DIRECT TAX – LAWS AND PRACTICE

WEEK 3 E TEXT
INCOME FROM SALARIES
Introduction
As per the Section 14 of the Income Tax Act,1961, there are five main
heads of income for any person. The computation of income tax is an
important part and has to be calculated according to the income of
a person. For a hassle-free calculation, the income has to be classified
properly so that there is no confusion regarding the same. The Income
tax Act has classified the sources of income under separate heads
and then, the income tax is computed accordingly. The provisions
and rules are according to the details mentioned in the Income Tax
Act.

Five heads of Income

• Income from Salary

• Income from House Property

• Income from Profits and Gains of Profession or Business

• Income from Capital Gains

• Income from Other Sources

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Let us discuss brief about each head of income

Income from Salary

The first head of Income Tax is income from salary which essentially
assimilates any remuneration, which is received by an individual in
terms of services provided by him based on a contract of
employment. This amount qualifies to be considered for income tax
only if there is an employer-employee relationship between the payer
and the payee respectively. Salary also should include the basic
wages or salary, advance salary, pension, commission, gratuity,
perquisites as well as the annual bonus.

Income from House Property

The second head of Income Tax is Income from house property,

according to the Income Tax Act 1961, Sections 22 to 27 is dedicated
to the provisions for the computation of the total standard income of
a person from the house property or land that he or she owns. An
interesting aspect is that the charge is derived out of the property or
land and not on the amount of rent received. However, if the property
is utilized for letting out the normal course of business, then the income
from the rent will be considered.

Income from Profits of Business

The third head of Income Tax is Income from Profits and Gains of
Business in which the computation of the total income are attributed
from the income earned from the profits of business or profession. The
difference between the expenses and revenue earned will be
chargeable. Here is a list of the income chargeable under the head:

• Profits earned by the assessee during the assessment year

• Profits on income by an organization

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 • Profits on sale of a certain license
• Cash received by an individual on export under a government
scheme
• Profit, salary or bonus received as a result of a partnership in a
firm
• Benefits received in a business

Income from Capital Gains

Capital Gains are the profits or gains earned by an assessee by selling

or transferring a capital asset, which was held as an investment. Any
property, which is held by an assessee for business or profession, is
termed as capital gains.

Income from other sources

Any other form of income, which is not categorized in the above-

mentioned clauses, can be sorted in this category. Interest income
from bank deposits, lottery awards, card games, gambling or other
sports awards are included in this category. These incomes are
attributed in Section 56(2) of the Income Tax Act and are chargeable
for income tax.

Let us discuss the first head of income i.e. Income from Salary in details.

INCOME FROM SALARY

Income from salary is the income or remuneration received by an

individual for services rendered or a contract undertaken by him/her.
This clause essentially assimilates the remuneration received by a
person for the services provided by him/her under the contract of
employment.

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This amount of remuneration will be considered as income for the
purposes of Income Tax Act only if there is an Employer and employee
relationship between the person who is making the payment and the
person who is receiving the payment.

Meaning of Salary

The salary for the purpose of calculation of income from salary

includes:

• Wages;
• Pension;
• Annuity;
• Gratuity;
• Advance Salary paid;
• Fees, Commission, Perquisites, Profits in lieu of or in addition to
Salary or Wages;
• Annual accretion to the balance of Recognized Provident Fund;
• Leave Encashment;
• Transferred balance in Recognized Provident Fund;
• Contribution by Central Govt. or any other employer to
Employees Pension A/c as referred in Sec. 80CCD.

SECTION 15

Basis of charge as per Section 15 – As per Sec 15, salary consist 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;

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

SECTION 16

The income chargeable under the head “Salaries” is computed after

making the following deductions under Section 16 :

1. Standard Deduction ;
2. Entertainment Allowance ; and
3. Professional Tax .

1. Standard Deduction [Sec. 16(i)/(ia)] –

• Standard deduction is Rs. 40,000*; or

• the Amount of Salary, whichever is Lower.

* increased to Rs.50,000 from the Assessment Year 2020-21

2. Entertainment Allowance [Sec. 16(ii)]

Entertainment allowance is first included in salary income under the

head “Salaries” and thereafter a deduction is given on the basis
enumerated in the following paragraphs:

(A). In the case of a Government employee (i.e., a Central

Government or a State Government employee), the least of the
following is Deductible:

1. Rs. 5,000;
2. 20 % of Basic Salary; or
3. Amount of Entertainment Allowance granted during the
previous year.

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In order to determine amount of entertainment allowance deductible
from salary, the following points need consideration:

1. For this purpose “salary” excludes any allowance, benefit or

other perquisites.
2. Amount actually expended towards entertainment (out of
entertainment allowance received) is not taken into
consideration.

