Month: August 2026

Management Notes

Interest Computation of Income from House Property, Property Owned by Co-owners

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Income from house property is computed after determining the annual value of the property and allowing deductions permitted under the Income tax Act, 2025. Interest on borrowed capital is an important deduction where money is borrowed for acquiring, constructing, repairing, renewing or reconstructing the property. The computation becomes slightly different when a property is jointly owned by two or more persons. In such cases, the income and eligible interest deduction are generally apportioned according to the definite and ascertainable ownership share of each co owner, subject to the applicable provisions.

1. Interest on Borrowed Capital

Interest paid or payable on borrowed capital used for acquiring, constructing, repairing, renewing or reconstructing a house property is allowed as a deduction, subject to the conditions and limits prescribed under the Income tax Act, 2025.

The borrowing should have a connection with the house property. Interest on a personal loan having no connection with acquisition, construction, repair, renewal or reconstruction of the property is generally not eligible as a deduction under the house property provisions.

Formula

Income from House Property = Annual Value − Eligible Deductions

The deductions generally include:

30% of Annual Value

Interest on Borrowed Capital

For a let out property, the eligible interest is generally allowed according to the applicable provisions. For a self occupied property, specific monetary limits and conditions apply.

2. Pre-Construction Interest

Interest relating to the period before the acquisition or completion of construction is treated separately. The eligible pre construction interest is accumulated and allowed in five equal annual instalments, beginning from the tax year in which the property is acquired or construction is completed.

Example

Pre construction interest = ₹2,00,000

Annual instalment = ₹2,00,000 ÷ 5 = ₹40,000

Therefore, ₹40,000 can be claimed each year, subject to the applicable provisions and limits.

3. Property Owned by Co-owners

When a house property is jointly owned by two or more persons and their respective shares are definite and ascertainable, each co owner is generally assessed separately in respect of his or her share of income from the property.

For example, if Mr. A and Mr. B own a property equally, each has a 50% share. The annual value, applicable deductions and eligible interest are apportioned according to their respective ownership shares.

Example

Suppose a property is owned equally by A and B.

Annual Value = ₹6,00,000

Interest on borrowed capital = ₹2,00,000

Each co owner’s share:

Particulars A B
Share in property 50% 50%
Annual Value ₹3,00,000 ₹3,00,000
30% Standard Deduction ₹90,000 ₹90,000
Interest on Borrowed Capital ₹1,00,000 ₹1,00,000

Therefore, subject to the applicable rules, the income from house property is computed separately in the hands of A and B.

4. Co-owners with Unequal Shares

Where ownership shares are different, income and eligible deductions are divided according to the actual ownership ratio.

Suppose A owns 60% and B owns 40% of a property having annual value of ₹5,00,000.

A’s share of annual value:

₹5,00,000 × 60% = ₹3,00,000

B’s share:

₹5,00,000 × 40% = ₹2,00,000

Similarly, eligible interest on borrowed capital is divided according to their respective shares, provided the borrowing and payment satisfy the applicable conditions.

5. Computation Format

The computation for each co owner can be presented as:

Gross Annual Value

Less: Municipal Taxes, where allowable

= Net Annual Value

Less: 30% Standard Deduction

Less: Eligible Interest on Borrowed Capital

= Income from House Property

Each co owner includes his or her share of the resulting income in the respective total income.

Management Notes

Capital Treatment of Pre and Post Construction

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Capital treatment of construction interest means the special tax treatment given to interest paid on borrowed capital used for the construction or acquisition of a house property before its construction is completed or the property is acquired. Instead of allowing the entire pre construction interest as a deduction in the year in which it is paid, the eligible amount is capitalised and allowed as a deduction in five equal annual instalments, beginning from the tax year in which construction is completed or the property is acquired. This treatment ensures that the interest incurred before the property becomes ready is spread over subsequent years for income tax purposes.

