Unit -3: Income from Salary

Income from Salary

• Employer-employee relationship: Every payment made by an employer to his employee

for service rendered would be chargeable to tax as salaries.

• Full-time or part-time employment: It does not matter whether the employee is a full-
time employee or a part-time one.

• Foregoing of salary: Once salary accrues, the subsequent waiver by the employee does not
absolve him for liability to income-tax. Such waiver is only an application and hence,
chargeable to tax.

• Surrender of salary: However, if an employee surrenders his salary to the Central

Government under section 2 of the Voluntary Surrender of Salaries (Exemption from
Taxation) Act, 1961, the salary so surrendered would be exempt while computing his taxable
income.

• Salary paid tax-free: means that the employer bears the burden of the tax on the salary of
the employee. In such a case, the income from salaries in the hands of the employee will
consist of his salary income and also the tax on this salary paid by the employer.

• Place of accrual of salary: As per sec - 9(1)(ii), place of accrual is a place where service is
rendered. Accordingly salary earned in India is deemed to accrue or arise in India even if it is
paid outside or it is paid or payable after the contract of employment in India comes to an
end.

Section 15:- CHARGING SECTION:

Basis of charge as per section 15 – salary consists of –

• Any salary due from an employer (or a former employer) to an assessee in the previous
year, whether actually paid or not;

• Any salary paid or allowed to him in the previous year by or on behalf of an employer
(or a former employer) though not due or before it became due; and

• Any arrears of salary paid or allowed to him in the previous year by or on behalf of an
employer (or former employer), if not charged to income tax for any earlier previous
year.

Advance of Salary Advance against salary Arrears of Salary

 Advance of salary is taxable
when it is received by the
employee irrespective of the
fact whether it is due or not.
Advance against salary is loan and Normally, Salary arrears must
different from advance salary. It is an be charged on due basis.
advance taken by employee form his However, there are
employer. This advance is generally circumstances when it may not
adjusted with his salary over a specified be possible to bring the same to
time period. It cannot be taxed as salary. charge on due basis.

• Salary:
The meaning of the term ‘salary’ for purposes of income-tax is much wider than what is
normally understood. The term ‘salary’ for the purposes of Income-tax Act 1961 will include
both monetary payments (e.g. basic salary, bonus, commission, allowances, etc.) as well as
non-monetary facilities (e.g. housing accommodation, medical facility, interest free loans,
etc.

Section 17(1) - Salary is defined to include:

• Wages;
• Any annuity or pension;
• Any gratuity;
• Any fees, commission, perquisites or profits in lieu of or in addition to salary or wages;
• Any advance of salary;
• Any payment received in respect of any period of leave not availed by him. i.e., leave
salary or leave encashment.
• The portion of annual accretion in any previous year to the balance at the credit of an
employee participating in a recognized provident fund to the extent it is taxable.
• Transferred balance in a recognized provident fund to the extent it is taxable; and
• The contribution made by the Central Government or any other employer in the previous
year to the account of an employee under a notified pension scheme referred to in section
80CCD.

Statement of salary:

Name of the Assesse _________________________________ PY 2020-21 AY 2021-22

Sl. Particulars Note Taxability Exemption Amount

No.
• Wages/Basic Salary 1 Fully Taxable - XXX
• Dearness Allowance 2 Fully Taxable - XXX
• Commission 3 Fully Taxable - XXX
• Bonus 4 Fully Taxable - XXX
• Advance Salary / Arrears salary 5 Fully Taxable - XXX
• Gratuity 6 Partly Taxable Sec -10(10) XXX
• Pension 7 Partly Taxable Sec-10(10A) XXX
• Leave Salary 8 Partly Taxable Sec- XXX
10(10AA)
• Allowances 9 Partly Taxable Sec-10(13A), XXX
Sec-10(14)
• Provident Fund 10 Partly Taxable Sec-10(11), XXX
Sec-10(12)
• Super Annuation fund 11 Partly Taxable Sec-10(13) XXX
• Retrench Compensation 12 Partly Taxable Sec-10(10B) XXX
• Voluntary Retirement Compensation (VRS) 13 Partly Taxable Sec-10(10C) XXX
• Perquisite 14 Partly Taxable Sec-17(2) XXX
Gross Salary XXXX
Less: Deduction u/s 16
• Standard Deduction 15 (XXX)
• Professional Tax 16 (XXX)
• Entertainment Allowance 17 (XXX)
Net taxable salary XXXX

Notes:

• Wages:
Wages means fixed regular payment earned for work or service. The words “wages”, “salary”,
“basic salary” are used interchangeably. Moreover, the payments in the form of Bonus,
Allowances, etc. made to the employee are also included within the meaning of salary.

• Annuity or Pension:
Annuity: If a person invests some money entitling him to series of equal annual sums, such
annual sums are annuities in the hands of the investor.

Pension: Concise Oxford Dictionary defines ‘pension’ as a periodic payment made

especially by Government or a company or other employers to employee in consideration of
past service payable after his retirement.

• Dearness Allowance (D.A.):

Dearness Allowance is fully taxable whether it is provided “in terms of retirement benefits” or
“not in terms of retirement benefits”.

DA in terms means DA which is forming part of retirement benefit calculation. In all the
formulas, DA is considered only if it is “in terms”.

If nothing is given about DA then assume it is “not in terms”.

• Commission:
Commission is fully taxable whether it is Turnover commission, Sale commission or any
other commission.

• Bonus:
It is taxable on receipt basis. It only declared is given then it should be ignored.

• Advance & Arrears Salary:

• Advance salary
Advance salary is taxable on receipt basis. Its advance against salary is given or only advance
is given then it should be ignored because it is treated as loan.

• Arrears salary
It means salary under dispute or increase of salary retrospectively. It is taxable in the year in
which it is received if not taxed earlier.

