Salaries and House Property
Salaries: the allowances that are tested
- Salary is taxed on due or receipt basis, whichever is earlier, u/s 15.
- Standard deduction Rs.50,000 is available in both regimes; entertainment allowance and professional tax (capped at Rs.2,500) are old-regime deductions only.
- HRA exemption u/s 10(13A) is the least of actual HRA, rent less 10% of salary, and 50% (metro) or 40% of salary. Salary means basic plus DA forming part plus commission on turnover.
- Leave encashment on retirement is exempt up to Rs.25,00,000 for non-government employees; gratuity has its own limits.
House property: the formula
Gross annual value, less municipal taxes actually paid by the owner, less 30% standard deduction, less interest u/s 24(b). Self-occupied interest is capped at Rs.2,00,000; pre-construction interest is allowed in five instalments. Loss from house property set off against other heads is capped at Rs.2,00,000.
Worked example
Basic Rs.40,000 p.m., DA Rs.10,000 p.m. forming part of salary, HRA Rs.15,000 p.m., rent Rs.18,000 p.m. in Delhi. Salary for HRA is Rs.6,00,000. Least of: HRA received Rs.1,80,000; rent less 10% of salary, Rs.2,16,000 minus Rs.60,000 equals Rs.1,56,000; 50% of salary Rs.3,00,000. Exemption is Rs.1,56,000, so taxable HRA is Rs.24,000.
Traps
- Computing 30% on annual value after interest instead of after municipal taxes.
- Under the new regime, HRA and LTA exemptions are not available and self-occupied interest is not deductible.
- Setting off let-out property loss beyond Rs.2,00,000 against salary income.
- Treating DA that does not form part of salary as salary for the HRA limit.