Less: Deduction u/s 16(iii) - Professional tax 1,500 Income from salary 2,49,281 Gross total income 2,49,281 Less: Deduction u/s 80C (See Note 5) 30,000 95

Total income 2,19,281 Total income (rounded off) 2,19,280 Notes: 1. HRA is exempt to the extent of least of the following: 2. Particulars Amount ( ₹) (i) Actual HRA received 1,500 (ii) Rent paid – 10% of salary ( ₹1,200 – 10% × ₹10,000) 200 (iii) 40% of salary (40% of ₹10,000) 4,000 Therefore, ₹1,800 ( ₹200 x 9), being the least amount, is exempt u/s10 (13A). 3. Ramesh is a private sector employee, covered by the Payment of Gratuity Act. Number of completed years of service is 34 years. Gratuity is exempt to the extent of minimum of the following: Particulars Amount ( ₹) (i) Statutory limit (ii) 15 days‘ salary for every completed year of service ( ₹10,000 × 34 × 10,00,000 1,96,154 15/26) (iii) Actual gratuity received 2,76,000 Therefore, ₹1,96,154 is exempt u/s 10(10). 4. Commuted pension is exempt from tax as under: Commuted value of 70% of usual pension: ₹25,000 Commuted value of full pension: ₹35,714 (i.e., ₹25,000 / 0.7) Amount exempt from tax is one-third of commuted value of full pension, i.e., 1/3 of ₹35,714 = ₹11,905, as Ramesh is in receipt of gratuity at the time of retirement. 5. Accumulated balance of recognised provident fund is exempt from tax as Ramesh has rendered continuous service of more than 5 years with his employer. 96

6. Deduction u/s 80C: Particulars Amount ( ₹) Contribution towards recognised provident fund 15,000 Insurance premium 15,000 Total deduction 30,000 Answer-7 Computation of Total Income of Ramesh for the A.Y. 2018-19 Particulars Amount Amount ( ₹) ( ₹) 1,80,000 Basic Salary ( ₹20,000 × 9) 72,000 Dearness Allowance ( ₹1,80,000 × 40%) 12,600 10,800 House Rent Allowance ( ₹5,000 × 9) 45,000 24,300 7,200 Less: Exempt u/s 10(13A) (Note 1) 32,400 4,050 5,400 Medical allowance ( ₹1,200 × 9) 5,400 5,400 Value of car (1800+900 × 9) Nil Gas / electricity ( ₹800 × 9) Nil Education Re-imbursement ( ₹450 × 9) Nil Watchman ( ₹600 × 9) 3,27,150 3,27,150 Sweeper ( ₹600 × 9) Cook ( ₹600 × 9) Interest on loan (Note 2) Gratuity 2,40,000 Less: Exempt u/s 10(10) (Note 3) 2,40,000 Leave salary 1,25,000 Less: Exempt u/s 10(10AA) (Note 4) 1,25,000 Income from Salary Gross total income Less: Deduction u/s 80C PF (Note 5) 43,200 97

NSC 20,000 88,200 PPF 15,000 2,38,950 LIP 10,000 Total Income Notes: Amount 1. HRA is exempt to the extent of least of the following: ( ₹) 45,000 Particulars 32,400 1,08,000 (i) Actual HRA received (ii) Rent paid – 10% of Salary ( ₹54,000 – 10% × ( ₹1,80,000 + ₹36,000) (iii) 50% of Salary [50% of ( ₹1,80,000+ ₹36,000) Therefore, ₹32,400, being the least amount, is exempt u/s 10(13A). 2. Interest on loan is not taxable as interest charged is more than the rate of SBI. 3. Gratuity is exempt to the extent of minimum of the following: Particulars Amount ( ₹) (i) Statutory limit 10,00,000 (ii) Half month‘s salary for every year of service (½ x 30 x ₹24,000) 3,60,000 (iii) Actual gratuity received 2,40,000 Therefore, ₹2,40,000 is exempt u/s 10(10). It is assumed that the employee is not covered under The Payment of Gratuity Act, 1972. 4. Leave encashment is exempt to the extent of minimum of the following: Particulars Amount ( ₹) (i) Statutory limit 3,00,000 (ii) Cash equivalent of leave at the credit of the employee(12 × ₹24,000) 2,88,000 (iii) 10 months average salary (10 x ₹24,000) 2,40,000 (iv) Actual amount received 1,25,000 Therefore, ₹1,25,000 is exempt u/s 10(10AA). 5. Employee‘s Contribution to RPF = 20% of (BS + DA for retirement benefits) = 20% of ( ₹1,80,000 + ₹36,000) = 20% of ₹2,16,000 = ₹43,200 98

