Chapter 3 of 11

27%

CA Intermediate Taxation★ Unit 1 and Unit 2 of Chapter 3 of ICAI Paper 3 Section A, part of the largest single chapter in the paper. Salaries is exemption and valuation rule application; House Property is short and mechanical, repeating in a narrow set of shapes.

Salaries and Income from House Property

The first two heads of income — how salary, allowances and perquisites are valued and exempted, and how a self-occupied, let-out or deemed-let-out house arrives at its annual value under section 24's two permitted deductions.

⏱ 32 min readModerate difficulty✓ Free · exam-pattern aligned

🧾

Timed practiceMCQs from this chapter with instant scoring

FlashcardsFormulas & traps on spaced repetition

CA Intermediate PYQsSolved previous-year questions

By the end of this chapter you'll be able to…

1Distinguish salary income from other payments by the presence of an employer-employee relationship
2Compute HRA exemption using the least-of-three formula, on a period basis where inputs change during the year
3Compute the exempt portion of gratuity, leave encashment and commuted pension for government and non-government employees
4Apply the standard deduction and the professional tax wash under section 16
5Classify a house property as let-out, self-occupied, or deemed let-out under the two-house relaxation
6Compute Gross Annual Value using the higher-of-Expected-Rent-and-Actual-Rent rule, with Standard Rent as a ceiling and vacancy relief where applicable
7Apply the two permitted deductions under section 24, including the differing interest ceilings for let-out and self-occupied property
8Compute pre-construction interest and its five-instalment spread
9Apply the treatment of unrealised rent and of arrears of rent or unrealised rent recovered in a later year

💡

Why this chapter matters in CA Intermediate

Salaries turns almost entirely on knowing which allowances and perquisites are exempt and to what extent, since the default for every allowance is full taxability and exemption is the exception that must be affirmatively established with its own formula. House Property is the shortest and most mechanical of the five heads: only two deductions are ever permitted from Net Annual Value, and nearly every question in the chapter reduces to correctly classifying the property (let-out, self-occupied, or deemed let-out) and then applying the standard 30% deduction and the interest ceiling that follows from that classification.

Before you start — revise these

🔗

Basic Concepts and Residential Status

The five-head computation skeleton and the previous year/assessment year vocabulary are assumed here.

Salaries and Income from House Property

Weightage: Unit 1 and Unit 2 of Chapter 3 of ICAI's Paper 3 Section A, together part of the largest single chapter in the paper. Salaries is almost pure exemption and valuation rule application; House Property is a short, mechanical head that repeats in a narrow set of shapes.

Income from Salaries

The relationship that defines the head

Income is taxed under Salaries only where it arises from an employer-employee relationship. A consultant's fee, a director's sitting fee for attending board meetings without an employment contract, a partner's remuneration from a firm — none of these is salary, because none arises from that relationship, whatever the payment is called.

Basis of charge — section 15. Salary is taxable on due basis or receipt basis, whichever is earlier. Salary due in a year, whether paid or not, is taxable; salary of an earlier year received in a later year, if already taxed on due basis, is not taxed again.

The components

Basic salary is fully taxable.

Allowances are, by default, fully taxable, and specific ones are wholly or partly exempt by express provision — the default is taxability, and exemption is the exception that must be affirmatively established.

Fully exempt allowances include, among others: allowances to certain government employees serving abroad.

Partly exempt, subject to a limit or actual expenditure: House Rent Allowance (HRA) — exempt to the extent of the least of actual HRA received; rent paid minus 10% of salary; and 50% of salary (metro cities — Mumbai, Kolkata, Delhi, Chennai) or 40% of salary (non-metro), where "salary" here means basic plus dearness allowance (if it forms part of retirement benefits) plus commission (if based on a fixed percentage of turnover), computed on a period basis wherever any of the inputs changes during the year.

Fully taxable allowances (illustrative, not exhaustive): dearness allowance, city compensatory allowance, medical allowance, entertainment allowance for non-government employees (a deduction, not exemption, is available to government employees, being the least of ₹5,000, 20% of basic salary, and actual entertainment allowance received).

