Unit 2: Income from house property & business
Direct and Indirect Tax Laws notes · PTU syllabus (BBA 622-18)
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Unit summary
Rent and business profits are two major sources of taxable income. This unit covers income from house property — meaning, annual value, deductions and treatment of interest on housing loans — and profits and gains of business or profession — admissible and inadmissible expenses, depreciation and research and development expenditure.
After this unit you can
- Compute income from house property for let-out and self-occupied property
- Explain the treatment of interest on housing loans
- Identify admissible and inadmissible business expenses
- Explain depreciation and R&D deductions
PTU syllabus topics
- Meaning of rental income
- treatment of interest on housing loans
- computation of income from house property
- admissible and non-admissible business expenses
- treatment of depreciation
- R&D expenditure
Gross annual value
Higher of expected rent and actual rent (simplified)
Net annual value
GAV − municipal taxes paid
Standard deduction
30% of NAV
Interest on loan
Deduction under Section 24(b)
Income
NAV − standard deduction − interest
Topic 1
Income from house property (Sections 22–27)
Taxable when: (1) property consists of building or land appurtenant, (2) the assessee is the owner, and (3) it is not used for own business or profession.
Annual value (for a let-out property)
- 1Municipal value and fair rent — take the higher
- 2Compare with standard rent — take the lower = Expected rent
- 3Compare expected rent with actual rent received/receivable — take the higher = GAV
- 4Less municipal taxes paid by the owner = Net Annual Value
Deductions (Section 24)
- 24(a) Standard deduction: 30% of Net Annual Value (for repairs, collection etc., regardless of actual spend).
- 24(b) Interest on borrowed capital: actual interest for let-out property (no limit, but set-off of loss restricted to ₹2 lakh); for self-occupied property up to ₹2,00,000 (old regime) if loan taken after 1.4.1999 for purchase/construction completed within 5 years; ₹30,000 otherwise.
- Pre-construction interest: deducted in 5 equal instalments starting from the year of completion.
Example
Municipal value ₹2,40,000, fair rent ₹2,60,000, standard rent ₹2,50,000, actual rent ₹2,70,000, municipal tax paid ₹20,000, interest on loan ₹1,10,000. Expected rent = lower of (2,60,000, 2,50,000) = ₹2,50,000. GAV = higher of (2,50,000, 2,70,000) = ₹2,70,000. NAV = ₹2,50,000. Standard deduction 30% = ₹75,000. Interest ₹1,10,000. Income from house property = ₹65,000.
Self-occupied property
- Annual value is Nil for up to two self-occupied houses.
- Only interest deduction applies, so the result is usually a loss (up to ₹2 lakh).
- Under the new regime, interest on a self-occupied property is not deductible.
Exam tip
Show GAV → NAV → deductions → income in a neat statement; examiners mark each step.
Topic 2
Profits and gains of business or profession (Sections 28–44)
Business includes trade, commerce, manufacture; profession requires special skill (doctor, CA, lawyer).
- 1
Net profit as per profit and loss account
- 2
Add: inadmissible expenses debited
- 3
Add: income not credited but taxable
- 4
Less: admissible expenses not debited
- 5
Less: incomes credited but exempt or taxable under other heads
- 6
Taxable business income
Admissible (allowed) expenses
- Rent, rates, taxes, repairs and insurance of business premises — Section 30.
- Repairs and insurance of machinery and plant — Section 31.
- Depreciation — Section 32.
- Scientific research — Section 35.
- Insurance premium on stock, employee health insurance (non-cash), bonus/commission to employees, interest on borrowed capital, bad debts written off — Section 36.
- General deduction — Section 37(1): any expense wholly and exclusively for business, not capital or personal.
Inadmissible (disallowed) expenses
- Personal expenses and income tax paid.
- Capital expenditure (other than through depreciation).
- Section 40(a): payments without TDS where required (30% of the expense disallowed for residents).
- Section 40A(3): cash payments above ₹10,000 to a person in a day (₹35,000 for transporters).
- Section 43B: certain expenses (taxes, employer's PF, bonus, interest to banks, and payments to MSEs beyond the agreed time) allowed only on actual payment.
- Penalties and fines for violation of law; expenditure on CSR.
- Excessive or unreasonable payments to relatives — Section 40A(2).
Topic 3
Depreciation (Section 32)
Depreciation is allowed on block of assets using the written down value (WDV) method (power companies may use straight line).
| Block | Rate (general) |
|---|---|
| Residential buildings | 5% |
| Non-residential buildings | 10% |
| Furniture and fittings | 10% |
| Plant and machinery (general) | 15% |
| Motor cars (not for hire) | 15% |
| Computers and software | 40% |
| Intangible assets (patents, copyrights) | 25% |
- If an asset is used for less than 180 days in the year of acquisition, only half the rate is allowed.
- Additional depreciation: 20% on new plant and machinery for manufacturing (half if used under 180 days, balance next year).
- Depreciation is compulsory whether claimed or not.
Example
Opening WDV of plant block ₹5,00,000; new machine bought for ₹2,00,000 and used for 100 days. Depreciation = 15% of 5,00,000 + 7.5% of 2,00,000 = ₹75,000 + ₹15,000 = ₹90,000.
Topic 4
Research and development expenditure (Section 35)
- Revenue expenditure on in-house scientific research related to the business — fully deductible.
- Capital expenditure on scientific research (other than land) — deductible in full in the year incurred.
- Contributions to approved research associations, universities, colleges and IITs — deductible (weighted deductions have been reduced to 100% in recent years).
- Expenditure incurred within 3 years before commencement of business is allowed in the year business starts.
Exam tip
Mention that weighted deduction rates under Section 35 have been phased down — state "as per current provisions" in answers.
Key terms
- Gross Annual Value
- The higher of expected rent and actual rent received
- Net Annual Value
- GAV minus municipal taxes paid by the owner
- Self-occupied property
- A house used by the owner for residence, annual value nil
- Block of assets
- Group of assets of the same class with the same depreciation rate
- Section 43B
- Certain expenses are allowed only when actually paid
Quick revision
- House property: GAV → NAV → 30% standard deduction → interest.
- Self-occupied: annual value nil; interest up to ₹2 lakh (old regime).
- Business income = net profit ± adjustments.
- Disallowed: personal, capital, cash over ₹10,000, no TDS, fines.
- Depreciation on WDV of block; half rate if used under 180 days.
Important exam questions
Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).
Short-answer questions
- Q1.What are the conditions for taxing income from house property?
- Q2.What is Gross Annual Value?
- Q3.What deductions are allowed under Section 24?
- Q4.Name any four inadmissible business expenses.
- Q5.What is a block of assets?
- Q6.What is Section 40A(3)?
Long-answer questions
- Q1.Explain the computation of income from house property with an example.
- Q2.Explain the treatment of interest on housing loans for let-out and self-occupied property.
- Q3.Discuss admissible and inadmissible expenses under business income.
- Q4.Explain the provisions relating to depreciation and research and development expenditure.
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