INCOME TAX

STUDY MATERIAL FOR

BBA
V SEMESTER

Prepared by

Dr. JAYA KRISHNA . Y

 S.V. Degree & P.G College
Education

Chapter 1
Income Tax in India --- An Introduction

In India, Income tax was introduced for the first time in 1860, by Sir James Wilson in order to
meet the losses sustained by the Government on account of the Military Mutiny of 1857.
Thereafter; several amendments were made in it from time to time. In 1886, a separate Income tax
act was passed. This act remained in force up to, with various amendments from time to time. In
1918, a new income tax was passed and again it was replaced by another new act which was
passed in 1922.This Act remained in force up to the assessment year 1961-62 with numerous
amendments. The Income Tax Act of 1922 had become very complicated on account of
innumerable amendments. The Government of India therefore referred it to the law commission
in1956 with a view to simplify and prevent the evasion of tax. The law commission submitted its
report-in September 1958, but in the meantime the Government of India had appointed the Direct
Taxes Administration Enquiry Committee submitted its report in 1956.In consultation with the
Ministry of Law finally the Income Tax Act, 1961 was passed. The Income Tax Act 1961 has
been brought into force with 1 April 1962. It applies to the whole of India including Jammu and
Kashmir.
Important Definitions
Assessment Year : Section 2(9)
“Assessment year” means the period starting from April 1 and ending on March 31 of the next
year. Eg: Assessment year 2013-14 which commences on April 1, 2013 and ends on March 31,
2014. Income of previous year of an assessee is taxed during the assessment year at the rates
prescribed by the relevant Finance Act for tax rates.
Previous year : section 3
Income earned in a particular year is taxable in the next year. The year in which income is earned is
known as previous year and the next year in which income is taxable is known as assessment year. I n
other words, previous year is the financial year immediately proceeding the assessment year.
Exceptions to the general rule that previous year’s income is taxable during the assessment year
In the following situations income of an assessee is liable to be assessed to tax in the same
year in which he earns the income:
a. Income of non-residents from shipping;
b. Income of persons leaving India either permanently or for a long period of time;
c. Income of bodies formed for short duration;
d .Income of a person trying to alienate his assets with a view to avoiding payment of tax;
e. Income of a discontinued business.
Person : Section 2(31)
The term “person” includes:
1. an individual;
2. a Hindu undivided family;
3. a company;
4. a firm;

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5. an association of persons or a body of individuals , whether incorporated or not;
6. a local authority; and
7. every artificial juridical person not falling with in any of the preceding categories.
Assessee : Section 2(7)
Every person in respect of whom, any proceeding under the act has been taken for the assessment
of his income or of the income of any other person in respect of which he is assessable or of the
loss sustained by him or by such other person or the amount of refund due to him or to such other
person may be called an assessee.
Deemed Assessee:
A person who is deemed to be an assessee for some other person is called “Deemed Assessee”.
Assessee In Default:
When a person is responsible for doing any work under the Income Tax Act and he fails to do it,
he is called an “Assessee in default”.

INCOME : Section2 (24)

