Income Tax Law and Practices

BC/5/CC/18 INCOME TAX LAW AND PRACTICE
BASIC SALARY: It is the sum paid by employer to employee as salary.

Treatment: Fully taxable in all cases
DEARNESS ALLOWANCE (DA) OR DEARNESS PAY (DP): It is an extra amount given to

an employee to meet the burden or inflation or increased cost of living.
Treatment: Fully taxable
FEES: An employee may be given apart from basic salary, extra remuneration for doing specific
job under the terms of employment. Such extra remuneration is termed as fee.
Treatment: Fully taxable in all cases
COMMISSION: It may be as a percentage or turnover or as a percentage of profit.

Treatment: Fully taxable.
BONUS: Bonus may be contractual or voluntary.

Treatment:
(i) Fully taxable
(ii) Contractual bonus is taxable as bonus whereas voluntary bonus is taxable as perquisite.
(iii) It is taxable in the year of receipt.
Note: If arrear bonus is received, assessee can claim relief u/s 89(1).
GRATUITY
Meaning: Gratuity is a retirement benefit. It is a lump sum payment made by an employer to an
employee in consideration of his past services when the employment is terminated. In the case of
employment coming to the end due to retirement or superannuation, it enables the affected
employee to meet the new situation, which quite often means a reduction in earnings or total
stoppage of earnings. In the case of death of an employee, it provides much needed financial
assistance to the surviving members of the family. Therefore, gratuity scheme serves as an
instrument of social security to the salaried assessee.
Exemption from gratuity [sec 10(10)]: sec 10(10) deals with the exemption from gratuity
income. Such exemption can be claimed by a salaried assessee. Gratuity received by an assessee
other than employee shall not be eligible for exemption u/s 10(10). E.g. Gratuity received by an
agent of LIC of India is not eligible for exemption u/s 10(10) as agents are not employees of LIC
of India.
Case A: Gratuity received during continuation of service is fully taxable in the hands of all
employee (whether Government or non-Government employee).
Case B: Gratuity received at the time of termination of service by Government employee
Gratuity received at the time of termination of service by Government employee is fully exempt
from tax u/s. 10(10) (i).
Department of Commerce, Pachhunga University College.

Stress: Government employee, here, includes employee of the Central or the state government or
local authority but does not include employee of statutory corporation.
Case C: Gratuity received at the time of termination of service by non-government
(including foreign government) employee, covered by the payment of Gratuity Act
Treatment
In such case, minimum of the following shall be exempted from tax u/s 10/ (10) (ii):
1. Actual Gratuity received;
2. ₹ 10,00,000; or
3. 15 working days’ salary for every completed year of service
Notes
a) Completed year of service includes any fraction in excess of 6 months (e.g.7 years 9 months
will be treated as 8 years;7 years 5 months will be treated as 7 years and 7 years 6 months will
be treated as 7 years).
b) Salary here means Basic + DA, last drawn
Case D: Gratuity received at the time of termination of service by non-government

employee not covered under the payment of Gratuity Act
Gratuity received at the time of termination of service by non-government employee (including
foreign government employee) being not covered under the payment of Gratuity Act shall be
exempted from tax u/s 10(10) (iii) to the extent of minimum of the following-
1. Actual Gratuity received;

2. ₹10,00,000; and
3. 1/2* Completed year of service*Average Salary p.m.
Notes
a) While calculating completed year of service ignore any fraction of the year. (e.g.7 years
9months will be treated as 7 years only)
b) Average Salary here means, Basic + DA # + Commission (being a fixed percentage on
turnover) being last 10 months’ average salary, immediately preceding the month of retirement.
(E.g. If an employee retires on 18/11/2016 then 10 months’ average salary shall be a period
starting from January 2016 and ending on October 2016).
* If DA is not forming a part of retirement benefit then the same shall not include in salary for
above purpose. However, DA itself shall be fully taxable.
Leave Salary Encashment

Meaning: As per service contract and discipline, normally, every employee is allowed certain
period of leave (with pay) every year. Such leave may be availed during the year or accumulated
by the employee. The accumulated leave lying to the credit of an employee may be availed

subsequently or encashed. When an employee receives an amount for waiving leaves lying to his
credit, such amount is known as leave salary encashment.
Treatment
Leave Salary Encashment
During continuation of Service (Case A) On Termination of Service
Government Employee (Case B) Other Employee (Case C)
(Case D): Salary paid for unavailed leave to legal heir of deceased employee is exempted.
Case A: Leave salary received during Continuation of Service

Leave salary during continuation of service is fully taxable in the case of the Government
employee as well as other employee [(sec. 17 (1) (va)]
Case B: Leave Salary Received by Government Employee

At the time of termination of service, leave salary received by the central or state government
employee is fully exempted u/s 10(10AA) (i).
Stress: Government employee here does not include employee of local authority or public sector
undertaking or foreign government employee.
Case C: Leave salary received by Non- Government employee

At the time of termination of service, leave salary received by a Non-Government employee
(including employee of foreign government, local authority, public sector undertaking) is
exempted to the minimum of the following u/s 10(10AA) (ii):
a) Actual amount received as a leave salary
b) Rs 3,00,000/-
c) 10* average salary p.m.
d) To the maximum of 30 days (normally taken as 1 month) average salary1 for every
completed year of service2, subject to deduction for actual leave availed during the 10
year of service
Academically: [{1 * completed years of service) - leave actually taken in terms of month} *
average salary p.m.]
1. Average salary means basic + DA # + commission (as a fixed percentage on turnover)

being last 10 months’ average salary ending on the date of retirement or superannuation.
(e.g. if an employee retires on 18/11/2016 ten 10 months’ average salary be a period
starting from 19th January ‘2016 and ending on 18th November ‘2016.

