Year: 2020

“Perquisite” may be defined as any casual emolument or benefit attached to an office or position in addition to salary or wages.

“Perquisite” is defined in the section 17(2) of the Income tax Act as including:

(i) Value of rent-free/concessional rent accommodation provided by the employer.

(ii) Any sum paid by employer in respect of an obligation which was actually payable by the assessee.

(iii) Value of any benefit/amenity granted free or at concessional rate to specified employees etc.

(iv) The value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at concessional rate to the assessee.

(v) The amount of any contribution to an approved superannuation fund by the employer in respect of the assessee, to the extent it exceeds one lakh rupees; and

(vi) The value of any other fringe benefit or amenity as may be prescribed.

Fully and Partially Taxable Perquisites

The following perquisites are fully taxable in the hands of all employees receiving such perquisites:

Rent free accommodation:

The rent free accommodation provided to employees by their employer is taxable. Since the employees are provided rent free accommodation, the amount of income accruing to them cannot be determined by them. Accordingly, there is prescribed manner for calculating income chargeable to tax as perquisite. The manner of calculating income chargeable to tax as perquisite for rent free accommodation is as follows:

Category of Employees	Income
	Unfurnished Accommodation	Furnished Accomodation
1) Provided to a Judge of High Court, Supreme Court2) Provided to an Officer of Parliament	In case of Rent free Official Residence: Nil	In case of Rent Free Official Residence: Nil
Provided to Central/ State Government employees	(a) License fees determined by the Central/ State Government	(a) Same as Unfurnished Accommodation(b) 10% p.a. Of the cost of furniture If such furniture is hired, then hire charges payable.
Provided to any other employee
1) Where the accommodation is owned by the employer	(i) 15% of salary in cities having population exceeding 25,00,000(ii) 10% of salary in cities having population between 10,00,000 and 25,00,000(iii) 7.5% of salary in other areas	(a) Same as Unfurnished Accommodation (b) 10% p.a. Of the cost of furniture If such furniture is hired, then hire charges payable.
2) Where the accommodation is taken on rent by the employer	Lower of the following:(i) Rent Payable Or(ii) 15% of salary	(a) Same as Unfurnished Accommodation (b) 10% p.a. Of the cost of furniture If such furniture is hired, then hire charges payable.
Accommodation provided in a hotel	Not Applicable since Hotel is presumed to be furnished.	Lower of the following:(i) 24% of salary Or(ii) Rent (Room Fare/ Charges) Payable

Concession in rent:

Some employers provide the employees with accommodation at rates lower than normal market rates. This reduction in rates is known as concession in rent.

The income chargeable to tax as perquisite as concession shall be determined as:

(i) Amount of Income chargeable to tax as above

(ii) Less: Amount of rent payable/ paid to the employer. 

Payment by the employer in respect of an obligation of employee:

In this case, the amount is liable to be paid by the employee and the employer pays the same.

Example: Self-Assessment Tax of the employee is paid by the Employer.

Note: If the employer pays taxes on behalf of employees on non-monetary perquisites provided to them, then such taxes are exempt in the hands of the employee. 

Sweat Equity allotted or transferred to the assessee:

The Companies in appreciation of its employees or with an aim to achieve a particular objective grants an option to the employees to subscribe equity shares at nil value or at concessional rates than the current market prices to its workforce. If the employee exercises such option and subscribes to such shares at nil or concessional rates, then it forms part of perquisites. 

Valuation of Sweat Equity shall be as follows:

Note: If the shares have been received at a concessional rate then the amount paid to the employer company shall be deducted from the value of perquisite calculated as above. 

Amount of any Contribution to an approved superannuation fund:

Employer’s contribution to superannuation fund is a perquisite.