The definition of the term “income” in section 2(24) is inclusive and not exhaustive.
Therefore, the term “income” not only includes those things that are included in section 2(24) but
also includes those things that the term signifies according to its general and natural meaning.
Income, in general, means a periodic monetary return which accrues or is expected to accrue
regularly from definite sources. However, under the Income-tax Act, 1961, even certain income
which do not arise regularly are treated as income for tax purposes e.g. Winnings from lotteries,
crossword puzzles.
Section 2(24) of the Act gives a statutory definition of income.
At present, the following items of receipts are included in income:—
(1) Profits and gains.
(2) Dividends.
(3) Voluntary contributions received by a trust/institution created wholly or partly for
charitable or religious purposes or by an association or institution
(4) The value of any perquisite or profit in lieu of salary taxable under section 17.
(5) Any special allowance or benefit other than the perquisite included above, specifically
granted to the assessee to meet expenses wholly, necessarily and exclusively for the
performance of the duties of an office or employment of profit.
(6) Any allowance granted to the assessee to meet his personal expenses at the place where
the duties of his office or employment of profit are ordinarily performed by him or at a
place where he ordinarily resides or to compensate him for the increased cost of living.
(7) The value of any benefit or perquisite whether convertible into money or not, obtained
from a company either by a director or by a person who has a substantial interest in the
company or by a relative of the director or such person and any sum paid by any such
company in respect of any obligation which, but for such payment would have been
payable by the director or other person aforesaid.
(8) The value of any benefit or perquisite, whether convertible into money or not, which is
obtained by any representative assessee mentioned under section 160(1)(iii) and (iv), or
by any beneficiary or any amount paid by the representative assessee for the benefit of the
beneficiary which the beneficiary would have ordinarily been required to pay.
(9) Deemed profits chargeable to tax under section 41 or section 59.
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(10) Profits and gains of businessEducation
or profession chargeable to tax under section 28.
(11) Any capital gains chargeable under section 45.
(12) The profits and gains of any insurance business carried on by Mutual Insurance Company or
by a cooperative society, computed in accordance with Section 44 or any surplus taken to be such
profits and gains by virtue of the provisions contained in the first Schedule to the Act.
(13) The profits and gains of any business of banking (including providing credit facilities)
carried on by a co-operative society with its members.
(14) Any winnings from lotteries, cross-word puzzles, races including horse races, card games
and other games of any sort or from gambling, or betting of any form or nature whatsoever.
(15) Any sum received by the assessee from his employees as contributions to any provident fund
or superannuation fund or Employees State Insurance Fund (ESI) or any other fund for the
welfare of such employees.
(16) Any sum referred to clause (va) of Section 28. Thus, any sum, whether received or receivable
in cash or kind, under an agreement for not carrying out any activity in relation to any business; or
not sharing any know-how, patent, copy right, trade-mark, licence, franchise, or any other
business or commercial right of a similar nature, or information or technique likely to assist in the
manufacture or processing of goods or provision of services, shall be chargeable to income tax
under the head “profits and gains of business or profession”.
(17) Any sum of money or value of property referred to in section 56(2)(vii) or section
56(2)(viia).
(18) Any consideration received for issue of shares as exceeds the fair market value of shares
referred to in section 56(2)(viib).
Gross Total Income Sec: 80b (5)
As per section 14, the income of a person is computed under the following five heads:
1. Salaries.
2. Income from house property.
3. Profits and gains of business or profession.
4. Capital gains.
5. Income from other sources.
If the income is not derived from any of the above sources, it is not taxable under the act. The
aggregate income under these heads is termed as “gross total income”.
Total Income Sec : 2(45)
Total income means the the amount left after making the deductions under section 80C to 80U
from the gross total income.
Casual Income
Any receipt which is of a casual and non-recurring nature is called casual income. Casual income
includes the following receipts:
1. Winning from lotteries,
2. Winning from crossword puzzles,
3. Winning from races (including horse races),
4. Winning from card games and other games of any sort
5. Winning from gambling or betting of any form or nature.

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Agriculture income
Agriculture income is exempt under the Indian Income Tax Act. This means that income earned
from agricultural operations is not taxed. The reason for exemption of agriculture income from
Central Taxation is that the Constitution gives exclusive power to make laws with respect to taxes
on agricultural income to the State Legislature. However while computing tax on non-agricultural
income agricultural income is also taken into consideration. As per Income Tax Act income
earned from any of the under given three sources meant Agricultural Income;
(i) Any rent received from land which is used for agricultural purpose.
(ii) Any income derived from such land by agricultural operations including processing of
agricultural produce, raised or received as rent in kind so as to render it fit for the market,
or sale of such produce.
(iii) Income attributable to a farm house subject to the condition that building is situated on or
in the immediate vicinity of the land and is used as a dwelling house, store house etc.
Now income earned from carrying nursery operations is also considered as agricultural income
and hence exempt from income tax.
In order to consider an income as agricultural income certain points have to be kept in mind:
(i) There must me a land.
(ii) The land is being used for agricultural operations.
(iii) Agricultural operation means that efforts have been induced for the crop to sprout out of the
land .
(iv) If any rent is being received from the land then in order to assess that rental income as
agricultural income there must be agricultural activities on the land.
(v) In order to assess income of farm house as agricultural income the farm house building must
be situated on the land itself only and is used as a store house/dwelling house.
Certain income which is treated as Agriculture Income:
(a) Income from sale of replanted trees.
(b) Rent received for agricultural land.
(c) Income from growing flowers and creepers.
(d) Share of profit of a partner from a firm engaged in agricultural operations.
(e) Interest on capital received by a partner from a firm engaged in agricultural operations.
(f) Income derived from sale of seeds.
Certain income which is not treated as Agricultural Income:
(a) Income from poultry farming.
(b) Income from bee hiving.
(c) Income from sale of spontaneously grown trees.
(d) Income from dairy farming.
(e) Purchase of standing crop.
(f) Dividend paid by a company out of its agriculture income.
(g) Income of salt produced by flooding the land with sea water.
(h) Royalty income from mines.
(i) Income from butter and cheese making.
(j) Receipts from TV serial shooting in farm house is not agriculture income.