2. While calculating completed year of service, ignore any fraction of the year. e.g. 10
years 9 months shall be taken as 10 years
Notes:
a) leave encashment received from more than one employer: where leave
encashment is received from more than one employer in the same previous year, the
aggregate amount exempt from tax shall not exceed the statutory deduction i.e. Rs
3,00,000/-
b) Earlier deduction claimed for leave encashment: while claiming the statutory
amount (i.e. Rs 3,00,000) any deduction claimed earlier as leave encashment shall
be reduced from Rs 3,00,000.
PENSION [Section 17(1)(ii)]

Meaning: Pension means a periodical payment received by an employee after his retirement. On
certain occasions, employer allows to withdraw a lump sum amount as the present value of
periodical pension. When pension is received periodically by employee, it is known as
Uncommuted Pension. On the other hand, pension received in lump sum is known as Commuted
pension. Such lump sum is determined considering factors like the age and health of the
recipient, rate of interest, etc.
Treatment:
Pension
Uncommuted Pension (Case A) Commuted Pension
Government Employee (Case B) Other Employee
Assessee receives gratuity (Case C) Assessee does not receive gratuity
Case A: Uncommuted Pension

Uncommuted pension is fully taxable in the hands of employees whether Government or Non-
Government employee.
Case B: Commuted Pension received by a Government Employee

Commuted pension received by a Government employee is fully exempt from tax u/s 10(10A)(i).

Case C: Commuted Pension received by an employee who also received Gratuity

One third of total pension (which assessee is normally entitled for) commuted shall be exempted
u/s 10(10A) (ii)
Stress: It is immaterial whether the employee is covered by the Payment of Gratuity Act or not.
Case D: Commuted Pension received by an employee who does not receive Gratuity
One half of total pension (which assessee is normally entitled for) commuted shall be exempted
u/s 10(10A) (ii)
Retrenchment Compensation
Meaning: Retrenchment means cancellation of contract of service by employer.
Tax Treatment [Sec. 10(10B)]: Any compensation received by a worker at the time of
retrenchment is exempted to the extent of minimum of the following:
a) Actual Amount Received;
b) Rs 5,00,000; or
c) An amount calculated in accordance with the provision of sec. 25F(b) of Industrial Disputes
Act, 1947 (Under the said Act a workman is entitled to retrenchment compensation equivalent to
15 days’ average pay, for every completed year of service or any part thereof in excess of 6
months).
Note: In case, where the compensation is paid under any scheme approved by the Central
Government nothing shall be taxable.
Compensation received at the time of Voluntary Retirement [Sec. 10(10C)]

Meaning: If an employee accepts retirement willingly in lieu of compensation then such
retirement is known as Voluntary Retirement.
Treatment: Voluntary Retirement compensation received or receivable by an employee is
eligible for exemption subject to the following conditions –
Conditions for exemption
1. Compensation is received from specified employer#
2. Compensation is received as per Voluntary Retirement Scheme (VRS) framed in accordance
with prescribed guidelines*

Amount of exemption
Exemption shall be minimum of the following –
a) Actual amount received as per guidelines; or
b) Rs 5,00,000.
# Specified Employer
* Any Company; or
* An authority established under Central, State or Provincial Act; or
* A Local Authority; or
* A Co-operative Society; or
* A Specified University; or
* An Indian Institute of Technology (IIT); or
* Any State Government; or
* The Central Government; or
* Notified Institution of Management (IIM Ahmedabad, IIM Bangalore, IIM Calcutta, IIM Lucknow,
and the Indian Institute of Foreign Trade New Delhi); or
* Notified Institution.
Stress: Voluntary retirement compensation received from the employer being an individual, firm,
HUF, AOP, etc. is fully taxable in the hands of employee.
Note: There exemption is allowed to an assessee under this section in any assessment year then
no deduction is allowed in any subsequent assessment years. It means deduction under this
section is allowed once in life of an assessee.
*Guidelines [Rule 2BA]
a) Scheme (VRS) must be applicable to all employees (other than director) who have either
completed age of 40 years or has completed 10 years of service. (This condition is, however, not
applicable in the case of an employee of a public sector company)
b) Such scheme must be framed to reduce the strength of employees.
c) The vacancy caused by VRS is not to be filled up.
d) The retiring employee is not to be employed in another company or concern belonging to the
same management.
e) The amount of compensation does not exceed
* the amount equivalent to 3 months salary for each completed year of service; or
* salary at the time of management multiplied by the balance month of service left.
Note: Salary here means [ Basic + DA (if forms a part of retirement benefit) + fixed
percentage of commission on turnover], last drawn.