• Gratuity:
Gratuity is a voluntary payment made by an employer in appreciation of services rendered by
the employee. Now-a-days gratuity has become a normal payment applicable to all
 employees. In fact, Payment of Gratuity Act, 1972 is a statutory recognition of the concept of
gratuity. Almost all the employers enter into an agreement with employees to pay gratuity.

• Gratuity received during the employment – fully taxable for all employees (Government
as well as non-government employees).

• Gratuity received at the time of retirement –

Exempt u/s 10(10)

Govt Employee Other

Employee

Fully Exempt POGA E‘ee Non-POGA

E‘ee . [Employer is covered
under POGA, 1972]

Other Employees:
• Covered by the Payment of Gratuity Act, 1972
Any death-cum-retirement gratuity is exempt from tax to the extent of least of the
following:

• 15/26 x last drawn salary x No. of yrs of completed year of service or part thereof in
excess of 6 months. [Rounding off allowed]
• Actually received
• Statutory Limit – Rs. 20,00,000

Note: Salary means basic salary and dearness allowance (Both in terms and not in terms).

• Not covered by the Payment of Gratuity Act, 1972:

Any death cum retirement gratuity received by an employee on his retirement or his
becoming incapacitated prior to such retirement or on his termination or any gratuity
received by his widow, children or dependents on his death is exempt from tax to the extent
of least of the following:

• 1/2 x salary p.m. (Average of last 10 months salary) x No. of years of completed service
[Rounding off not allowed]
• Actual Amount received
• Statutory Limit – Rs. 20,00,000

Note: Salary means basic salary and dearness allowance, if provided in terms of
employment for retirement benefits, and turnover commission.

• Where gratuity is received from 2 or more employers in the same year then aggregate
amount of gratuity exempt from tax cannot exceed Rs.20,00,000.

• Where gratuity is received in any earlier yea from former employer and again received
from another employer in a later year, the limit of Rs.20,00,000 will be reduced by the
 amount of gratuity exempt earlier.

• Government employee are employees of Central Government/local authorities/ Statutory

Corporation/ members of the Civil Services/ Defence Services.

• Annuity or Pension:
Annuity is a sum payable in respect of particular year. It is a yearly grant. If a person invests
some money entitling him to series of equal annual sums.
Annuity received from Taxable as
• Present employer Salary
• Past employer Profit in lieu of salary
• Other than an employer Income from other sources

Pension is a periodic payment made especially by the Government or a company or other

employers to the employee in consideration of past service payable after his retirement.

• Uncommuted pension (monthly pension): Uncommuted pension refers to

pension received periodically. It is fully taxable in the hands of both government and
non-government employees.

• Commuted pension (lumpsum pension): Commutation pension means lump sum

amount taken by commuting the whole or part of the pension. Many persons convert
their future right to receive pension into a lumpsum amount receivable immediately.

Exempt u/s 10(10A) in respect of commuted pension after retirement.

• Government Employee: Fully Exempt.

• Other Employees: Any commuted pension received is exempt from tax in the
following manner:

If the employee is in receipt of gratuity

If the employee does not received any

gratuity

• Leave Salary or Leave Encashment:

Employees are allowed to take leave during the period of service. Employee may avail
such leave or in case the leave is not availed, then the leave may either lapse or be
accumulated for future or allowed to be encashed every year or at the time of
termination/retirement as Leave Salary.

• Leave salary during employment - Fully taxable for all employees.

• Leave salary at the time of retirement.

 Exemption u/s – 10(10AA)
• Government employees: Fully exempt.

• Non-government employees: Least of the following is exempt:

• Leave credit x Salary p.m. (Average of last 10 months)
• 10 Months x Salary p.m. (Average of last 10 months
• Actual amount received
• Statutory Limit - Rs. 3,00,000
(Whichever is lower)

Notes:

• Salary means basic salary, dearness allowance, if provided in terms of employment for
retirement benefits, and turnover commission.

• Leave Credit =Leave allowed [Max 30 days for every completed year of service] – Actual
Leaves taken

• Where leave salary is received from two or more employers in the same year then the
aggregate amount of leave salary exempt from tax cannot exceed Rs.3,00,000.

• Where leave salary is received in any earlier year from a former employer and again
recived from another employer in a later year, the limit of Rs.3,00,000 will be reduced by
the amount of leave salary exempt earlier.

• Allowances:

Allowances
Fully Taxable Partly Taxable Fully Exempt
• Entertainment Allowance • House Rent • Allowances to High court
Allowance [u/s judges
10(13A)]
• Dearness Allowance • Special Allowances • Allowance paid by the United
[u/s 10(14)] Nations Organisation
• Overtime Allowance • Compensatory Allowances
• Fixed Medical Allowance • Sumptuary allowance
• City Compensatory Allowance • Allowance granted to
Government employees o/s
India.
• Interim Allowance
• Servant Allowance
• Project Allowance
• Tiffin/Lunch/Dinner
Allowance
• Any other cash allowance
• Warden Allowance
• Non-practicing Allowance
• Transport Allowance to
 employee other than
blind/deaf and
dumb/handicapped employee

• Allowances which are fully taxable

• Entertainment allowances: This allowance is given to employees to meet the expenses

towards hospitality in receiving customers etc,.

• City compensatory allowances: City Compensatory Allowance is normally intended to

compensate the employees for the higher cost of living in cities.

• Transport allowance: Transport allowance granted to an employee to meet his

expenditure for the purpose of commuting between the place of his residence and the
place of his duty is fully taxable. However, in case of blind/deaf and
dumb/handicapped is exempt.

• Allowances which are partially taxable

• House rent allowance [Sec 10(13A)]: HRA is a special allowance specially granted to
an employee by his employer towards payment of rent for residence of the employee.

Metro Cities (i.e., Delhi, Kolkata, Mumbai, Other Cities

Chennai)
• 50% of salary for the relevant period • 40% of salary for the relevant period
• Rent Paid – 10% of salary for the period • Rent Paid – 10% of salary for the period
• HRA Actually received • HRA Actually received

Note: Salary = Basic Salary, Dearness Allowance (in terms of retirement benefits) and
Turnover commission.