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Partly agriculture income Education
Partly agricultural income consists of both the element of agriculture and business, so non
agricultural part of the income is taxed. Some examples for partly agricultural income are given
below:
1. Profit of business other than Tea
This rule applicable to agricultural produce like cotton, tobacco, and sugarcane etc, here the
market value of the agricultural produce raised by the Assessee for utilizing it as raw material for
his business will be deducted out of the total profit of such Assessee while calculating tax on his
income.
2. Profit from Tea manufacturing
If a person using his own tealeaves grown by him for his tea manufacturing business, then 60
% of his income will be treated as agricultural income and the remaining 40 % will be treated as
business income. So he has to pay tax on that remaining 40% of income.
3. Income from the manufacturing of centrifuged latex or cenex
If a person manufacturing centrifuged latex by using his own made raw then, 65 % of the
income derived from the sale of the same is treated as agricultural income so he has to pay tax
remaining part of the income.
4. Income from the coffee manufacturing
a) 75% of the income derived from the sale of coffee grown and cured by the seller in India is
deemed to be agricultural income 25% is taken as business income.
b) 65% the income derived from the sale of coffee grown, cured, roasted and grounded by the
seller in India is deemed to be agricultural income 40% is taken as business income.

Capital and revenue receipts and expenditure

Receipts which are non-recurring (not received again and again) by nature and whose benefit is
enjoyed over a long period are called "Capital Receipts", e.g. money brought into the business by
the owner (capital invested), loan from bank, sale proceeds of fixed assets etc. Capital receipt is
shown on the liabilities side of the Balance Sheet.
receipts which are recurring (received again and again) by nature and which are available for
meeting all day to day expenses (revenue expenditure) of a business concern are known as
"Revenue receipts", e.g. sale proceeds of goods, interest received, commission received, rent
received, dividend received etc.
Distinction between Capital Receipt and Revenue Receipt:
No. Revenue Receipt Capital Receipt
1 It has short-term effect. The benefit is It has long-term effect. The benefit is
enjoyed within one accounting period. enjoyed for many years in future.
2 It occurs repeatedly. It is recurring and It does not occur again and again. It is
Regular in nature. nonrecurring and irregular in nature.
3 It is shown in profit and loss account on It is shown in the Balance Sheet on the
the credit side. liability side.
4 It does not produce capital receipt. Capital receipt, when invested, produces
revenue receipt e.g. when capital is
invested by the owner, business gets
revenue receipt (i.e. sale proceeds of goods
etc.).
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5 This does not increase or decrease the The capital receipt decreases the value of
value of asset or liability. asset or increases the value of liability e.g.
sale of a fixed asset, loan from bank etc.
6 Sometimes, expenses of capital nature Sometimes expenses of revenue nature are
are to be incurred for revenue receipt, to be incurred for such receipt e.g. on
e.g. purchase of shares of a company is obtaining loan (a capital receipt) interest is
capital expenditure but dividend paid until its repayment.
received on shares is a revenue receipt.

Difference between Capital Expenditure and Revenue Expenditure:

No. Revenue Expenditure Capital Expenditure

1 Its effect is temporary, i.e. the Its effect is long-term, i.e. it is not exhausted
benefit is received within the within the current accounting year-its benefit is
accounting year. received for a number of years in future.
2 Neither an asset is acquired nor is An asset is acquired or the value of an existing
the value of an asset increased. asset is increased.
3 It has no physical existence because Generally it has physical existence except
it is incurred on items which are intangible assets.
used by the business.
4 It is recurring and regular and it It does not occur again and again. It is
occurs repeatedly. nonrecurring and irregular.
5 This expenditure helps to maintain This expenditure improves the position of the
the business. business.
6 The whole amount of this A portion of this expenditure (depreciation on
expenditure is assets) is shown in trading & P & L A/c and the
shown in trading P & L A/c or balance are shown in the balance sheet on asset
income statement. side.
7 It does not appear in the balance It appears in the balance sheet until its benefit is
sheet. fully exhausted.
8 It reduces revenue (profit) of the It does not reduce the revenue of the concern.
business
Residential Status And Tax Incidence
Tax incidence on an assessee depends on his residential status. The residential status
of an assessee is determined with reference to his residence in India during the previous year.
Therefore, the determination of the residential status of a person is very significant in order to find
out his tax liability. Residence and citizenship are two different things. The incidence of tax has
nothing to do with citizenship.
Residential Status of an Individual
As per section 6, an individual may be (a) resident and ordinarily resident in Ind ia, (b)
resident but not ordinarily resident in India, or(c) non-resident in India. The following are the two
sets of conditions for determining the residential status of an individual:

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Basic conditions : Education
He is in India in the previous year for a period of 182 days or more
OR
He is in India for a period of 60 days or more during the previous year and has been in
India for a period of 365 days or more during 4 years immediately preceding the
previous year.
Note: In the following two cases, an individual needs to be present in India for a minimum
of 182 days or more in order to become resident in India:
(a) An Indian citizen who leaves India during the previous year for the purpose of taking
employment outside India or an Indian citizen leaving India during the previous year as a
member of the crew of an Indian ship.
(b) An Indian citizen or a person of Indian origin who comes on visit to India during the previous
year (a person is said to be of Indian origin if either he or any of his parents or any of his
grandparents was born in undivided India).
Additional Conditions:
(i) He has been resident in India in at least 2 out of 10 previous years [according to basic
condition noted above] immediately preceding the relevant previous year.
AND
(ii) He has been in India for a period of 730 days or more during 7 years immediately preceeding
the relevant previous year.
Resident
An individual is said to be resident in India if he satisfies any one of the basic conditions.
(A) Resident And Ordinarily Resident
An individual is said to be resident and ordinarily resident in India if he satisfies any one of the
basic conditions and both of the additional conditions.
(B) Resident But Not Ordinarily Resident
An individual is said to be resident but not ordinarily resident in India if he satisfies any one of
the basic conditions but not satisfies both of the additional conditions.
Non-Resident
An individual is a non-resident in India if he satisfies none of the basic conditions.
Residential Status Of A Hindu Undivided Family
As per section 6(2), a Hindu undivided family (like an individual) is either resident in India or
non-resident in India. A resident Hindu undivided family is either ordinarily resident or not
ordinarily resident.
HUF : Resident or Non-Resident
A Hindu undivided family is said to be resident in India if control and management of its affairs is
wholly or partly situated in India. A Hindu undivided family is non-resident in India if control and
management of its affairs is wholly situated outside India.
A resident Hindu undivided family is an ordinarily resident in India if the karta or manager of
the family (including successive kartas) satisfies the following two additional conditions as laid
down by section 6(6)(b).
Additional condition (i) Karta has been resident in India in at least 2 out of 10 previous years
[according to the basic condition mentioned in immediately preceding the relevant previous year)
Additional condition (ii) Karta has been present in India for a period of 730 days or more during
7 years immediately preceding the previous year.
If the Karta or manager of a resident Hindu undivided family does not satisfy the two additional
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conditions, the family is treated asEducation
resident but not ordinarily resident in India.
Residential Status of Firm and Association of Persons
As per section 6(2), a partnership firm and an association of persons are said to be resident in
India if control and management of their affairs are wholly or partly situated within India during
the relevant previous year. They are, however, treated as non-resident in India if control and
management of their affairs are situated wholly outside India.