Annuity[Sec 17(1) (ii)]

Meaning : Annuity means a yearly allowance, income, grant of an annual sum, etc. for life or in
perpetuity.
Treatment
Case Treatment
Annuity payable by a present employer, Fully taxable as salary.
whether voluntarily or contractual.
Annuity received from an ex-employer. Fully taxable as ‘profit in lieu of salary’ u/s
17(3)(ii).
Annuity received from a person other than Taxable as per provision of Sec. 56 as
employer e.g. from insurer, etc. ‘Income from other sources’.
Salary received in lieu of notice period:

Meaning : When an employer retrenches an employee then he has to give a proper notice. If an
employer fails to do so then he will have to pay salary equivalent to notice period, apart from
retrenchment compensation. Such amount is known as salary received in lieu of notice period.
Treatment: Fully Taxable.
Profits in lieu of salary [Sec. 17(3)]

Following receipts are taxable as profits in lieu of salary:
1. The amount of any compensation due to or received by an assessee from his employer or
former employer at or in connection with the (a) termination of his employment, (b) modification
of the terms and conditions of employment.
2. Any payment due to or received by an assessee from his employer or former employer except
the following:
 Gratuity exempted u/s 10(10);
 House rent allowance exempted u/s 10(13A);
 Commuted pension exempted u/s 10(10A);
 Retrenchment compensation exempted u/s 10(10B);
 Payment from an approved Superannuation Fund u/s 10(13);
 Payment from statutory provident fund or public provident fund;
 Payment from recognized provident fund to the extent it is exempt u/s 10(12)
3. Any payment from unrecognized provident fund or such other to the extent to which it does
not consist of contributions by the assessee or interest on such contributions.
4. Any sum received by the employee under the Keyman Insurance Policy including the sum
allocated by way of bonus on such policy.
5. Any amount due to or received by the employee (in lump sum or otherwise) prior to
employment or after cessation of employment.

Allowances
Allowance means fixed quantum of money given regularly in addition to salary to meet
particular requirement. The name of particular allowance may reveal the nature of requirement
Allowances at glance
1. House Rent Allowance
2. City Compensatory Allowance
General Allowance 3. Tiffin Allowance
4. Medical Allowance
5. Servant Allowance
6. Entertainment Allowance
7. Travel of Transfer allowance
Allowance u/s 10(14)(i), deductions 8. Daily Allowance
from which depends upon actual 9. Conveyance Allowance
expenditure stated in Rule 2BB(1) 10. Assistant Allowance
11. Professional Development Allowance
12. Uniform Allowance
Few of these allowances are discussed later and

further Rule 2BB (2) being given for ready
reference.
Allowance u/s 10(14)(ii), deduction 13. Children Education Allowance
from which do not depend upon actual 14. Children Hostel Allowance.
expenditure stated in Rule 2BB(2) 15. Truck Driver’s Allowance
16. Transport Allowance
17. Tribal Areas Allowance
18. Special Compensatory Allowance
19. Border Area Allowance
20. Border Area Allowance, etc.
Allowance to a Government employee being an Indian citizen working outside India

[Sec.10(7)]
Allowance received from UNO
Compensatory allowance under Article 222(2) of the Constitution
Allowance to judges of the High Court and the Supreme Court
Any other Allowance
Importance of name of Allowance

Treatment of allowance does not depend on the name of the name of the allowance but on the
purpose for which such allowance is given. E.g. Room-rent allowance shall also be treated as
House rent allowance, Children tuition fee allowance shall be treated as Children education
allowance, etc.

House Rent Allowance (HRA) sec[10(13A) and rule 2A]

Meaning: An allowance to meet the expense in connection with the rent of the house, by
whatever name called.
Tax Treatment: Minimum of the following is exempted from tax.
a. Actual HRA received

b. An amount equal to 50% of salary (when house is situated in a metro city) or 40% of
salary (when house in any other place) for the relevant period
c. The excess of rent paid over 10% of salary [Arithmetically, (Rent Paid-10%of salary)]
Notes
1) Salary here means: Basic +D. A (if it from a part of retirement benefits)
+commission as a fixed % on turnover.
2) Exemption is not available if employee live in his own house, or in a house for which
he does not pay any rent.
City Compensation Allowance

Meaning: An allowance to meet personal expenses, which arise due to special circumstances on
the compensate extra expenditure by reason of posting at a particular place.
Treatment: Full taxable
Tiffin Allowance
Meaning: An allowance to meet the expenditure of tiffin, refreshments etc.
Medical Allowance
Meaning: An allowance to meet the expenditure on medical treatment etc.
Servant Allowance
Meaning: An allowance to meet the expenditure of servant for personal purpose.
Entertainment Allowance
Meaning: It is an allowance to meet expenditure on entertainment by whatever name called
Treatment: Fully taxable, irrespective of actual expenditure incurred.
Note: Government employee can claim deduction u/s 10(ii) discussed later in this chapter
Truck Driver’s Allowance

Meaning: Any allowance (by whatever name called) granted to an employee working in any
transport system to meet his personal expenditure during his duty performed in the course of
running of such transport (from one place to another place), provided that such employee is not
in receipt of daily allowance.

Treatment: Minimum of the following shall be exempted:

a) 70% of the allowance
b) ₹10,000 p.m.
Illustration 26
Preet is employed as a driver in a transport company. During the previous year 2016-17, he has
been paid ₹24,000 being allowance to meet his personal expenses in course of running trucks
from one place to another. He is not in receipt of daily allowance. The expenditure incurred is
however, ₹30,000. Find out the amount chargeable to tax.
Solution
Calculation of Taxable Truck Driver Allowance of Preet for the A.Y. 2017-18
Particulars Amount Amount

Actual allowance received
Less: Minimum of the following is exempted 24,000
u/s 10(14):
a) 70% of the allowance 16,800
b) ₹10,000 p.m. 1,20,000 16,800
Taxable Allowance 7,200
Transport Allowance
Meaning: An allowance, by whatever name called, to meet the expenditure for the purpose of
travelling between the place of duty.
Treatment: Minimum of the following will be exempted:
a) Actual amount received; or
b) ₹1,600 p.m. (in case of blind/deaf and dumb/orthopaedically handicapped employee
₹3,200 p.m.)

