1

CONTENTS

S.N PARTICULAR PAGE NO.

1. TOTAL INCOME
- Meaning 6
- Definition
7
INCOME FROM SALARY
2.
- Meaning
8
- Basic Salary
- Fees, Commission & Bonus 9
- Allowances
9
- Perquisite
- Profit in lieu of salary 10-13
- Deduction from Salary
14-15
INCOME FROM HOUSE PROPERTY
16-18
- Meaning
3. 19-20
- Basis of Charge
- Annual Value
- Types of Property
21
- Deduction
- Property owned by Co-owners 22
- Exempt Income
23-24
ILLUSTRATION
25-26
CONCLUSION
27-28
REFERENCES
29
30
4. 31-33
5. 34
6. 35
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Chapter 1

TOTAL INCOME

Meaning

`The total income of an assessee is computed by deducting from the gross total
income all permissible deductions available under the Chapter VI A of the Income
Tax Act, 1961. This is also referred to as the Net Income or Taxable Income.

The term Total income can also be used for both, an individual and a companys
income. The Total income of an individual, is the amount left after all deductions
from the gross income, but if we discuss about Total income of a company it is the
amount left after reducing all expenses (selling & distribution, office &
administration), interest, taxes, losses and other appropriations (like dividend). It
is the amount left after all adjustments (i.e. Provisions). In this the non
operational income are also included in rental income, profit from the sale of
assets.

Totalincome, computed in accordance with sec.5 according to residential status, isa

rrived at after allowing deductions under Sec.80CCC to 80U from the gross totalin
come. The charge of income tax is on total income of an assessee. Incomes
exempted from income tax do not form a part of total income.

From Gross Total Income, certain deductions are allowed under sections 80C to
80U and the balance income after deductions is known as Total Income.

How Total Income of Individual is computed?

The steps in which the Total Income, for any assessment year, is determined are as
follows:
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1. Determine the residential status of the assessee to find out which income is to be
included in the computation of his Total Income.

2. Classify the income under each of the following five heads. Compute the
income under each head after allowing the deductions prescribed for each head of
income.

Definition

As per S.2(45) of Income Tax Act, 1961, unless the context otherwise requires, the
term total income means the total amount of income referred to in section 5,
computed in the manner laid down in this Act.
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Chapter 2

INCOME FROM SALARY

Meaning

Income can be charged under this head only if there is an employer employee
relationship between the payer and payee. Salary includes basic salary or wages,
any annuity or pension, gratuity, advance of salary, leave encashment, commission,
perquisites in lieu of or in addition to salary and retirement benefits.

The aggregate of the above incomes, after exemptions available, is known as Gross
Salary and this is charged under the head income from salary.

Salary includes [section17 (1)]:-

i. Wages
ii. Any annuity on pension
iii. Any gratuity
iv. Any fees, commission, bonus, perquisite on profits in lieu of or in addition
to any salary on wages
v. Any advance of salary
vi. Any earned leave
vii. Employers contribution (taxable) towards recognized provident fund

Basic Salary
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As the name suggests, this forms the very basis of salary. This is the core of salary,
and many other components may be calculated based on this amount. It usually
depends on ones grade within the companys salary structure. It is a fixed part of
ones compensation structure. The basic salary differs according to the type of the
industry. For instance, employees in the information technology industry get
more take-home salary while employees in the manufacturing companies get more
fringe benefits. Within a company Basic Salary generally depends on her or her
designation. Any increment in the salary is expressed as percentage of Basic salary

FEES, COMMISSION AND BONUS

Any fees or commission paid or payable to an employee is fully taxable and is

included in salary. Commission payable may be at a fixed amount or a fixed
percentage of turnovers. In both the cases, it is taxable as salary only when it is
paid or payable by the employer to the employee. When commission is based on
fixed percentage of turnover achieved by employee, it is included in basic salary
for the purpose of grant of retirement benefits and for computing certain
exemptions that we will discuss later on.

