Computation of Income

This section contains only salient features for computation of income. The sections in this topic are as under:

Salary Income

Salary normally includes wages, annuity, pension, gratuity, commission, perquisites, etc. and any other payment received by an employee from the employer received during the year.

Allowances

Most allowances are taxable like City Compensatory allowance, tiffin allowance, fixed medical allowance and servant allowances; encashment of any concession is also taxable.

A)   House Rent Allowance

Out of house rent allowance received during the year, least of the following three amounts will not be included in income: -

• The amount equal to 50% of annual salary, for persons staying in Mumbai, Chennai, Calcutta or Delhi, but 40%, for others
• The actual amount of house rent allowance received
• The amount of rent actually paid in excess of 10% of annual salary

Here, salary includes basic salary, dearness allowance, and commission on fixed percentage, but not other allowances.

B)    Transport allowance

Transport allowance for traveling from residence to office is exempt up to Rs 800 per month.

C) Any allowance granted for encouraging the academic, research and other professional pursuits

To the extent the allowance is utilised for the purpose specified.

D) Children Education Allowance

Rs. 100 per month per child up to a maximum of two children

E) Any allowance granted to an employee to meet the hostel expenditure on his child

Rs. 300 per month per child up to a maximum of two children

Perquisites

The following perquisites are not taxable either under the executive instructions of the Central Board of Direct Taxes or by virtue of specific provision in the Act/Rules :

Rent-Free House

• Rent-free official residence provided to a judge of a High Court or of the Supreme Court.
• Rent-free furnished residence (including maintenance thereof) provided to an official of Parliament, a Union Minister or a Leader of Opposition in Parliament
• Accomodation provided in a 'remote area' to an employee working at a mining site or an onshore oil exploration site, or a project execution site or an accomodation provided in an offshore site of similar nature.
• Accomodation provided on transfer of an employee in a hotel for not exceeding 15 days in aggregate.

Car

• Re-imbursement of expenses in respect of car (which is owned by employee and used for personal and official purpose) (amount not taxable is up to Rs. 1,200 per month for car having engine capacity of not more than 1600cc, Rs. 1,600 per month for car of above 1600cc and Rs. 600 per month for driver).
• Conveyance facility provided to High Court Judges and Supreme Court Judges.
• Conveyance facility provided to an employee to cover the journey between office and residence.

Interest-Free Loan

• Interest-free / concessional loan of an amount not exceeding Rs.20,000

Others

• Gift-in-kind up to Rs.5,000 in a year.
• Employer's contribution to staff group insurance scheme.

Leave Encashment

Leave encashment while in service is taxable. Encashment of sick leave is taxable.

Leave encashment received at the time of retirement is fully exempt in the case of Government Servants. In the case of non-Govt. Employees, leave encashment is exempt to the extent of the least of the following four amounts: -

• Rs. 3,00,000/-
• Ten months' average salary; 
• Cash equivalent of the leave due at the time of retirement;
• Leave encashment actually received at the time of retirement.

Here the average salary means the average of the salary drawn during the last ten months before retirement.

Gratuity

Any death cum retirement gratuity received by Government or Local Authority employees is exempt from tax. For Non-Government Employees the taxability depends on whether Gratuity is covered under the Gratuity Act

A)        Gratuity covered under the Gratuity Act

For Gratuity covered under the Gratuity Act, total of gratuity received by an employee, covered by the Gratuity Act, from various employers in whole of service is exempt from tax to the extent of least of the following three amounts:

• 15 days' salary, based on the last drawn salary, for each completed year of service
• Rs. 3,50,000/-; or
• The gratuity actually received.

B)         Gratuity not covered under the Gratuity Act

For Gratuity not covered under the Gratuity Act any gratuity not covered by the Gratuity Act, is exempt from tax to the extent of least of the three amounts

• The half month's salary for each completed year of service; or
• Rs.3,50,000/-; or
• The gratuity actually received.

VRS Compensation

Compensation received at the time of voluntary retirement is exempt up to Rs 5 lakhs under certain conditions.

Deductions from Salary income

Certain deductions are available while determining the taxable salary income.

A) Standard Deduction

Standard deduction from the Assessment year 2004-05

B)         Professional Tax

Professional tax, which is paid, is allowed as deduction.

C)        Arrears salary

If salary is received in arrears or in advance, it can be spread over the years to which it relates and be taxed accordingly as per section 89(1) of the Income tax Act.

House Property Income

Tax is on the annual value of the house property after allowing certain deductions. House Property consists of any building, flat, shop etc., and the land attached to the building.

Computation of income from Self Occupied property

Income is computed after giving certain deductions from the annual value of the property.

A)        Computation of annual value of self occupied property

The annual value of Self occupied property is taken as NIL if the property is fully utilized for own residential stay during the year or if the property is not actually occupied as owner and is also not let out. If a property is let out for only a part of the year, proportionate annual value will be calculated.

B)         Entitled deductions for self occupied property

The only entitled deduction is interest, if any payable, on loan taken for the purchase or construction of the house property. The maximum deduction on this account is Rs.30,000/-; However, for properties acquired or constructed between the 1st April 1999 and the 1st April 2003 out of borrowed funds, maximum limit is Rs. 1,50,000/-

Computation of income from let out property

Income is computed after giving certain deductions from the net annual value of the let out property.

A)        Computation of net value of let out property

For let out properties the gross annual value will be the greater of the following three amounts:

• Municipal value of the property;
• Actual rent received during the year;
• Fair rent i.e. rent of similar properties in the same or similar locality.

Out of the gross annual value, municipal taxes actually paid during the year has to be deducted to arrive at the net annual value.