Perquisites are benefits or amenities provided by the employer over and above salary. Under section 17(2), perquisites are taxable only for specified employees for certain categories, but the major perquisites — rent-free accommodation, concessional accommodation, interest-free or concessional loans above prescribed limits, and specified fringe benefits — are taxable for all employees, not merely specified ones, which is a distinction candidates blur.

Rent-free accommodation valuation depends on whether the employer is government or other, and where other, on the population of the city and whether the accommodation is owned or leased by the employer — the computation is a set percentage of salary (population-graded) or the lease rent paid, whichever is applicable, subject to specified caps.

Perquisites exempt for all employees: medical facility in an employer-maintained hospital, medical insurance premium paid by the employer, refreshment during working hours, and certain other specified categories.

Retirement benefits

Gratuity. Fully exempt for a government employee. For a non-government employee covered by the Payment of Gratuity Act, 1972, exempt to the extent of the least of: 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 a month; and the notified statutory ceiling. For a non-government employee not covered by that Act, exempt to the least of: actual gratuity received; half a month's average salary for every completed year of service (no rounding for a part year), computed on the average salary of the last 10 months, with a divisor of 30; and the notified statutory ceiling.

Leave encashment. Fully exempt at retirement for a government employee. For a non-government employee, exempt to the least of: actual amount received; notified statutory ceiling; 10 months' average salary; and 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 average salary of the preceding 10 months.

Pension. Uncommuted pension (a periodic payment) is fully taxable for every employee. Commuted pension (a lump sum in lieu of the periodic payment) is fully exempt for a government employee. For a non-government employee: if he also receives gratuity, the exempt portion is one-third of the pension that would have been received had the whole pension been commuted; if he does not receive gratuity, the exempt portion is one-half of that notional full-commutation value.

Retrenchment compensation is exempt to the least of the amount calculated under the Industrial Disputes Act, 1947, the notified statutory ceiling, and the actual amount received.

Deductions from salary — section 16

Standard deduction is a fixed statutory amount, deductible from gross salary without requiring any expenditure to be shown. Entertainment allowance deduction is available only to government employees, as described above. Professional tax (employment tax) actually paid is deductible in full, and if paid by the employer on the employee's behalf, is first added as a perquisite and then allowed as a deduction — a wash that candidates frequently get only half right, either adding it without deducting or deducting without adding.

Income from House Property

The charging provision and its curious feature

Section 22 charges to tax the annual value of property consisting of any buildings or lands appurtenant thereto, of which the assessee is the owner, other than portions the assessee occupies for his own business or profession.

The curious feature, worth stating explicitly because it distinguishes this head from every other, is that the charge is on annual value, a notional figure the property is deemed capable of yielding, not on rent actually received. A property lying vacant, earning nothing, can still generate taxable "income" under this head, because the charge is on capacity to earn, not on actual receipt — subject to the specific relief available where a let-out property remains vacant for part of the year, described below.

Who is the owner

The assessee taxed is the legal owner, with important deeming extensions: a person who has transferred a house to a spouse or a minor child otherwise than for adequate consideration (subject to specified exceptions) is deemed the owner under the clubbing provisions covered separately; a person in possession of a property under a part-performance arrangement within the meaning of section 53A of the Transfer of Property Act, even without a registered conveyance, is deemed owner; and the holder of an impartible estate is deemed the individual owner of the estate.

The three categories

Let-out property. Actually let out during the year, wholly or partly.

Self-occupied property (SOP). Occupied by the owner for his own residence, and not actually let out during any part of the year.

Deemed let-out property. Where the assessee owns more than two self-occupied houses (the relaxation to two, up from one, is a change from the earlier position that older material still gets wrong), the additional houses beyond the first two — even though not actually let and used by the owner — are treated as deemed let out, and their annual value is computed as if they had been let.

Computing Gross Annual Value (GAV)

For a let-out property, GAV is the higher of the Expected Rent and the Actual Rent Received or Receivable.