Special allowance as prescribed in Rule 2BB

The following special allowance are notified by the Government as exempt u/s 10(14) (ii):
Maximum amount
Name of Allowance Place exempt from tax
1. Any allowance (by Any place Top the extent of
whatever name called) amount incurred for
granted to meet the cost of the said purpose.
travel on tour or on
transfer (including any
sum paid in connection
with transfer, packing and
transportation of personal
effects on such transfer)
2. Any allowance, whatever Any place To the extent of

granted on tour or for the amount incurred for
period of journey in the said purpose.
connection with transfer,
to meet the ordinary daily
charges incurred by an
employee on account of
absence from his normal
place of duty.
3. Any special compensatory 1. Specified area of ₹800 per month

allowance in the nature of a) Manipur
special compensatory b) Arunachal Pradesh
(hilly area) allowance or c) Sikkim
high altitude allowance or d) Uttar Pradesh
uncongenial climate e) Himachal Pradesh
allowance or snow bound f) Jammu& Kashmir
area allowance or
avalanche allowance.
2. Siachen area of Jammu& Kashmir ₹7,000 pm
3. All places located at a height of ₹300 per month

1,000 meters or more above the sea
level, other than places specified
at(1) and (2) above

4.Any special compensatory 1.Specified area of: Rs.1,300 per month

allowance in the nature of a) Little Andaman, Nicobar and
Border Area Allowance or Narcondum Islands.
Remote Locality allowance b) North and Middle Andamans.
or c) Throughout Lakshadweep Minicoy
Difficult Area Allowance Islands
or d) All places or north of the
Disturbed Area Allowance demarcation line.
e) Himachal Pradesh
f) Mizoram
g) Jammu & Kashmir
h) Uttar Pradesh
i) Sikkim
2.Installations in the Continental Shelf of Rs.1,100 per month
India and the Exclusive Economic Zone
of India
3.Specified area of: Rs.1050 per month
a) Throughout Arunachal Pradesh other
than areas covered by point (1)
above.
b) Throughout Nagaland
c) South Andaman (including Port
Bihar)
d) Throughout Lunglei District
(excluding
areasbeyond25 km, from Lunglei
town)
of Mizoram
e) Dharmanagar, Kailasahar, Amarpur
and khowai in Tripura.
f) Jammu & Kashmir
g) Himachal Pradesh
4.Specified area of:

a) Throughout Aizawl district of
Mizoram. Rs.750 per month
b) Tripura
c)Manipur
d) Himachal Pradesh
e) Jammu & Kashmir
5.Jogfalls in Shimoga district in Karnataka Rs.300 per month
6.Specified area of Himachal Pradesh, Rs. 200 per month

Assam and Meghalaya

5. Tribal area/Schedule Specified area of Rs.200 per month

Areas/Agency Areas Allowance a) Madhya Pradesh;
b) Tamil Nadu;
c) Uttar Pradesh;
d) Karnataka;
e) Tripura;
f) Assam;
g) West Bengal;
h) Bihar;
i) Orissa.
6. Any allowance in the (a) for altitude of 9000 to 15000 ft. Rs.1060 per month
nature of high altitude
granted to the member of
Arm force operating in high (b) For altitude above 15000 ft. Rs.1600 per month
altitude area
7. Under Ground Allowance
to an employee who is Whole of India Rs.800 per month
working in uncongenial,
unnatural climate in
underground coal-mines.
8. Compensatory field Area Specified area of: Rs.2600 per month

Allowance [no exemption is a) Arunachal Pradesh
available in respect of an b) Manipur and Nagaland
allowance mentioned at 4 c) Sikkim
supra] d) Himachal Pradesh
e) Uttar Pradesh
f) Jammu & Kashmir
9. Compensatory Modified Specified area of: Rs.100 per month
field area allowance [no a) Punjab and Rajasthan
exemption is available in b) Haryana
respect of an allowance c) Himachal Pradesh
mentioned at 4 supra] d) Arunachal Pradesh & Assam
e) Mizoram and Tripura
f) Uttar Pradesh
g) Jammu and Kashmir
h) Sikkim and West Bengal

10. Any special allowance

in the nature of counter
insurgency allowance
granted to the members of
armed forces operating in Whole of India Rs.3900 per month
areas away from their
permanent locations for a
period of more than 30
days [no exemption shall
be available in respect of
distributed areas
allowance referred to in 4
supra]
11.Compensatory highly
active field area allowance Whole of India Rs.4,200 per month
granted to Armed forces.
12.Island(duty) allowance Andaman and Nicobar and Rs.3,250 per month

to armed force Lakshadweep of islands
Allowance to Government employees outside India

As per sec.10(7), any allowance or perquisite allowed outside India by the Government to an
Indian for rendering services outside India is wholly exempt from tax.
Stress:
1.Assessee must be –
a) Government employee;
b) Citizen of India; and
c) Working outside India.
2.Any allowance or perquisite to such employee shall be exempted u/s 10(7).
Allowance received from UNO (United Nations Organization)

Basic salary or Allowance paid by the UNO to its employees is not taxable.
Compensatory allowance under Article 222(2) of the Constitution

It is fully exempt from tax.
Allowance to Judges of the High Court or the Supreme Court

Any allowance paid to judges of the high court u/s 22A (2) and sumptuary allowance u/s 22C of
the “High Court judges (Conditions of Service) Act, 1954” is not taxable. Allowance to
the Supreme Court Judges u/s 23B of the “Supreme Court Judges (Conditions of Service)
Act,1958” is also exempt.
Any other allowance for which there is no specific provision shall be fully taxable