Exempted incomes from Tax

The following Income is exempt from Income tax:-
1. Agriculture Income [Sec. 10(1)]
2. Payments received from family income by a member of HUF [Sec. 10(2)]
3. Share of profit from a firm [Sec. 10(2A)]
4. Interest received by a non resident from prescribed securities [Sec. 10(4)]
5. Interest received by a person who is resident outside India on amounts credited in the non-
resident (External) account [Sec. 10(4)]
6. Leave travel concession provided by as employer to his Indian citizen employee,Sec. 10(5)]
7. Remuneration received by foreign diplomats of all categories [Sec. 10(6)]
8. Salary received by a foreign citizen as an employee of a foreign enterprise provided his stay in
India does not exceed 90 days [Sec. 10(6)(vi)]
9. Salary received by a non-resident foreign citizen as a member of ship’s crew provided his
total stay in India does not exceed 90 days [Sec. 10(6)(vii)]
10. Remuneration received by an employee, being a foreign national, of a foreign government
deputed in India for training in a Government establishment or public sector undertaking [Sec.
10(6)(xi)]
11. Tax paid on behalf of foreign companies [Sec. 10(6A)]
12. Tax paid by Government or an Indian concern in case of a non-resident / foreign company
[Sec.10(6B)]
13. Income arising to notified foreign companies from services provided in or outside India in
project connected with the security of India [Sec. 10(6C)]
14. Foreign allowance granted by the Government of India to its employees posted abroad [Sec.
10(7)]
15. Remuneration received from a foreign Government by an individual who is in India in
connection with any sponsored co-operative technical assistance programme with a foreign
Government and the income of the family members of such employee [Sec. 10(8)and(9)]
16. Remuneration / fee received by non-received consultants and their foreign employees [Sec.
10(8A),(8B) and (9)]
17. Death-cum-retirement gratuity [Sec. 10(10)]
18. Commuted value of pension and any payment received by way of commutation of pension by as
individual out of annuity plan of LIC or any other insurer from a fund set up by that corporation
or insurer [Sec. 10(10A)]
19. Leave salary [Sec. 10(10AA)]
20. Retrenchment compensation [Sec. 10(10B)]
21. Compensation received by victims of Bhopal gas leak disaster [Sec. 10(10BB)]
22. Compensation from the Central Government or a state Government or a local authority
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received by an individual or hisEducation
legal heir on account of any disaster [Sec. 10(10BC)]
23. Compensation received from a public sector company at the time of voluntary retirement or
separation [Sec. 10(10C)]
24. Tax on perquisite paid by employer [Sec. 10(10CC)]

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25. Any sum (including bonus) on life insurance policy (not being a keyman insurance policy) [Sec.
10(10D)]
26. Any amount from provident fund paid to retiring employee [Sec. 10(11)]
27. Amount from an approved superannuation fund to legal heirs of the employee [Sec. 10(13)]
28. House rent allowance subject to certain limits [Sec. 10(13A)]
29. Special allowance granted to an employee [Sec. 10(14)]
30. Interest from certain exempted securities [Sec. 10(15)]
31. Payment made by an Indian company, engaged in the business of operation of an aircraft, to
acquire an aircraft on lease from a foreign Government or foreign enterprise [Sec. 10(15A)]
32. Scholarship granted to meet the cost of education [Sec. 10(16)]
33. Daily allowance of a member of parliament or state Legislature (entire amount is exempt), any
other allowance subject to certain conditions [Sec. 10(17)]
34. Rewards given by the central or state Government for literary, scientific or artistic work or
attainment or for service for alleviating or for service for alleviating the distress of the poor, the
weak and the ailing, or for proficiency in sports and games or gallantry awards approved by the
Government [Sec. 10(17A)]
35. Pension and family pension of gallery award winners [Sec. 10(18)]
36. Family pension received by family members of armed forces [Sec. 10(19)]
37. National property income of any one place occupied by a former ruler [Sec. 10(19A)]
38. Income from local authorities [Sec. 10(20)]
39. Any income of housing boards constituted in India for planning, development or improvement
of cities, town or villages [Sec. 10(20A)]
40. Any income of an approved scientific research association [Sec. 10(21)]
41. Income of specified non- agencies [Sec. 10(22B)]
42. Any income (other than interest on securities income from property income received for
rendering any specific services and income by way of interest or dividends) of approved
professional bodies [Sec. 10(23A)]
43. Any income received by any person on behalf of any regimental fund or non public fund
established by the armed forces of the union for the welfare of the past and present members
of the such forces or their dependents [Sec. 10(23AA)]
44. Income of funds established for the welfare of employees [Sec. 10(23AAA)]
45. Any income of the pension fund set by LIC or any other insurer approved by the controller of
insurance or insurance Regulatory and development authority [Sec. 10(23AAB)]
46. any income (other than business income) of a trust or a society approved by Khadi and village
industries commission [Sec. 10(23B)]
47. Income of an authority whether known as Khadi and village industries board or by any other
name for the development of Khadi and village industries [Sec. 10(23BB)]
48. Income of the European Economic Community derived in India by way of, interest, dividends
or capital gains in certain cases [Section 10(23BBB)]
49. Any income arising to anybody or authority established, constituted or appointed under any
enactment for the administration of public religious or charitable trusts or endowments or
societies for religious or charitable purposes [Section 10(23BBA)]