Expected Rent is the higher of Municipal Value and Fair Rent, but restricted to Standard Rent where the property is subject to rent control legislation — Standard Rent operates as a ceiling on Expected Rent, never as a floor.

Where the property was let out for only part of the year, GAV is computed proportionately, comparing the Expected Rent for the whole year against the actual rent for the let-out period, and taking the higher, but a further specific relief applies:

Vacancy relief. Where the property is let and was 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 (not the Expected Rent) is taken as GAV — the vacancy period genuinely reduces the annual value rather than being ignored, provided the shortfall arises because of the vacancy and not for some other reason such as the tenant simply defaulting while occupying.

For a self-occupied property (within the limit of two), GAV is taken as nil.

For a deemed let-out property, GAV is computed exactly as for an actually let-out property — Expected Rent, since there is no actual rent.

Deductions under section 24

Only two deductions are permitted from Net Annual Value (GAV less municipal taxes actually paid by the owner during the year), and this short, closed list is the single most examinable fact in the chapter.

Standard deduction — 30% of Net Annual Value, a flat statutory allowance with no requirement to show actual expenditure, available for let-out and deemed let-out property; not available for a self-occupied property with nil GAV, since 30% of nil is nil in any event.

Interest on borrowed capital, deductible under section 24(b), with different limits depending on the category:

For a let-out or deemed let-out property, interest is deductible in full, with no upper ceiling, whether the loan was for acquisition, construction, repair, renewal or reconstruction.
For a self-occupied property, interest is capped. Where the loan is for acquisition or construction completed within 5 years from the end of the financial year in which capital was borrowed, and the loan was taken on or after 1 April 1999, the deduction is capped at ₹2,00,000. Where these conditions are not met — construction not completed within 5 years, or loan for repair, renewal or reconstruction, or loan taken before 1 April 1999 — the cap falls to ₹30,000.

Pre-construction interest. Interest for the period prior to the year of completion of construction or acquisition is not deducted in the year it accrues; instead, it is aggregated and deducted in five equal annual instalments commencing from the year of completion, subject to the same overall ceiling that applies to the property.

Composite rent and unrealised rent

Where the owner also lets out furniture or provides services (a lift, security) along with the property for a composite rent, and the rent for the property can be separated from the rent for other assets or services, the property portion alone is taxed under this head; the remainder is taxed under Business/Profession or Other Sources as applicable. Where it cannot be separated, the entire composite rent is generally taxed under Other Sources or Business income, not House Property.

Unrealised rent that the owner is unable to recover, meeting prescribed conditions (the tenancy is bona fide, the defaulting tenant has vacated or steps have been taken to compel vacation, the defaulting tenant is not in occupation of any other property of the assessee, and the assessee has taken reasonable steps including legal proceedings to recover it), is excluded from Actual Rent Received or Receivable in computing GAV for the year to which it relates.

Arrears of rent and unrealised rent recovered subsequently. Where arrears of rent, or unrealised rent earlier excluded, are received in a later year, they are taxable in the year of receipt, whether or not the assessee is still the owner of the property in that year, after a flat 30% deduction, with no other deduction permitted against this receipt.

Key formulas & results

Everything to memorise for the exam hall, in one card. Screenshot this for revision.

HRA exemption = least of (actual HRA received, rent paid minus 10% of salary, 50%/40% of salary for metro/non-metro)

Gratuity (Gratuity Act covered) exemption = least of (actual gratuity, 15 days' last-drawn salary x completed years, divisor 26, statutory ceiling)

Gratuity (not covered) exemption = least of (actual gratuity, half month's average salary of last 10 months x completed years, divisor 30, statutory ceiling)

Commuted pension exemption (non-government, with gratuity) = 1/3 of full commutation value; (without gratuity) = 1/2 of full commutation value

GAV of let-out property = higher of (Expected Rent, Actual Rent Received or Receivable)

Expected Rent = higher of (Municipal Value, Fair Rent), capped at Standard Rent

Net Annual Value = GAV less municipal taxes actually paid by the owner during the year