The tax treatment for approved superannuation fund is as follows:

1. Employer’s Contribution to Superannuation Fund: Upto Rs. 1,50,000/- exempt in the hands of the employee.
2. Employee’s Contribution to Superannuation Fund is allowed as deduction under Chapter VIA. (Subject to the limits specified)
3. Interest accumulated on such fund is exempt from tax.
4. Payment of balance of fund:
5. To the employee on retirement
6. To the employee on disablement
7. To the legal heirs on death of the employee 

Transport Facility and Valuation of Free or Concessional Tickets:

 The Value of any benefit or amenity resulting from the provision by an employer:

(i) Who is engaged in the carriage of passengers or goods,

(ii) To any employee or to any member of his household for personal or private journey free of cost or at concessional fare,

(iii) In any conveyance owned, leased or made available by any other arrangement by such employer for the purpose of transport of passengers or goods

Shall be taken to be the value at which such benefit or amenity is offered by such employer to the public as reduced by the amount, if any, paid by or recovered from the employee for such benefit or amenity.

However, there would be no such perquisite to the employees of an airline or the railways. 

Valuation of benefit of provision of domestic servants

If the employee or any member of his household are provided with domestic servants such as sweeper, gardener, watchman or personal assistant then the benefits so received by the employee are taxable as perquisites in the hands of the employee. 

Utility such as gas, electricity or water supplied by employer

If the employer pays to the utility provider on behalf of the employee or if the employer himself provides such utilities then the benefits so received by the employee are taxable as perquisites in the hands of the employee. 

Free or concessional educational facilities

If the employer provides free or concessional educational facilities from the educational institutions maintained and owned by the employer or if free educational facilities are allowed in any other educational institution then the benefits so received by the employee are taxable as perquisites in the hands of the employee.

However, if the educational institution is maintained and owned by the employer and the employer provides free or concessional education facilities to the employee himself or his children and the benefits so received by the employee does not exceed Rs. 1,000/- per month then such amount shall not be taxable in the hands of the employee as perquisite. 

Interest-free or concessional loan

The value of the benefit to the employee as a result of interest-free loan or concessional loan for any purpose provided to the employee or any member of his household is a taxable perquisite.

However, this perquisite will be not be chargeable to tax in any of the following cases:

1. If such loan is provided for the purpose of treatment of diseases such as cancer, tuberculosis, etc. However, out of the amount of loan provided, if the employee receives reimbursement from any medical insurance scheme, then such amount shall not be exempt.
2. Amount of loans made to an employee does not exceed Rs. 20,000/-. 

  Free or concessional food and non-alcoholic beverages

If the employer provides free or concessional food and/ or beverages such as tea, coffee etc., then the benefits so received by the employee are taxable as perquisites in the hands of the employee. However, if the following are provided by the employer then they are not taxable in the hands of employees as perquisites:

1. Free food and beverages such as tea, coffee etc. provided by the employer to an employee during working hours at office or business premises less than Rs. 50/- per meal.
2. Vouchers provided having value less than Rs. 50/- per meal
3. Tea or Snacks provided during working hours
4. Free food and beverages such as tea, coffee etc. provided during working hours provided in a remote area or an offshore installation. 

 Gifts or Vouchers

Gift or vouchers received by employees or by member of his household on ceremonies or occasions are taxable perquisites in the hands of the employees. However, if the value of such gifts in totality do not exceed Rs. 5,000/- then such gifts are not taxable as perquisite in the hands of the employees. 

Reimbursement of credit card expenses

If the employer reimburses expenses incurred by the employee or any member of his household using a Credit card then the benefits so received by the employee are taxable as perquisites in the hands of the employee.

However, if such expenses are made by the employee exclusively for official purposes and the employer has documented the expenses incurred using the credit card then such reimbursements are not taxable as perquisite in the hands of the employees. 

Club expenditure

If the employer pays or reimburses for the periodic subscription of a club for the employee or any member of his household then the benefits so received by the employee are taxable as perquisites in the hands of the employee.

However, if the following are provided by the employer then they are not taxable in the hands of employees as perquisites:

1. If the use of health club, sports and such facilities are provided uniformly to all employees by the employer.
2. Such expenditure is incurred wholly and exclusively for business purposes and if the expenditure is properly documented by the employer. 

