How do I calculate income tax on rental income?

     Print Edition: May 15, 2008

I am 57 years old and will retire this year.What are the tax rules regarding provident fund, pension and gratuity at the time of retirement.

—Swati Sen

Any amount of money received from a recognised provident fund account on retirement is fully exempt from tax. Pension income is taxed in the same way as salary income. However, commuted value of pension is specifically exempted under Section 10(10A) of the Income Tax Act and the amount of exemption depends on the fact whether or not you have received gratuity at the time of retirement. In case of receipt of gratuity, the commuted value of 33% of the pension is exempt from tax. In case, no gratuity is received, the commuted value of 50% of the pension is exempt from tax. The balance of the commuted pension becomes taxable.

The least of the following three calculations is the tax exemption on the gratuity received on retirement
• 15 days salary for every completed year of service
• Six months’ salary on the basis of last average salary drawn
• Rs 3.5 lakh (for employees covered under Payment of Gratuity Act, 1972).

When I quit my last job in August 2007, I had to pay Rs 35,000 as I had not given adequate notice as required in the terms of employment. My current employer reimbursed this amount to me as part of my salary, deducting tax at source on it. Do I have to pay tax on this amount? It is only a reimbursement of the amount paid by me.

—Rakesh Vora

The amount received by you from your present employer will be taxable. The payment of short-notice-period money is an expense in your hands. You had to pay salary amount as per the terms of employment for not serving the notice period. Your present employer paid you this amount to enable you to join him at the earliest. It may appear to be a reimbursement but as per tax laws there is no provision to treat this amount as reimbursement of expenses. Consequently, it will be treated as your income and be added to your salary income to be taxed at the rates applicable to you.

I pay Rs 7,500 a month as rent. I want to take a home loan to buy a flat. I plan to let out the flat while continuing to live in the rented house. Can I claim tax benefits in respect of house rent allowance (HRA) on the rent paid as well as on the loan?

—Yogendra Pitale

Yes, you can claim tax benefits simultaneously for both HRA and home loan as they are independent of each other. Since you are actually paying rent you can claim tax benefit in respect of HRA. In case of home loan, deduction can be claimed under Section 80C for the repayment of principal component of the home loan up to a maximum amount of Rs 1 lakh. You can also claim the interest paid on the home loan as a deduction from the rental income received by you under the head “income from house property”. For houses which are given on rent, full amount of interest paid on home loan is allowed as a deduction.

I recently joined a private company and realised that my new employer does not provide leave travel allowance (LTA). Instead the company says that “they are providing this as part of the overall package”. Isn’t providing for LTA mandatory for all companies as per government rules?


Providing LTA is not mandatory for private sector employers. Private companies provide LTA either separately or as part of the total package, meaning you can opt for it or not. Once you opt to take LTA, you can claim income tax exemption for the same, according to the rules laid down by the government which remain same across all private companies.

I get Rs 9,000 as rental income. How do I calculate income tax on it?


Rental income is taxable under the head “income from house property”. The net income under this head is clubbed with your other income and is taxable at the rates applicable to an individual. From the annual rental income, deduction is allowed for the municipal and other local taxes actually paid by the owner of the house. A standard deduction at the rate of 30% is allowed for repairs and other expenses, irrespective of the actual expense incurred by the owner. Besides this, if you have taken any home loan for the construction or purchase of your house, the interest component is also allowed as an expense.

I am a senior citizen with an income of about Rs 2 lakh a year.According to Budget 2008 I am below taxable limit. Do I still need to file my return?

—Raj Kohli

From the financial year 2008-9 senior citizens will have to pay income tax only if their net income from all sources exceeds Rs 2.25 lakh a year. As your income is below taxable limit you are not required to pay any tax and it is not mandatory for you to file your return. However, you may still file your return showing “below taxable” to maintain continuity as the minimum tax slabs keep changing every year.

I am in the process of taking a home loan. Please explain the tax provisions for self-occupied and rented house.

—Devika Mittal

Tax provisions vary slightly for self-occupied and rented house. The home loan repayment consists of two components—the principal repayment and the interest repayment. The repayment of principal amount qualifies for deduction under Section 80C in both cases, i.e., in case of a self-occupied house as well as a rented house up to a maximum of Rs 1 lakh a year. The interest component is allowed as a deduction under the head “income from house property” under Section 24(b) up to a limit of of Rs 1.5 lakh a year in case of self-occupied house. However, full amount of interest can be claimed in case the house is given on rent.

I am a government employee planning to do an MBA. Can I claim tax deduction under Section 80C for the expenses incurred on my studies?

—Keshav Dev

You cannot claim deduction under Section 80C as expenses incurred for one’s own education are not admissible. Deduction is allowed only for tuition fees (excluding development fees, donations, etc) paid to an educational institution within India for the full-time education of any two children of an assessee. However, if you take an education loan to fund your studies, you are eligible for tax benefits under Section 80E. The interest paid on the education loan will be fully deductible from your taxable income, provided the institute is a recognised body.

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