Section 24 deductions: 30% of NAV (standard deduction) + interest on borrowed capital (full for let-out; capped at 2,00,000 or 30,000 for self-occupied depending on conditions)

Pre-construction interest spread over 5 equal instalments from the year of completion

Arrears of rent / unrealised rent recovered later: taxable in year of receipt after a flat 30% deduction, no other deduction

INTERMEDIATE EXAMINATIONCA Inter

1. Mr. Nair, employed in Mumbai, has basic salary of ₹40,000 per…[6]

HRA exemption is the least of three figures,…

6/6

Tap the paper to answer it.

Practice Studio

CA Inter answers are written, not ticked

Write one on Salaries and Income from House Property and it comes back marked to the CA Inter scheme in about twenty seconds.

Write one answer

⚠️

Traps CA Intermediate sets — and how to dodge them

These are the exact option-traps and misreads that cost marks under negative marking.

WATCH OUT

✗ Computing HRA exemption on gross salary instead of basic plus DA (if part of retirement benefits) plus turnover-based commission

✓

WATCH OUT

✗ Applying the 30% standard deduction to a self-occupied property with nil GAV

✓

WATCH OUT

✗ Capping interest on a let-out property's loan, when there is no ceiling for let-out or deemed let-out property

✓

WATCH OUT

✗ Applying the 2,00,000 self-occupied interest cap without checking the 5-year completion condition and the 1 April 1999 loan date condition

✓

WATCH OUT

✗ Deducting pre-construction interest in the year it accrues instead of spreading it over five instalments from the year of completion

✓

WATCH OUT

✗ Treating Standard Rent as a floor for Expected Rent rather than a ceiling

✓

WATCH OUT

✗ Ignoring vacancy relief and using Expected Rent as GAV even where actual rent fell below it because of a genuine vacancy

✓

WATCH OUT

✗ Adding professional tax paid by the employer as a perquisite without then allowing the offsetting deduction, or the reverse

✓

WATCH OUT

✗ Treating deemed let-out as applying beyond one self-occupied house, when the relaxation now permits two

✓

WATCH OUT

✗ Applying a deduction other than the flat 30% to arrears of rent or unrealised rent recovered in a later year

✓

Exam-pattern practice

PYQ-style questions with full solutions. Work through them as a readiness check — mark yourself honestly and get your gap report at the end.

Readiness check

Are you exam-ready for Salaries and Income from House Property?

15 problems from this chapter. Try each one, reveal the worked solution, mark yourself honestly — get your gap report at the end.

15 questions~11 min

5-minute revision

The whole chapter, distilled. Read this the night before the exam.

•Salary needs an employer-employee relationship; a consultant's fee or director's sitting fee outside employment is not salary
•Every allowance is taxable by default; exemption must be affirmatively established under a specific provision
•HRA exemption = least of actual HRA, rent paid minus 10% of salary, 50%/40% of salary — computed on a period basis if inputs change
•Gratuity, leave encashment and commuted pension each have their own least-of formula distinguishing government from non-government employees
•Uncommuted pension is always fully taxable; only the commuted lump sum can be partly exempt
•Professional tax paid by the employer is a wash: add as perquisite, then deduct under section 16
•House Property charges annual value (notional capacity to earn), not actual rent received
•Up to TWO self-occupied houses may have nil GAV; any beyond two are deemed let out
•GAV of a let-out property = higher of Expected Rent and Actual Rent; Standard Rent caps Expected Rent, never floors it
•Vacancy relief applies only where the shortfall is caused by genuine vacancy, not by tenant default while in occupation
•Only TWO deductions under section 24: 30% standard deduction (not on nil SOP GAV) and interest on borrowed capital
•Interest is uncapped for let-out/deemed let-out; capped at 2,00,000 or 30,000 for self-occupied depending on the 5-year and 1999 conditions
•Pre-construction interest is spread over 5 equal instalments from the year of completion, not deducted as it accrues
•Arrears of rent / unrealised rent recovered later: taxed in year of receipt regardless of current ownership, flat 30% deduction only

CA Intermediate question blueprint

How this topic is asked, tier by tier — so you can prep to the pattern.