 Use of movable assets

If movable assets such as laptops are provided by the employer to the employee then the benefits so received by the employees are not taxable in the hands of the employee. However, other movable assets such as furniture, car etc are provided by the employer to the employee than the the benefits so received by the employee are taxable as perquisites in the hands of the employee.

Transfer of movable assets

If the employer transfers any movable assets such as computers and electronic items, motor cars etc. in the name of the employee than the the benefits so received by the employee are taxable as perquisites in the hands of the employee. 

Fully Exempt Perquisites

The following perquisites are fully exempt from tax subject to compliance of conditions specified: 

Telephone	Telephone provided by the employer to his employee at his residence.
Transport Facility	Transport Facility provided by an employer engaged in the business of carrying of passengers or goods to his employees either free of charge or at concessional rate
Privilege passes and Privilege ticket	These are provided by Indian railways to its employees.
Perquisites allowed outside India by the Government	Perquisites allowed outside India by the Government to a citizen of India for rendering services outside India
Employer’s Contribution to staff group insurance scheme	Employer takes a single insurance of all the staff and contributes towards the insurance premium.
Recreational Facilities	Subsidized lunch or dinner provided by the employer.
Amount spent on training of employees	This includes amount paid for refresher management course including expenses on boarding and lodging.
Sum payable by employer to a Approved Funds	Funds include Recognised Provident Fund, Approved Superannuation Fund or Deposit-linked insurance fund.
Medical Facilities	The following are exempt:(i) Value of medical treatment in a hospital maintained by the employer to the employee or any of his family members(ii) payment by the employer for treatment in a Government Hospital(iii) payment by the employer for treatment of prescribed diseases in any approved hospital(iv) mediclaim insurance premium paid by the employer for the employee(v) reimbursement upto Rs. 15,000/- of expenditure actually incurred by the employee for self or any of his family members.
Amount paid towards expenditure incurred outside India on medical treatment	This includes the following:(i) medical treatment of the employee or any member of the family of such employee outside India,(ii) travel and stay abroad of the employee or any member of the family of such employee for medical treatment(iii) travel and stay abroad of one attendant who accompanies the patient in connection with such treatment.Conditions:(i) The amount of exemption will be limited to the amount approved by RBI(ii) If the employee’s taxable income before deductions is more than Rs. 2,00,000/- then the expenditure on travelling of the patient and the attendant shall be fully taxable.
Conveyance Facility	Conveyance facility provided to Supreme Court and High Court Judges.
Payment of premium on personal accident insurance policies

Perquisite arising out of supply of gas, electric energy or water:

This shall be determined as the amount paid by the employer to the agency supplying the same. If the supply is from the employer’s own resources, the value of the perquisite would be the manufacturing cost per unit incurred by the employer. However, any payment received from the employee towards the above would be reduced from the amount [Rule 3(4)]

• Transport  Allowance

Any amount paid to employee for expenses incurred on commuting between residence and place of duty

Exemption: Rs. 1,600 per month (In case of blind, deaf, dumb and handicapped employees Rs.3, 200 per month) is exempted

• House Rent Allowance

Any allowance paid by employer to pay employee’s rented accommodation

Exemption: Least of following three is exempted:-

1. Actual HRA received
2. 40 % of salary ( 50% if house situated in Mumbai, Calcutta, Delhi or Madras)
3. Actual rent paid minus 10% of salary (Salary is Basic +DA or Basic as per company’s salary structure)

Note:

1. HRA is fully taxable if employee is living in his own house or if he don’t pay any rent.
2. Pan number of land lord is required if house rent exceeds Rs. 1 lakh

• Conveyance Allowance

Any allowance paid by employer to meet expenses incurred on conveyance while performing office duties

Exemption: Exempted to the extent of expense incurred for official purpose (Varies from company to company as per their policy)

• Children Education Allowance

It is reimbursement for educational expenses incurred for two children

Exemption: Up to Rs. 100 per month per child up to 2 children is exempted

• Hostel Expenditure Allowance

Any allowance granted to an employee to meet the hostel expenditure of his child

Exemption: Up to Rs. 300 per month per child up to 2 children is exempted

• Uniform Allowance

In this case, according to dress code of the office, an employee can claim uniform reimbursement for formal clothes purchased for office wear. Does not necessary for workers in factory, it’s for all employees who have to follow certain dress code in office and its maintenance.

