Computation of Income
This section contains only salient features for computation of income. The sections in this topic are as under:
Salary income
House Property income
Capital Gains
Other Sources Income
Deductions
Rebates
Salary Income
Salary normally includes wages, annuity, pension, gratuity, commission, perquisites, etc. and any other payment received by an employee from the employer received during the year.
Deductions from Salary income
Certain deductions are available while determining the taxable salary income.
A) Standard Deduction
Standard deduction from the Assessment year 2004-05
Salary income before giving Standard Deduction
Amount of standard Deduction from the assessment year 2004-05
Income from salary is less than Rs. 1.5 lakhs
40% of gross salary or Rs.30,000 whichever is lower
Income from salary exceeds Rs. 1.5 lakhs but does not exceed Rs. 5 lakhs
Rs. 30,000
Income from Salary exceeds Rs. 5 lakhs
Rs. 20,000/-
B) Professional Tax
Professional tax, which is paid, is allowed as deduction.
C) Arrears salary
If salary is received in arrears or in advance, it can be spread over the years to which it relates and be taxed accordingly as per section 89(1) of the Income tax Act.
House Property Income
Tax is on the annual value of the house property after allowing certain deductions. House Property consists of any building, flat, shop etc., and the land attached to the building.
Computation of income from Self Occupied property
Income is computed after giving certain deductions from the annual value of the property.
A) Computation of annual value of self occupied property
The annual value of Self occupied property is taken as NIL if the property is fully utilized for own residential stay during the year or if the property is not actually occupied as owner and is also not let out. If a property is let out for only a part of the year, proportionate annual value will be calculated.
B) Entitled deductions for self occupied property
The only entitled deduction is interest, if any payable, on loan taken for the purchase or construction of the house property. The maximum deduction on this account is Rs.30,000/-; However, for properties acquired or constructed between the 1st April 1999 and the 1st April 2003 out of borrowed funds, maximum limit is Rs. 1,50,000/-
Computation of income from let out property
Income is computed after giving certain deductions from the net annual value of the let out property.
A) Computation of net value of let out property
For let out properties the gross annual value will be the greater of the following three amounts:
Municipal value of the property;
Actual rent received during the year;
Fair rent i.e. rent of similar properties in the same or similar locality.
Out of the gross annual value, municipal taxes actually paid during the year has to be deducted to arrive at the net annual value.
B) Entitled deductions for let out property
The deductions available for computing House Property Income are:
30% of the net annual value for repair and maintenance and rent collection expenses for the property
Interest on money borrowed to build, buy or repair the property;

Capital Gains
If any Capital Asset is sold or transferred, the profits arising out of such sale are taxable as capital gains in the year in which the transfer takes place.
Definition of capital asset
Capital Asset means all moveable or immovable property except trading goods, personal effects, agricultural land other than within municipal areas or within 8 kilometers from it wherever notified and gold bonds. Jewelry and ornament are not personal effects and their sale will attract capital gains.
Distinction between short term and long-term asset
Capital Assets are of two types i.e., long term and short term. Long-term capital assets are assets held for more than 36 months before they are sold or transferred. In case of shares, debentures and mutual fund units the period of holding required is only 12 months. Different rates of tax apply for gains on transfer of the long term and short-term capital assets. Gains on short-term capital asset are taxed as regular income.
Computation of Capital Gains
Capital gains are to be computed by deducting the following three amounts from the consideration money received on transfer of the asset.
i) The actual cost of the asset or its estimated market value as on 1.4.81, if acquired earlier;
ii) The cost of improvement, if any, for the asset;
iii) Expenses incurred on transfer of the asset; and
In case of a long-term capital asset, the costs are increased as per a Cost inflation index for the year.
Cost Inflation index
Click here to view the cost Inflation Index

Other Sources Income
Any income other than (a) salary, (b) house property income (c) Income from business or profession, or (d) Capital Gains income, will be taxed as Income from Other Sources. Examples are interest from deposits, winnings from lotteries, races, income from the hiring out of machinery, or machinery compositely with building, royalty, copyright fees, family pension, dividends other than from domestic companies and mutual funds etc.
Allowable Deductions
Deductions
Deduction is the amount, which is reduced from the gross total income before computing tax.
There are other deductions such as for donations, for repayment of loans taken for educational purposes etc.
Deductions on Interest etc. U/s 80L
If interest is earned on Govt. Securities, Bank deposits, Post Office deposits, debentures, National Savings Certificates etc., deduction up to Rs. 12,000/- u/s 80 L is allowable from the net income after deducting the expenditure incurred in earning it. Further, an additional deduction up to Rs. 3,000/- will be allowable on interest from Govt. Securities, if not already covered in the Rs. 12,000/- limit mentioned earlier.
Deductions on premium for medical insurance
If premium for medical insurance is paid by cheque for a person, or his dependent family member or member of the HUF, deduction up to Rs. 10,000/- for insurance premium paid is allowable. In respect of senior citizens the maximum limit for deduction will be up to Rs. 15,000/-.