(B). In the case of a Non-Government Employee (including

employees of Statutory Corporation and Local Authority), :

Entertainment Allowance is NOT deductible.

3. Professional Tax or Tax on Employment [Sec. 16(iii)] –

Professional Tax or Tax on Employment, levied by a State under article

276 of the Constitution, is Allowed as Deduction.

The following points should be kept in view —

1. Deduction is available only in the year in which professional tax

is paid.
2. If the professional tax is paid by the employer on behalf of an
employee, it is first included in the salary of the employee as a
“perquisite” and then the same amount is allowed as deduction
on account of “professional tax” from gross salary.
3. There is no monetary ceiling under the Income-tax Act. Under
article 276 of the Constitution, a State Government cannot
impose more than Rs. 2,500 per annum as professional tax. Under
the Income-tax Act, whatever professional tax is paid during the
previous year, is deductible.

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SECTION 17

Section 17 includes term salary , perquisites, profits in lieu of salary

(1) "salary" includes—

(i) wages ;

(ii) any annuity or pension ;

(iii) any gratuity ;

(iv) any fees, commissions, perquisites or profits in lieu of or in addition

to any salary or wages ;

(v) any advance of salary;

(vi) the annual accretion to the balance at the credit of an employee

participating in a recognized provident fund, to the extent to which it
is chargeable to tax under Rule 6 of Part A of the Fourth Schedule; and

(vii) the aggregate of all sums that are comprised in the transferred
balance as referred to in sub-rule (2) of Rule 11 of Part A of the Fourth
Schedule of an employee participating in a recognized provident
fund, to the extent to which it is chargeable to tax under sub-rule (4)
thereof ;

(2) "perquisite" includes —

(i) the value of rent-free accommodation provided to the assessed by

his employer ;

(ii) the value of any concession in the matter of rent respecting any
accommodation provided to the assessed by his employer ;

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(iii) the value of any benefit or amenity granted or provided free of
cost or at concessional rate in any of the following cases—

(a) by a company to an employee who is a director thereof ;

(b) by a company to an employee being a person who has a

substantial interest in the company ;

(c) by any employer (including a company) to an employee to whom

the provisions of paragraphs (a) and (b) of this sub-clause 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
payment, exceeds eighteen thousand rupees;

(iv) any sum paid by the employer in respect of any obligation which,
but for such payment, would have been payable by the assesse ; and

(v) any sum payable by the employer, whether directly or through a

fund, other than a recognized provident fund or an approved
superannuation fund, to effect an assurance on the life of the assesse
or to effect a contract for an annuity ;

(3) "profits in lieu of salary" includes—

(i) the amount of any compensation due to or received by an

assessed from his employer or former employer at or in connection
with the termination of his employment or the modification of the
terms and conditions relating thereto ;

(ii) any payment, other than any payment referred to in clause

(10) 1[clause (10A)] clause (11) or clause (12) 2[or clause (13A)]
of section 10, due to or received by an assesse from an employer or a
former employer or from a provident or other fund (not being an
approved superannuation fund), to the extent to which it does not
consist of contributions by the assesse or interest on such contributions.

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Some important concepts relating to Salaries

(1) Employer-employee relationship: Every payment made by an

employer to his employee for service rendered would be chargeable
to tax as income from salaries. Before an income can become
chargeable under the head ‘salaries’, it is vital that there should exist
between the payer and the payee, the relationship of an employer
and an employee.

(2) Full-time or part-time employment: Once the relationship of

employer and employee exists, the income is to be charged under
the head “salaries”. It does not matter whether the employee is a full-
time employee or a part-time one. If, for example, an employee works
with more than one employer, salaries received from all the employers
should be clubbed and brought to charge for the relevant previous
years.

(3) Foregoing of salary: Once salary accrues, the subsequent waiver

by the employee does not absolve him from liability to income-tax.
Such waiver is only an application and hence, chargeable to tax.

(4) 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.

(5) Salary paid tax-free: This, in other words, 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. However, as per section 10(10CC), the income-tax paid by
the employer on nonmonetary perquisites on behalf of the employee
would be exempt in the hands of the employee.

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(6) Place of accrual of salary: Under section 9(1)(ii), salary earned in
India is deemed to accrue or arise in India even if it is paid outside
India or it is paid or payable after the contract of employment in India
comes to an end. If an employee gets pension paid abroad in respect
of services rendered in India, the same will be deemed to accrue in
India. Similarly, leave salary paid abroad in respect of leave earned in
India is deemed to accrue or arise in India.