Answer-8 Computation of taxable income and tax liability of Mr. Jaideep for the A.Y. 2018-19 Particulars ₹₹ Basic salary 1,90,000 Dearness allowance 12,300 City compensatory allowance 3,100 Education allowance: 2,340 Less: Exempt [see Note 3] 1,560 780 House rent allowance 16,200 Less: Exempt [see Note 1] 270 15,930 Reimbursement of medical expenditure (i.e., ₹21,233 – ₹15,000) 6,233 Reimbursement of expenditure on books and journals for official Nil work (not chargeable to tax) Gross salary 2,28,343 Less: Deductions u/s 16 ---- Net salary 2,28,343 Income from other sources (i.e. ₹90,000 – ₹3,400) 86,600 Gross total income 3,14,943 Less: Deduction u/s 80C [see Note 4] 32,253 Total income 2,82,690 Tax on total income Income-tax 1,634.50 Less: Rebate u/s 87A 1,634.50 nil Add: Education cess & SHEC @3% nil Tax payable nil Tax payable (rounded off) nil Notes: 1. House rent allowance is exempt from tax to the extent of the least of the following: (a) ₹80,920 (being 40% of ₹2,02,300); (b) ₹16,200 (being the amount of house rent allowance); 99

(c) ₹270 [being the excess of rent paid over 10% of salary, i.e., ₹20,500 – 10% of ( ₹1,90,000 + ₹12,300)] 2. Expenditure on books and maintenance of car is application of income and is not deductible. 3. Education allowance for children is not chargeable to tax up to ₹100 per child per month for a maximum of 2 children. Therefore, in this case, the amount not chargeable to tax is ₹65 per month for 2 children, i.e., ₹1,560. 4. Deduction u/s 80C is computed as under: Contribution to statutory provident fund [i.e., 11% of ( ₹1,90,000 + ₹12,300)] ₹22,253 Insurance premium (maximum: 20% of sum assured i.e. 20% of 50,000) ₹10,000 Total deduction ₹32,253 Answer-9 False - The membership fee payable to the Institute is an obligation of Mr. S, which is paid by his employer i.e. T Ltd. Under the definition of perquisite, an obligation of the employee paid by the employer is to be treated as a perquisite and hence chargeable to tax. Answer-10 Perquisite value for housing loan The value of the benefit to the assessee resulting from the provision of interest-free or concessional loan made available to the employee or any member of his household during the relevant previous year by the employer or any person on his behalf shall be determined as the sum equal to the interest computed at the rate charged per annum by the State Bank of India (SBI) as on the 1st day of the relevant previous year in respect of loans for the same purpose advanced by it. This rate should be applied on the maximum outstanding monthly balance and the resulting amount should be reduced by the interest, if any, actually paid by him. ―Maximum outstanding monthly balance‖ means the aggregate outstanding balance for loan as on the last day of each month. The perquisite value for computation is 10% - 6% = 4% Month Maximum outstanding balance Perquisite value at 4% for as on last date of month the month April May 5,88,000 1,960 June 5,76,000 1,920 July 5,64,000 1,880 August 5,52,000 1,840 5,40,000 1,800 100

September 5,28,000 1,760 October 5,16,000 1,720 November 5,04,000 1,680 December 4,92,000 1,640 January 4,80,000 1,600 February 4,68,000 1,560 March 4,56,000 1,520 Total value of this perquisite 20,880 Perquisite Value of Air Conditioners ₹ Original cost 2,00,000 Depreciation on SLM basis for 4 years @10% i.e. ₹2,00,000 × 10% × 4 Written down value 80,000 Amount recovered from the employee 1,20,000 Perquisite value 90,000 Chargeable perquisite in the hands of 30,000 Mr. Badri for the assessment year ₹ Housing loan Air Conditioner 20,880 Total 30,000 50,880 Answer-11 Advance Salary Advance salary is taxable when it is received by the employee, irrespective of the fact whether it is due or not. It may so happen that when advance salary is included and charged in a particular previous year, the rate of tax at which the employee is assessed may be higher than the normal rate of tax to which he would have been assessed. Section 89(1) provides for relief in these types of cases. Loan or Advance against Salary Loan is different from salary. When an employee takes a loan from his employer, which is repayable in certain specified instalments, the loan amount cannot be brought to tax as salary of the employee. 101