1. Pre Construction Interest

Pre construction interest refers to the interest payable on borrowed capital during the period before the acquisition or completion of construction of a house property. Under the Income tax Act, 2025, interest relating to the period before the tax year in which the property is acquired or construction is completed is not generally allowed as a deduction immediately. Instead, the eligible pre construction period interest is aggregated and allowed in five equal annual instalments, beginning from the tax year in which the acquisition is completed or construction is completed.

The pre construction period generally ends on the date immediately preceding the date of acquisition or the date of completion of construction, as applicable. Interest incurred during this period must relate to the borrowing used for acquiring, constructing, repairing, renewing or reconstructing the property.

For example, Mr. A borrows ₹20,00,000 for construction of a house. Interest of ₹2,50,000 is incurred before construction is completed. If the property is completed during the relevant tax year, the eligible ₹2,50,000 is not deducted entirely in that year. Instead, it is divided into five equal instalments.

₹2,50,000 ÷ 5 = ₹50,000 per year

Therefore, ₹50,000 can be considered as the annual instalment along with the current year’s eligible interest, subject to the applicable conditions and limits.

The purpose of this treatment is to spread the benefit of interest incurred before the property becomes operational over five years. It prevents the entire pre construction interest from being claimed as a deduction in a single year.

Thus, pre construction interest is capitalised for tax purposes and subsequently allowed in five equal instalments from the year of acquisition or completion of construction.

2. Post Construction Interest

Post construction interest means interest on borrowed capital that relates to the period after the acquisition of the property or completion of its construction. Such interest is treated differently from pre construction interest because the property has already been acquired or constructed.

Interest payable on borrowed capital used for acquiring, constructing, repairing, renewing or reconstructing a house property may be claimed as a deduction under the applicable provisions. For a let out property, the eligible interest is generally deductible subject to the provisions governing the computation of income from house property.

For example, Mr. B completes construction of his house on 1 April 2026 and pays ₹1,80,000 as interest on the housing loan during the tax year. The ₹1,80,000 represents post construction interest and is considered as a deduction according to the applicable provisions.

For a self occupied property, the deduction for interest is subject to the prescribed monetary limits and conditions. Therefore, the entire interest paid may not always be deductible.

The important distinction is that current year post construction interest is considered in the year to which it relates, whereas pre construction interest is allowed through five equal instalments.

Basic treatment:

Post Construction Interest = Deduction in the relevant tax year, subject to applicable limits

Management Notes

Deduction’s u/s 22 – a) Standard Deduction b) Interest on Borrowed

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Under the Income tax Act, 2025, Section 22 provides deductions while computing income chargeable under the head “Income from House Property.” The section mainly allows two important deductions: 30% of the annual value as standard deduction and interest payable on borrowed capital used for acquiring, constructing, repairing, renewing or reconstructing the property. These deductions are allowed after determining the annual value under Section 21.

a) Standard Deduction [Section 22(1)(a)]

A standard deduction of 30% of the annual value is allowed while computing income from house property. The deduction is allowed irrespective of the actual amount spent by the owner on repairs, maintenance, insurance, electricity, security or other expenses relating to the property. Therefore, the taxpayer does not have to prove the actual expenditure incurred on maintenance.

Formula:

Standard Deduction = 30% × Annual Value

For example, if the annual value of a house property is ₹5,00,000:

Standard Deduction = ₹5,00,000 × 30% = ₹1,50,000

Thus, ₹1,50,000 will be allowed as deduction while computing income from house property.

b) Interest on Borrowed Capital [Section 22(1)(b)]

Where a house property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the interest payable on such borrowed capital is allowed as a deduction, subject to the specific limits and conditions applicable to the property. For a let out property, the interest deduction is generally allowed without a monetary ceiling under Section 22(1)(b).

For certain self occupied properties, the aggregate deduction for interest is restricted to ₹2,00,000, where the prescribed conditions are satisfied, including completion of acquisition or construction within the specified period and furnishing the required certificate. In other cases, the applicable limit is ₹30,000.