Allowances
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It is the amount received by an individual paid by his/her employer in addition to

salary to meet some service requirements such as Dearness Allowance (DA),
House Rent Allowance (HRA), Leave Travel Assistance (LTA), Lunch Allowance,
Conveyance Allowance, Childrens Education Allowance, and City compensatory
Allowance etc. Allowance can be fully taxable, partly or non taxable.

Heres a glance at allowances that are either taxable, partly taxable or non-taxable:

Taxable Allowances:

Dearness Allowance: Dearness Allowance (DA) is an allowance paid to

employees as a cost of living adjustment allowance paid to the employees to cope
with inflation. DA paid to employees is fully taxable with salary. The IT Act
mandates that tax liability for DA along with salary must be declared in the field
return.

Entertainment Allowance: Employees are allowed the lowest of the declared

amount --one-fifth of basic salary, actual amount received as allowance or Rs.
5,000. This is an allowance provided to employees to reimburse the expenses
incurred on the hospitality of customers. However, Government employees can
claim exemption in the manner provided in section 16 (ii). All other employees
have to pay tax on it.
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Overtime Allowance: Employers may provide an overtime allowance to

employees working over and above the regular work hours. This is called overtime
and any allowance received for this is fully taxable.

City Compensatory Allowance: City Compensatory Allowance is paid to

employees in an urban centre which may be highly expensive and to cope with the
inflated living costs in the cities. This allowance is fully taxable.

Interim Allowance: When an employer gives any Interim Allowance in lieu of

final allowance, this becomes fully taxable.

Project Allowance: When an employer provides an allowance to employees to

meet project expenses, this is also fully taxable.

Tiffin/Meals Allowance: Sometimes employers may provide Tiffin/Meals

Allowance to the employees. This is fully taxable.

Cash Allowance: When the employer provides a cash allowance like marriage
allowance, bereavement allowance or holiday allowance, it becomes fully taxable.

Non-Practicing Allowance: When physicians are attached to Clinical Centers of

the various Laboratories/Institutes, any non-practicing allowance paid to them
become fully taxable.

Warden Allowance: When an employer pays an allowance to an employee

working as a Warden i.e. Keeper in an educational Institute, the allowance received
is fully taxable.

Servant Allowance: When an employer pays an employee to engage services of a

servant, such an allowance is taxable.
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Partly Taxable:

House Rent Allowance (HRA): When an employer pays an allowance for the
employees accommodation it is called House Rent Allowance. Tax exemption
under section 10 (13A) can be claimed on whichever amount is lower of the three:

HRA as per actuals received by the employee

Rent paid as per actuals less 10% of Basic Salary

In Metros i.e. Delhi, Mumbai, Chennai or Kolkata, as much as 50% of basic salary
or else 40% of it if the accommodation is in a non-metro.

Any amount of House Rent Allowance received after claiming such deduction is
taxable.

Fixed Medical Allowance: This is an allowance paid by the employer when the
employee or any of his family members fall sick for the cost incurred on their
treatment. If any such reimbursement exceeds Rs.15,000 per year; the same is
taxable.

Special Allowance: A special allowance paid to employees is covered under

section 14(i) and does not fall within the purview of a perquisite. It is essentially
for performance of a duty is partly taxable.
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Non-Taxable:

Some of the allowances, usually paid to Government servants, judges and

employees of UNO are not taxable. These are:

Allowances paid to Govt. servants abroad: When servants of Government of

India are paid an allowance while serving abroad, such income is fully exempt
from taxes.

Sumptuary allowances: Sumptuary allowances paid to judges of HC and SC are

not taxed.

Allowance paid by UNO: Allowances received by employees of UNO are fully

exempt from tax.

Compensatory allowance paid to judges: When a judge receives compensatory

allowance, it is not taxable.
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Perquisites

Perquisite may be defined as any Casual Emolument or Benefit attached to an

office or position in Addition to Salary or Wages.

It also denotes something thatbenefits a man by going in to his own pocket.Perquis

ites may be provided in cash or in kind.Perquisites are included in salary income
only if they are received by an employee from his employer.