Exemption: Exempted to the extent of expense incurred for official purpose (Varies from company to company as per their policy)

• Research Allowance

It is granted for encouraging the academic research and other professional pursuits.

Exemption- Exempted to the extent of expense incurred for official purpose (Varies from company to company as per their policy)

• Helper/Assistant Allowance

Exemption- Exempted to the extent of expense incurred for official purpose (Varies from company to company as per their policy)

• Allowance to meet travel cost and transfer

Exemption- Exempted to the extent of expense incurred for official purpose (Varies from company to company as per their policy)

• Entertainment Allowance Government employees

Least of the following is exempt from tax:

a) Rs 5,000

b) 1/5th of salary (excluding any allowance, benefits or other perquisite)

c) Actual entertainment allowance received

• Daily Allowance

Daily allowance is given to meet the ordinary daily charges incurred by an employee on account of absence from his normal place of duty

Exemption: Exempted to the extent of expense incurred for official purpose (Varies from company to company as per their policy)

• Tribal area allowance

Allowance is given to employees who worked in (a) Madhya Pradesh (b) Tamil Nadu (c) Uttar Pradesh (d) Karnataka (e) Tripura (f) Assam (g) West Bengal (h) Bihar (i) Orissa

Exemption- Exempted up to Up to Rs. 200 per month

• Underground Allowances

Underground allowances granted to employees working in unpleasant, unnatural climate in underground mines

Exemption: Exempted up to Up to Rs. 800 per month

• Border area allowance Remote Locality or allowance or Disturbed Area allowance or Difficult Area Allowance (Subject to certain conditions and locations)

Exemption: Amount exempt from tax varies from Rs. 200 per month to Rs. 1,300 per month

• High Altitude Allowance ( For armed forces)

It is granted to armed forces operating in high altitude areas (Subject to certain conditions and locations)

Exemption:

a) Up to Rs. 1,060 per month (for altitude of 9,000 to 15,000 feet)

b) Up to Rs. 1,600 per month (for altitude above 15,000 feet)

• Highly active field area allowance ( For armed forces)

  Subject to certain conditions and locations

  Exemption: Up to Rs. 4,200 per month

• Island Duty Allowance ( For armed forces)

 It is granted to members of armed forces in Andaman and Nicobar and Lakshadweep  group of Island (Subject to certain conditions and locations)

Exemption: Up to Rs. 3,250 per month

Allowance is amount paid to employees as a part of salary or disbursement of expenses incurred during course of their regular job duty. Salary structures are normally broke up into basic salary and allowances, out of which basic salary is fully taxable and allowances can be partially or fully taxable or may fully exempted. Allowances provided by company may differ to differ according to their policies.

Fully taxable allowances

The list of fully taxable allowances is as follows (Differs from company to company as per company allowances):-

• Dearness Allowance

This allowance is paid to employees to adjust their cost of living to cope up with inflation is fully taxable

• City compensatory allowance

Fully taxable allowance of salary generally given to employees working in big cities to compensate for the higher standard of living.

• Fixed Medical allowance

It is fixed allowance paid by company per month to employees whether they submit bills or not. It is fully taxable. But employees can claim tax benefit up to Rs.15,000 under medical reimbursement (bills and supporting documents required in this case)

• Tiffin/Lunch/Dinner/Refreshment Allowance

Any allowance paid by company for Tiffin/lunch / Dinner or refreshments is fully taxable

• Servant Allowance

When an employer pays an employee to engage services of a servant, such an allowance is taxable.

