Salaries and Income from House Property — Practice

Question 1

Mr. Nair, employed in Mumbai, has basic salary of ₹40,000 per month and DA (forming part of retirement benefits) of ₹10,000 per month throughout the year. He receives HRA of ₹18,000 per month and pays rent of ₹22,000 per month. Compute his HRA exemption for the year.

Accepted Answer

HRA exemption is the least of three figures, all computed for the year since the inputs are constant throughout. Salary for this purpose is basic plus DA forming part of retirement benefits, that is 40,000 plus 10,000, giving 50,000 per month or 6,00,000 for the year. The first figure is actual HRA received: 18,000 times 12, that is 2,16,000. The second is rent paid minus 10% of salary: annual rent of 22,000 times 12 is 2,64,000, less 10% of 6,00,000, that is 60,000, giving 2,04,000. The third is 50% of salary, Mumbai being a metro city: 50% of 6,00,000, that is 3,00,000. The least of 2,16,000, 2,04,000 and 3,00,000 is 2,04,000, so the exempt HRA is 2,04,000, and the balance of the HRA actually received, 2,16,000 less 2,04,000, that is 12,000, is taxable as part of salary.

Question 2

Mr. Desai, a non-government employee covered by the Payment of Gratuity Act, 1972, retires after 24 years and 7 months of service. His last drawn basic salary plus DA was ₹60,000 per month. He receives gratuity of ₹9,50,000. Compute the exempt amount, assuming the notified statutory ceiling is ₹20,00,000.

Accepted Answer

For an employee covered by the Payment of Gratuity Act, the exemption is the least of three figures: actual gratuity received, 15 days' salary for every completed year of service or part thereof exceeding six months, computed on last drawn salary with a divisor of 26 working days, and the notified statutory ceiling. Completed years of service including the rounding rule: 24 years and 7 months rounds up to 25 completed years, since a part year exceeding six months counts as a full completed year under this formula. The second figure is therefore 15 divided by 26, multiplied by last drawn salary of 60,000, multiplied by 25 years: 15/26 times 60,000 is 34,615.38 per year, multiplied by 25 gives 8,65,384.62, which rounds to 8,65,385. The three figures to compare are actual gratuity of 9,50,000, the computed figure of 8,65,385, and the statutory ceiling of 20,00,000. The least of these is 8,65,385, so that amount is exempt, and the balance of the gratuity actually received, 9,50,000 less 8,65,385, that is 84,615, is taxable as profit in lieu of salary.

Question 3

Mr. Bose, a non-government employee, receives a monthly pension of ₹15,000. He commutes 40% of his pension and receives ₹4,80,000 as commuted value. He also receives gratuity from his employer. Compute the taxable pension for the year, showing the uncommuted and commuted portions separately.

Accepted Answer

Uncommuted pension is fully taxable for every employee without exception. Since 40% has been commuted, the remaining 60% continues to be received monthly; assuming commutation occurred at the start of the year for simplicity, the uncommuted monthly pension is 60% of 15,000, that is 9,000, giving 1,08,000 for the year, fully taxable. On the commuted portion, since Mr. Bose is a non-government employee who also receives gratuity, the exempt fraction is one-third of the pension that would have been received had the whole pension, that is 100%, been commuted. The commuted value received of 4,80,000 represents 40% of the pension, so the value of a full 100% commutation is 4,80,000 divided by 40, multiplied by 100, that is 12,00,000. One-third of that full-commutation value, 12,00,000 divided by 3, is 4,00,000, which is exempt. The balance of the commuted receipt actually taxable is 4,80,000 less 4,00,000, that is 80,000. Total taxable pension for the year is therefore the uncommuted 1,08,000 plus the taxable portion of the commuted amount, 80,000, giving 1,88,000. Had Mr. Bose not received any gratuity, the exempt fraction would instead have been one-half of the full-commutation value, that is 6,00,000, which would have exceeded the actual commuted receipt of 4,80,000 and made the entire commuted amount exempt.

Question 4

Mrs. Ahluwalia owns three houses: House A, occupied by her for residence; House B, also kept for her own use as a second home in another city, never let out; and House C, let out throughout the year for ₹18,000 per month. State the classification and GAV treatment of each, explaining the relevant relaxation.