Similarly, advance against salary is different from advance salary. It is an advance taken by the employee from his employer. This advance is generally adjusted against his salary over a specified time period. It cannot be taxed as salary. Answer-12 Computation of taxable salary of Mr. M. for the Assessment Year 2018-19 Particulars Amount Amount ( ₹) ( ₹) Basic Salary ( ₹20,000 ×5) +( ₹25,000 × 7) 24,000 2,75,000 Transport allowance ( ₹2,000 × 12) 19,200 Less: Exempt u/s 10(14) ( ₹1600 × 12) 6,000 4,800 Children education allowance ( ₹500 × 12) 2,400 Less: Exempt u/s 10(14) ( ₹100 × 2 × 12) 3,600 City Compensatory Allowance ( ₹300 × 12) 3,600 Hostel Expenses Allowance ( ₹380 × 12) 4,560 Less: Exempt u/s 10(14) ( ₹300 × 2 × 12 i.e. ₹7,200 but restricted to 4,560 the actual allowance of ₹4,560) Tiffin allowance (fully taxable) Nil Tax paid on employment 5,000 Employer‘s contribution to R.P.F in excess of 12% of salary 2,500 (i.e. 3% of ₹2,75,000) 8,250 Gross Salary Less: Tax on employment u/s 16(iii) 3,02,750 Taxable salary 2,500 3,09,850 Notes: (i) The question states that contribution to recognised provident fund is at 15% of Basic salary + D.A. However, since neither the amount nor rate of D.A. has been given in the question, contribution to recognised provident fund has been taken as15% of basic salary. (ii) Professional tax paid by employer should be included in the salary of Mr. M as a perquisite since it is discharge of monetary obligation of the employee by the employer. Thereafter, deduction of professional tax paid is allowed to the employee from his gross salary. Answer-13 Computation of Relief u/s 89 for the Assessment Year 2018-19 102

Particulars ₹₹ Salary Income for the year excluding the arrears 5,25,000 Add: Arrears relating to Financial Year 2007-08 40,000 Total Income 5,65,000 Assessment year 2018-19 Tax on ₹5,65,000 Nil 0 First ₹2,50,000 5% 12,500 Next ₹2,50,000 20% 13,000 Balance ₹65,000 25,500 Add: Education cess @ 2% 510 Secondary and higher education cess @1% 255 Tax on total income (including arrears) (A) Total Income excluding arrears 5,25,000 26,265 Tax on ₹5,25,000 First ₹2,50,000 Nil 0 Next ₹2,50,000 5% 12,500 Balance ₹25,000 20% 5,000 Add: Education cess @ 2% 17,500 Secondary and higher education cess @ 1% 350 Tax on total income (excluding arrears) (B) 175 Difference between A & B 18,025 Assessment Year 2008-09 I 8,240 Total Income assessed Add: Arrears relating to Financial year 2007-08 1,40,000 Total income (including arrears) 40,000 Tax on ₹1,80,000 Add: Education Cess @ 2% 1,80,000 Tax on total income (including arrears) (C) 11,000 Total Income excluding arrears 220 11,220 103 1,40,000

Tax on ₹1,40,000 4,000 Add: Education Cess @ 2% 80 Tax on total income (excluding arrears) (D) Difference between C & D 4,080 Relief u/s 89 (I – II) II 7, 140 Tax payable for A.Y. 2018-19 ( ₹26265 – ₹1,100) 1,100 25,165 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 Rent paid (15,000 × 12) 1,80,000 1,62,000 Less:10% of basic pay (i.e. 10% of ₹1,80,000) 18,000 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. (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: 104

Rent paid ₹ ₹ Tax (See Working Note 1 below) 1,80,000 Net cash flow 1,81,545 Option 2: Concessional accommodation 1,545 2,38,455 Cash inflows [Basic Pay + Special Allowance] Less: Cash outflows: 3,00,000 Rent recovery Tax (See Working Note 2 below) 60,000 60,000 Net cash flow nil 2,40,000 Since the net cash flow is higher in Option 2, Mr. Khanna should opt for concessional accommodation, which would be more beneficial to him. Working Notes – ₹ 1. Computation of tax under Option 1 (HRA): 1,80,000 Salary: 30,000 Basic Pay HRA (taxable) 1,20,000 Special allowance 3,30,000 Total salary Tax on ₹3,30,000 4,000 Less: Rebate u/s 87A 2,500 1,500 Add: Education cess @ 3% Tax payable (including education cess) 45 1,545 2. Computation of tax under Option 2 (Concessional accommodation) 1,80,000 Salary: 1,20,000 Basic Pay Special allowance Nil Concessional accommodation 3,00,000 Total salary Tax on ₹3,00,000 5,000 105