Perquisite [Sec.17(2)]
Meaning and chargeability

In common parlance, perquisite means, any casual emoluments or benefits attached to an office
or position, in addition to salary or wages, which is availed by an employee. In other words,
perquisites arte the benefits in addition to normal salary.
As per sec. 17(2) of the Income tax Act, Perquisite includes –
i. Value of rent-free accommodation provided by the employer.
ii. Value of concession in rent in respect of accommodation provided to the assessee by his
employer.
iii. The value of any benefit or amenity granted or provided free of cost or at concessional
rate to ‘specified employees’.
iv. Amount paid by an employer in respect of any obligation which otherwise would have
been payable by the employee.
v. Sum payable by an employer, whether directly or through a fund other than recognized
provident fund or approved superannuation fund or deposit-linked insurance fund, to
effect an assurance on the life of the assessee or to effect a contract for an annuity.
vi. The value of any specified security or sweet equity shares allotted or transferred, directly
or indirectly, y the employer, or former employer, free of cost or at concessional rate to
the assessee.
vii. Any contribution in excess of Rs.1.50 lakh to an approved superannuation fund by the
employer in respect of the assessee.
viii. The value of any other fringe benefit or amenity as may be prescribed.
Notes
a) Perquisites are taxable under the head “Salaries” only if, they are:
 Allowed by an employer to his employee or any number of his household.
 Resulting in the nature of personal advantage to the employee.
 Derived by virtue of employee’s authority
b) Perquisite may be contractual or voluntary.

c) Perquisite may be received from the former, present of prospective employer.
d) Member of household includes:
 Spouse (whether dependent or not);
 Children and their spouse (whether dependent or not);
 Parents (whether dependent or not);
 Dependents.


$ Specified employees [Sec. 17(2)(iii)]
Any perquisite other than above shall be taxable in the hands of specified employee only.
Specified employee means:
1. A director employee
Note: It is immaterial –
a) whether he is a nominee of the management, workers, the Government or financial
institutions on the board;
b) whether the employee is full time director or a part time; and
c) whether he was a director throughout the previous year or not.
2. An employee who has substantial interest in the employer company.

Substantial interest means the employee beneficially holds 20% or more voting power in
the employer company.
3. An employee whose aggregate salary from all employers together exceeds $50,000 p.a
For computing the sum of $50,000, following are to be excluded/ deducted:
a) All non-monetary benefits;
b) Non-taxable monetary benefits;
c) *Deduction u/ s 16(ii) and 16(iii) [Discuss later in this chapter]; and
d) Employer’s contribution to Provident Fund
Theoretical Question
Who is the specified employee u/ s 17(2)(iii) of Income Tax Act 1961 [B. Com [P]1995]
Exempted Perquisites
Following perquisites are exempted in hands of employee:

1. Tea or snacks: Tea, similar non-alcoholic beverages and snacks provided during working
hours.
2. Food: Food provided by employer in working place.
3. Recreational facilities: Recreational facilities extended to a group of employees.
4. Goods sold to employee at concessional rate: Goods manufactured by employer and sold by him
employees at concessional (not free) rates.
5. Conveyance facility: Conveyance facility provided-

 To employees for journey between office and residence and vice versa.
 To the judges of High Court and Supreme Court.
6. Training: Amount spent on training of employees including boarding and lodging expenses of
the employees on such training.

7. Services rendered outside India: Any perquisite allowed outside India by the Government to a
citizen of India foe rendering services outside India.
8. Contribution in some specified schemes:

 Employer’s contribution to a pension on deferred annuity scheme.
 Employer’s contribution to staff group insurance scheme.
 Payment of annual premium by employer on personal accident policy affected by him in
respect of his employee.
9. *Loans
Loan given at nil or at concessional rate of interest by the employer provided the aggregate
amount of loan does not exceed ₹20,000Interest free loan for medical treatment of the diseases
specified in Rule 3A.
10. *Medical facility

 A provision of medical facility at office is exempt
 In any other case, medical facility up to ₹15,000 is exempt.
Note: However, medical allowance is fully taxable.
11. Periodicals and journals: Periodicals and journals required for discharge of work.
12. Telephone, mobile phones: Expenses for telephone, mobile phones actually incurred on behalf of
employee by the employer whether by way of direct payment or reimbursement.
13. *Free education family: Free education facility to the children of employee in an institution owned or
maintained by the employer provided cost of such facility does not exceed ₹1,000 per month per child.
(Note: Such facility is not restricted to two children as in case of Children Education allowance.)
14. Computer or Laptop: Computer of Laptop provided whether to use at office or at home (provided
ownership is not transferred to employee).
15. Movable Assets: Sale or gift of any movable asset (other than car and electronic items) of
employee after being used by the employer for 10 or more years.
16. Leave Travel Concession: Leave Travel Concession (LTC) subject to few conditions.
17. Rent-free accommodation:

 Rent-free official residence provided to a judge of a High Court or the Supreme Court.
 Rent-free furnished residence (including maintenance thereof) to official of Parliament, a
Union Minister or a Leader of opposition in Parliament.
18. Accommodation: Accommodation provided-

 On transfer of an employee in a hotel for a period not exceeding 15 days in aggregate.
 In a remote area to an employee working at a mining site or an onshore exploration site or a
project execution site or a dam site or a power generation site or an offshore site.