Accepted Answer

House C is a let-out property, since it was actually let throughout the year, and its GAV is computed as the higher of Expected Rent and Actual Rent Received or Receivable, the actual rent here being 18,000 times 12, that is 2,16,000, compared against Expected Rent based on municipal value and fair rent subject to the standard rent ceiling. Houses A and B require applying the relaxation that now permits an assessee to treat up to two self-occupied houses as self-occupied with nil GAV, rather than only one as under the earlier position that older material still incorrectly states. Since Mrs. Ahluwalia owns only two houses that are not let out, House A and House B, both may be treated as self-occupied properties, and both have a GAV of nil under section 23(2), with no deemed letting-out arising. Had she owned a third house kept for her own use and not let out, only two of the three could be chosen as self-occupied with nil GAV; the remaining one would be treated as deemed let out, computed as if it had actually been let, using Expected Rent since there is no actual rent to compare it against. The classification here therefore requires no deemed letting-out at all, since the two-house relaxation exactly accommodates Mrs. Ahluwalia's two non-let-out houses.

Question 5

A property has municipal value ₹2,40,000, fair rent ₹2,70,000, and is not subject to rent control. It is let at ₹25,000 per month but remains vacant for 2 months during the year owing to the tenant vacating and a delay in finding a new tenant. Compute GAV, and separately state the GAV if instead the tenant had occupied throughout but defaulted on 2 months' rent while remaining in occupation.

Accepted Answer

Expected Rent is the higher of municipal value and fair rent, since there is no rent control restriction to apply as a ceiling: the higher of 2,40,000 and 2,70,000 is 2,70,000, so Expected Rent for the full year is 2,70,000. Actual rent for the 10 months it was actually let, at 25,000 per month, is 2,50,000; had it been let for the full 12 months it would have been 3,00,000, but the property was vacant for 2 months. On the vacancy facts as given, the vacancy relief provision applies: where a property is let and remains vacant for part of the year, and owing to such vacancy the actual rent received or receivable is less than the Expected Rent, the actual rent received or receivable is taken as GAV rather than the Expected Rent. Here the shortfall, actual rent of 2,50,000 against Expected Rent of 2,70,000, arises because of the genuine vacancy of 2 months, so GAV is the actual rent received of 2,50,000, lower than the Expected Rent that would otherwise apply. On the alternative facts, where the tenant occupied throughout but simply defaulted on 2 months' rent while remaining in occupation, the shortfall does not arise because of vacancy but because of the tenant's default while occupying, so the vacancy relief provision does not apply at all; GAV in that case is the higher of Expected Rent, 2,70,000, and rent receivable for the full year (the amount contractually due regardless of default, 3,00,000), giving a GAV of 3,00,000, with the unrealised 2 months' rent potentially excluded separately under the distinct unrealised rent provision if its specific conditions are met.

Question 6

Mr. Chatterjee took a loan on 1 June 2021 to construct a self-occupied house, completed on 15 March 2026. Interest for the pre-construction period totals ₹3,00,000, and interest for the current year 2025-26 alone is ₹1,80,000. Compute the deduction available under section 24(b) for 2025-26, and state what would change if construction had instead been completed on 20 April 2027.

Accepted Answer

First check the completion timeline against the 5-year condition, since that determines which self-occupied interest cap applies. The loan was borrowed in the financial year 2021-22, so the 5-year period for completion runs to the end of the financial year 2026-27; construction completed on 15 March 2026 falls within that window, and the loan was taken after 1 April 1999, so both conditions for the higher self-occupied cap are satisfied and the applicable ceiling is 2,00,000. Current year interest of 1,80,000 is deductible in full for 2025-26, since it does not exceed the ceiling on its own. Pre-construction interest of 3,00,000 is not deducted in the years it accrued; it is aggregated and spread over 5 equal annual instalments commencing from the year of completion, that is 2025-26 onward, giving an instalment of 3,00,000 divided by 5, that is 60,000, deductible in 2025-26 and in each of the four following years. Total interest otherwise deductible for 2025-26 is therefore current year interest of 1,80,000 plus the pre-construction instalment of 60,000, that is 2,40,000, but this is capped at 2,00,000 for a self-occupied property meeting the 5-year condition, so the deduction actually allowed for 2025-26 is 2,00,000. Had construction instead been completed on 20 April 2027, that falls in the financial year 2027-28, beyond the 5-year window running to the end of 2026-27, so the completion condition fails and the applicable self-occupied cap falls to 30,000 instead of 2,00,000, substantially reducing the interest deduction available in every year, both current and via the pre-construction instalments, once construction is eventually complete.