• Project Allowance

Any amount paid to employee who are involved in projects or settle expenses incurred during projects on behalf of company

• Overtime Allowance

Any amount paid for overtime is fully taxable

• Telephone allowance

Telephone allowance is fully taxable. However, telephone bill reimbursement is fully exempted.

• Holiday Allowance

This allowance is paid if employee have worked on holiday is fully taxable

• Entertainment Allowance ( Except government employees )

This allowance is payable to employees for expenses incurred for hospitality of customers or clients who meet them in connection with their office or business work. It may paid as fixed amount in salary or out of salary to employees for private sector employees. For government sector is partially exempted.

• Any Other Cash Allowance

The income chargeable under the head “Salaries” is computed after making the following deductions under Section 16:

1. Standard Deduction
2. Entertainment Allowance Deduction
3. Professional Tax

1. Standard Deduction [Sec. 16(i)/(ia)]

• Standard deduction is Rs. 40,000
• The Amount of Salary, whichever is lower

2. Entertainment Allowance [Sec. 16(ii)]

Entertainment allowance is first included in salary income under the head “Salaries” and thereafter a deduction is given on the basis enumerated in the following paragraphs:

(A). In the case of a Government employee (i.e., a Central Government or a State Government employee), the least of the following is Deductible:

1. 5,000
2. 20 % of Basic Salary
3. Amount of Entertainment Allowance granted during the previous year

In order to determine amount of entertainment allowance deductible from salary, the following points need consideration:

1. For this purpose “salary” excludes any allowance, benefit or other perquisites.
2. Amount actually expended towards entertainment (out of entertainment allowance received) is not taken into consideration.

(B). In the case of a Non-Government Employee (including employees of Statutory Corporation and Local Authority):

Entertainment Allowance is NOT deductible.

3. Professional Tax or Tax on Employment [Sec. 16(iii)]

Professional Tax or Tax on Employment, levied by a State under article 276 of the Constitution, is allowed as Deduction.

The following points should be kept in view:

1. Deduction is available only in the year in which professional tax is paid.
2. If the professional tax is paid by the employer on behalf of an employee, it is first included in the salary of the employee as a “perquisite” and then the same amount is allowed as deduction on account of “professional tax” from gross salary.
3. There is no monetary ceiling under the Income-tax Act. Under article 276 of the Constitution, a State Government cannot impose more than Rs. 2,500 per annum as professional tax. Under the Income-tax Act, whatever professional tax is paid during the previous year, is deductible.

Gross Annual Value and Net Annual Value

Gross Annual Value of a property is the value at which the property might reasonably be expected to be let from year to year. It is more like a notional rent which one could have earned in case property had been let out. Even if the property is not let out, the notional rent or deemed rent receivable is taxable.

As per section 23(1)(a) the Annual Value of any property shall be the sum for which the property might reasonably be expected to be let from year to year. It may neither be the actual rent derived nor the municipal valuation of the property. It is something like notional rent which could have been derived, had the property been let. In determining the annual value there are 4 factors which are normally taken into consideration. These are:

1. Actual Rent Received or Receivable
2. Municipal Value

• Fair Rent of the Property

1. Standard Rent

Computation of Annual Value of a Property [Section 23(1)]

As per the Income Tax Act. the Annual Value is the value after deduction of municipal taxes, if any, paid by the owner. But for sake of convenience, the annual value may be determined in the following two steps:

Step I : Determine the Gross Annual Value:

Gross Annual Value is determined as follows –

Step-1	Find out reasonable expected rent of the property
Step-2	Find out rent actually received or receivable after excluding unrealized rent but before deducting loss due to vacancy
Step-3	Find out which one is higher—amount computed in Step-1 or Step-2.
Step-4	Find out loss because of vacancy
Step-5	Step-3 minus Step-4 is Gross Annual Value

Determine the Net Annual Value :

From the gross annual value computed in step I, deduct municipal tax actually paid by the owner during the previous year.

