Taxation of Income from Salary and House Property under the Income Tax Act, 1961: A Legal Study
Introduction
The Income Tax Act, 1961 classifies taxable income under five distinct heads in order to ensure clarity, certainty, and uniform application of tax law. Among these, Income from Salary and Income from House Property are two of the most commonly applicable heads, especially for individual taxpayers. While both fall under the same statute, they are governed by different legal principles and reflect the legislature’s varied approach towards taxing income derived from personal services and ownership of immovable property.
This article examines these two heads strictly from a legal perspective, focusing on statutory provisions, underlying principles, and judicial interpretation. The objective is to understand how the law distinguishes between different sources of income while ensuring equity and administrative efficiency.
Income from Salary
Meaning and Legal Basis
Income from salary is governed by Sections 15 to 17 of the Income Tax Act, 1961. The most essential requirement for income to be taxed under this head is the existence of an employer–employee relationship. Without this relationship, any payment received, irrespective of its regularity or amount, cannot be treated as salary.
The term “salary” has been defined inclusively under Section 17 to cover wages, pension, gratuity, commission, fees, perquisites, and profits in lieu of salary. Courts have consistently held that the nature of the relationship, and not the nomenclature of payment, is determinative for taxability under this head.
Basis of Chargeability
Under Section 15, salary is taxable on a due or receipt basis, whichever is earlier. This provision prevents postponement of tax liability by deferring payment. Arrears and advance salary are also taxable, though relief under Section 89 may be claimed to reduce hardship arising from progressive tax rates.
This approach reflects the legislature’s intent to tax income arising from employment in a straightforward and predictable manner.
Allowances and Perquisites
Allowances form an important component of salary and are taxed based on their purpose. While certain allowances such as Dearness Allowance are fully taxable, others like House Rent Allowance enjoy conditional exemptions under Section 10.
Perquisites, which are non-monetary benefits provided by the employer, are also taxable to ensure tax neutrality between cash and non-cash compensation. However, exemptions are provided for perquisites that facilitate official duties or basic employee welfare, indicating a balanced approach between revenue collection and social considerations.
Deductions from Salary
Deductions under this head are limited and are provided under Section 16, including the standard deduction and professional tax. The restricted scope of deductions highlights the legislature’s intention to keep salary taxation simple and less prone to manipulation compared to business income.
Income from House Property
Chargeability under Section 22
Income from house property is governed by Sections 22 to 27 of the Act. Section 22 taxes the annual value of buildings or land appurtenant thereto, provided the assessee is the owner. Importantly, the tax is levied not merely on actual rent received but on the capacity of the property to earn income.
Properties used by the owner for their own business or profession are excluded, as such income is taxable under a different head.
Ownership and Deemed Ownership
Ownership is the foundation of taxation under this head. The Act recognises not only legal ownership but also deemed ownership under Section 27. This includes cases such as transfer of property to a spouse without adequate consideration or possession under part-performance of a contract.
Judicial interpretation has emphasised that beneficial ownership and right to enjoy property are often more relevant than strict legal title, thereby preventing tax avoidance through artificial arrangements.
Concept of Annual Value
The concept of annual value, defined under Section 23, lies at the core of income from house property. It represents the reasonable income that the property is capable of earning in a year. Factors such as municipal valuation, fair rent, and actual rent received are considered.
In areas governed by rent control laws, standard rent acts as a ceiling, ensuring fairness and preventing excessive notional taxation.
Self-Occupied and Let-Out Property
The Act draws a clear distinction between self-occupied and let-out properties. The annual value of a self-occupied house is taken as nil, subject to conditions, reflecting the policy of encouraging home ownership.
However, where an assessee owns more than the permitted number of self-occupied houses, additional properties may be treated as deemed let-out, even if no rent is earned. Let-out properties are taxed fully based on their annual value.
Deductions under Section 24
Section 24 allows two key deductions:
- A standard deduction of 30% of net annual value for repairs and maintenance.
- Interest on borrowed capital, subject to statutory limits.
These deductions recognise the inherent costs of property ownership and provide reasonable relief to taxpayers.
Comparative Legal Analysis
From a legal standpoint, the difference between these two heads is significant. Income from salary is linked to personal service and employment, taxed strictly on accrual or receipt with minimal deductions. In contrast, income from house property is asset-based, relying on notional valuation and allowing broader statutory deductions.
This distinction demonstrates the legislature’s nuanced approach in tailoring tax provisions according to the nature of income, rather than applying a uniform standard across all sources.
Conclusion
Income from salary and income from house property together illustrate the structured and principle-driven nature of Indian tax law. While both are taxed under the same statute, they operate on different legal foundations—one based on service, the other on ownership. The statutory framework, supported by judicial interpretation, seeks to balance equity, certainty, and administrative convenience.
For law students, understanding these heads is essential not only for academic purposes but also for appreciating how fiscal policy is translated into enforceable legal norms in everyday life.
contributed by : Mandeep Mudgal