Basis of charge (sec 15) – ‘due’ or ‘receipt’ basis whichever is earlier

Basis of charge in respect of salary income is fixed by section 15. Salary

is chargeable to tax either on “due” basis or on “receipt” basis,
whichever matures earlier.

For example, if salary of 2019-20 is received in advance in 2018-19, it is

included in the total income of the previous year 2018-19 in “receipt”
basis (as tax incidence matures earlier on “receipt” basis, “due” basis
is not relevant in this case; therefore, salary will not be included in total
income of the previous year 2019-20). On the other hand, salary which
has become due in 2017-18 and received in 2018-19, is included, in
total income of previous year 2017-18 on “due” basis (as incidence of
tax matures earlier on “due” basis, “receipt” basis is inapplicable;
salary, will, therefore, not be included in total income of the previous
year 2018-19). Tax is, thus attracted at earliest possible point of time.

Advance Salary: It is usually paid at the 10th or 15th of the month. It is

taxable on receipt basis, in the assessment year relevant to the
previous year in which it is received, irresponsible of the incidence of
tax in the hands of the employee. The advance is based on 40
percent of the monthly salary and the number of days worked during
the month.

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Arrear Salary: It is taxable on receipt basis, if the same has not been
subjected to tax earlier on due basis. In this case also recipient can
claim relief under section 89.

Performa for computation of income under the head “Salaries”

Taxability of salary

Different receipts Tax Treatment

Basic Salary Taxable

Dearness allowance/ pay Taxable

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Advance Salary Taxable in the year of receipt.

Arrears of salary Taxable in the year of receipt, if

not taxed on due basis earlier.

Leave encashment while in Taxable

services

Leave encashment at the time of Exempt in the heads of a

retirement or at the time of Government employee. In the
leaving job case of a non- government
employee, it is exempt in some
cases

Salary in lieu of notice Taxable

Salary to partner Not chargeable under the head

“salary” but taxable in some
“profit and gains of business and
profession”.

Fees and Commission Taxable

Bonus Taxable on receipt basis if not

taxed earlier on due basis.

Gratuity Exempt in the hands of a

government employee. It is
exempt in some cases

Monthly pension( uncommuted Taxable

pension)

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Lump sum payment of pension ( Exempt in the hands of a
i.e., commuted pension) government employee. In the
case of a non-government
employee, it is exempt in some
cases.

Pension under National Pension At the time of receipt of pension

Scheme (NPS) it is chargeable to tax.

Annual Accretion to the credit 1. Excess of employer’s

balance in recognized provident contribution over 12% of
fund salary is taxable.
2. Excess of interest over
notified interest is taxable
(notified rate of interest is
9.5%).

Retrenchment Compensation Exempt from tax to the extent of

least of the following;

1. Amount calculated under

section 25 F(b) of the
Industrial Disputes Act; or
2. An amount specified by the
Government(i.e. Rs.
5,00,000)

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Allowances

Fully Taxable allowances:

• Dearness Allowance: The allowance is paid to the employees to

cope with inflation.

• Entertainment Allowance: This is an allowance that is provided to

the employees to reimburse the expenses which are incurred on
the hospitality.

• Overtime Allowance: Overtime allowance is the allowance

which is paid to the employees for working above the regular
work hours.

• City Compensatory Allowance: This allowance is paid to those

employees who move to urban cities.

• Project Allowance: When an employer provides an allowance

to the employees to meet the project expenses.

• Tiffin/Meals Allowance: Employees may be provided with meal

allowances in some cases.

• Cash Allowance: Employer may also provide cash allowance in

some cases like for marriage or holiday purposes.

Partly Taxable allowances:

• House Rent Allowance: It is the allowance that an employer pays

to his employee for accommodation.

• Entertainment allowance

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 • Special allowances like allowance for travel, uniform, research
allowance etc.

• Special allowance to meet personal expenses like children’s

education allowance, children hostel allowance etc.

Non Taxable allowances:

• Allowances that is paid to the Govt. servants abroad: When the

government employee of India are paid allowances when they
are serving abroad.

• Sumptuary allowances: Sumptuary allowances which are paid

to the judges of HC and SC are not taxed.

• Allowance paid by UNO: Allowances which is received by the

employees of UNO are fully exempt from tax.

• Compensatory allowance paid to judges: When a judge

receives a compensatory allowance, it is also not taxable.