The balance shall be the net annual value which, as per Income-tax Act., is the annual value.

The annual value has to be determined for different categories of properties. These could be:

A. House property which is let throughout the previous year.

B. House property which is let and was vacant during the whole or any part of the previous year.

C. House property which is part of the year let and part of the year self-occupied.

House property which is self-occupied for residential purposes or could not actually be self occupied owing to employment at any other place.

(A) Annual Value for House Property which is Let throughout the Previous Year.

Step1: Determine Gross Annual Value

Gross Annual Value of the House Property Let for the whole year shall be higher of the following two:

(a) Expected rent;

(b) Actual rent received or receivable.

How to calculate Expected Rent:

The higher of the following two is taken to be the expected rent:

(i) Municipal Valuation;

(ii) Fair Rental value.

Basis of Charge [Section 22]:

Income from house property shall be taxable under this head if following conditions are satisfied:

a) The house property should consist of any building or land appurtenant thereto;

b) The taxpayer should be the owner of the property;

c) The house property should not be used for the purpose of business or profession carried on by the taxpayer.

Computation of income from house property:

Income from a house property shall be determined in the following manner:

Particulars	Amount
Gross Annual Value	–
Less: Municipal Taxes	–
Net Annual Value	****
Less: Standard deduction at 30% [Section 24(a)]	–
Less: Interest on borrowed capital [Section 24(b)]	–
Income from house property	****

Gross Annual value [Sec. 23(1)]

The Gross Annual Value of the house property shall be higher of following:

a) Expected rent, i.e., the sum for which the property might reasonably be expected to be let out from year to year. Expected rent shall be higher of municipal valuation or fair rent of the property, subject to maximum of standard rent;

b) Rent actually received or receivable after excluding unrealized rent but before deducting loss due to vacancy

Out of sum computed above, any loss incurred due to vacancy in the house property shall be deducted and the remaining sum so computed shall be deemed to the gross annual value.

Taxpayers should be aware that for every house property owned by them, income tax is payable on a yearly basis. The tax payable is calculated as a percentage of the net annual value of the property. The net annual value is determined based on the approximate amount of annual rent which the property can be expected to fetch in the market at an arms’ length price. Each and every house property owned by a taxpayer is taxable, with the exclusive exception of self-occupied residential properties. Even in the case of self-occupied residential properties, the exemption from taxability is given only for one self-occupied property. 

According to Section 24 of the Income Tax Act, “the Income from House Property shall be reduced by the amount of interest that is paid on Loan where the loan has been taken for the purpose of purchase, construction, renewal, repair or reconstruction of property”. The following deduction from Net Annual Value (NAV) is permissible to determine the taxable income from house property:

• Deduction at 30% on NAV under Section 24(a).
• Interest on loan under Section 24(b) if the loan is taken for purchases, construction, repair or reconstruction of House Property.

Calculating Net Annual Value Deduction

The Net Annual Value of the house property deduction can be divided into two scenarios:

Let-out House Property

In this case, Net Annual Value can be deducted under two sections:

• The standard deduction under Section 24(A)
• Interest on money borrowed under Section 24(B).

Self-occupied House

In this case, the Net Annual Value can be deducted from the interest on money that is borrowed under Section 24(B).

Section 24(A)

Section 24(a) deals with the standard deduction of the Net Annual Value. It is a deduction made out of the Net Annual Value for some expenses of the owner of the house property that is connected with the rental income. The rental income includes charges like rent collection charges, insurance of house, repair of the house, and so on. All these charges will be deductible at 30% of NAV.

Self-occupied house property does not require standard deduction because there is no NAV for a self-occupied house. In simple terms, the standard deduction for a let out house or for a deemed let outhouse is 30% of Net Annual Value. On the other hand, there is no deduction for a self-occupied house.