Interest relating to the period before acquisition or construction of the property is allowed in five equal instalments, beginning from the tax year in which the property is acquired or construction is completed.

Computation

Annual Value
Less: 30% Standard Deduction
Less: Interest on Borrowed Capital
= Income from House Property

Management Notes

Recovery of Arrears of Rent and Unrealized Rent

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Under the Income tax Act, 2025, Section 23 contains the special provisions relating to arrears of rent and unrealised rent received or realised subsequently. These provisions ensure that rent which was not taxed earlier because it had not been received, or because it was genuinely unrealised, is brought to tax when it is subsequently received or realised. The amount is treated as income from house property in the tax year in which it is received or realised. Importantly, the assessee can claim a deduction of 30% of such arrears or unrealised rent, irrespective of the expenses actually incurred in collecting the amount.

1. Arrears of Rent

Arrears of rent means rent relating to an earlier period which was due from the tenant but was received by the assessee in a later tax year.

For example, rent of ₹2,00,000 relating to an earlier year becomes payable by the tenant but is received by the landlord in the current tax year. The ₹2,00,000 will be treated as income from house property in the year in which it is received.

The important point is that the amount is taxable in the year of receipt, even though it relates to an earlier period.

2. Unrealised Rent

Unrealised rent refers to rent which the owner was unable to recover from the tenant. Under the applicable rules, unrealised rent can be excluded while determining annual value if the prescribed conditions are satisfied. These conditions include a genuine tenancy, the tenant having vacated or steps being taken to make the tenant vacate, the tenant not occupying another property of the assessee, and reasonable steps having been taken for recovery of the unpaid rent or the Assessing Officer being satisfied that legal proceedings would be useless.

If such unrealised rent is subsequently recovered, Section 23 treats the recovered amount as income from house property in the tax year in which it is realised.

3. 30% Deduction

Section 23 specifically provides a deduction equal to 30% of the arrears of rent or unrealised rent subsequently realised. This deduction is allowed while computing the taxable amount under the head Income from House Property.

Formula:

Taxable Arrears / Unrealised Rent = Amount Received − 30% Deduction

Thus, effectively 70% of the amount received or realised becomes taxable.

Example

Suppose Mr. A receives arrears of rent of ₹1,00,000 during the current tax year.

Particulars Amount
Arrears of rent received ₹1,00,000
Less: 30% deduction ₹30,000
Taxable amount ₹70,000

The ₹70,000 is included under the head Income from House Property in the year of receipt.

4. Taxability Even if Not Owner in Year of Receipt

A significant feature of Section 23 is that the arrears or subsequently realised unrealised rent is included as income from house property even if the assessee is not the owner of the property in the tax year in which the amount is received or realised.

Therefore, the tax treatment follows the nature of the amount as arrears or previously unrealised rent rather than depending upon ownership in the year of actual receipt.

Management Notes

Determination of Annual Value [Sec. 21]

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Under the Income tax Act, 2025, Section 21 provides rules for determining the annual value of a property for computing income chargeable under the head “Income from House Property.” The annual value represents the amount that the property can reasonably be expected to earn as rent during the relevant tax year. It is an important step because income from house property is generally computed after determining the annual value and allowing the deductions permitted by the Act.

1. Let Out Property

For a property that is actually let out, the annual value is generally determined by considering the reasonable expected rent and the actual rent received or receivable. The applicable provisions and prescribed rules are considered to determine the taxable annual value.

For example, if the reasonable expected rent of a property is ₹3,60,000 and the actual rent received is ₹4,00,000, the applicable provisions are applied to determine the annual value.

2. Property Let Out for Part of the Year

Where a property is let out for only part of the tax year, the rent received or receivable for the period of actual letting is considered along with the expected rent, according to the prescribed rules.

For example, if a property is let out for six months at ₹30,000 per month, the actual rent for the period is ₹1,80,000. The annual value is then determined according to the applicable provisions.