Relevant period means the period during which the said accommodation was
occupied by the assesse during the previous year.

• Special Allowance [Sec 10(14)]:

Particulars
Rule 2BB

Professional Allowance
Allowances granted to meet expenses incurred wholly, necessarily and exclusively in the
performance of the duties of an office or employment of profit. Sec - 10(14)(i) – There is no limit on
the amount which the employee can receive from the employer, but whatever amount is received
should be fully utilized for the purpose for which it was given to him
Travelling Allowance - To meet cost of travel on tour or on transfer.
Daily Allowance – To meet the ordinary daily charges incurred by an employee on account of
absence from his normal place of duty.
Conveyance Allowance – To meet the expenditure incurred in conveyance in performance of duties
of an office.
Helper Allowance – To meet the expenditure incurred on helper where such helper is engaged in the
performance of the duties.
Research Allowance – To encouraging the academic, research, and training pursuits in educational
and research institutions.
Uniform Allowance – To meet expenditure on the purchase or maintenance of uniform.

Personal Allowance
Allowances granted to meet his personal expenses at the place where prescribed for the purposes of
section 10(14)(ii)- There is a limit on the amount which the employee can receive from the employer.
Any amount in excess of these specified limits will be taxable.

Allowances Limits
Special Compensatory (Hilly Areas) Allowance Rs.800 or Rs.300 p.m. depending upon the
specified locations
Rs.7,000 pm in Siachen area of Jammu &
Kashmir
Border area allowance or remote locality allowance Rs.1,300 or Rs.1,100 or Rs.1050 or Rs.750 or
or difficult area allowance or disturbed area Rs.300 or Rs.200 pm depending upon the
allowance specified locations
Special Compensatory (Tribal/Schedule Rs.200 pm
Areas/Agency Areas) Allowances
Allowance granted to an employee working 70% of such allowance upto a maximum of
in any transport system Rs.10,000 pm
Children Education Allowance Rs.100 pm per child upto a maximum of two
children
Children Hostel Allowance Rs.300 pm per child upto a maximum of two
children
Compensatory Field Area Allowance Rs.2,600 pm
Compensatory Modified Field Area Allowance Rs.1,000 pm
Counter insurgency allowance Rs.3,900 pm
Transport allowance granted to an Rs.3,200 pm
employee who is blind or deaf and dumb or
orthopedically handicapped.
Underground Allowance Rs.800 pm
High Altitude Allowance
For Altitude 9,000 -15,000 fts Rs.1,060 pm
For above 15,000 fts Rs.1,600 pm
Special compensatory highly active field area Rs.4,200 pm
allowance
Island (duty) allowance granted to the member of Rs.3,250 pm
the armed forces in Andaman & Nicobar and
Lakshadweep Group of Islands.
 • Provident Fund
Provident fund scheme is a scheme intended to give substantial benefits to an employee at
the time of his retirement. Under this scheme, a specified sum is deducted from the salary of
the employee as his contribution towards the fund. The employer also generally contributes
the same amount out of his pocket to the fund. The contributions of the employer and the
employee are invested in approved securities. Interest earned thereon is also credited to the
account of the employee.

• Statutory Provident Fund (SPF)

The SPF is governed by Provident Funds Act, 1925. It applies to employees of
government, railways, semi-government institutions, local bodies, universities and all
recognized educational institutions.

• Recognized Provident Fund (RPF)

RPF means a provident fund recognized by the Commissioner of Income Tax for the
purposes of income tax. It is governed by Part A of Schedule IV to the Income-tax Act,
1961.

• Unrecognised Provident Fund (URPF):

A fund not recognized by the Commissioner of Income Tax is Unrecognised Provident
Fund.

• Public Provident Fund (PPF):

Public provident fund is operated under the Public Provident Fund Act, 1968. A
membership of the fund is open to every individual though it is ideally suited to self-
employed people. A salaried employee may also contribute to PPF in addition to the fund
operated by his employer.

Particulars Recognised PF Unrecognised PF Statutory PF Public PF

Exemption 10(12) Not Applicable Sec – 10(11)
Employer’s Amount in excess Not taxable Fully exempt N.A.(as there is
Contribution of 12% of salary is only assessee’s
taxable own contribution)
Employee’s Eligible for Not eligible for Eligible for Eligible for
Contribution deduction u/s deduction deduction u/s deduction u/s 80
80C 80C C
Interest Credited Amount in excess Not taxable yearly Fully exempt Fully exempt
of 9.5% p.a. is
taxable
Lumpsum Exempt subject to Fully Taxable Fully Exempt Fully Exempt
conditions [Note [Note -2]
-1]

Note: Salary = Basic Salary +Dearness Allowance (if provided in terms for retirement
benefits) and Turnover commission.

Notes:
• Lumpsum amount received from RPF is exempt u/s 10(12) if employee has rendered service
of 5 years or more. if employee rendered service less than 5 years the exemption allowed in
respect of employer’s contribution and interest shall be withdrawn. However in the following
 three cases exemption shall not be withdrawn even though service is less than 5 years.

• Employee retired due to ill health

• Employee retired due to shut down of employer’s business.
• Any other cause beyond the control of employee.
• Employee has retired with the instruction that his balance in RPF should be
transferred to new employer or to his NPS account.

• Amount received on the maturity of URPF

• Employee’s contribution is not taxable
• Interest on Employee’s contribution is taxable under Income from Other sources.
• Employer’s contribution and interest thereon is taxed as Salary.

• Superannuation Fund

Particulars Approved Superannuation Fund Unapproved Superannuation Fund

Employer contribution Amount in excess of Rs.1,50,000 p.a. Not taxable
Employee contribution Ignore no deduction u/s – 80C Ignore
Interest credited Fully Exempt Not taxable
Lumpsum Fully Exempt Taxable same as URPF

• Profit in lieu of salary [Sec.17(3)] - It includes the following:

• The amount of any compensation due to or received by an assesse from his employer or
former employer at or in connection with the termination of his employment.