Section 24(B)

Section 24(B) deals with the purchases of items in connection with the construction or repair of a house property. For this section to be applicable, the owner of the house property has to avail a housing loan through which the transaction for the purchase, construction, repairs or renovation of the house of completed.

In such cases, the interest paid for the housing loan is used for the deduction of NAV at the time of calculating the house property income. There is no maximum limit for let out house property/deemed let out house property. For a self-occupied house, there is a maximum limit up to which the interest can be claimed for deduction.

Computation of Self-occupied House Property

Section 24(2)

When the property consists of a house or part of a house which is in the owner’s occupation for the purposes of his own residence or cannot be owned by the owner by the reason of fact that owing to his employment business or profession carried on at any other place, the owner has to reside at that other place in a building that is not belonging to him. The annual value of the house or part of the house would be considered as nil.

Section 23(3)

The annual value of the self-occupied house would not be taken as nil to the below conditions:

• If the house of part of the house which is actually let during the whole or any part of the previous year; or 
• Any other benefit that is derived by the owner from such a house.

In the above cases, the annual value would be determined as per provisions applies for the let out properties.

Section 23(4)

If there is more than one residential house, that is in the employment of the owner for his residential purposes then the owner might exercise an option to treat any one of the houses to be self-occupied. The other house would be deemed to be let out and the annual value of such houses will be determined as per the following Section 23(1)(a). The assessee, in this case, must exercise his option in a way that his taxable income is the minimum. Such an option would be changed from year to year. If an assessee has a house property that consists of two or more residential units and all such units are self-occupied, then the annual value of the entire house property would be considered as nil as there is only one house property though it has more than one residential units.

As per the amendments in income tax law made by the Finance Act, 2019, the benefits under Section 23(2) is to be allowed for two self-occupied houses instead of one. If there are more than two residential houses, that are in the occupation of the owner of his residential purposes then the owner may exercise an option to treat any two of the houses to be self-occupied. The other houses will be determined as per Section 23(1)(a). The annual value of two self-occupied houses opted by the assessee can be taken as nil.

Deduction in respect of one Self-Occupied House

When the annual value is nil, the assessee will not be allowed for the standard deduction of 30%. However, the assessee will be granted deduction on account of interest as under:

• If capital is borrowed, then the maximum amount of deduction on account of interest would be Rs.30,000  (not Rs.2 lakhs).
• The acquisition or construction must be completed within 5 years from the end of the financial year in which the capital was borrowed. The construction of the residential unit to have commenced before April 1, 1999. 
• The aforesaid three conditions are satisfied, the higher deduction of Rs.2 lakhs would be available.

 Section 23(5) 

Where the house property consisting of any land or building appurtenant thereto are held as stock-in-trade and the property or any part of the property is not let during the whole or any part of the previous year. Then the annual value of house property or part of the house, for the period up to 1 year from the end of the financial year in which the completion certificate of construction of the house property is taken from the competent authority, shall be taken to be nil.

Under section 10 of the Income-tax Act 1961 following incomes from house property are exempted from tax. These incomes are not to be included in the total income of assessee. Hence no tax is payable on such incomes. These incomes are:

1. Agricultural House Property [Section 2(1)(c)].

Income from such house property which is situated on or in the immediate vicinity of agricultural land which is used for agricultural purposes by cultivator is exempted from tax.

2. Income from Property held under Trust Wholly for Charitable or Religious Purposes [Section 11(1)(a)]:

Income derived from property held under trust, wholly for charitable and religious purposes, shall be exempt:

• To the extent such income is applied in India for such purposes; and
• Where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of 15% of the income from such property.

3. Income from Property held under trust which is applied in part only for Charitable or Religious purposes [Section 11(1)(b)]:

Income derived from property held under trust in part only for such purpose, shall be exempt:

• To the extent such income is applied in India for such purposes, provided, the trust in question is created before the commencement of Income-tax Act, 1961 i.e. before 1.4.1962; and
• Where any such income is finally set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of 15% of the income from such property.