Typical weightage: 10

Exam-hall strategy

Battle-tested tips from mentors and toppers for this topic under the sectional clock.

For salary problems, list every component and mark each taxable, exempt or partly exempt with its formula before totalling
Compute HRA on a period basis whenever the facts show a change in salary, rent or HRA during the year
For retirement benefits, identify government or non-government status first, since it decides which formula and which divisor apply
In house property problems, classify the property (let-out, self-occupied, deemed let-out) in the first line before computing GAV
State Expected Rent as the higher of municipal value and fair rent, capped at standard rent, as a separate working note
Check the 5-year completion and 1 April 1999 conditions explicitly before applying the self-occupied interest cap
Remember only two deductions exist under section 24; never add municipal taxes as a third deduction from NAV, since they are deducted before NAV is even arrived at

Beyond the exam

Where this skill shows up in the job you're competing for — and in life.

HRA and gratuity exemption computations are the most comm…

HRA and gratuity exemption computations are the most common salary tax planning conversations between an employee and a chartered accountant every year

Rent-free accommodation valuation is a live compliance is…

Rent-free accommodation valuation is a live compliance issue for large employers structuring executive compensation packages

Home loan interest deduction planning under section 24(b)…

Home loan interest deduction planning under section 24(b) drives the decision of many taxpayers on whether to let out a second property or keep it self-occupied

The arrears-of-rent-after-sale rule is applied whenever a…

The arrears-of-rent-after-sale rule is applied whenever a landlord sues a defaulting tenant and eventually recovers rent years after selling the property

Where else this topic is tested

Prepare once, score in every exam that asks it.

CA Final Paper 4 — Direct Tax Laws, where salary and house property computations recur in composite problems

CMA Intermediate — Direct Taxation

CS Executive — Tax Laws

Income Tax Department departmental examinations, where these two heads are core computational material

📝 My notes

Saved on this device — sign in to sync · how this works

0/600

Questions aspirants ask

Pulled from the Q&A community and mentor sessions.

Because an allowance is, in substance, additional cash paid to the employee on top of salary, and cash received by an employee from an employer is presumptively income unless a specific provision says otherwise. The exemptions that exist — HRA, certain travel and special allowances — are targeted reliefs recognising that part of the payment genuinely reimburses a cost the employment imposes, such as rent in a location away from home. Because these are exceptions to a general rule of taxability, they are drawn narrowly and with specific formulas, and a candidate should never assume an allowance is exempt without being able to point to the specific provision and compute the specific limit.

It is available to any individual or Hindu undivided family assessee without a requirement to show any particular circumstance such as employment relocation; an assessee may simply choose which two of several non-let-out houses to treat as self-occupied with nil GAV, and any further houses not let out are deemed let out. The relaxation from one house to two houses reflects that many assessees genuinely maintain two homes — for example one at a place of work and one in a hometown — without either being let out, and taxing the second on a notional basis in that ordinary situation was seen as an unfair burden.

Because a let-out property is genuinely earning income against which its full financing cost is a legitimate expense in arriving at the true economic profit, so no ceiling applies. A self-occupied property earns no actual income at all, its GAV being nil, so allowing an uncapped interest deduction against it would create a pure loss position purely from personal borrowing used for a personal residence, which the law caps rather than disallows entirely, striking a balance between recognising the real cost of home financing and preventing an open-ended loss from a property that generates no taxable receipt whatsoever.

Compute the exemption on a period basis, breaking the year into sub-periods at each point any of the three inputs — HRA received, rent paid, or salary for the purpose of the formula — changes, and applying the least-of-three test separately to each sub-period using that sub-period's own figures, then summing the exempt amounts across all sub-periods. A single whole-year computation using annual totals is only correct where none of the inputs changed during the year; where any did, the whole-year shortcut understates or overstates the true exemption and is a common source of error in longer salary problems.