19. Tax on Non-Monetary Perquisite paid by an employer on behalf of employee. With effect from A.Y.
2003-04 a new sec. 10(10CC) has been inserted which provides that income tax paid by employer on
behalf of employee on income, being non-monetary perquisite, is not a taxable perquisite.
20. Health club, Sports Club facility
Theoretical question
1. Enumerate six perquisites that are exempt from Income tax.
[B. Com [P] 1989,1990,1992,1999,2005] [B. Com[H] 1989]
2. Write short note on perquisite.
[B. Com[H] 1991,1992,1996,1998] [B. Com [P]1984,1986,1988,1991,1993,1997,1998]
3. Define perquisite. Classify it and site two examples of each class. [B. Com [P]1995]
4. State the tax treatment of Telephone bill paid by the employer where the telephone is used partly for
official and partly foe the private use of employee. [B.Com [P] 1991]
Valuation of Perquisites
Valuation of Rent-free Unfurnished Accommodation (RFA) [Rule3(1)]
Rent-free accommodation is taxable in the hands of all employees (except the Judges of High
Court or Supreme Court and official of the Parliament or Union Minister and a leader of
Opposition).
For the purpose of valuation, employees are divided into three categories:
a) Employees of the Central or State Government or of any undertaking under the

control of the Government;
b) Accommodation provided by Government to an employee serving on deputation
c) Other employees
a) Central and State Government Employee (including Military person)
The value of perquisite in respect of such accommodation is equal to the licence
fee. Which would have been determined by the Central or State Government in
accordance with the rules framed by the Government.
{Academically, the taxable value of the perquisite will be mentioned in the problem.}
b) Accommodation provided by Government to an employee serving on

deputation
Where the accommodation is provided by the Central Government or any State
Government to an employee who is serving on deputation with any body or
undertaking under the control of such Government, then the value of perquisite
of such an accommodation shall be:

City in which accommodation is provided Value of Perquisite
Having population exceeding 25 lacs as per 15% salary for the period during which the
2001 census employee occupied the said accommodation.
Having population exceeding 10 lacs but not 10% of salary for the period during which the
exceeding 25 lacs as per 2001 census employee occupied the said accommodation.
Any other city 7.5% of salary for the period during which the
employee occupied the said accommodation.
Notes:
a) Salary for the purpose of Rent free accommodation: Salary here means:
Basic + Dearness allowance/pay (if it forms a part of retirement benefit) + Bonus +
Commission + Fees + All other taxable allowances (only taxable amount) + Any other
monetary payment by whatever name called (excluding perquisites and lump-sum
payments received at the time of termination of service or superannuation or voluntary
retirement like gratuity, severance pay leave encashment, voluntary retrenchment
benefits, commutation od pensions and similar payments)
Stress
 Salary shall be determined on due basis.
 Where an assessee is receiving salary from two or more employers, the aggregate salary
for the period during which accommodation has been provided (by any of the employer)
shall be taken into account.
 Monetary payments, which are not in the nature of perquisite, shall be taken into account.
E.g. Leave encashment received during the continuation of service shall be included in
salary for this purpose. However, if such pay leave is received at the time of retirement,
then such receipt shall not be considered.
 Here salary does not include employer’s contribution to Provident Fund of the employee.
b) The employer of such an employee shall be deemed to be that body or undertaking where
the employee is serving on deputation.
c) Other Employees (residual category)

The value of perquisite is determined as per the following table:

City in which Accommodation is owned by the Accommodation is

accommodation is provided employer not owned by the
employer
Having population exceeding 15% of salary for the period during
25 lacs as per 2001 census which the employee occupied the said
accommodation.
Having population exceeding 10% of salary for the period during Rent paid or payable
10 lacs but not exceeding 25 which the employee occupied the said by the employer or
lacs as per 2001 census accommodation. 15% of salary,
whichever is lower.
Any other city 7.5% of salary for the period during

which the employee occupied the said
accommodation.
Notes
a) Salary for the purpose of Rent free accommodation: Salary here means:
Basic + Dearness allowance/pay (if it forms a part of retirement benefit) + Bonus +
Commission + Fees +All other taxable allowances (only taxable amount) + Any other
monetary payment by whatever name called (excluding perquisites and lump-sum
payments received at the time of termination of service or superannuation or voluntary
retirement like gratuity, severance pay leave encashment, voluntary retrenchment
benefits, commutation od pensions and similar payments)
Stress
 Salary shall be determined on due basis.
 Where an assessee is receiving salary from two or more employers, the aggregate salary
for the period during which accommodation has been provided (by any of the employer)
shall be taken into account.
 Monetary payments, which are not in the nature of perquisite, shall be taken into account.
E.g. Leave encashment received during the continuation of service shall be included in
salary for this purpose. However, if such pay leave is received at the time of retirement,
then such receipt shall not be considered.
 Here salary does not include employer’s contribution to Provident Fund of the employee.
b) Exemption of 90 days in case of two house allotment: Where an employee is

transferred from one place to another and he is provided with an accommodation at new
place also, the value of perquisite shall be taken for only one such house having lower
value for a period not exceeding 90 days. Thereafter, the values of both such houses are
taxable.

c) Any accommodation provided to an employee working at a mining site; or an on-shore

oil exploration site; or a project execution site; or a dam; or a power generation site; or an
off-shore site, which
Being of a temporary nature and having plinth area not exceeding 800 sq.ft. is
located not less than 8 kms away from the local limits of any municipality or a
cantonment board; or
 Is located in a remote area.
Remote area here means an area located at least 40 KM. away from a town having
population not exceeding 20000 as per latest published census.
Valuation of Rent-free Furnished Accommodation

Furnished accommodation means Accommodation + Furniture.
Value of Furnished accommodation = Value of accommodation + Value of furniture
Value of Accommodation: As discussed above.
Value of Furniture: As per the following table
Case Taxable Value
Furniture owned by the employer 10% of original cost of furniture
Furniture hired by the employer Actual hire charges paid/payable by the

employer
Note: “Furniture” here, includes refrigerator, television, radio, air-conditioner and other
household appliances, etc.
Valuation of accommodation provided at Concessional rent