Perquisites as defined u/s 17 (2)

The term perquisites is defined by section 17 (2) as including the following items:

1. The value of Rent-free Accommodation provided to the assessee by his

employer

2. The value of any concession in the matter of rent respecting any

accommodation provided to the assessee by his employer

3. The value of any benefit or amenity granted or provided free of cost or at

concessional rate in any of the following cases:

By a company to an employee who is a director thereof ;

By a company to an employee, being a person who has substantial interest in
the company ;
By any employer (including a company) to an employee to whom provisions
of (i) and (ii) above do not apply and whose income under the head salaries
exclusive of the value of all benefits or amenities not provided for by way
of monetary benefits, exceeds Rs. 50,000
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4. Any sum paid by the employer in respect of any obligation which but for such
payment would have been payable by the assessee. Obligation of Employee
met by Employer

5. Any sum payable by the employer, whether directly or through a fund other
than a recognized provident fund or approved superannuation fund or a deposit-
linked insurance fund, to affect an assurance on the life of the assessee or to affect
a contract for an annuity

6. The value of any other fringe benefits or amenity as may be prescribed.

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Profit in lieu of salary

U/s 17 (3) profit in lieu of salaries includes:

1. Compensation for Termination of Employment or modification of

Terms & Conditions

The amount of any compensation due to or received by an assessee from his

employer or former employer at or in connection with the termination of his
employment or the modification of the terms and conditions relating thereto;

2. Payment from Employer from PF or Other Fund

Any payment (other than any pension, gratuity, HRA,Retrenchment compensation,

etc) due to or received by anassessee from an employer or a former employer or fro
m aprovident or other fund , to the extent to which it does not consist of
contributions by the assessee or interest on such contributions.

3. Keyman Insurance Policy

Any sum received under a Keyman insurance policy including the sum allocated
by way of bonus on such policy.

4. Sums Received from Future or Former Employer

Any amount due to or received, whether in lump sum or otherwise, by any

assessee from any person (A) before his
joiningany employment with that person; or (B) after cessation of his employment
with that person.
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5. Payment of Employees Obligation Employer

Any sum paid by the employer in respect of any obligationwhich, but for such pay
ment, would have been payable by the assessee;

6. Payments from Certain Funds :

Any sum payable by the employer, whether directly or through a fund, other than a
recognised provident fund or anapproved superannuation fund or a Deposit-linked
Insurance
Fundestablished u/s 3G of the Coal Mines Provident Fund andMiscellaneous Provi
sions Act, 1948 or u/s 6C of the Employees Provident Fund and Miscellaneous
Provisions Act, 1952to effect an assurance on the life of the assessee or to effect a
contract for an annuity;

7. Treatment of Annual Accretion to Provident Fund;

Provident Funds are established to provide for the retirement benefits of the
employees. The Scheme of funds envisages
annualcontributions from both the employer and the employee and theaccumulatio
n of interest on the balances. The funds are of three types Viz.

I. Statutory Provident Fund set up or established and administered by the

Government.
II. Recognised Provident Fund set up by others but recognized
by the Commissioner of Income Tax
III. Unrecognised Provident Fund set up by others but not recognised by the
Commissioner of Income Tax due to non-compliance with the guidelines
laid down for recognition

Other Points:
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Employers Contribution to all the three funds is exempt at the time of

contribution.
If the P.F. is deducted from the salary of the employee, salary will have to be
grossed up in all the three cases
Employees Contribution when received back on retirement is exempt in all
the three above mentioned cases.
Interest on Employees Contribution from Unrecognised Provident Fund
will be treated as Income from Other Sources.

8. Transferred Balance: - S. 7

When an Unrecognised Provident Fund is subsequentlyrecognised, the balances sta

nding in the Unrecognised ProvidentFund are transferred to the Recognised Provid
ent Fund. Thesebalances are called transferred balances and are deemed to be the
income of that year as per section 7. Such amount consisting of employees
contribution in excess of 12% of Basic Salary and interest credited
in excess of 8.5% per annum are taxed as the salary under section 17(1).

Deduction from salary

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Entertainment Allowance:

Entertainment Allowance is the amount paid to employee to use it for the purpose
of hospitality of customers.