• The amount of any compensation due to or received by an assesse from his employer or
former employer at or in connection with the modification of the terms and
conditions of employment.

• Any payment due to or received by an assesse from his employer or former employer except
the following:

• payment of gratuity exempted under section 10(10);

• payment of house rent allowance exempted under section 10(13A);

• payment of commuted pension exempted under section 10(10A);

• payment of retrenchment compensation exempted under section 10(10B);

• payment from an approved Superannuation Fund under section 10(13);

• payment from statutory provident fund or public provident fund;

• payment from recognized provident fund to the extent it is exempt under section 10(12).

• Any payment from unrecognized provident fund or such other fund to the extent to which it
does not consist of contributions by the assesse or interest on such contributions.

• Retrenchment Compensation
The retrenchment compensation means the compensation paid under industrial Disputes
Act, 1947 or under any Act, Rule, Order or Notification.
 It may be noted that compensation on account of termination and due to modification in
terms and conditions of employment would be taxable as “profit in lieu of salary”. However,
the retrenchment compensation would be exempt u/s 10(10B),

• Amount of compensation calculated as per Industrial Dispute Act, 1947

(i.e., 15/26 x Avg. Salary of last 3 months x No. of years of completion of service)
• Statutory limit – Rs.5,00,000
• Actually received
Whichever is lower.

Note: Salary = Basic salary + Dearness allowances + Commission + all other taxable
monetary allowances + perquisites such as rent free accommodation, supply of light, water,
medical attendance or any other amenity, supply of food grains or other articles.

Does not include:

• Any bonus;
• Contribution to a retirement benefits scheme; and
• Any gratuity payable on the termination of his service.

• Voluntary Retirement Receipts [Exempt 10 (10C)]

Lumpsum payment or otherwise received by an employee at the time of voluntary retirement
would be taxable as “profit in lieu of salary”. However, it would be exempt u/s 10(10C),

• Salary p.m. x 3 months x No. of years of completed year of service.

• Salary p.m. x No. of remaining months of service.
• Actual amount received.
• Maximum 5,00,000.

Note: Salary p.m. = Basic Salary + Dearness Allowance (in terms of retirement benefits) +
Turnover Commission.

Note:
• As per Rule 2BA prescribes the following guidelines
• It applies to an employee who has completed 10 years of service or completed 40
years of age.
• It applies to all employees of a company.
• The vacancy caused by the voluntary retirement or separation must not be filled
up.
• The retiring employee of a company shall not be employed in another company
or concern belonging to the same management.
• Where exemption for VRS u/s 10(10C) has been allowed in any assessment year, then no
exemption thereunder shall be allowed to him in any other assessment year.

• Perquisites [Sec 17(2)]:

It means extra benefit offered by employer to employee. It may be monetary or non-monetary.
the term “perquisites” to include:

• the value of rent-free accommodation provided to the assessee by his employer.

• the value of any concession in the matter of rent respecting any accommodation provided to
 the assesse by his employer.
• the value of any benefit or amenity granted or provided free of cost or at concessional rate in
any of the following cases:
• by a company to an employee who is director thereof;
• by a company to an employee, being a person who has substantial interest in the
company;
• by any employer (including a company) to an employee to whom provisions of (i) and (ii)
above do not apply and whose income under the head “Salaries” exclusive of the value of
all benefits or amenities not provided for by way of monetary benefits, exceeds Rs.50,000
[Sec.17(2)(iii)];
• any sum paid by the employer in respect of any obligation which but for such payment would
have been payable by the assesse;
• any sum payable by the employer, whether directly or through a fund other than a recognized
provident fund or approved superannuation fund or a deposit-linked insurance fund, to
effect an assurance on the life of the assesse or to effect a contract for an annuity;
• the value of any specified security or sweat equity shares allotted or transferred, directly or
indirectly by the employer, or former employer, free of cost or at concessional rate to the
assesse.
• the amount of any contribution to an approved superannuation fund by the employer in
respect of the assesse, to the extent it exceeds Rs.1,50,000;
• the value of any other fringe benefit or amenity as may be prescribed.

Difference between allowance & perquisites

• Allowance – It means monthly fixed amount received by employee from employer whether
actual expenditure is incurred or not. It is part of salary.
eg. HRA, Medical Allowances, etc.
• Perquisites – It means benefits or facility provided by employer. It is received when actual
expenditure is incurred.
eg. Medical facility, car facility etc.

Perquisites taxable in the case of all employees:

• Furnished / unfurnished house without rent or at concessional rent:

RENT FREE ACCOMODATION (HOUSE FACILITY)

Govt. Employee Other

Employee
Taxable as per License
fees decided by Govt.
Owned by Employer Hired by
Employer
Taxable amount = Taxable
amount =
7.5%/10%/15% of Salary (i) 15% of
salary .
(ii) Hire charge
paid by ‘er
[Whichever is
lower]

Furniture also provided

Owned by Employer Hired

10% of cost Hire charges paid by Employer
Note:
• Population upto 10 Lakhs = 7.5%.
> 10 Lakhs upto 25 Lakhs = 10%.
> 25 Lakhs = 15%.

• Meaning of Salary – BDBACM

B – Basic Salary A – Taxable Allowances
D – Dearness Allowance C – Commission (All)
B-Bonus M – Other monetary income excluding perks.

• For computing BDBACM perks should not be considered.

• BDBACM should be calculated on due basis, means salary of current period should be
considered. Advance salary, arrears salary should be ignored.
• For computing BDBACM, retirement benefit should not be considered i.e., gratuity, pension,
leave salary, VRS, retrenchment compensation, lumpsum, amount from provident, etc,.
• BDBACM should be considered for that much time for which assesse occupied such house.
• Employer contribution towards PF & interest on PF should also be not considered.