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50. Income of SAARC Fund for Regional Projects, set up by Colombo Declaration [Section
10(23BBC)]
51. Any income of Secretariat of Asian Organisation of Supreme Audit Institutions [Section
10(23BBD)]
52. Any income received by any person on behalf of specified national funds and approved public
charitable trust or institution [Section 10(23C)]
53. Income of Mutual Fund set up by — a public sector bank or a public financial institution
[Section 10(23D)]
54. Any income by way of dividend, or long term capital gains of venture capital funds and
venture capital companies [Section 10(23F)]
55. Income of a member of Scheduled Tribe, living in Nagaland, Manipur, Tripura, Arunachal
Pradesh and Mizoram from any source arising by reason of his employment therein and
income by way of dividend and interest on securities [Section 10(26)]
56. Any income accruing or arising to any resident of Ladakh from any source therein or out of
India before the assessment year 1989-90, provided that such person was resident in Ladakh in
the previous year relevant to the assessment year 1962-63 [Section 10(26A)]
57. Any income of a statutory Central or State corporation or of a body/institution, financed by the
Government formed for promoting the interest of Scheduled Castes/Tribes [Section 10(26B)]
58. Income of co-operative society formed for promoting interests of members of Scheduled
Castes/Scheduled Tribes [Section 10(27)]
59. Income by way of subsidy from Tea Board for replanting or replacement of tea bushes or for
the purpose of rejuvenation or consolidation of areas used for cultivation of tea in India
[Section 10(30)]
60. Subsidy received by planters of Rubber, Coffee, Cardamon [Section 10(31)]
61. Income of a minor child up to Rs. 1,500 in respect of each minor child whose income is
includible under section 64(1A) [Section 10(32)]
62. Any income by way of Capital gains on transfer of US-64 units [Section 10(33)]
63. Dividend on or after April, 2003 from domestic companies [Section 10(34)]
64. Income on units of Mutual Funds on or after April 1, 2003 [Section 10(35)]
65. Long term Capital gains on transfer of listed Equity Shares purchased during 1-3-2003 to 29-
2-2004 [Section 10(36)]
66. Capital gain to individual/HUF on compensation received on compulsory acquisition of urban
agriculture land [Section 10(37)]
67. Long term capital gain in some cases [Section 10(38)]
68. Sum received without consideration from international sporting event held in India [Section
10(39)]
69. Income of Industrial Units situated in trade-free zones, specified technology parks etc. [Section
10A]
70. Income from specified 100% export oriented undertakings [Section 10B]
71. Income from property held for approved charitable or religious purposes [Section 11]
72. Specified Income of Registered political parties [Section 13A]

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INCOME FROM HOUSE PROPERTY

The annual value of a property, consisting of any buildings or lands appurtenant thereto, of
which the assessee is the owner, is chargeable to tax under the head ‘Income from house
property’. However, if a house property, or any portion thereof, is occupied by the assessee, for
the purpose of any business or profession, carried on by him, the profits of which are chargeable
to income-tax, the value of such property is not chargeable to tax under this head.
Thus, three conditions are to be satisfied for property income to be taxable under this head:
1. The property should consist of buildings or lands appurtenant thereto.
2. The assessee should be the owner of the property.
3. The property should not be used by the owner for the purpose of any business or profession
carried on by him, the profits of which are chargeable to income-tax.
Ownership of house property
It is only the owner (or deemed owner) of house property who is liable to tax on income under
this head. Owner may be an individual, firm, company, co-operative society or association of
persons. The property may be let out to a third party either for residential purposes or for business
purposes. Annual value of property is assessed to tax in the hands of the owner even if he is not in
receipt of the income. For tax purposes, the assessee is required to be the owner in the previous
year only.
Deemed Owner [Section 27]
1. Owner: An Individual shall be considered as owner of a property when the document of title to
the property is registered in his name.
2. Deemed Owner: Under the following circumstances, Income from House Property is taxable
in the hands of the Individual, even if the property is not registered in his name —
(a) Where the Property has been transferred to spouse for inadequate consideration other than in
pursuance of an agreement to live apart.
(b) Where the Property is transferred to a minor child for inadequate consideration (except a
transfer to minor married daughter)
(c) Where the Individual holds an impartible estate.
(d) Where the Individual is a member of Co-operative Society, Company, or other Association
and has been allotted a house property by virtue of his being a member, even though the property
is registered in the name of the Society / Company / Association.
(e) Where the property has been transferred to the individual’s name as part-performance of a
contract u/s 53A of the Transfer of Property Act, 1882. (i.e. Possession of the Property has been
transferred to Individual, but the Title Deeds have not yet been transferred).
(f) Where the Individual is a holder of a Power of Attorney enabling the right of possession or
enjoyment of the property.
(g) Where the property has been constructed on a leasehold land.
(h) Where the ownership of the Property is under dispute.
(i) )Where the property is taken on a lease for a period of not less than 12 years, then the lessee
shall be deemed as the owner of the property.