Entertainment Allowance is given as a part of salary. It is taxable in the hands of

employee as per the provisions of Section 16(ii). The section states as follows:

Section 16 (ii)

16 The income chargeable under the head Salaries shall be computed after
making the following deductions;

(ii) a deduction in respect of any allowance in the nature of an entertainment

allowance specifically granted by an employer to the assessee is in receipt of a
salary from the Government, a sum equal to one-fifth of his salary (exclusive of
any allowance, benefit or other perquisite) or five thousand rupees, whichever is
less.

Professional Tax:

Professional also renowned as Tax on Employment is paid to the state government.

It is deducted by the employer from the salary payable to the employee and such
tax is paid to the state government on behalf of the employee. Professional Tax is
levied by the state government under the right given in article 276 of the
Constitution. As it is a part of salary and paid to the State Government, it is
allowed as a deduction while calculating the taxable amount under the head

Income from Salaries. Thus Professional tax on employment is allowed as a

deduction under section 16 (iii) of the Income Tax Act, in the following manner:
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Section 16 (iii)

16 The income chargeable under the head Salaries shall be computed after
making the following deductions;

(iii) a deduction of any sum paid by the assessee on account of a tax on

employment within the meaning of clause (2) of article 276 of the Constitution,
leviable by or under any law.

Certain Points to be kept in mind:

Professional tax is allowed as a deduction to all the employees.

It is allowed as a deduction when actually paid.

Chapter 3

INCOME FROM HOUSE PROPERTY

Meaning
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The annual value of property, consisting of any buildings or lands appurtenant

thereto of which the assessee is the owner, other than such portions of such
property as he may occupy for the purposes of any business or profession carried
on by him, the profits of which are chargeable to income tax, shall be chargeable to
income tax under the head "Income from House Property".

Income Comes Under Head of House Property:

Annual value of building or land owned by assessee. There is a charge on

the potential of property to generate income not on the rent received. But if
property is used for making profit in business then it will be taxable not under this
head but will be taxable under head of profit in business/ profession.

Only the income from buildings or part of a building, held by the assessee as the
owner and the income from land appurtenant to the buildings is covered under this
section. Income from other property such as open land is out of the purview of this
section. Income from such land will be taxed under the head, 'income from other
sources.'

The term 'buildings includes any building (whether occupied or intended for self-
occupation), office building, godown, storehouse, warehouse, factory, halls, shops,
stalls, platforms, cinema halls, auditorium etc.

Income arising out of the building or a part of the building is covered under this
section.

Land appurtenant includes land adjoining to or forming a part of the building. It

would depend on the nature of the land, whether it is appurtenant to the residential
building, factory building, hotel building, club house, theatre etc. and will include
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courtyards, compound, garages, car parking spaces, cattle shed, stable, drying
grounds, playgrounds and gymkhana.

Even if a company is formed for the sole object of acquiring and letting out
immovable properties, the rental income would be taxable as "Income from House
property" and not as business income."

BASIS OF CHARGE (SECTION 22)

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.

Annual Value

As per section 23 (1) (a), the annual value of any property shall be the sum for
which the property might reasonably be expected to be let from year to year.
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It may neither be the actual rent derived nor the municipal valuation of the
property. It is something like notional rent which could have been derived, had the
property been let.

Determining Annual Value

In determining the annual value there are four factors which are normally taken
into consideration. These are:

Actual rent received or receivable

A rent received or receivable by the owner from tenant for let out property after
deduction of unrealised rent called actual rent received or receivable.

Municipal Value

Municipal value is the value as determined by the municipal authorities for levying
municipal taxes on house property.

Fair rent of the property

Fair value or fair rent is the rent which a similar property can fetch in the same or
similar locality.

Standard rent

Standard rent is the rent of the property fixed under the Rent Control Act.
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Computation of annual value of a property [Section 23 (1)]

As per Income tax, annual value is the value after deduction of municipal taxes, if
any, paid by the owner. Annual value may be determined in the following two
steps:

1. Determine gross annual value

2. From gross annual value, deduct municipal taxes paid by the owner during
previous year. The balance shall be the net annual value which, as per the
Income tax Act, is the annual value.

Types of Property

Let out Property(LOP)

- Let out throughout previous year
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- Let and was vacant during the whole or any part of the previous year
- Part of the year let and part of the year self occupied.