Less: Rebate u/s 87A 5000 nil Add: Education cess @ 3% nil Tax payable (including education cess) nil Answer-15 Computation of total income of Mr. X for A.Y.2018-19 Particulars ₹ ₹ ₹ 2,25,000 Income from Salaries 54,000 54,000 Basic salary ( ₹25,000 × 9 months) 36,000 36,000 18,000 House rent allowance 1,12,500 Actual amount received 93,750 Less: Exemption u/s 10(13A) Least of the following 70,000 (i) HRA actually received (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 3,06,250 Less: Exemption u/s.10(10)(iii) Least of the following 4,00,000 (i) Actual amount received (ii) Half month average salary for each year of completed 3,06,250 10,00,000 service (1/2 × 24,500 × 25) (iii) Statutory limit Leave encashment 3,15,000 2,45,000 Actual amount received 3,15,000 Less: Exemption u/s.10(10AA) 2,45,000 3,06,250 Least of the following (i) Actual amount received (ii) 10 months average salary (24,500 × 10) (iii) Cash equivalent of unavailed leave calculated on the basis of maximum 30 days for every year of actual service rendered to the employer from whose service 106

he retired (see note 2 below) 3,00,000 4,06,750 (iv) Statutory limit Gross Salary 22,500 Nil Profits and gains of business or profession 40,000 4,06,750 Business loss of ₹80,000 to be carried forward as the same 37,500 cannot be set off against salary income. 1,00,000 Gross Total income 3,06,750 Less: Deduction u/s.80C 2,837.50 RPF PPF 2,500 NSC 337.50 Total income 10.12 Tax on total income Less: Rebate u/s 87A 347.62 350 Add: Education cess and Secondary and higher education cess @ 3% 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= actual service rendered by him to the employer 750 days Less: Leave taken /availed by Mr. X during the period of his = 15 days/year × 25= service 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 = 375 × 24,500 /30= his retirement ₹3,06,250 Answer-16 Computation of taxable income and tax liability of Smt. Savita Rani for A.Y. 2017-18 Particulars ₹ ₹ Income from salary 107

Basic salary (45,000 × 12) 5,40,000 1,44,000 DA (12000 × 12) 72,000 House Rent allowance (full taxable) 91,800 9,720 Employer‘s contribution to RPF in excess of 12% is taxable as salary 15,000 income. 6,000 7,71,720 12% of salary is ₹82,080. Employer‘s contribution is 15% of (salary plus 50% of D.A.), which is ₹91,800. 30,000 28,368 Excess contribution is ( ₹91,800 – ₹82,080) 8,30,088 Perquisite in respect of interest free loan (See Note 1 below) 1,06,800 ₹1,50,000 × 8%× ½ 7,23,288 Net Salary 5673.60 8,495.00 Income from house property (of which Smt. Savita Rani is the deemed owner) – See Note 2 below 5673.60 51,484 Long term Capital Gain: 571.58 1,143.15 Gross Total Income 58,872.23 Deduction U/s.80C – in respect of RPF contribution 58,870 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 ₹84,950 (u/s.112) Tax on long term capital gain – whichever is less Income tax payable on income other than LTCG (i.e. ₹7,29,702– 28,368) i.e. ₹6,94,920 Add: Education cess and Secondary and higher education cess @3% Total tax payable Total tax payable (rounded off) 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. 108

Answer-17 Computation of taxable income of Ramesh for the assessment year 2018-19 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 less exemption @ ₹1600 p.m. Gratuity NIL (i) Statutory limit ₹10,00,000 (ii) Half month average salary ₹8,100 × 20 yrs = 1,62,000 (iii) Actual amount received = ₹3,00,000 Least of the above is exempt. Balance is taxable Nil 1,38,000 24,000 27,312 Income from House property: Self-occupied – ALV Less: Interest on monies borrowed u/s.24 (24,000) Income from house property 18,000 Income from other sources: Fixed deposit interest Gross total income 2,67,000 Note 1: Average salary of 10 months preceding the date of retirement is to be computed: Basic pay 10,000 × 6 60,000 Basic pay 12,000 × 4 48,000 Total 1,08,000 Add: 50% DA – eligible for retirement benefits 54,000 1,62,000 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. 2018-19 Particulars ₹ ₹ 2,40,000 Basic salary (20,000 × 12) 109