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 S.V. Degree & P.G College
House Property Income Is Exempt Education
From Tax To Certain Persons
1. An Ex-Ruler for his occupation (palace)
2. Local Authority.
3. Approved Scientific Research Association.
4. Institution for the development of Khadi and Village Industries.
5. Khadi and Village Industries Boards.
6. A body or authority for administering religious or charitable Trust or endowments.
7. Certain Funds, educational institutions, hospitals etc.
8. Registered Trade Union.
9. Statutory Corporation or an institution or association financed by the Government for
promoting in the interests of members of SC or ST.
10. Co-operative Society for promoting the interest of the members of SC or ST.
11. Charitable Trust.
12. Political Parties
DETERMINATION OF ANNUAL VALUE
The basis of calculating Income from House property is the ‘annual value’. This is the inherent
capacity of the property to earn income and it has been defined as the amount for which the
property may reasonably be expected to be let out from year to year. It is not necessary that the
property should actually be let out. The municipal value of the property, the cost of construction,
the standard rent, if any, under the Rent Control Act, the rent of similar properties in the same
locality, are all pointers to the determination of annual value.
Gross Annual value
The Gross Annual Value is the municipal value, the actual rent (whether received or receivable)
or the fair rental value, whichever is highest. If, however, the Rent Control Act applies to the
property, the gross annual value Fair rental value or municipal value whichever is higher or
Standard rental value whichever is less. If the property is let out but remains vacant during any
part or whole of the year and due to such vacancy, the rent received is less than the reasonable
expected rent, such lesser amount shall be the Annual value.
The principle of determining GAV is :
Expected Rental Value OR
Actual Rent received for full year,
Whichever is more.
Here, Expected Rental Value is calculated as follows:
If the let out property is not subject to Rent Control Act ERV is:
FRV or MRV whichever is higher.
If the let out property is subject to Rent Control Act ERV is:
FRV or MRV whichever is higher
OR
Standard Rental Value ,
Whichever is less.
Municipal Tax
Municipal Tax includes services tax like Water Tax and Sewerage Tax levied by any local
authority. It can be claimed as a deduction from the Gross Annual Value of the Property.

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 S.V. Degree & P.G College
Conditions: Education

(a) Paid by Owner. The tax shall be borne by the owner and tie same was paid by him during the
previous year.
(b) Property let out: Municipal Tax can be claimed as a deduction only in respect of let out or
deemed to be let out properties (i.e. more than one property self occupied).
(c) Year of payment: Municipal Tax relating to earlier previous years, but paid during the current
previous year can be claimed as deduction only in the year of payment.
(d) Advance Taxes: Advance Municipal Tax paid shall not be allowed as deduction in the year of
payment, but can be claimed in the year in which it falls due.
(e) Borne by Tenant: Municipal taxes met by tenant are not allowed as deduction.
.Unrealized Rent
Unrealized Rent means the rent not paid by the tenant to the owner and the same shall be
deducted from the Actual Rent Receivable from the property before computing income from that
property, provided the following conditions are satisfied:
1. The tenancy is bonafide
2. The defaulting tenant should have vacated the property
3. The assessee has taken steps to compel the defaulting tenant to vacate the property
4. The defaulting tenant is not in occupation of any other property owned by the assessee
5. The assessee has taken all reasonable steps for recovery of unrealized rent or satisfies the
Assessing Officer that such steps would be useless.
Deduction from Net Annual Value
A. Standard Deduction u/s 24(a): Standard deduction of 30% of NAV (Net Annual Value) shall
be allowed to the assessee.
B. Interest on Loan u/s 24(b):
1. Purpose of loan: The loan shall be borrowed for the purpose of acquisition, construction,
repairs, renewal or reconstruction of the house property.
2. Accrual basis: The interest will be allowed as a deduction on accrual basis, even though it is
not paid during the financial year.
3. Interest on interest: Interest on unpaid interest shall not be allowed as a deduction.
4. Brokerage: Any brokerage or commission paid for acquiring the loan will not be allowed as a
deduction.
5. Prior period interest: Prior Period Interest shall be allowed in five equal installments
commencing from the financial year in which the property was acquired or construction was
completed.
Note: Prior period interest means the interest from the date of borrowal of the loan up to the end
of the financial year immediately preceding the financial year in which acquisition was made or
construction was completed.
6. Interest on fresh loan to repay existing loan: Interest on any fresh loan taken to repay the
existing loan shall be allowed as a deduction.
7. Inadmissible interest: Interest payable outside India without deduction of tax at source and in
respect of which no person in India is treated as an agent u/s 163 shall not be an allowable
expenditure. [Section25]
8. Certificate: The assessee should furnish a certificate from the person from whom the amount is
borrowed.