In case of Hotel Accommodation Benefit:

Taxable amount = i) 24% of salary (BDBACM)
ii) Hire (Rent) charges paid by Employer.
[Whichever is lower]
Note:
• If hotel facility is provided at the time of transfer of employee & if it is upto 15 day, the it
is not taxable.
• In house facility & hotel facility if employer recover any rent from employee then such
rent should be deducted from above taxable amount.

• Medical facility.
• Treatment in India

Treatment in Govt. Hospital Otherwise

Treatment in Employer’s Own Hospital
Treatment in Govt. Recognised Hospital Exempt upto
 Rs. 15,000

• Treatment Outside India

Benefit of treatment Benefit of stay Benefit of Travel

Exempt upto limit prescribed by RBI It is fully exempt if

GTI is upto Rs. 200,000
Otherwise it is Fully
taxable

Note:
• Medical insurance premium is fully exempt.
• Exemption for treatment is allowed for employee spouse, children & dependent relative
(Mother, Father, Brother & Sister).
• Exemption of stay & travel is allowed only for one patient & one attendant.

• Providing use of movable asset.

• Computer / Laptop – Fully exempt.
• Other asset (TV, AC, etc)

Owned by Employer Hired by Employer

Taxable amount = 10% of cost Taxable amount = Hire charges paid by
‘er

• Transfer of movable asset.

Computer / Laptop Car Any other asset

Taxable amount Taxable amount Taxable amount

=WDV – Consideration =WDV – Consideration =WDV
-Contribution

Dep” @ 50% on WDV Dep” @ 20% on WDV Dep” @ 10% on

SLM
Method Method Method
Note: Dep” should be computed for every Completed for year.

• Amount paid by an employer in respect of any obligation which otherwise

would have been payable by the employee.
e.g. Tax borne by employer on non-monetary perquisites of employee.

• Amount payable by an employer directly or indirectly to effect an assurance on

 the life of employee or to effect a contract of an annuity
e.g. Contribution to provident fund, contribution to NPS.

• Interest-free / concessional loan.

• If aggregate amount of original loan does not exceed Rs.20,000, the perquisite is not
taxable.
• Loan for medical treatment (given in rule 3A) is not taxable subject to a few conditions.

• Transport facility by a transport undertaking

• Not taxable if it is provided by an airline or the railways.

• Not taxable if the employee is a non-specified employee.

• Free food and beverage

• Food and non-alcoholic beverages provided in working hours in remote area or in an off-
shore installation are exempt from tax.

• Tea, coffee or non-alcoholic beverages and snacks in working hours are tax-free perquisites.

• Meals (lunch and/or dinner) in office hours is not taxable if cost to the employer is Rs.50(or
less) per meal. [i.e., if cost of food is more then 50 per day, then entire amount is taxable in
the hands of employee]

• Gift or gift voucher

Gift in kind upto Rs. 5,000 is exempt. [ i.e., if gift is more then Rs.5000, then entire gift is
taxable]

• Value of any specified security / sweat equity shares allotted or transferred to

an employee or former employee.

It means company offer shares to employee at concessional rates.

Taxable amount = FMV of shares - Issue price

FMV should be taken on the date on which option is exercised by employee.

Perquisites exempt from tax in all cases

Telephone Telephone provided by an employer to an employee at his

residence
Transport Facility Transport facility provided by an employer engaed in the

Privilege passes and privilege ticket
Perquisites allowed outside India by the
government
Employer’s contribution to staff group
insurance scheme.
Annual Premium by employer on
personal accident policy
Recreational facilities
Amount spent on training of employees
Leave Travel Concession
Conveyance facility
• Leave travel concession:
Exempt u/s 10(5)
Travel by Air
mode
available
Amount exempt from reimbursement of travel expenditure paid by employer to
employee:
Incase of Travel by Air:
• Actual Expense
• Economy Class fare
[Whichever is lower]
In case of Travel by any other mode:
• Railway facility is available
• Actual Expenses
business of carrying of passengers or goods to his employees
either free of charge or at concessional rate.
Privilege passes and privilege ticket orders granted by Indian
Railways to its employees;
Perquisites allowed outside India by the Government to a
citizen of India for rendering service outside India
Employer’s contribution to staff group insurance
Payment of annual premium by employer on personal accident
policy effected by him on the life of the employee.
Recreational facilities, including club facilities, extended to
employees in general i.e., not restricted to a few select
employees;
Amount spent by the employer on training of employees or
amount paid for refresher management course including
expenses on boarding and lodging
Leave travel concession is exempt subject to conditions as per
Sec – 10(5) [Refer Note: 1].
Conveyance facility provided to High Court Judges, Supreme
Court Judges.
Travel by any other
Railway facility available Railway facility not
xx
xx
xx
 • 1st class Railway A/c fare xx

[Whichever is lower]

• Railway facility is not available

• Recognised transport facility is available

Exempt

• Actual Expenses xx

• Delux class bus fare xx

[Whichever is lower]

• Recognised transport facility is not available

• Actual Expense xx

• 1st class railway fare of similar distance xx

[Whichever is lower]

Note:
• LTC exemption is available for the travel of employee, his spouse, children & dependent
relative – (Mother, Father, Brother, Sister)
Exemption of LTC is available only for 2 children born on or after 1/10/1998.
• 1st time = 1 child 2nd time = Twins
Total 3 children = Exemption allowed to all 3 children.
• 1st time = Twins 2nd time = 1 child
Total 3 children = Exemption allowed to only 2 children.
• LTC exemption is available for 2 years during the block of 4 years (current block is 2014-
17).

Perquisites taxable only in case of specified employees:

• Car or any other automotive conveyance

• Car is used for fully office purpose – Fully Exempt.
If Employer maintains record of each journey & Employer issue a certificate that car is
used exclusively for office purpose.

• Car is used for fully personal purpose.

Car of owned by Employer = 10% of cost
or
Hired by Employer = Hire charges paid by Employer
Plus Driver’s Salary (if paid by Employer) = XXX
Plus Running & maintenance charges (if paid by Employer) = XXX
 • Car is used for partly office & partly personal purpose. (POPP)
POPP

Car owned by Employer Car owned by Employer &

Expense

Running & maintenance charges

paid by Employee Employer

Taxable Amount Taxable

Amount

Employee Employer [600 p.m. / 900 p.m.] [1800

p.m./2400 p.m.]