3. Self Occupied Property

Where a house property is occupied by the owner for his own residence, its annual value may be taken as nil, subject to the conditions and limits prescribed under the Act. This provision provides relief where the owner uses the property for personal residence rather than earning rental income.

4. More Than One House Property

Where an assessee owns more than one house property and the properties are used for own residence, the Act provides specific rules for determining which properties can receive the nil annual value treatment. The remaining property or properties may be subject to the applicable annual value provisions.

5. Importance of Annual Value

The annual value is the starting point for computing income from house property. After determining it, eligible deductions such as municipal taxes and the standard deduction are considered according to the applicable provisions.

Basic computation:

Annual Value − Eligible Deductions = Income from House Property

Thus, Section 21 provides the framework for determining annual value, which is essential for calculating the taxable income from house property.

Management Notes

Chargeability [Sec. 20]

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Under the Income tax Act, 2025, Section 20 deals with the chargeability of income under the head “Salaries”. Salary income is taxable when there is an employer employee relationship between the person paying the amount and the person receiving it. The section determines the amounts that are included in salary income and the point at which they become chargeable to tax. Salary is generally taxable on the basis of due or receipt, whichever occurs earlier, subject to the specific provisions of the Act.

Amounts Chargeable as Salary

Particular Tax Treatment
Salary Due Salary becomes taxable when it becomes due to the employee, even if it has not actually been received.
Salary Received Salary received before it becomes due is generally taxable in the year of receipt.
Advance Salary Salary received in advance is taxable in the year in which it is received.
Arrears of Salary Salary relating to an earlier period but received later is generally taxable on receipt if it was not taxed earlier.
Bonus and Commission Taxable as salary when received or due, as applicable under the charging provisions.
Pension Pension received from an employer or former employer is generally chargeable under the head Salaries, subject to applicable provisions.
Perquisites Taxable value of specified benefits and facilities provided by the employer is included in salary.
Profits in Lieu of Salary Amounts covered by the relevant provisions relating to profits in lieu of salary are chargeable to tax.

Important Principle:

The basic rule can be expressed as:

Salary Income Chargeable = Salary Due or Salary Received, Whichever is Earlier

For example, if salary of ₹60,000 for March becomes due on 31 March but is paid in April, it is generally chargeable in the tax year in which it became due. If the employer pays ₹60,000 as advance salary in March for a future month, it is generally chargeable in the year in which it is received.

However, salary is taxable under this head only where an employer employee relationship exists. Amounts received for independent professional services are generally considered under the appropriate head rather than Salaries.

Thus, Section 20 establishes the chargeability of salary income and ensures that salary is taxed at the appropriate point of time, while the remaining provisions determine exemptions, perquisites, deductions and the final taxable salary.

Management Notes

Illustrations including deduction of Retirement Benefits

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Illustration 1: Gratuity

Mr. A receives a salary of ₹8,00,000 during the year. He also receives gratuity of ₹3,00,000 on retirement. Assume ₹2,50,000 of gratuity is exempt under the applicable provisions.

Solution:

Particulars Amount
Salary ₹8,00,000
Gratuity received ₹3,00,000
Less: Exempt gratuity ₹2,50,000
Taxable gratuity ₹50,000
Gross Salary ₹8,50,000

If standard deduction of ₹50,000 is applicable:

Taxable Salary = ₹8,50,000 − ₹50,000 = ₹8,00,000

illustration 2: Leave Encashment

Mr. B receives salary of ₹7,00,000 and leave encashment of ₹4,00,000 at the time of retirement. Assume ₹3,00,000 is exempt under the applicable provisions.

Solution:

Particulars Amount
Salary ₹7,00,000
Leave Encashment ₹4,00,000
Less: Exempt amount ₹3,00,000
Taxable Leave Encashment ₹1,00,000
Gross Salary ₹8,00,000
Less: Standard Deduction ₹50,000
Taxable Salary ₹7,50,000

illustration 3: Pension

Mr. C receives pension of ₹3,60,000 during the year after retirement. He also receives commuted pension of ₹5,00,000. Assume ₹3,00,000 of the commuted pension is exempt under the applicable provisions.