It may be noted that a person can save tax on income from salary by
getting the Tax Saving Allowances.

House Rent Allowance Section 10(13A)

Exemption in respect of house rent allowance in regulated by rule 2A.

It is based upon the following –

1. An amount equal to 50% of salary, where residential house is

situated at Bombay, Calcutta, Delhi or Madras and an amount
equal to 40 % of salary where residential house is situated at
any other place.

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 2. House rent allowance received by the employee in respect of
the period during which rental accommodation is occupied
by the employee during the previous year.

3. The excess of rent paid over 10% of salary.

CONDITIONS TO BE SATISFIED FOR CLAIMING HRA DEDUCTION

• This deduction is allowed only when an employee actually pay

rent for his residence purpose. If no rent is paid for any period,
then no deduction is allowed for that period. Rent receipts may
be asked as proof by the income tax officer. No documents are
required to be attached at time of filing ITR.

• If there is any change in the amount of salary, rent or HRA or city

of residence from metro to non-metro or vice versa during the
year then such deduction is calculated on monthly basis.

• There is no requirement that employee should not own a house

property. If the employee resides in a rented property, he can claim
exemption even if he owns a house property in the same or different
city.

• Deduction of house rent allowance, home loan interest

under section 24b, repayment of housing loan under section
80C can be claimed simultaneously.
• If an employee receives HRA which is allowed as deductible under
this section then no deduction is allowed under section 80GG.
• No deduction is allowed under this section if employee does not
receive any house rent allowance from employer. However
deduction for rent paid can be claimed under section 80GG.

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Section 10 (14):
Under special allowance act of Section 10 (14), exemption is granted
based on the amount utilized for a specific purpose by the employee.
The exemption depends on the following points:
• Allowance amount.
• Actual amount used for the purpose for which the allowance
has been granted.
Section 10 of the Income Tax Act covers many allowances such as
Leave Travel Allowance, Uniform Allowance, Travelling Allowance,
House Rent Allowance and some more. However, some special
allowances that are exempt fall under Section 10 (14).
Section 10 (14) (i):
Under Section 10 (14)(i), allowances are exempted to the extent of
the amount received as allowance or amount spent on certain duties,
whichever is the lower figure.
Allowances covered in this category are:
• Daily Allowance: Daily allowance is given to employees to meet
the daily charges incurred when on tour or for the duration of a
transfer in the job. This type of allowance is granted when the
employee is not in the usual place of duty.
• Travel Allowance: Travel allowance covers costs related to
travel while on tour or on transfer while on duty. This allowance
also includes travel costs incurred while getting transferred to
another location, including packaging or transport of personal
objects.
• Research/ Academic Allowance: Allowance granted for the
purpose of encouraging academic and research related

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 training, education or professional duties is termed as academic
or research allowance.
• Conveyance Allowance: Allowance for conveyance is granted
to employees in case of expenses incurred while travelling for
duties of office. However, the employer does not pay for travel
from home to work as it is not considered as a duty of the office.
This allowance comes under a different section called as
‘Transport allowance’ and is not exempt from tax.
• Helper Allowance: Sometimes your employer allows you to
appoint a helper for performing official duties of the office. In
such cases, helper allowance is granted.
• Uniform Allowance: Allowance when given for the purchase or
maintenance of uniform, required to be worn while on duty is
referred to as uniform allowance. This allowance can be opted
for only when an office duty prescribes a specific uniform.
Usually, it is not required to furnish details of the expenses incurred
under this category of allowance unless the expense are
disproportionate to the salary or unreasonable in reference to the
duty performed by the employee. At most times, it is not required for
you to keep a proof of documents and a simple declaration serves
the purpose.
Section 10 (14) (ii):
Under this section, allowance granted to employees for working under
certain set of conditions while on duty. The amount exempted is either
the amount received as allowance or the limit mentioned, whichever
is lesser.
The types of allowances in this category and exempt in allowances
are listed below:

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 1. Compensatory allowance for working in areas of high altitude or
hilly areas, also known as climate allowance:
Hilly areas of HP, UP, J&K and North East - Rs.800
Siachen are of J&K - Rs.7000 per month
Common places above 1000mtr or above - Rs.300
2. Scheduled or tribal or agency areas allowance:
Karnataka, West Bengal, MP, Assam, Orissa, Tamil Nadu, Bihar, UP and
Tripura. - Rs. 200
3. Allowance for duty in border area or remote area or any
difficult/disturbed areas:
Allowances ranging from Rs.200 to Rs.1300 pm are exempt under the
Rule 2BB.
4. Allowance for children education: Rs.100 pm for each child and
a maximum of two children.
5. Allowance for working in a transport system for personal
expenses, while on duty: 70% of allowance up to Rs.10,000 pm.
6. Field area allowance:
Areas of Nagaland, J&K, HP, UP, AP, Sikkim and Manipur – Rs.2600 pm
7. Allowance for employee’s children’s hostel expenses: Rs.300 pm
for each child up to two children.
8. Allowance granted to armed forces for cases of counter
insurgency: Rs.3900 per month.
9. Transport allowance to physically disabled employee on duty to
travel to work: Rs.1600 per month.
10. Transport allowance for commute between work and
residence: Rs.1600 pm.

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 11. Compensatory allowance for duty in modified field area:
Specific areas of West Bengal, North East, Rajasthan, J&K, UP and HP
– Rs.1000 pm.
12. Island Duty allowance granted to armed forces in
Andaman & Nicobar and Lakshadweep: Rs.3250 per month.
13. Allowance for working in underground mines: Rs.800 per
month.
14. Special compensatory highly active field area
allowance: Rs.4200 pm.
15. Allowance for armed forces in a high altitude region:
9000 – 15,000ft – Rs.1060 pm
Above 15,000 ft – Rs.1600 pm

Special Individuals Receiving Allowances Exempt:

There are certain individuals who also receive allowances exempt
under Section 10:
• Allowances granted to High Court Judges.
• Allowance given to a UNO employee.
• Sumptuary allowance received by Supreme Court and High
Court Judge.
• Allowances granted to government employees who are Indian
citizens, working abroad.

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PENSION [Sec. 10(10A)]
Pension is sum of money which is added in the time of employment
years, and from which payments are drawn to support the person's
retirement from work in the form of periodic payments.
• Pension can be divided into two types:
i. Uncommuted Pension
ii. Commuted Pension
• Uncommuted Pension -It is taxable as salary under section 15 in
the hands of a Government employee as well as a non -
Government employee.
• Commuted Pension is received in one time rather in installments.
• In case of employees of Central & State Govt. or Local Authority
or statutory corporation, the entire commuted value of pension
is exempt 10(10A) (i).
Payment in commutation of pension received by any other
employee-
• In case of any other employee, if the employee receives
gratuity, the commuted value of one third (1/3) of the pension is
exempt, otherwise, the commuted value of ½ of the pension is
exempt.
• If payment in commutation of pension received by the
employee exceeds the aforesaid limits. Such excess is liable to
tax in the assessment year relevant to the previous in which it is
due or paid. The assesse can, however, claim relief in term
of section 89 read with rule 21A.

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INCOME TAX ON COMMUTED PENSION:
Computation of income tax on commuted pension at the time of filing
income tax return will be as follows:
Amount received as commuted pension xxx
less: Amount exempt xxx
COMPUTATION OF PENSION AMOUNT EXEMPT:
1. Received from Government Employer: Fully exempt from
Income Tax.
2. Pension received from Non-Government Employer: The
following shall be exempt:
• If Gratuity is received along with pension: 1/3rd of the amount of
pension which he would have received had he commuted 100%
of pension.
• If no Gratuity and only Pension received: 1/2 of the amount of
pension which he would have received had he commuted 100%
of pension.

Gratuity – Section 10(10) Of Income Tax Act

Gratuity is a payment made by the employer in appreciation of past
services of employee. It can be paid at the time of retirement or
resignation or termination of employee from his employment. Income
tax act provides exemption for the amount an employee receives as
gratuity from his employer. After this exemption the rest will be taxable
in the hand of employee under the head SALARY.

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Exemption for a Government Employee
Gratuity received by a government employee will be fully
exempted from income tax.
Exemption when Gratuity Received Under the Payment of Gratuity
Act, 1972
Gratuity act 1972 is applicable to an establishment where 10 or more
employees are employed during the financial year. If on a single day,
an establishment has employed more than 10 or more employees
then this gratuity act will be applicable to them. Once gratuity act
1972 is applicable it will continue to be applicable even though
numbers of employees are reduced below 10.
In case the employee is covered under gratuity act 1972, the least of
the followings will be exempted and gratuity in excess of the
exemption limit will be taxable in the hands of employee.
1. Gratuity actually received
2. Rs. 10,00,000 (enhanced to Rs. 20,00,000 from AY 2018-19)
3. 15 days of salary for every completed year of service or part
thereof in excess of 6 months (15/26 * last drawn salary * length
of service)
Leave Encashment
Any amount received in lieu of leaves accumulated is referred to as
Leave Encashment and is taxed under the head ‘Income from Salary’.
Under the Income Tax Act section 10(10AA), Leave Encashment is
exempt to a certain extent.
• In case of a Central Government or State Government
employee – any amount received as leave encashment is
exempt from tax

