Income from Salaries and Income from House Property
What the exam tests
This domain tests the employer-employee relationship, salary allowances and perquisites, retirement benefits, and the annual-value computation for house property. The exam often combines an HRA exemption with house property interest or a let-out property computation.
Salary rules
- Salary is taxable on due or receipt, whichever is earlier. Advance salary and arrears are taxable in the year of receipt, subject to relief under Section 89 in appropriate cases.
- HRA exemption: Least of actual HRA received; rent paid minus 10% of salary; and 50% of salary in Delhi, Mumbai, Kolkata or Chennai, otherwise 40%. Salary means basic plus dearness allowance forming part of retirement benefits plus commission as a fixed percentage of turnover.
- Standard deduction: ₹50,000 under the old regime; ₹75,000 under the default new regime from AY 2025-26.
- Common exemptions include gratuity under Section 10(10), leave encashment under Section 10(10AA) and specified allowances.
House property rules
Gross annual value is the higher of expected rent and actual rent, subject to municipal taxes. Net annual value is gross annual value minus municipal taxes paid by the owner. A 30% standard deduction is allowed from net annual value. Interest on borrowed capital is deductible subject to limits; a self-occupied house generally has nil annual value, while a let-out house is taxed on actual rent.
Worked example
Basic plus DA forming part of salary is ₹7,20,000. HRA received is ₹2,40,000; rent paid is ₹2,16,000 in a metro city. Exemption is least of ₹2,40,000; ₹2,16,000 minus ₹72,000 = ₹1,44,000; and 50% of ₹7,20,000 = ₹3,60,000. HRA exemption is ₹1,44,000.
Traps
HRA is not the full rent paid. Municipal taxes are deducted only if paid by the owner. Interest on a self-occupied house is not unlimited. Do not claim both HRA exemption and deduction for the same rent as a business expense without satisfying the conditions.