Dearness allowance @ 30% 24,000 72,000 19,200 Transport allowance 4,800 14,400 Less: Exemption u/s10(14) (read with Rule 2 BB @ ₹1600 p.m.) Nil Motor car maintenance borne by employer (36,000 – 1,800 x 12) Nil 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 Nil 3,31,200 Value of lunch provided during working hours (assumed all meals for less than ₹50/meal) 3,200 Residence telephone bill –not taxable Nil 3,200 3,28,000 Computer provided in the residence of employee by the employer – not chargeable to tax (Rule 3(7)(vii)) Gross Salary Less: Deduction under chapter VI-A 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. 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 2018-19 110

Particulars 60,000 ₹ Income under the head ―salaries‖ 18,000 5,52,000 Salary [ ₹46,000 × 12 ] 42,000 Medical facility[ in the hospital maintained by the company exempt] 30,000 82,800 Rent free accommodation 2,000 [Rule 3(1) ] – 15% of salary is taxable 2,50,000 24,000 Use of dining table for 4 months 50,000 [ ₹60,000 × 10 /100 × 4 /12] Nil Valuation of perquisite of interest on loan 2,00,000 [Rule 3(7)(i)] – assumed 9% is taxable which is to be reduced by 40,000 12,000 actual rate of interest charged i.e. [ 9% - 5% = 4%] 10,000 Gift given on the occasion of wedding anniversary ₹4,750 not liable 1,60,000 to tax 80,000 80,000 Perquisite on sale of dining table cost 7,62,800 Less: Depreciation on straight line method @ 10% for 3 years ₹ W.D.V ₹ Less: Amount paid by the assessee 5,000 7,62,800 Purchase through credit card – not being a privilege but covered by Nil section 17(2)(iv) Original cost of car Less: Depreciation from 16.7.14 to 15.7.2015 @ 20% Less: Depreciation from 16.7.2015 to 15.7.16 @ 20% on WDV Value as on 14.07.2017 - being the date of sale to employee Less: Amount received from the assessee on 14.07.2017 Gross salary Computation of taxable income Particulars Income from salaries Income from other sources (i) Interest on fixed deposit with a company (ii) Income from specified mutual fund exempt u/s 10(35) 111

(iii) Interest received by minor daughter (3,000 -1500) 1,500 (iv) Income from UTI received by a handicapped minor son Nil 6,500 (Assuming that the disability is of the nature specified in 7,69,300 section 80 U, section 64(1A) is not applicable - exempt U/s.10(35) 90,000 1,00,000 10,000 6,69,300 Gross total income 46,360.00 Less: Chapter VI-A deductions 1,390.89 Section 80 C – PPF & ICICI bonds 47,750.88 Section 80 CCC – LIC 47,750.00 Total Income Tax on above income of ₹6,69,300 Add: Education cess @ 3% Total tax liability Total tax liability (R/o) Note: It is presumed that the housing loan was availed on 1.4.2017. Answer-22 Computation of Total Income of Mrs. Lakshmi for A.Y. 2018-19 Particulars ₹ ₹ Income from salary Basic salary 15,000 6,00,000 Dearness allowance 7,200 2,40,000 Bonus 1,00,000 Commission (calculated as percentage of turnover) 15,000 1,50,000 Entertainment allowance 3,00,000 Children‘s hostel allowance (See Note 1) 30,000 Less: Exemption (300 x 12 x 2) 12,000 Rent free unfurnished accommodation (Refer working Note 1) 7,800 Excess contribution to PF by employer (Refer working Note 2) 70,000 Gross salary 1,81,200 Less: Deduction u/s.80C 13,79,000 LIC PF Deduction u/s.80CCC in respect of LIC pension fund 112

3,25,000 Deduction limited to ₹1,50,000 as per Sec.80CCE 1,50,000 Deduction u/s 80D 10,000 Total income before deduction u/s.80G Deduction u/s 80G: Limited to 10% of total income ₹1,21,900. 12,19,000 Deduction @ 50% Total income 60,950 Tax on total income 11,58,050 Add: Education cess @ 3% 1,57,415.00 Total tax liability 4,722.45 Total tax liability (rounded off) 1,62,137.45 1,62,140.00 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 Bonus 30,000 Commission @ 1% of turnover 7,800 Entertainment allowance 11,27,800 Children‘s hostel allowance 1,69,170 Gross Salary 70,000 15 % of salary Actual rent paid by the company 3,00,000 The least of the above is chargeable perquisite. 1,18,800 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 ₹9,90,000 113