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 In case of a Non-Government employee – The least of the following
is exempt from the total leave encashment received –
o 10 months average salary. Where average salary means
the salary of 10 months immediately preceding the
retirement or resignation. Salary means basic salary and
DA, excludes all allowances and perquisites.
o Leave encashment actually received
o Amount equal to salary for the period of leave earned
(leave earned not to exceed 30 days for every year of
actual service)
o Rs 3,00,000 – Maximum amount specified by Government
The amount chargeable to tax shall be Total Leave Encashment
received less exemption calculated above = amount to be added to
Income from Salary (and taxed on the basis of applicable tax slabs).

Retrenchment Compensation 10(10B)

Compensation received in excess of the aforesaid limit is taxable and
would form part of Gross Salary. However, assesse will be eligible for
relief u/s 89 read with Rule 21A.
Least of following is exempt:
1. Compensation actually received.
2. 5,00,000
3. 15/26 * Average salary of last 3 months * Completed years of
service and part thereof in excess of 6 months.

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Voluntary Retirement Compensation 10(10C)
As per Section 10 (10C) of the IT Act, 1961, any amount received by
an employee of a public sector company on voluntary retirement is
exempt up to Rs 5 lakh. You have to receive this amount in terms of
a scheme of voluntary separation. This compensation is avail by
Central & State Government, Public sector company, any other
company, local authority, co-operative society, IIT etc.
Least of following is exempt:
1. Compensation actually received.
2. Rs. 5,00,000
3. Last drawn salary * 3 months * completed years of service.
4. Last drawn salary * remaining months of service.

Provident Fund
An investment fund contributed to by employees, employers, and
(sometimes) the state, out of which a lump sum is provided to each
employee on retirement.

Types of Provident Funds: Tax Implications

• Statutory Provident Fund (SPF / GPF)
• These are maintained by Government, Semi Govt bodies,
Railways, Universities, Local Authorities etc.
• The contributions made by the employer are exempted
from income taxes in the year in which contributions are
made.
• The contributions made by the employee can be claimed
as tax deductions under section 80c.

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 • Interest amount credited during the financial year is not
treated as income and hence it is exempted from income
tax.
• The redemption amount at the time of retirement is
exempted from tax.
• If an employee terminates the PF account, the withdrawal
amount too is exempted from taxes.
Recognized Provident Fund (RPF)
• Any establishment (business entity) which employs 20 or
more employees can join RPF. Most of the individuals (who are
salaried) generally contribute to this type of Provident Fund. This
is one of the popular types of Employees Provident Funds
(EPF). (Organizations which employ less than 20 employees can
also join RPF if the employer and employees want to do so)
• The business entity can either join the Govt. scheme set up by
the PF Commissioner (or) the employer himself can manage the
scheme by creating a PF Trust. All Recognized Provident Fund
Schemes must be approved by The Commissioner of Income
Tax (CIT).
• Employer’s contribution in excess of 12% of salary is treated as
income of the employee and is taxable. In excess of 12%, the
contributions are taxable in the year of contribution.
• Tax Deduction u/s. 80C is available for amount invested by the
employee (up to Rs 1.5 Lakh in a Financial Year).
• Interest amount earned (up to 9.5% interest rate) on PF balance
(employee’s + employer’s contributions) is tax free. In excess of
9.5%, the interest on contributions is taxable as ‘salary’ in the year
in which it is accrued.

Page 26 of 46
 • Accumulated funds redeemed by the employee at the time of
retirement / resignation are exempt from tax if he/she continues
the service for 5 years or more.

Unrecognized Provident Fund (UPF)

These are not recognized by Commissioner of Income Tax.

• Employer’s contribution is not treated as income in the year of

investment and hence not taxable in that specific year. So, it is
tax free in the year of contribution.
• Tax deduction under section 80c is not available on Employees
contributions.
• Interest earned is not treated as income in the year it is credited
and hence not taxable in the year of accrual.
• At the time of redemption/retirement, the employer’s
contributions and interest thereon is treated as ‘salary income’
and chargeable to tax. However, employee’s contribution is not
chargeable to tax. Interest on Employees contribution will be
charged under income from other sources.