Question 7

Mr. Iyer sold his let-out property in 2023-24 but received ₹1,80,000 as arrears of rent relating to periods before the sale in the previous year 2025-26, after he had ceased to be the owner. Advise on the taxability, the deduction available, and whether ownership at the time of receipt matters.

Accepted Answer

The arrears of rent are taxable in the previous year 2025-26, the year of actual receipt, notwithstanding that Mr. Iyer is no longer the owner of the property and has not been since 2023-24. The Act specifically provides that arrears of rent, and unrealised rent earlier excluded from Actual Rent Received or Receivable and later recovered, are taxable in the year of receipt whether or not the assessee is the owner of the property in that year, which is a deliberate departure from the ordinary rule that income under this head is taxed on the owner for the year to which it relates. Only a flat deduction of 30% is permitted against this receipt, with no other deduction of any kind allowed, so unlike ordinary Net Annual Value there is no separate deduction for interest on borrowed capital or for municipal taxes against arrears received in this way. On the 1,80,000 received, the deduction is 30% of 1,80,000, that is 54,000, leaving 1,26,000 taxable under the head Income from House Property for 2025-26. The rule that current ownership is irrelevant exists because arrears relate to a period when the recipient genuinely was the owner and the income genuinely accrued to him then; taxing it on receipt rather than losing it to the fact of a subsequent sale ensures rental income actually earned does not escape tax merely because payment was delayed past a change of ownership.

Question 8

Mr. Kumar's gross salary before any deduction is ₹8,40,000. His employer pays professional tax of ₹2,400 on his behalf directly to the state government during the year. Compute the effect on his taxable salary, showing both the addition and the deduction.

Accepted Answer

The professional tax paid by the employer on the employee's behalf must be dealt with in two steps that together produce a wash, and a candidate who performs only one step gets half the treatment. First, because the employer has discharged what is in substance the employee's own personal tax obligation, the amount is added to the employee's income as a perquisite, since the employer's payment on the employee's behalf of an obligation the employee would otherwise have had to meet himself is a benefit conferred by the employer. So 2,400 is added to gross salary before further computation, taking the figure to 8,42,400. Second, section 16 permits a deduction for professional tax actually paid by or on behalf of the assessee during the year, and this deduction is available in full regardless of who physically remits it, provided it is paid in respect of the employee's employment; so the same 2,400 is then deducted. The two steps net to zero effect on final taxable salary from the professional tax itself, which is the correct outcome since the employee has not actually received any additional spendable benefit, merely had an obligation of his own discharged for him. The standard deduction, a separate fixed statutory amount available without any requirement to demonstrate actual expenditure, is deducted in addition and independently of this professional tax treatment, further reducing gross salary to arrive at income chargeable under the head Salaries.

Question 9

Mr. Deshmukh works as an independent management consultant, invoicing his fees to several client companies. One client also pays him a monthly retainer under a formal employment contract for a separate, part-time role as its compliance head. Advise on how each source of income is taxed.

Accepted Answer

The two income streams are taxed under different heads because only one arises from an employer-employee relationship. Income is taxed under the head Salaries only where it arises from that specific relationship of employer and employee; a consultant's fee, however regular or substantial, paid to someone engaged as an independent professional rather than as an employee, does not satisfy this test regardless of what the payment is called or how it is structured. Mr. Deshmukh's consulting fees from his various clients are therefore taxable under the head Profits and Gains of Business or Profession, since he renders services as an independent professional without being subject to the direction and control that characterises employment. The monthly retainer from the one client under a formal employment contract for the compliance head role is different: it arises from a genuine employer-employee relationship, evidenced by the formal employment contract and the defined role, and is accordingly taxable under the head Salaries, computed on a due or receipt basis as that head requires, with its own set of allowances, perquisites and deductions applicable, entirely separate from the consulting income which follows the business income computation rules instead.