MULTIPLE CHOICE QUESTIONS 1. Mr. J is working with ABC Ltd. He joined the service on 1/1/2012 in the grade of ₹10,000 - ₹1,000 - ₹15,000 - ₹2,000 - ₹25,000. 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 2018-2019. (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 ₹8,000pm.Hereceives 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 15/3/2018 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 2017-2018 i.e. PY 2018-2019. (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 . (a) 69,600 (b) 63,400 (c) 64,600 (d) 68,400 Answer questions (7 to 9) from the following information Mr. J was employed since 1st July 2000 in an establishment. His salary was fixed at ₹14,800 in the grade of ₹14,000 - ₹400 - ₹22,000 w.e.f.1/7/2011. He got the benefit of 15% of salary as DA 114

which is treated as forming part of the salary for the retirement benefits. He retired on 1/2/2018 and received ₹3,40,000 as a Gratuity from his employer. 7. Calculate his income under the head ‗Salary‘ for the AY 2018-2019 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 2018-2019 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 15/2/2018 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 31/3/2018 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. 12. Calculate the exempted amount of commuted pension? (a) 2,97,000 (b) 2,79,000 (c) 7,92,000 (d) 7,29,000 115

13. Calculate his taxable salary for the AY 2018-2019. (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 31/12/2017 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 2018-2019. (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 1/1/2018. 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 2017. In a road accident he died on 1/12/2017 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 18. Calculate taxable salary of Mrs. J (b) 1,22,000 (a) 1,20,500 (d) 1,20,000 (c) 1,21,000 116

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 1/11/2017 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 1/11/2017 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 2018-2019. 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.f1/1/2018 after serving for 16 years and 7 months. At the time of the retirement he received ₹50,000 as Leave Encashment for unavailed 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 1/7/2017. Compute the amount of leave encashment exempt from tax. (a) 24,200 (b) 22,400 (c) 24,000 (d) 20,400 117

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) 118

SOLUTIONS Q1. Calculation of Gross Salary of Mr. J for the AY 2018-2019, i.e. PY 2017 – 18. Basic Salary ( ₹15,000 x 9) + ( ₹17,000 x ₹1,86,000 3) 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 pm As on 1/1/2012 ₹11,000 pm As on 1/1/2013 ₹12,000 pm As on 1/1/2014 ₹13,000 pm As on 1/1/2015 ₹14,000 pm As on 1/1/2016 ₹15,000 pm As on 1/1/2017 ₹17,000 pm As on 1/1/2018 Q2. Calculation of deduction of Entertainment Allowance ₹24,000 Deduction is Least of ₹19,200 ₹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 2018-2019. Basic Salary ( ₹8,000 x 12) ₹96,000 ₹24,000 Entertainment Allowance ( ₹2,000 x 12) ₹96,000 ₹2,16,000 DA ( ₹100% of B.S.) ₹5,000 Gross Salary Less: 16 (ii) Entertainment Allowance Working note 119

Less: 16 (iii) Professional Tax paid ( ₹100 x 12 x 2) ₹2,400 Taxable Salary ₹2,08,600 Q6. Calculation of Taxable Salary for the AY 2018-2019. ₹54,000 ₹8,400 Basic Salary ( ₹4,500 X12) ₹7,200 DA ( ₹700 X12) ₹6,900 Entertainment Allowance ( ₹600 X12) ₹1,200 ₹68,400 Q7. Calculation of Basic Salary of Mr. J. ₹14,800 ₹15,200 1/7/2011 ₹15,600 1/7/2012 ₹16,000 1/7/2013 ₹16,400 1/7/2014 ₹16,800 1/7/2015 ₹17,200 1/7/2016 1/7/2017 If Mr. J is a Central Government employee: Calculation of Taxable Salary Basic Salary ( ₹16,800 X 3 ) + ( ₹17,200 X 7) ₹1,70,800 DA 15 % of ₹1,70,800 ₹25,620 Gratuity ₹3,40,000 Less: Exempt u/s 10(10) ₹3,40,000 Nil Taxable Salary ₹1,96,420 Q8. If Mr. J is covered under the Payment of Gratuity Act, 1972: Calculation of Taxable Salary Basic Salary ( ₹16,800 X 3 ) + ( ₹17,200 x 7) ₹1,70,800 DA 15 % of ₹1,70,800 ₹25,620 Gratuity ₹3,40,000 Less: Exempt u/s 10(10) ₹1,93,996 ₹1,46,004 Taxable Salary ₹3,42,424 Least of the following amount of Gratuity is exempt from tax ₹3,40,000 (a) Actual amount received 120