Valuation will be made as if the rent-free accommodation is provided and the amount so
computed will be reduce by the rent payable by the employee.
Value of Rent free accommodation as usual ******

Less: Rent payable by employee to employer for the above facility *****
Taxable value of perquisite *******
Stress: The above rule of valuation shall be applicable in case of the Government employee also.
Taxable value of concessional rent furnished accommodation in case of the government

employee
License fee ***

Add: 10% of cost of furniture or actual hire charge paid by employer ***
Less: Actual rent paid by employee ***
Tax value of concessional rent furnished accommodation ***

Valuation of perquisite in respect of motor car[Rule3(2)]

Car is own by Car is Used by employee Taxable value Who is chargeable
maintained for
by
Office purpose Not perquisite Not applicable
Employer Personal purpose M¹+D² Specified

employee
Both purpose Rs1800 or Rs2400p.m³
Office purpose Not a perquisite Not applicable
Employer Employee Personal purpose D Specified

employee
Both purpose Rs600/900p.m⁴
Employer Employee Office purpose Not perquisite Not applicable
Personal purpose M
Actual expenditure
incurred by the
Both purpose employer as reduced
by Rs1800/2400p.m³ All employee
(Further deduction of
Rs900p.m for driver)or
a higher deduction of
prescribed conditions
are satisfied
EMPLOYEE Any purpose Not perquisite Not applicable
Motor-car facility provided by an employer is taxable in the hands of employee on the following basis;
1
M=Maintenance cost
2
D=Depreciation @ 10%of actual cost of the car. However, if the car is not owned by employer then
actual higher charge incurred by employer shall be considered
3
Rs2400p.m in case of higher capacity car and Rs1800p.m for lower capacity car.
4
Rs900p.m. in case of higher capacity car and Rs600p.m. for lower capacity car.
#
Higher capacity car means a car whose cubic capacity of engine exceeds 1.6 litres.

5 Condition to be fulfilled for claiming higher deduction:

*The employer has maintained complete details of journey undertaken for official purpose which
may include date of journey, destination, mileage, and the amount of expenditure incurred
thereon; and
*The employer gives the certificate to the effect that the expenditure was incurred wholly and
exclusively for the performance of official duties.
Chauffer/Driver
If chauffer is also provided, then salary of chauffer is further to be added to the value of
perquisite (as computed above). However, if car is used for both i.e. official and personal
purpose then Rs900p.m. (irrespective of higher or lower capacity of car) is to be taken as value
of chauffer perquisite.
Notes
a) If a motor car is provided at a concessional rate than charges paid by employee for such car,
shall be reduced from the value of perquisite.
b) The word "month" denotes completed month any part of month shall be ignored.
c) When more than one car is provided to employee, otherwise than wholly and exclusively for
office purpose, the value of perquisite for-
*One car shall be taken as car is provided partly for office and partly for private purpose i.e.
Rs1800 or Rs2400p.m. (plus Rs900p.m. for chauffer, if provided); and
*For other car(S) value shall be calculated as car(s) are provided exclusively for further purpose
d)Further reminded conveyance facility to the judges of High Court or Supreme Court is not
taxable
e) Use of any vehicle provided to an employee for journey from residence to work place or vice
versa is not a taxable perquisite.
Valuation of perquisite in respect of Free Domestic Servants [Rule 3(3)]

Value of perquisite are determined as under:
Servant appointed by Taxable value of perquisite Taxable in hands of
Employer Actual cost to the employer is Specified employee
Employee taxable as perquisite All employee
Notes
a) If rent-free accommodation (owned by the employer) is provided with gardener, then
gardener’s salary and maintenance cost of garden shall not be taxable. [Circular No.122
dated 19/10/1973]
b) Any amount charged from the employee for such facility shall be reduced from above
value.
c) Domestic servant allowance given to employee is fully taxable.
d) Reimbursement servant-salary by the employer shall be taxable in hands of all employee.

Theoretical Question
1.Explain how will you value the perquisite –

a) Salary paid by employer for gardener and watchman where the accommodation
provided by the employer is owned by him. B. Com (P) 1991]
Media Facility [Provision to Sec. 17(2)]

Medical facility is taxable as under:
a) Medical facility provided in India
Case Treatment
1 Medical facility provides to the employee or his family in a hospital, clinic, Fully
dispensary or nursing hone maintained by the employer. Exempted
2 Reimbursement of medical bill of the employee or his family of- Fully

• Any hospital maintained by Government or Local Authority; or Exempted
• Any hospital approved by the Government for its employee.
3 Payment/ reimbursement by employer of medical expenses incurred by an Fully

employee on himself / his family in a hospital, which is approved by the CCIT, for Exempted
the prescribed disease (like Cancer, TB, AIDS, etc.)
Employee must attach with the return of income-
• a certificate from the approved hospital specifying the prescribed disease or
ailment for which hospitalization was required; and
• a receipt for the amount paid to the hospital.
4 Group medical insurance (i.e. Mediclaim) _obtained by the employer for his Fully
employees. Exempted
5 Any reimbursement by the employer of any insurance premium paid by the Fully
employee, for insurance of his health or the health of any member of his family. Exempted
6 Reimbursement of any medical bill whether for employee or for his family Exempted
member. up to
₹15,000

b) Medical facility provided outside India

Case Treatment
Medical Expenditure Exempted to the extent permitted by RBI
Cost of stay abroad