Question 10

Ms. Ekta works in Delhi with basic salary of ₹35,000 per month throughout the year. She receives HRA of ₹15,000 per month for the first six months, paying rent of ₹16,000 per month, then relocates within Delhi, receiving HRA of ₹18,000 per month for the remaining six months while paying rent of ₹20,000 per month. Compute her HRA exemption for the year, applying the period basis.

Accepted Answer

Since HRA and rent both change mid-year, the exemption must be computed separately for each six-month period rather than on annual totals, since a single whole-year computation using annual totals would misstate the true exemption whenever inputs change during the year. For the first six months, salary for the HRA formula is basic salary of 35,000 per month, that is 2,10,000 for the period; the three figures to compare are actual HRA received, 15,000 times 6, that is 90,000; rent paid minus 10% of salary, that is 16,000 times 6 minus 10% of 2,10,000, giving 96,000 minus 21,000, that is 75,000; and 50% of salary for Delhi as a metro city, that is 50% of 2,10,000, giving 1,05,000. The least of 90,000, 75,000 and 1,05,000 is 75,000, exempt for the first period. For the second six months, salary remains 2,10,000 for the period; actual HRA received is 18,000 times 6, that is 1,08,000; rent paid minus 10% of salary is 20,000 times 6 minus 21,000, that is 1,20,000 minus 21,000, giving 99,000; and 50% of salary remains 1,05,000. The least of 1,08,000, 99,000 and 1,05,000 is 99,000, exempt for the second period. Total HRA exemption for the year is 75,000 plus 99,000, that is 1,74,000.

Question 11

Mr. Farooqui, a non-government employee, retires after 22 years of service with 15 days of leave in his last month at an average salary of ₹45,000 per month over his last 10 months. He has 240 days of accumulated leave to his credit at retirement and receives ₹3,60,000 as leave encashment. Compute the exempt amount, assuming the notified statutory ceiling is ₹25,00,000.

Accepted Answer

For a non-government employee, leave encashment at retirement is exempt to the least of four figures: the actual amount received; the notified statutory ceiling; 10 months' average salary; and the cash equivalent of leave standing to credit at retirement, computed on the basis of a maximum of 30 days' leave for each completed year of service, at the average salary of the preceding 10 months. The actual amount received is 3,60,000. The statutory ceiling is 25,00,000. Ten months' average salary is 45,000 times 10, that is 4,50,000. The cash equivalent of leave, capped at 30 days per completed year, requires computing the maximum permissible leave: 22 completed years at 30 days each gives a maximum of 660 days, but Mr. Farooqui's actual accumulated leave is only 240 days, which is below that cap and therefore governs; the cash equivalent is 240 days at the per-day rate derived from the average salary of 45,000 per month, that is 45,000 divided by 30, giving 1,500 per day, multiplied by 240 days, giving 3,60,000. The least of 3,60,000, 25,00,000, 4,50,000 and 3,60,000 is 3,60,000, so the entire leave encashment received is exempt, and no portion is taxable.

Question 12

Mr. Gowda owns three houses, none of which is let out: House X used as his primary residence, House Y used as a weekend home, and House Z kept vacant and unused. He wishes to know which combination of houses he should treat as self-occupied to minimise his tax. Advise on the mechanics of the choice and its consequence for House Z.

Accepted Answer

Mr. Gowda may treat any two of his three non-let-out houses as self-occupied with nil Gross Annual Value, since the relaxation permits up to two houses to be so treated regardless of actual occupation pattern, and the choice of which two is entirely his own; the Act does not mandate that the houses he actually occupies most, or first, must be the ones chosen. The remaining house, whichever he does not select, is treated as deemed let out, with its Gross Annual Value computed as if it had actually been let, using Expected Rent since there is no actual rent to compare it against, and it is then subject to the ordinary section 24 deductions applicable to a let-out or deemed let-out property, including the 30% standard deduction and interest on borrowed capital without the ceiling that applies to self-occupied property. To minimise tax, Mr. Gowda should generally select the two houses with the highest potential Expected Rent to treat as self-occupied, since that removes their notional annual value from taxation entirely, leaving the house with the lowest Expected Rent, likely House Z given it is kept vacant and presumably in a less desirable state or location, to be the deemed let-out property, minimising the taxable notional income that results from the deeming provision applying to whichever house is left over.