Public Provident Fund (PPF)

• Under PPF any individual from public, whether is in employment

or not may contribute to this fund.
• The minimum contribution is Rs. 500 p.a. & maximum is Rs 1.5 Lakh
Rs. p.a. The amount is repayable after 15 years.
• PPF can serve as an excellent retirement planning / savings tool,
for those who do not come under any pension scheme.
• The PPF offers tax benefit under section 8OC and the interest
earned is also exempt from tax. All the eligible withdrawals are
exempted from taxes.

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Perquisites

Perquisites are those payments which are received by an employee

from the employer over and above the salary.

Perquisites that are taxable for all the employees:

• Rent free accommodation

• Club fee payments
• Movable assets
• Concession in accommodation rent
• Interest-free loans
• Educational expenses
• Insurance premium paid on behalf of employees

Perquisites that are taxable only to specified employees:

• Free gas, electricity etc. for domestic purpose

• Concessional transport facility
• Concessional educational expenses
• Payment made to gardener, sweeper and attendant.

Perquisites that are exempt from tax:

• Medical benefits
• Health Insurance Premium
• Leave travel concession
• Staff Welfare Scheme
• Car, laptop etc. for personal use.

Specified employees: - The following employees are known as

specified employees –

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 • A director employee- An employee who is a director in the
employer- company at any time during the previous year, is a
specified employee of the company in which he is a director.
• An employee who has substantial interest in the employer
company- An employee who has a substantial interest in the
employer-company at any time during the previous year is a
specified employee of the company in which he has substantial
interest.
• An employee drawing in excess of Rs 50,000 – An employee (not
covered by the above two categories), which income
chargeable under the head “Salaries” (exclusive of the value of
all benefits or amenities not provided by way of monetary
payments) exceeds Rs. 50,000, is a specified employee.

Non-specified employee: - Any employee, other than a specified

employee, is a “non-specified employee”.

Valuation of Perquisites

As a rule, the taxable value of perquisites in the hands of the

employees is its cost to the employer. However, specific rules for
valuation of certain perquisites are briefly given below:

1. Residential accommodation provided by the employer

• Union or State Government Employees [ Section 17(2)(i) read

with Rule 3(1)]

The value of perquisite is the license fee as determined by the Govt.

as reduced by the rent actually paid by the employee.

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 • Non-Government Employees[ Section 17(2)(i)(ii) read with Rule
3(1) ]

The value of perquisite is an amount equal to

(i) 15% of salary in cities having population exceeding 25 lakhs as per

2001 census;

(ii) 10% of salary in cities having population exceeding 10 lakhs but not
exceeding 25 lakhs as per 2001 census; and

(iii) 7.5% of salary in any other place.

Rent free furnished accommodation:[ Section 17(2)(i) read with Rule

3(1) ]

The value would be the value of unfurnished accommodation as

computed above, increased by 10% per annum of the cost of
furniture (including TV/radio/refrigerator/AC/other gadgets). In case
such furniture is hired from a third party, the value of unfurnished
accommodation would be increased by the hire charges
paid/payable by the employer. However, any payment recovered
from the employee towards the above would be reduced from this
amount.

The value of perquisite arising out of the above would be 24% of salary
or the actual charges paid or payable to the hotel, whichever is lower.
The above would be reduced by any rent actually paid by the
employee. It may be noted that no perquisite would arise, if the
employee is provided such accommodation on transfer from one
place to another for a period of 15 days or less.

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3. Use of Motor Car[ Section 17(2)(iii) read with Rule 3(3) ]

S.No. Circumstances Engine Capacity upto Engine Capacity above 1600

1600 cc cc

1 Where the motor car is owned or hired by the employer

(a) is used Fully Exempt.

wholly and
Provided that specified documents are
exclusively in
maintained by the employer.
the
performance
of his official
duties;

(b) is used Actual amount of expenditure incurred by the

exclusively for employer on the running and maintenance of
the private or motor car during the relevant previous year
personal including remuneration, if any, paid by the
purposes of employer to the chauffeur as increased by the
the employee amount representing normal wear and tear* of
or any the motor car and as reduced by any amount
member of his charged from the employee for such use.
household and
the running
and
maintenance
expenses are
met or
reimbursed by
the employer;

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(c) is used
partly in the
performance
of duties and
partly for
private or
personal
purposes of his
own or any
member of his
household and
-

(i) the ₹ 1,800 (plus ₹ 900, if ₹ 2,400 (plus ₹ 900, if

expenses on chauffeur is also chauffeur is also
maintenance provided to run the provided to run the
and running motor car) motor car)
are met or
reimbursed by
the employer;