[Upto 1600cc/ >1600 cc] [Upto 1600/

>1600 cc]

No benefit Taxable Amount

Not Taxable Running & Maintenance charges

paid by Employer xxx

(-) 1800 p.m. / 2400 p.m. (xxx)

Balance Taxable Amount xxx

[upto 1600 cc – 1800 p.m.] [> 1600 cc – 2400 p.m.]

Note:

• If employer also provided driver, then Rs.900 p.m. should be added to above taxable
amount.

• If more than one car is provided for POPP then one car is taxable according to above
standard amount & other car shall be taxable on the assumption that it is fully used for
personal purpose.

Note:

• If employer also provided driver, then Rs.900 p.m. should be added to above taxable
amount.

• If more than one car is provided for POPP then one car is taxable according to above
 standard amount & other car shall be taxable on the assumption that it is fully used for
personal purpose.

• Education facility to employee’s family members

For Specified Employee:
• For employee – Fully exempt.
• For children – It is exempt if value of education is upto Rs. 1000 p.m. per child &
education is provided in employer’s own institution or institution where employer
have tie-ups, otherwise fully taxable.
• For other relatives – Fully taxable.

• Service of a sweeper, gardener, watchman or personal attendant.

For specified employee:
The value of benefit to the employee or any member of his household resulting from the
provision by the employer of the services of a sweeper, a gardener, a watchman or personal
attendant, shall be the actual cost to the employer.

• Supply of gas, electricity or water for household purposes.

For specified employee:
Circumstances Value of benefit
If payment is made to agency supplying of gas, Sum equal to the amount paid on that account by
electricity, etc,. the employer to the agency supplying the gas,
electric energy or water
If supply is made from resources owned by the Manufacturing cost per unit incurred by the
employer employer
Deduction form Gross Salary Income [Sec. 16]

Sec.16(iia) – Standard Deduction

A standard deduction of Rs. 40,000 or the amount of salary, whichever is lower, is to be

provided to the employees.

Sec.16(ii) – Professional tax:

It means tax on employment. If it is paid by employer on behalf of employee, then first it

should be taxable and thereafter deduction allowed u/s 16(ii). If it is paid by employee then
only deduction is allowed.

Sec.16(iii) Entertainment allowance:

It is fully taxable for all employee. But deduction is allowed to government employees u/s
16(iii) as follows:

• 20% of Basic Salary.

• Actual amount received.

• Maximum Rs.5,000.

[Whichever is lower]

Salary Definition*
 Definitions of Salary
• Gratuity – POGA Basic Salary + Dearness Allowance (Both)
• Gratuity – Non POGA Basic Salary + Dearness Allowance (in terms of retirement) + Turnover
• Leave Encashment commission.
• Contribution to PF
• Voluntary retirement
scheme compensation
• Retrenchment Salary = Basic salary + Dearness allowances + Commission + all other
compensation taxable monetary allowances + perquisites such as rent free accommodation,
supply of light, water, medical attendance or any other amenity, supply of
food grains or other articles.
• Rent Free Basic Salary, Dearness Allowance, Bonus, Commission, taxable allowance,
Accommodation and other monetary income excluding perks.

• Entertainment Allowance Basic Salary

Profit in lieu of salary [Sec.17(3)] - It includes the following:

• The amount of any compensation due to or received by an assesse from his employer or
former employer at or in connection with the termination of his employment.

• The amount of any compensation due to or received by an assesse from his employer or
former employer at or in connection with the modification of the terms and conditions of
employment.

• Any payment due to or received by an assesse from his employer or former employer except
the following:

• payment of gratuity exempted under section 10(10);

• payment of house rent allowance exempted under section 10(13A);

• payment of commuted pension exempted under section 10(10A);

• payment of retrenchment compensation exempted under section 10(10B);

• payment from an approved Superannuation Fund under section 10(13);

• payment from statutory provident fund or public provident fund;

• payment from recognized provident fund to the extent it is exempt under section 10(12).

• Any payment from unrecognized provident fund or such other fund to the extent to which it
does not consist of contributions by the assesse or interest on such contributions.

Perquisites
• Perquisites [Sec 17(2)]:
It means extra benefit offered by employer to employee. It may be monetary or non-monetary.
the term “perquisites” to include:

• the value of rent-free accommodation provided to the assessee by his employer.

• the value of any concession in the matter of rent respecting any accommodation provided to
the assesse by his employer.
• the value of any benefit or amenity granted or provided free of cost or at concessional rate in
 any of the following cases:
• by a company to an employee who is director thereof;
• by a company to an employee, being a person who has substantial interest in the
company;
• by any employer (including a company) to an employee to whom provisions of (i) and (ii)
above do not apply and whose income under the head “Salaries” exclusive of the value of
all benefits or amenities not provided for by way of monetary benefits, exceeds Rs.50,000
[Sec.17(2)(iii)];
• any sum paid by the employer in respect of any obligation which but for such payment would
have been payable by the assesse;
• any sum payable by the employer, whether directly or through a fund other than a recognized
provident fund or approved superannuation fund or a deposit-linked insurance fund, to
effect an assurance on the life of the assesse or to effect a contract for an annuity;
• the value of any specified security or sweat equity shares allotted or transferred, directly or
indirectly by the employer, or former employer, free of cost or at concessional rate to the
assesse.
• the amount of any contribution to an approved superannuation fund by the employer in
respect of the assesse, to the extent it exceeds Rs.1,50,000;
• the value of any other fringe benefit or amenity as may be prescribed.

Difference between allowance & perquisites

• Allowance – It means monthly fixed amount received by employee from employer whether
actual expenditure is incurred or not. It is part of salary.
eg. HRA, Medical Allowances, etc.
• Perquisites – It means benefits or facility provided by employer. It is received when actual
expenditure is incurred.
eg. Medical facility, car facility etc.