(b) Maximum limit of ₹10,00,000 (c) 15/26 x Salary x 17 years = 15/26 x ₹19,780 x 17 years ₹1,93,996 Q9. Least of the following amount of Gratuity is exempt from tax ₹3,40,000 (a) Actual amount received ₹10,00,000 (b) Maximum limit of ₹1,57,136 (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 Apr =19,642 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 ₹75,000 , i.e., ₹9,25,000 (c) 15/30 x Avg. Salary x 16 years = 15/30 x ₹17,000 x ₹1,36,000 16 years Calculation of Average Salary Average salary is BS + DA(R) + Commission on % basis of turnover Jan 15,000 + 2,000 + 0 17,000 17,000 Dec 15,000 + 2,000 + 0 17,000 17,000 Nov 15,000 + 2,000 + 0 17,000 Oct 15,000 + 2,000 + 0 Sep 15,000 + 2,000 + 0 121

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 Basic Salary DA ( ₹15,000 x 10.5) ₹1,57,500 Gratuity ( ₹3,500 X 10.5) ₹36,750 Less: Exempt u/s 10(10) Taxable Salary ₹3,15,000 ₹1,79,000 ₹1,36,000 ₹3,73,250 Q12. Calculation of Taxable Salary Q13. Calculation of Un-commuted pension Calculation of Taxable salary of Mr. J Basic Salary ( ₹7,500 x 9.5 month) ₹71,250 ( ₹2,500 x 9.5 month) ₹23,750 DA ( ₹2,000 x 9.5 month) ₹19,000 ₹1,14,000 Allowance Taxable Salary Q14. Computation of Total Income Q15. Calculation of Mrs. J‘s Income Q16. Calculation of Taxable income of Mrs. J Q17-18-19 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 Nil Income from House Property Nil Property Income from PGBP Nil Income from PGBP Nil Income from Capital Nil Income from Capital Gain Nil Gains Income from other Nil Income from other Sources sources 122

Family pension ( ₹4500 × 4) ₹18,000 Less: exempt ₹6,000 Lower of the following is exempt: (a) Limit ₹15,000 (b) 1/3 of ₹18,000 ₹6,000 Total income ₹80,000 Total Income ₹1,32,000 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 Q22. Not Covered under Gratuity Act—Least of the following amount of Gratuity is exempt from tax 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 March ₹4,500 + 0 + 0 ₹4,500 Average salary is ₹5,000 x 6 + ₹4,500 x 4 ₹4,800 10 Calculation of Unavailed leave 123

Leave allowed Company‟s data As per Income tax rules Completed year of Job 40 30 Total leave 16 16 Leave availed 640 480 Leave Unavailed 340 340 300 140 Sub-Section 2.2 124

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. 2.2.2. Self-occupied and Let out House Property 125

Refer Para 2.5 for detailed discussions. 2.2.3. Determination of Gross and Net Annual Value – Section 23 Particulars ₹ ₹ xxx Gross Annual Value (see para 2.5 for detailed discussions) xxx xxx Less: Municipal taxes paid during the year by the assessee xxx Annual Value (also called Net Annual Value) xxx xxx Less: Deductions u/s 24 xxx (a) Standard deduction @ 30% of NAV (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. (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. 126

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. Mr. J ownsa house property the details of which are as below:- ₹1,00,000 ₹1,12,000 Municipal Valuation Fair Rental ₹90,000 Standard Rent ₹11,000 per month Actual Rent Received Municipal Taxes ₹15,000 Municipal Taxes paid 40% of the above Repairs charges for the property Insurance Premium ₹10,000 ₹7,500 Mr. J has borrowed an amount of ₹5,00,000 @ 10% per annum from HDFC on 1st April 2012 and construction of the property was completed in April 2014. Calculate the income from house property for the PY 2017-2018. Solution Calculation of House Property Income Less GAV 132000 MT 6000 127

Less NAV 126000 Less 24(a) 37800 Income 24(b) 70000 u/h HP 18200 Pre -construction interest 1/4/2012 31/3/2014 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. Illustration-1 Compute NAV in the following cases assuming municipal taxes paid are ₹5,000 in each case. 128