Question 13

Two individuals each take a home loan for a self-occupied house. Mr. Hussain borrowed on 1 May 2018 for construction completed on 1 February 2023 (interest for the year ₹2,40,000). Mrs. Iyer borrowed on 1 June 2020 for repairs to her existing self-occupied house (interest for the year ₹45,000). Compute the interest deduction available to each, explaining which cap applies.

Accepted Answer

Mr. Hussain's loan qualifies for the higher self-occupied cap of 2,00,000, since both conditions for it are satisfied: the loan was taken on 1 May 2018, after 1 April 1999, and construction was completed on 1 February 2023, which is well within 5 years from the end of the financial year in which the capital was borrowed, that financial year being 2018-19 and the 5-year window therefore running to the end of 2023-24. His interest for the year of 2,40,000 exceeds the 2,00,000 cap, so only 2,00,000 is deductible, with the excess of 40,000 simply lost for that year, since unlike pre-construction interest there is no instalment mechanism to defer and recover a current year's excess over the self-occupied cap in later years. Mrs. Iyer's loan is for repairs rather than for acquisition or construction, and the lower cap of 30,000 applies to interest on a loan for repair, renewal or reconstruction of a self-occupied property regardless of when the loan was taken or how long the repairs took, since the 5-year completion condition and the higher 2,00,000 cap are specifically tied to acquisition or construction loans and do not extend to repair loans at all. Her interest for the year of 45,000 exceeds the 30,000 cap applicable to her situation, so only 30,000 is deductible, with the excess of 15,000 lost for the year. The comparison illustrates that the purpose of the loan, not merely its size or the borrower's diligence in completing works, is what determines which of the two self-occupied ceilings applies.

Question 14

Mr. Joshi purchases a flat under an agreement and takes possession, paying substantially the full price, but the registered sale deed is not yet executed. He lets the flat out. Advise on who is taxed on the rental income under the head House Property, and the provision that governs.

Accepted Answer

Mr. Joshi is taxed on the rental income as the deemed owner of the flat, notwithstanding the absence of a registered conveyance. Section 22 charges the annual value of house property to the person who is the owner, but the definition of owner for this purpose is extended by deeming provisions, one of which specifically addresses this situation: a person who is allowed to take or retain possession of any building or part thereof in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882, is deemed to be the owner of that building for the purposes of this head, even though no registered document of transfer has been executed in his favour. Mr. Joshi's possession under the agreement, coupled with substantial payment of the price, is precisely the kind of part-performance arrangement that provision addresses, and it exists because taxing house property income depends on identifying who genuinely enjoys the economic benefits of ownership, and a person in Mr. Joshi's position, holding possession and having paid the price under an enforceable contract, is for all practical purposes the true owner even before the formal registration catches up with the substance of the transaction. The formal registered owner, if different, is not the person taxed on the rental income in this situation.

Question 15

Mr. Khanna lets out a furnished flat for a composite monthly rent of ₹50,000, which under the lease agreement is separately itemised as ₹35,000 for the flat and ₹15,000 for the furniture provided. State the tax treatment, and explain how it would differ if the agreement did not separate the two components.

Accepted Answer

Where the rent for the property can be separated from the rent attributable to furniture or other assets and services provided along with it, the property portion alone is taxed under the head Income from House Property, and the remainder is taxed under a different head, generally Income from Other Sources for furniture letting income not connected with any business, or under Business or Profession if letting furnished properties is itself Mr. Khanna's business. Here the lease agreement itself separately itemises 35,000 for the flat and 15,000 for the furniture, so the separation is clear and contractually established, and Mr. Khanna's House Property income is computed on the property rent of 35,000 per month, that is 4,20,000 for the year, subject to the ordinary GAV and section 24 computation, while the furniture rent of 15,000 per month is taxed separately under Other Sources, with section 57 permitting a deduction for current repairs, insurance premium and depreciation on the furniture let out. Had the agreement not separated the two components, leaving a single undifferentiated composite rent, the position would be different: where the rent for the property and the rent for other assets or services cannot be separated, the entire composite rent is generally taxed as a single receipt under Other Sources or Business income as applicable, rather than under House Property at all, since the Act requires a genuine, ascertainable property-only figure before this head can apply to any part of a composite payment.

Practice — Salaries and Income from House Property

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