Perquisites taxable in the case of all employees:

• Furnished / unfurnished house without rent or at concessional rent:

RENT FREE ACCOMODATION (HOUSE FACILITY)

Govt. Employee Other

Employee

Taxable as per License

fees decided by Govt.
 Owned by Employer Hired by
Employer
Taxable amount = Taxable
amount =
7.5%/10%/15% of Salary (i) 15% of
salary .
(ii) Hire charge
paid by ‘er
[Whichever is
lower]

Furniture also provided

Owned by Employer Hired

10% of cost Hire charges paid by Employer
Note:
• Population upto 10 Lakhs = 7.5%.
> 10 Lakhs upto 25 Lakhs = 10%.
> 25 Lakhs = 15%.

• Meaning of Salary – BDBACM

B – Basic Salary A – Taxable Allowances
D – Dearness Allowance C – Commission (All)
B-Bonus M – Other monetary income excluding perks.

• For computing BDBACM perks should not be considered.

• BDBACM should be calculated on due basis, means salary of current period should be
considered. Advance salary, arrears salary should be ignored.
• For computing BDBACM, retirement benefit should not be considered i.e., gratuity, pension,
leave salary, VRS, retrenchment compensation, lumpsum, amount from provident, etc,.
• BDBACM should be considered for that much time for which assesse occupied such house.
• Employer contribution towards PF & interest on PF should also be not considered.

In case of Hotel Accommodation Benefit:

Taxable amount = i) 24% of salary (BDBACM)
ii) Hire (Rent) charges paid by Employer.
[Whichever is lower]
Note:
• If hotel facility is provided at the time of transfer of employee & if it is upto 15 day, the it
is not taxable.
• In house facility & hotel facility if employer recover any rent from employee then such
rent should be deducted from above taxable amount.

• Medical facility.
• Treatment in India

Treatment in Govt. Hospital Otherwise

Treatment in Employer’s Own Hospital
Treatment in Govt. Recognised Hospital Exempt upto
Rs. 15,000
 • Treatment Outside India

Benefit of treatment Benefit of stay Benefit of Travel

Exempt upto limit prescribed by RBI It is fully exempt if

GTI is upto Rs. 200,000
Otherwise it is Fully
taxable

Note:
• Medical insurance premium is fully exempt.
• Exemption for treatment is allowed for employee spouse, children & dependent relative
(Mother, Father, Brother & Sister).
• Exemption of stay & travel is allowed only for one patient & one attendant.

• Providing use of movable asset.

• Computer / Laptop – Fully exempt.
• Other asset (TV, AC, etc)

Owned by Employer Hired by Employer

Taxable amount = 10% of cost Taxable amount = Hire charges paid by
‘er

• Transfer of movable asset.

Computer / Laptop Car Any other asset

Taxable amount Taxable amount Taxable amount

=WDV – Consideration =WDV – Consideration =WDV
-Contribution

Dep” @ 50% on WDV Dep” @ 20% on WDV Dep” @ 10% on

SLM
Method Method Method
Note: Dep” should be computed for every Completed for year.

• Amount paid by an employer in respect of any obligation which otherwise

would have been payable by the employee.
e.g. Tax borne by employer on non-monetary perquisites of employee.

• Amount payable by an employer directly or indirectly to effect an assurance on

the life of employee or to effect a contract of an annuity
e.g. Contribution to provident fund, contribution to NPS.
• Interest-free / concessional loan.
• If aggregate amount of original loan does not exceed Rs.20,000, the perquisite is not
taxable.
• Loan for medical treatment (given in rule 3A) is not taxable subject to a few conditions.

• Transport facility by a transport undertaking

• Not taxable if it is provided by an airline or the railways.

• Not taxable if the employee is a non-specified employee.

• Free food and beverage

• Food and non-alcoholic beverages provided in working hours in remote area or in an off-
shore installation are exempt from tax.

• Tea, coffee or non-alcoholic beverages and snacks in working hours are tax-free perquisites.

• Meals (lunch and/or dinner) in office hours is not taxable if cost to the employer is Rs.50(or
less) per meal. [i.e., if cost of food is more then 50 per day, then entire amount is taxable in
the hands of employee]

• Gift or gift voucher

Gift in kind upto Rs. 5,000 is exempt. [ i.e., if gift is more then Rs.5000, then entire gift is
taxable]

• Value of any specified security / sweat equity shares allotted or transferred to

an employee or former employee.

It means company offer shares to employee at concessional rates.

Taxable amount = FMV of shares - Issue price

FMV should be taken on the date on which option is exercised by employee.

Perquisites exempt from tax in all cases

Telephone Telephone provided by an employer to an employee at his

Transport Facility
Privilege passes and privilege ticket
Perquisites allowed outside India by the
government
residence
Transport facility provided by an employer engaed in the
business of carrying of passengers or goods to his employees
either free of charge or at concessional rate.
Privilege passes and privilege ticket orders granted by Indian
Railways to its employees;
Perquisites allowed outside India by the Government to a
citizen of India for rendering service outside India
 Employer’s contribution to staff group
insurance scheme.
Annual Premium by employer on
personal accident policy
Recreational facilities
Amount spent on training of employees
Leave Travel Concession
Conveyance facility
Employer’s contribution to staff group insurance
Payment of annual premium by employer on personal accident
policy effected by him on the life of the employee.
Recreational facilities, including club facilities, extended to
employees in general i.e., not restricted to a few select
employees;
Amount spent by the employer on training of employees or
amount paid for refresher management course including
expenses on boarding and lodging
Leave travel concession is exempt subject to conditions as per
Sec – 10(5) [Refer Note: 1].
Conveyance facility provided to High Court Judges, Supreme
Court Judges.