Solution:

Particulars Amount
Pension ₹3,60,000
Commuted Pension ₹5,00,000
Less: Exempt Commuted Pension ₹3,00,000
Taxable Commuted Pension ₹2,00,000
Gross Salary ₹5,60,000
Less: Standard Deduction ₹50,000
Taxable Salary ₹5,10,000

illustration 4: Multiple Retirement Benefits

Mr. D receives the following amounts on retirement:

Salary = ₹6,00,000
Gratuity = ₹4,00,000
Leave Encashment = ₹3,00,000
Commuted Pension = ₹5,00,000

Assume the following amounts are exempt:

Gratuity = ₹3,00,000
Leave Encashment = ₹2,00,000
Commuted Pension = ₹3,00,000

Solution:

Particulars Amount
Salary ₹6,00,000
Taxable Gratuity ₹1,00,000
Taxable Leave Encashment ₹1,00,000
Taxable Commuted Pension ₹2,00,000
Gross Salary ₹10,00,000
Less: Standard Deduction ₹50,000
Taxable Salary ₹9,50,000

Thus, retirement benefits are first examined for the applicable exemption. The taxable portion is then

Management Notes

Computation of Taxable Salary

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Taxable Salary means the amount of salary income that remains chargeable to tax after including taxable salary components and deducting the deductions specifically allowed under the Income tax Act, 2025. Salary is taxable under the head “Salaries” when an employer employee relationship exists. The computation begins with basic salary and other taxable components such as dearness allowance, bonus, commission, taxable allowances, perquisites and profits in lieu of salary. Eligible exemptions and deductions are then considered according to the applicable provisions and tax regime.

Format for Computation of Taxable Salary:

Particulars Amount
Basic Salary xxx
Add: Dearness Allowance xxx
Add: Bonus / Commission xxx
Add: Taxable Allowances xxx
Add: Taxable Perquisites xxx
Add: Profits in lieu of Salary xxx
Add: Other Taxable Salary Components xxx
Gross Salary xxx
Less: Exemptions, where applicable xxx
Salary after Exemptions xxx
Less: Standard Deduction and other deductions allowed under the applicable provisions xxx
Income Chargeable under the Head Salaries xxx

Step 1: Determine Basic Salary

Basic salary is the principal component of salary and is fully included in taxable salary, subject to the applicable provisions. It may be paid monthly or annually.

Step 2: Add Taxable Allowances

Allowances such as dearness allowance, taxable house rent allowance, transport related allowances and other allowances are included according to their respective tax treatment. Certain allowances may be wholly or partly exempt if the prescribed conditions are satisfied.

Step 3: Add Taxable Perquisites

The value of taxable benefits provided by the employer is added to salary. Examples include rent free accommodation, concessional accommodation, motor car facilities and certain loans or other benefits. The value is determined according to prescribed rules.

Step 4: Add Other Salary Components

Bonus, commission, pension, gratuity, profits in lieu of salary and other taxable employment related receipts are included where applicable.

Step 5: Allow Eligible Deductions

After determining salary income, deductions specifically permitted under the applicable provisions are reduced. The standard deduction is an important deduction available subject to the applicable tax regime and prescribed limits.

Example:

Suppose an employee receives:

Basic Salary = ₹6,00,000

Bonus = ₹50,000

Taxable Allowances = ₹1,00,000

Taxable Perquisites = ₹50,000

Gross Salary = ₹8,00,000

If the applicable standard deduction is ₹50,000:

Taxable Salary = ₹8,00,000 − ₹50,000 = ₹7,50,000

Therefore, ₹7,50,000 will be the income chargeable under the head Salaries before considering any other applicable provisions.