Self - occupied property or unoccupied property. (SOP)

A self occupied property is one which is owned and used by you for your own
residential purpose. You have to occupy the property throughout the year. Thus, a
property or a house not occupied by the owner for his/her residence cannot be
treated as a self-occupied property.

Deemed let out property (DLOP)

If there are more than one residential houses, which are in the occupation of the
owner for his residential purposes then he may exercise an option to treat any one
of the houses to be self-occupied. The other houses (s) will be deemed to be let out
and the annual value of such house (s) will be determined as per section 23 (1) (a).

Format to determine the taxable income:-

(A) Let out and deemed let out property.

Gross Annual Value (GAV) xxx

Less : Property taxes paid to local authority xxx
Net Annual Value (NAV) xxx
Less : Deductions u/s. 24 xxx

a) 30% of the net annual value xxx

b) Interest on capital borrowed (loans) xxx

xxx
Income from house property

(B) Self occupied property:-

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Annual value as per sec. 23 (2) Nil

Less : Interest on loan borrowed as per sec. 24 (b) xxx
Loss from house property xxx

(C) Deemed to be Let out Property:-

Annual Value xxx

Less: Municipal Taxes xxx
Net Annual Value xxx
Less: Deduction u/s 24 xxx
Income from DLOP xxx

Deduction from Income from House Property

From the Net Annual Value, the following deductions are allowed under S.24:

Standard Deduction
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Standard Deduction of 30% of Annual Value is allowed as deduction to every

person.

Any type of expenses incurred by the assessee for acquiring, constructing,

repairing, reconstructing, maintaining, renovation, renewal etc shall not be allowed
as deduction.

Flat 30% of deduction shall be allowed irrespective of the expenses incurred by the
assessee.

Interest (Sec 24b)

1) Interest on housing loan is allowable as deduction on accrual basis not on paid
basis (even if account books are kept on cash basis) if capital is borrowed for the
purpose of purchase, construction, repair, renewal or reconstruction of the house
property. Deduction can be claimed for two or more housing loans.

2) Interest includes service fees, brokerage, commission, prepayment charges etc.

3) Interest/penalty on unpaid interest shall not be allowed as deduction.

4) Deduction shall be allowed irrespective of the nature of loan whether it is

housing loan or personal loan from any person/institution.

5) If a person instead of raising a loan from a third party pays sale price to the
seller in installments along with interest than such interest is also allowable.

6) Interest on borrowed money which is payable outside India shall not be allowed
as deduction under section 24(b), unless the tax on the same has been paid or
deducted at source and in respect of which there is no person in India, who may be
treated as an agent of the recipient for such purpose.
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7) For claiming deduction under this section, assessee must be the owner or
deemed owner of the house property and loan shall be in the assessee name.

Maximum Limit of deduction under section 24b

This limit of deduction is applicable assessee wise and not property wise.
Therefore if an assessee owns two or more house property then the total deduction
for that assessee remains same.

1) In Let out Property/Deemed to be Let Out No maximum limit

2) Self Occupied House (SOP) Rs. 2, 00,000. (1, 50,000 for A.y 2014-15 and
before)

In the following cases the above limit of Rs 2, 00,000 for SOP shall be reduced to
Rs. 30,000

Loan borrowed before 01-04-1999 for any purpose related to house property.
Loan borrowed after 01-04-1999 for any purpose other than construction or
acquisition.
If construction/acquisition is not completed within 5 years from the end of the
financial year (3 years till financial year 2015-16) in which capital was borrowed.

Property owned by Co-owners [S.26]

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i. Where property is owned by two or more persons, whose shares are definite
and ascertainable, then the income from such property cannot be taxed as
income of AOP.
ii. The share income of each such co-owner should be determined in
accordance with section 22 to 25 and include in his individual assessment.
iii. Where the house property owned by co-owners is self occupied by each of
the co owners, the annual value of the property of each co-owner will be Nil
and each co-owner shall be entitled to a deduction of Rs. 30,000 / Rs. 2,
00,000, as the case may be, under section 24(b) on account of interest on
borrowed capital.
iv. Where the house property owned by co-owners is let out, the income from
such property shall be computed as if the property is owned by one owner
and thereafter the income so computed shall be apportioned amongst each
co-owner as per their specific share.