• Leave travel concession:

Exempt u/s 10(5)

Travel by Air Travel by any other

mode

Railway facility available Railway facility not

available

Amount exempt from reimbursement of travel expenditure paid by employer to

employee:

Incase of Travel by Air:

• Actual Expense xx

• Economy Class fare xx

[Whichever is lower]

In case of Travel by any other mode:

• Railway facility is available

• Actual Expenses xx

• 1st class Railway A/c fare xx

[Whichever is lower]

• Railway facility is not available

• Recognised transport facility is available

Exempt
 • Actual Expenses xx

• Delux class bus fare xx

[Whichever is lower]

• Recognised transport facility is not available

• Actual Expense xx

• 1st class railway fare of similar distance xx

[Whichever is lower]

Note:
• LTC exemption is available for the travel of employee, his spouse, children & dependent
relative – (Mother, Father, Brother, Sister)
Exemption of LTC is available only for 2 children born on or after 1/10/1998.
• 1st time = 1 child 2nd time = Twins
Total 3 children = Exemption allowed to all 3 children.
• 1st time = Twins 2nd time = 1 child
Total 3 children = Exemption allowed to only 2 children.
• LTC exemption is available for 2 years during the block of 4 years (current block is 2014-
17).

Perquisites taxable only in case of specified employees:

• Car or any other automotive conveyance

• Car is used for fully office purpose – Fully Exempt.
If Employer maintains record of each journey & Employer issue a certificate that car is
used exclusively for office purpose.

• Car is used for fully personal purpose.

Car of owned by Employer = 10% of cost
or
Hired by Employer = Hire charges paid by Employer
Plus Driver’s Salary (if paid by Employer) = XXX
Plus Running & maintenance charges (if paid by Employer) = XXX

• Car is used for partly office & partly personal purpose. (POPP)
POPP

Car owned by Employer Car owned by Employer &

Expense
 Running & maintenance charges

paid by Employee Employer

Taxable Amount Taxable

Amount

Employee Employer [600 p.m. / 900 p.m.] [1800

p.m./2400 p.m.]

[Upto 1600cc/ >1600 cc] [Upto 1600/

>1600 cc]

No benefit Taxable Amount

Not Taxable Running & Maintenance charges

paid by Employer xxx

(-) 1800 p.m. / 2400 p.m. (xxx)

Balance Taxable Amount xxx

[upto 1600 cc – 1800 p.m.] [> 1600 cc – 2400 p.m.]

Note:

• If employer also provided driver, then Rs.900 p.m. should be added to above taxable
amount.

• If more than one car is provided for POPP then one car is taxable according to above
standard amount & other car shall be taxable on the assumption that it is fully used for
personal purpose.

Note:

• If employer also provided driver, then Rs.900 p.m. should be added to above taxable
amount.

• If more than one car is provided for POPP then one car is taxable according to above
standard amount & other car shall be taxable on the assumption that it is fully used for
personal purpose.

• Education facility to employee’s family members

For Specified Employee:

• For employee – Fully exempt.
• For children – It is exempt if value of education is upto Rs. 1000 p.m. per child &
education is provided in employer’s own institution or institution where employer
have tie-ups, otherwise fully taxable.
• For other relatives – Fully taxable.

• Service of a sweeper, gardener, watchman or personal attendant.

For specified employee:
 The value of benefit to the employee or any member of his household resulting from the
provision by the employer of the services of a sweeper, a gardener, a watchman or personal
attendant, shall be the actual cost to the employer.

• Supply of gas, electricity or water for household purposes.

For specified employee:

Circumstances Value of benefit

If payment is made to agency supplying of gas,
electricity, etc,.
If supply is made from resources owned by the
employer
Sum equal to the amount paid on that account by
the employer to the agency supplying the gas,
electric energy or water
Manufacturing cost per unit incurred by the
employer

Deduction form Gross Salary Income [Sec. 16]

Sec.16(iia) – Standard Deduction

A standard deduction of Rs. 40,000 or the amount of salary, whichever is lower, is to be

provided to the employees.

Sec.16(ii) – Professional tax:

It means tax on employment. If it is paid by employer on behalf of employee, then first it

should be taxable and thereafter deduction allowed u/s 16(ii). If it is paid by employee then
only deduction is allowed.

Sec.16(iii) Entertainment allowance:

It is fully taxable for all employee. But deduction is allowed to government employees u/s
16(iii) as follows:

• 20% of Basic Salary.

• Actual amount received.

• Maximum Rs.5,000.

[Whichever is lower]
Salary Definition*

Definitions of Salary
• Gratuity – POGA Basic Salary + Dearness Allowance (Both)
• Gratuity – Non POGA Basic Salary + Dearness Allowance (in terms of retirement) + Turnover
• Leave Encashment commission.
• Contribution to PF
• Voluntary retirement
scheme compensation
• Retrenchment Salary = Basic salary + Dearness allowances + Commission + all other
compensation taxable monetary allowances + perquisites such as rent free accommodation,
supply of light, water, medical attendance or any other amenity, supply of
food grains or other articles.
• Rent Free Basic Salary, Dearness Allowance, Bonus, Commission, taxable allowance,
Accommodation and other monetary income excluding perks.

• Entertainment Allowance Basic Salary

Profit in lieu of salary [Sec.17(3)] - It includes the following:

• The amount of any compensation due to or received by an assesse from his employer or
former employer at or in connection with the termination of his employment.

• The amount of any compensation due to or received by an assesse from his employer or
former employer at or in connection with the modification of the terms and conditions of
employment.

• Any payment due to or received by an assesse from his employer or former employer except
the following:

• payment of gratuity exempted under section 10(10);

• payment of house rent allowance exempted under section 10(13A);

• payment of commuted pension exempted under section 10(10A);

• payment of retrenchment compensation exempted under section 10(10B);

• payment from an approved Superannuation Fund under section 10(13);

• payment from statutory provident fund or public provident fund;

• payment from recognized provident fund to the extent it is exempt under section 10(12).

• Any payment from unrecognized provident fund or such other fund to the extent to which it
does not consist of contributions by the assesse or interest on such contributions.