B)         Entitled deductions for let out property

The deductions available for computing House Property Income are:

• 30% of the net annual value for repair and maintenance and rent collection expenses for the property
• Interest on money borrowed to build, buy or repair the property;

Ownership of property

Besides owning property in own name, a person is deemed as owner in following three cases:

• As transferor of the property to spouse or minor child for inadequate or no consideration;
• As holder of an impartible estate or a property in part performance of a contract under the Transfer of Property Act;
• As share holder of a co-operative society or a company, which entitles to hold any property

Capital Gains

If any Capital Asset is sold or transferred, the profits arising out of such sale are taxable as capital gains in the year in which the transfer takes place. 

Definition of capital asset

Capital Asset means all moveable or immovable property except trading goods, personal effects, agricultural land other than within municipal areas or within 8 kilometers from it wherever notified and gold bonds. Jewelry and ornament are not personal effects and their sale will attract capital gains.

Distinction between short term and long-term asset

Capital Assets are of two types i.e., long term and short term. Long-term capital assets are assets held for more than 36 months before they are sold or transferred. In case of shares, debentures and mutual fund units the period of holding required is only 12 months.  Different rates of tax apply for gains on transfer of the long term and short-term capital assets. Gains on short-term capital asset are taxed as regular income.

Computation of Capital Gains

Capital gains are to be computed by deducting the following three amounts from the consideration money received on transfer of the asset.

i)          The actual cost of the asset or its estimated market value as on 1.4.81, if acquired earlier;

ii)         The cost of improvement, if any, for the asset;

iii)         Expenses incurred on transfer of the asset; and

In case of a long-term capital asset, the costs are increased as per a Cost inflation index for the year.

Cost Inflation index

Click here to view the cost Inflation Index

Exemptions from Capital Gains

In case of Individuals and HUF, long-term capital gains are exempt if the sale proceeds are reinvested in certain assets.

Some examples:

A)        Profits on sale of residential house is reinvested in a new residential house.

B)         Long term capital gains are invested in notified bonds

These exemptions are subject to certain conditions and the reinvestment has to be made within the prescribed time.

Other Sources Income

Any income other than (a) salary, (b) house property income (c) Income from business or profession, or (d) Capital Gains income, will be taxed as Income from Other Sources. Examples are interest from deposits, winnings from lotteries, races, income from the hiring out of machinery, or machinery compositely with building, royalty, copyright fees, family pension, dividends other than from domestic companies and mutual funds etc.

Allowable Deductions

• In case of winnings from lotteries and races no deduction is allowable.
• For family pension, the allowable deduction is 1/3rd of the pension or Rs. 15,000/- whichever is lower.
• For other cases, any revenue expenditure, exclusively incurred for earning such income is allowed as deduction.
• In case of income from hiring of machinery, depreciation on such machinery is also allowable as deduction.

Deductions

Deduction is the amount, which is reduced from the gross total income before computing tax.

There are other deductions such as for donations, for repayment of loans taken for educational purposes etc.

Deductions on Interest etc. U/s 80L

If interest is earned on Govt. Securities, Bank deposits, Post Office deposits, debentures, National Savings Certificates etc., deduction up to Rs. 12,000/- u/s 80 L is allowable from the net  income after deducting the expenditure incurred in earning it.  Further, an additional deduction up to Rs. 3,000/- will be allowable on interest from Govt. Securities, if not already covered in the Rs. 12,000/- limit mentioned earlier.

Deductions on premium for medical insurance

If premium for medical insurance is paid by cheque for a person, or his dependent family member or member of the HUF, deduction up to Rs. 10,000/- for insurance premium paid is allowable.  In respect of senior citizens the maximum limit for deduction will be up to Rs. 15,000/-.

Deductions on expenditure on handicapped dependent

If any expenditure has been incurred on the treatment, nursing, training of a handicapped dependent, or for creating an insurance benefit for such person a deduction up to a maximum limit of Rs. 40,000/- u/s  80DD is allowable subject to the condition that  doctor working in a government hospital has issued the necessary certificate.

Deductions on treatment of diseases

If an individual or an HUF actually incurs expenditure for treatment of certain specified diseases for himself, dependents or a member of HUF, deduction up to Rs.40,000 /- u/s 80DDB is allowable. For treatment of senior citizens, the amount of deduction will be up to Rs.60,000 /-. This deduction is available only for certain specified diseases.

Deductions on contribution to pension funds

If an individual contributes to specified pension funds deduction up to Rs.10,000 /- u/s 80CCC is allowable. The pension will however be taxable on receipt.

Rebates

Rebate u/s 88

For the assessment year 2003-04, the amount of rebate is as follows -

1. Tax rebate under section 88 is available at 30% of the net qualifying amount if the following two conditions are satisfied.

a. income chargeable under the head "Salaries" (before giving deduction under section 16) does not exceed Rs. 1,00,000; and

b. income chargeable under the head "Salaries" is not less than 90% of gross total income.

2. If gross total income does not exceed Rs. 1,50,000 ,tax rebate is available at 20% of the net qualifying amount.

3. If gross total income exceeds Rs. 1,50,000 but does not exceed Rs. 5,00,000, tax rebate is available at 15% of the net qualifying amount.

4. If gross total income exceeds Rs. 5,00,000 tax rebate under section 88 is not available.

Rebate for senior citizens

Taxpayers of the age of sixty-five and above, at any time during the relevant previous year, will get an additional rebate from tax payable up to a maximum of Rs 20,000/-. 

Rebate for women taxpayers

All women resident in India get a special rebate up to Rs. 5,000/- out of the tax payable by them.  This rebate will not be allowable for women tax payers above sixty five at any time during the relevant previous year, who will get senior citizen rebate of Rs. 20,000/-.