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 Less: Loss of vacancy 60000 Actual Rent 276000 GAV 180000 Less: Municipal taxes paid 276000 NAV 5,000 2,71,000 Case 2 Expected rent 336000 Less: Loss of vacancy 120000 Actual Rent 216000 GAV 360000 Less: Municipal taxes paid 360000 NAV 5,000 3,55,000 Case 3 Expected rent 336000 Less: Loss of vacancy 90000 Actual Rent 246000 GAV 270000 Less: Municipal taxes paid 270000 NAV 5,000 2,65,000 Case 4 Expected rent 336000 Loss of vacancy 400000 Actual Rent Nil GAV 80000 Municipal taxes paid 80000 NAV 5,000 75,000 129

Case 5 Expected rent 336000 252000 Case 6 Loss of vacancy 84000 252000 Actual Rent 252000 GAV 336000 Municipal taxes paid 72000 5,000 NAV 2,47,000 Expected rent Loss of vacancy 264000 Actual Rent 216000 GAV 264000 Municipal taxes paid NAV 5,000 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 one 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 one 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 the end of the financial year in which the loan was taken If any of the conditions stated above does not fulfilled, ₹30,000 like:  Loan taken before 01/04/1999 130

 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 (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 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 71000 Less: Municipal taxes 2000 NAV 69000 Case E: In case of deemed to be let out property (a) Where the assessee owns more than one property for self-occupation, then the income from any one such property, at the option of the assessee, shall be 131

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. 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) 132

B DLO 71000 C DLO 34000 House Property Income 70000 Option II A DLO 35000 B SO (20000) C DLO 34000 House Property Income 49000 Option III A DLO 35000 B DLO 71000 C SO (15000) House Property Income 91000 Answer is Option II 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 1/4/2017. Compute the annual value of the house. Solution: Calculation of NAV LO ½ SO ½ GAV 40000 Nil Less MT 9000 Nil NAV 31000 Nil Note: For the purpose of computing GAV, ALV shall always be considered for the whole year except in two cases: 133

(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. 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 one house property for the purpose of self- occupation, the annual value of any one of those 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 25/2/14 with the help of a loan of ₹8,00,000 @12% raised on 1-4-09. Half of the loan was repaid on 31/3/12 and rest is still outstanding. Compute Mr. J‘S income from house property for the assessment year 2018-19. 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 [1-4-09 to 31-03-12] = 288000 400000*12*12 month [31-03-12 to 31-03-13] = 48000 336000 1/5th of 336000 = (67200) to be allowed in 5 installments. Interest for Post Construction Period - 4L @ 12% = 48000 Special Provisions Unrealised Rent – Explanation to Section 23 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: 134

 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. The particular so far residential house are given below. Annual rent ₹37,200: Municipal taxes paid ₹8,800; Interest on money borrowed for construction ₹5,000: Collection charges actually paid ₹300.The assessee mortgaged the property for ₹36,000, which was spent on his daughter‘s marriage. The assessee paid interest of ₹3,000 on the mortgage loan this year. The assessee also claimed that he had not realized rent from his tenants for PY to the extent of ₹14000 and he proved his claims to the entire satisfaction of the Assessing Officer that the conditions for its admissibility were satisfied. Compute his income from house property. Solution: Calculation of House Property Income Annual Rent 37,200 14,000 Less Unrealised Rent 23,200 23200 Actual Rent 8800 14400 GAV 4320 5000 Less MT 5080 NAV Less 24(a) 24(b) House Property Income Recovery of Unrealized Rent and Arrears of Rent – 25A UR AR Taxable as income of the previous year in Taxable as income of the year in which he recovers the unrealized rent. which he receives the arrears of rent. Taxable in the hands of the assessee whether he Taxable in the hands of the is the owner of that property or not. assessee whether he is the owner of that property or not. 30% of amount to be allowed as deduction. 30% of the amount of arrears shall be allowed as deduction. Unrealised rent means the rent which has been Arrears of rent is in respect of rent deducted from actual rent in any previous year not charged to income-tax for any for determining annual value. previous year. 135

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 1/4/2010 @ ₹3000p.m.for five years upto 31/3/2015. 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.1/4/2015 if Mr .K pays him rent @ ₹4000p.m. K agreed to it and paid the arrears of rent from1/4/2016 to 31/3/2017, On 1/6/2017. 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 2017-2018. Solution: Calculation of House Property Income GAV 48000 6000 Less MT 42000 12600 Less NAV 50000 24(a) (20600) 24(b) 67200 46600 House Property Income Add: Arrear of rent 96000 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. 136

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 Individual spouse (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 Individual minor 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 Person in building or part thereof in part performance of a contract of the possession nature 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 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 137

(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 charged to tax under the head ―Profits and gains of business or profession‖ or under the head ―Income from other sources‖. 138

(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. 139