Management Notes

Income Not be included in the Total Income [Schedule III and Sec 11]

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Under the Income tax Act, 2025, certain incomes are specifically excluded from the computation of total income, subject to the conditions prescribed by the Act. Such income is generally referred to as exempt income. The purpose of these provisions is to provide relief for specified receipts and income earned under particular circumstances. Schedule III contains various categories of income that are not included in total income, while Section 11 provides specific exemptions relating to income of certain entities or persons subject to prescribed conditions. Exempt income is different from income on which tax is payable after deductions or rebates.

Important Categories of Exempt Income:

Particular Explanation
1. Agricultural Income Agricultural income, as defined under the Act, is generally excluded from total income subject to the applicable provisions.
2. Income of Certain Local Authorities Income covered by the specific exemption provisions applicable to qualifying local authorities may not be included in total income.
3. Income of Certain Statutory Bodies Specified income of qualifying statutory or similar bodies may receive exemption where the prescribed conditions are satisfied.
4. Income of Certain Institutions Income of specified institutions, organisations or entities may be exempt where the requirements of the Act are fulfilled.
5. Income of Charitable or Religious Trusts Income applied or accumulated for charitable or religious purposes may receive exemption subject to the conditions prescribed under the relevant provisions.
6. Certain Share of Income Certain income received by a member from an entity may be excluded where the Act specifically provides for such treatment.
7. Certain Retirement Benefits Specified retirement related receipts, such as qualifying gratuity, pension or leave encashment, may be wholly or partly exempt subject to prescribed conditions.
8. Other Specified Exemptions Other incomes specifically listed in Schedule III or covered by particular exemption provisions may be excluded from total income.

Important Points

Exemption does not mean that the income is ignored for every purpose. Certain exempt incomes may be relevant for determining tax rates, reporting requirements, or other tax computations, depending on the applicable provisions.

The taxpayer must satisfy the conditions prescribed for claiming an exemption. If the conditions are not fulfilled, the amount may become taxable under the relevant provisions.

Thus, Schedule III and Section 11 identify specific categories of income that are not included in total income, thereby providing statutory tax relief for qualifying taxpayers and transactions.

Management Notes

Perquisite [Sec. 17]

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A perquisite is a benefit, facility or advantage provided by an employer to an employee in addition to the employee’s regular salary. Under the Income tax Act, 2025, Section 17 deals with perquisites and their tax treatment while computing income under the head “Salaries.” Perquisites may be provided in cash or in kind and may be available to the employee or to a person connected with the employee, depending on the applicable provisions. A perquisite is taxable only according to the specific rules and valuation provisions prescribed under the Act.

Common Examples of Perquisites:

Perquisite Explanation
1. Rent Free Accommodation Accommodation provided by the employer without charging rent, subject to prescribed valuation rules.
2. Concessional Accommodation Accommodation provided to an employee at a rent lower than its prescribed value.
3. Motor Car Facility A motor car provided by the employer for personal or partly personal use may constitute a taxable perquisite.
4. Interest Free or Concessional Loan A loan provided by the employer at no interest or at a concessional rate may be taxable subject to specified conditions.
5. Free or Concessional Education Educational facilities provided to an employee or specified family members may be taxable subject to applicable rules.
6. Free Meals Meals or refreshments provided by the employer may constitute a perquisite, subject to prescribed exemptions and conditions.
7. Employer’s Contribution Certain contributions made by the employer towards specified funds or schemes may become taxable when the prescribed limits or conditions are exceeded.
8. Club or Other Facilities Certain club memberships, facilities or benefits provided by the employer may be taxable according to the prescribed rules.

Tax Treatment

Perquisites are generally included in the employee’s salary income when they are taxable perquisites. However, some benefits are specifically exempt or are taxable only when certain conditions are satisfied. The value of a perquisite is determined according to the valuation rules prescribed under the Income tax law.

For example, if an employer provides an employee with rent free accommodation, the taxable value is not necessarily equal to the market rent. It is calculated according to the prescribed valuation method.

Therefore, perquisites are an important component of salary income, and their proper identification and valuation is necessary for calculating the employee’s taxable income and the employer’s TDS liability.

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