4. Income from Property held under trust which is applied for Charitable Purposes outside India [Section 11(1)(c)]:

• Income derived from property held under trust, created on or after 1.4.1952 for charitable purpose which tends to promote international welfare in which India is interested, shall be exempt to the extent to which such income is applied to such purpose outside India. Religious trusts are not covered here.
• Income derived from property held under a trust for charitable or religious purposes, created before 1.4.1952, shall be exempt to the extent to which such income is applied to such purposes outside India.

In the above two cases, it is necessary that the Board, by general or special order, has directed in either case that it shall not be included in the total income of the person in receipt of such income.

5. Self-Occupied but Vacant House [Section 23(3)].

in case an assessee keeps one of his own houses reserved for self-occupation but is living in a rented house elsewhere due to his employment or profession the income from such house is taken to be NIL.

The annual value of self-occupied house shall not be NIL:

• If such house or part of the house is actually let during the whole or any part of the previous year
• Any other benefit therefrom is derived by the owner from such house.

In the above cases, the annual value shall be determined as per provisions applicable for let out properties i.e. under clause (a), (b) or (c) of section 23(1).

6. House used for Own Business or Profession.

There is no income chargeable to tax under this head from such house property.

7. Property held by Registered Trade Union [Section 10(24)].

Income from a house property owned by a registered trade union is not to be included in its G.T.I.

8. Income from House Property held by following shall be exempted:

• House property held by a local authority.
• House property held by a scientific research institution.
• House property held at a political party.
• House property held by a university and any other educational institution working for spreading education and not to earn profit.
• House property held by a hospital or medical institution working for the spreading of medical services to people and are not meant for earning profit.
• It is income from a farmhouse.

9. One House Property (a palace) owned by a former ruler of Indian states.

Ex-rulers of Indian states may be owning many palaces but only one palace of their choice shall be treated as a self occupied house and shall be exempted.

10. One Self-Occupied House.

In case assessee owns one residential house, the net annual value of the same shall be taken as nil but in case he owns more than one house, then only one of his choice but normally of higher value shall be treated as a self occupied one and other/others are treated as deemed to Je let out.

 

Out of sum computed above, any loss incurred due to vacancy in the house property shall be deducted and the remaining sum so computed shall be deemed to the gross annual value.

Deductions:

Description	Nature of Deductions
Municipal Taxes	Municipal taxes including service-taxes levied by any local authority in respect of house property is allowed as deduction, if: a) Taxes are borne by the owner; and b) Taxes are actually paid by him during the year.
Standard Deduction [Section 24(a)]	30% of net annual value of the house property is allowed as deduction if property is let-out during the previous year.
Interest on Borrowed Capital * [Section 24(b)]	a) In respect of let-out property, actual interest incurred on capital borrowed for the purpose of acquisition, construction, repairing, re-construction shall be allowed as deduction
	b) In respect of self-occupied residential house property, interest incurred on capital borrowed for the purpose of acquisition or construction of house property shall be allowed as deduction up to Rs. 2 lakhs. The deduction shall be allowed if capital is borrowed on or after 01-04-1999 and acquisition or construction of house property is completed within 5 years.
	c) In respect of self-occupied residential house property, interest incurred on capital borrowed for the purpose of reconstruction, repairs or renewals of a house property shall be allowed as deduction up to Rs. 30,000.

* Any interest pertaining to the period prior to the year of acquisition/ construction of the house property shall be allowed as deduction in five equal installments, beginning with the year in which the property was acquired/ constructed.

* Deduction for interest on borrowed capital shall be limited to Rs. 30,000 in following circumstances:

1. a) If capital is borrowed before 01-04-1999 for the purpose of purchase or construction of a house property;
2. b) If capital is borrowed on or after 01-04-1999 for the purpose of re-construction, repairs or renewals of a house property;
3. c) If capital is borrowed on or after 01-04-1999 but construction of house property is not completed within five years from end of the previous year in which capital was borrowed.