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 S.V. Degree & P.G College
Education

Income From Self – Occupied House Property

The annual value of one self-occupied house property is taken as ‘Nil’. From the annual
value, only the interest on borrowed capital is allowed as a deduction under section 24. The
amount of deduction will be:
1. Either the actual amount accrued or Rs.30,000/- whichever is less
2. When borrowal of money or acquisition of the property is after 31.3.1999 - deduction is
Rs.1,50,000/- applicable to A.Y 2002-03 and onwards.

However, if the borrowal is for repairs, renewals or reconstruction, the deduction is restricted to
Rs.30, 000. If the borrowal is for construction/acquisition, higher deduction as noted above is
available. If a person owns more than one house property, using all of them for self-occupation,
he is entitled to exercise an option in terms of which, the annual value of one house property as
specified by him will be taken at Nil. The other self occupied house property/is will be deemed to
be let-out and their annual value will be determined on notional basis as if they had been let out.
Annual Value of a house property which is partly self – occupied and partly let out: If a house
property consists of two or more independent residential units, one of which is self – occupied
and the other unit(s) are let out, the income from the different units is to be calculated separately.

Illustration:1
Compute Gross annual value:
Actual rent Rs: 24,000 p.a.
Fair rent Rs:28,000 p.a.
Standard rent Rs: 20,000 p.a.
Solution:
Gross Annual Value = ERV or Actual Rent Received for full year, whichever is higher.
Here Rent Control Act is applicable.
FRV =Rs: 28,000 ; SRV = 20,000
Therefore, ERV = 20,000.
Actual Rent = 24,000
So, GAV = 24,000.

Illustration:2
Calculate annual rental value from the following particulars for the assessment year 2013-
14.Actual rent Rs: 14,000 p.m.; MRV Rs: 1,20,000 p.a.; FRV Rs:1,32,000 p.a. Standard rent Rs:
1,38,000. During the P.Y. the assessee is not able to realise two months rent.
Solution:
Expected Rental Value = 1,32,000
Actual rent for the full year (14,000x12) = 1,68,000
Therefore, GAV = 1,68,000.
Annual Value = 1,68,000 – unrealised rent
= 1,68,000 -- 28,000 = 1.40,000.
========

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 S.V. Degree & P.G College
Education

Illustration:3
Compute gross annual value for the AY 2013-14:
FRV Rs: 1,32,000 p.a.; Actual rent Rs:12,000 p.m.; MRV Rs:1,20,000 p.a., Standard rent Rs:
1,30,000.
Solution:
Expected Rental Value = Rs: 1,30,000
Actual rent for full year (12,000 x 12) = Rs:1,44,000
Therefore, GAV = Rs: 1,44,000.
==========

Illustration:4
Rinju is the owner of 2 houses. From the following, find out annual value of the houses:

House-1 House-2
Municipal value 30,000 35,000
Actual rent 40,000 32,000
FRV 36,000 30,000
SRV 30,000 36,000
Municipal tax paid 4,000 3,500

Solution:
MRV or FRV (higher) 36,000 35,000
SRV 30,000 36,000
ERV (Lesser of the above 2) 30,000 35,000
Actual Rent 40,000 32,000
GAV (higher of 3 and 4) 40,000 35,000
Less : Municipal Taxes 4,000 3,500
Annual Value 36,000 31500
====== ======

Income Tax Page 17