Exempt Income
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Income from farm house.

Income of an approved scientific research association.
Income of an educational institution and hospital.
Property income of a trade union.
Property income of a charitable trust.
Property income of a political party.
Property used for own business or profession.

Chapter 4

ILLUSTRATION
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Mr. Chintan Chitale a severely physically disabled (85%) is employed with Pidilite
Industries. He furnishes you the following information for the year ended 31st
March, 2014.

(a) Basic Salary Rs.30, 000 p.m.

(b) Dearness Allowance at 20% of Basic Salary

(c) Profession Tax deducted at Rs.200 pm.

(d) Bonus Rs.30, 000

(e) House Rent Allowance Rs. 800 p.m. (fully taxable)

(f) Perquisite value of Gas, Water and Electricity Rs.2, 500.

(g) Arrears of Salary received as per revised pay scale, Net arrears Rs.50, 000,
Tax deducted at source on arrears of salary Rs.15, 000.

(h) He owned a residential house which was used for his own residence. Fair rent
Rs.50, 000 and Municipal valuation of the house was Rs.60, 000.

(i) He spent the following amounts during the year

i. Municipal taxes paid Rs.6,000

ii. Insurance of property Rs.2,000
iii. Interest on Housing Loan from ICICI Bank Rs.40,000 (Loan taken in August
2012)

(j) He paid Rs.4, 000 by credit card to GIC for Medical Insurance of his health

Compute the total income and Tax of Mr. Chintan of A.Y.2014-15.

Solution:

Name: MR. CHINTAN CHITALE STATUS: INDIVIDUAL

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PREVIOUS YEAR: 2013-14 ASSESSMENT YEAR: 2014-15

Computation of Total Income Rs. Rs. Rs.

A. INCOME FROM SALARY
Basic Salary (30,000*12) 3,60,000
D.A. (20% of 3,60,000) 72,000
Bonus 30,000
H.R.A. (800*12) 9,600
Perquisite Value of Gas etc. 2,500
Arrears of Salary
Net Received 50,000
Add : TDS 15,000 65,000
5,39,100
Less : Profession Tax (200*12) (2,400) 5,36,700
B. INCOME FROM HOUSE PROPERTY (SOP)
NAV Nil
Less: Int. on Housing Loan from ICICI Bank (40,000) (40,000)
C. GROSS TOTAL INCOME (A+B) 4,96,700
D. LESS: DEDUCTION UNDER CHAPTER VIA
U/S 80 D : Medical Insurance Premium 4,000
U/S 80 U: Physically Handicapped (85%) 1,00,000 (1,04,000)
E. NET TAXABLE INCOME (C-D) 3,92,700

F. TAX 19,270
E.C. @ 3% (385+193) 578 19,848
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Working Notes:

For SOP following items are not to be considered

(1) Fair Rent Rs.50, 000 (2) Municipal Valuation Rs.60, 000

(3) Municipal Taxes Paid Rs.6, 000 (4) Insurance of Property Rs.2, 000

Chapter 5

CONCLUSION
 30

The total income of an assessee is computed by deducting from the gross total
income all permissible deductions available under the Chapter VI A of the Income
Tax Act, 1961.

The term salary is defined under section 17 (1) of the income tax act to include
following items as salary; Wages. Any annuity or pension. Any gratuity. Any fee,
commission, perquisite or profit in lieu of salary or in addition to any salary or
wages.

House Property consists of any building or land appurtenant thereto of which the
assessee is the owner. The appurtenant lands may be in the form of a courtyard or
compound forming part of the building.

Chapter 6

REFERENCES
 31

http://www.caclubindia.com/articles/income-from-salary-23975.asp

https://www.bankbazaar.com/tax/how-calculate-taxable-income-from-
salary.html

https://www.scribd.com/doc/7380592/Income-TaxAct-1961

https://www.scribd.com/doc/300923278/Income-From-House-Property