(Patient + One Exempted to the extent permitted by RBI
Attendant / Care taker)
Cost of travel (Patient + One Attendant / Exempted only when gross total Income of the employee
Care taker) excluding this (cost of travel) perquisite, does not exceed
₹2,00,000 p.a.
Taxpoint: In calculation of gross total income ceiling,

taxable value of medical treatment perquisites and cost of
sty perquisite shall be included.
Notes
a) Hospital includes a dispensary, a clinic or a nursing home.
b) For this purpose, ‘family’ means:
• Spouse, children of the individual; and
• Parents, brothers, sisters of the individual, wholly or mainly dependent on him.
c) Fixed Medical Allowance is fully taxable.
d) The expenditure on medical treatment by the employer may be by the way of payment or
reimbursement.
e) The perquisite is taxable in the hands of specified employee, however if the bills are issued in
the name of employee and reimbursed by the employer, then it shall be taxable in the hands of all
employees.

Tax on employment or professional tax [Sec 16(iii)]

Tax on employment, profession, trade, etc. levied by a State under Article 276 of the Constitution will be
allowed as deduction on cash basis, whether paid by employee or by employer (on behalf of employee)
from gross taxable salary.
Note: If employer (on behalf of employee) pays Professional tax then:
a. Firstly, it is to be included as taxable perquisite; and
b. Further, it is allowed as deduction u/s 16(iii).
C. Meaning of salary for different purposes

For Retirement benefit
Gratuity (covered by the payment of (Basic+DA) last drawn
Gratuity Act)
Gratuity (not covered by payment of (Basic+DA1+Commission2) being average of last 10
Gratuity Act) months preceding the month of retirement
Leave encashment. (Basic+DA1+Commission2) being average of last 10
Months immediately from the date of retirement
Voluntarily requirement (Basic+DA1+Commission2) last drawn
For regular benefit
Rent free accommodation. (Basic+DA1+Commission2+Bonus+Fees+Any other
Taxable allowance + Any other monetary benefits
Excluding perquisite and lump sum payment received at
a time of termination of service or requirement
Specified employee. (Basic +DA1+Commission2+Bonus+Fees+ Any other
Taxable allowance +Any other monetary benefits +
Deduction u/s 16)
Entertainment allowance Basic only
Any other case. (Basic +DA1+ Commission2)
1
DA only if it forms a part of retirement benefit
2
Commission as a fix percentage of turnover.

Income Tax Law and Practices

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Income Tax Law and Practices

Uploaded by

Copyright:

Available Formats

BC/5/CC/18 INCOME TAX LAW AND PRACTICE

BASIC SALARY: It is the sum paid by employer to employee as salary.

DEARNESS ALLOWANCE (DA) OR DEARNESS PAY (DP): It is an extra amount given to

COMMISSION: It may be as a percentage or turnover or as a percentage of profit.

BONUS: Bonus may be contractual or voluntary.

Department of Commerce, Pachhunga University College.

Case D: Gratuity received at the time of termination of service by non-government

1. Actual Gratuity received;

Leave Salary Encashment

Department of Commerce, Pachhunga University College.

Leave Salary Encashment

During continuation of Service (Case A) On Termination of Service

Government Employee (Case B) Other Employee (Case C)

Case A: Leave salary received during Continuation of Service

Case B: Leave Salary Received by Government Employee

Case C: Leave salary received by Non- Government employee

1. Average salary means basic + DA # + commission (as a fixed percentage on turnover)

Department of Commerce, Pachhunga University College.

PENSION [Section 17(1)(ii)]

Uncommuted Pension (Case A) Commuted Pension

Government Employee (Case B) Other Employee

Assessee receives gratuity (Case C) Assessee does not receive gratuity

Case A: Uncommuted Pension

Case B: Commuted Pension received by a Government Employee

Department of Commerce, Pachhunga University College.

Case C: Commuted Pension received by an employee who also received Gratuity

Compensation received at the time of Voluntary Retirement [Sec. 10(10C)]

Department of Commerce, Pachhunga University College.

Department of Commerce, Pachhunga University College.

Annuity[Sec 17(1) (ii)]

Salary received in lieu of notice period:

Profits in lieu of salary [Sec. 17(3)]

Department of Commerce, Pachhunga University College.

Few of these allowances are discussed later and

Allowance to a Government employee being an Indian citizen working outside India

Importance of name of Allowance

Department of Commerce, Pachhunga University College.

House Rent Allowance (HRA) sec[10(13A) and rule 2A]

a. Actual HRA received

City Compensation Allowance

Truck Driver’s Allowance

Department of Commerce, Pachhunga University College.

Treatment: Minimum of the following shall be exempted:

Particulars Amount Amount

Department of Commerce, Pachhunga University College.

Special allowance as prescribed in Rule 2BB

2. Any allowance, whatever Any place To the extent of

3. Any special compensatory 1. Specified area of ₹800 per month

3. All places located at a height of ₹300 per month

Department of Commerce, Pachhunga University College.

4.Any special compensatory 1.Specified area of: Rs.1,300 per month

4.Specified area of:

5.Jogfalls in Shimoga district in Karnataka Rs.300 per month

6.Specified area of Himachal Pradesh, Rs. 200 per month

Department of Commerce, Pachhunga University College.

5. Tribal area/Schedule Specified area of Rs.200 per month

8. Compensatory field Area Specified area of: Rs.2600 per month

Department of Commerce, Pachhunga University College.

10. Any special allowance

12.Island(duty) allowance Andaman and Nicobar and Rs.3,250 per month

Allowance to Government employees outside India

Allowance received from UNO (United Nations Organization)