(ii) the ₹ 600 (plus ₹ 900, if ₹ 900 (plus ₹ 900, if

expenses on chauffeur is also chauffeur is also
running and provided by the provided to run the
maintenance employer to run the motor car)
for private or motor car)
personal use
are fully met
by the
assessee

Page 32 of 46
2 Where the employee owns a motor car but the actual running and
maintenance charges (including remuneration of the chauffeur, if
any) are met or reimbursed to him by the employer

(i) such Fully Exempted

reimbursement
Provided that specified documents are
is for the use of
maintained by the employer.
the vehicle
wholly and
exclusively for
official
purposes;

(ii) such Subject to Subject to maintaining

reimbursement maintaining specified specified documents by
is for the use of documents by employer, the actual
the vehicle employer, the actual amount of expenditure
partly for amount of incurred by the
official expenditure incurred employer as reduced by
purposes and by the employer as ₹ 2400 (plus ₹ 900, if
partly for reduced by ₹ 1800 chauffeur is also
personal or (plus ₹ 900, if provided to run the
private chauffeur is also motor car)
purposes of provided by the
the employee employer to run the
or any motor car)
member of his
household.

3 Where the employee owns any other automotive conveyance but

the actual running and maintenance charges are met or
reimbursed to him by the employer

Page 33 of 46
 (i) such Fully Exempt Not applicable
reimbursement
Provided that
is for the use of
specified documents
the vehicle
are maintained by
wholly and
the employer.
exclusively for
official
purposes;

(ii) such Subject to

reimbursement maintaining specified
is for the use of documents by
vehicle partly employer, the actual
for official amount of
purposes and expenditure incurred
partly for by the employer as
personal or reduced by the
private amount of ₹ 900.
purposes of
the employee.

4. Services of a sweeper, a gardener, a watchman

or a personal attendant[ Section 17(2)(iii) read with Rule 3(3) ]
Taxable value of perquisite shall be salary paid or payable by the
employer for such services less any amount recovered from the
employee.

Page 34 of 46
 5. Supply of Gas, Electric Energy or Water[ Section 17(2)(iii) read with
Rule 3(4) ]
The value of the benefit to the employee resulting from the supply of
gas, electric energy or water for his household consumption shall be
determined as the sum equal to the amount paid on that account by
the employer. Where such supply is made from resources owned by
the employer, without purchasing them from any other outside
agency, the value of perquisite would be the manufacturing cost per
unit incurred by the employer. Where the employee is paying any
amount in respect of such services, the amount so paid shall be
deducted from the value so arrived at.

6. Free / Concessional Educational Facility[ Section 17(2)(iii) read with

Rule 3(5) ]

Facility Value of perquisite if provided in Value of perquisite if provided in

extended the school owned by the any other school
to employer

Children Cost of such education in similar Amount incurred less amount

school less ₹ 1,000 per month per recovered from employee (an
child (irrespective of numbers of exemption of ₹ 1,000 per month
children) less amount recovered per child is allowed)
from employee

Other Cost of such education in similar Cost of such education incurred

family school less amount recovered
member from employee

Page 35 of 46
Other Educational Facilities

Reimbursement of school fees of children or family member of

employees - Fully Taxable

Free educational facilities/ training of employees - Fully exempt

7. Transport facilities provided by the employer

engaged in carriage of passenger or goods (except Airlines or
Railways)[ Section 17(2)(iv) read with Rule 3(8) ]

Value at which services are offered by the employer to the public less
amount recovered from the employee shall be a taxable perquisite.

8. Amount payable by the employer to effect an insurance on life of

employee
or to effect a contract for an annuity[ Section 17(2)(iv) ]

Fully Taxable.

9. ESOP/ Sweat Equity Shares[ Section 17(2)(vi) read with Rule 3(8) ]

Fair Market value of shares or securities on the date of exercise of

option by the assessee less amount recovered from the employee in
respect of such shares shall be the taxable value of perquisites.

Fair Market Value shall be determined as follows:

a. In case of listed Shares: Average of opening and closing price as

on date of exercise of option (Subject to certain conditions and
circumstances)
b. In case of unlisted shares/ security other than equity shares:
Value determined by a Merchant Banker as on date of exercise

Page 36 of 46
 of option or an earlier date, not being a date which is more than
180 days earlier than the date of exercise of the option.

10. Employer's contribution towards superannuation fund[ Section

17(2)(vii) ]

Taxable in the hands of employee to the extent such contribution

exceeds Rs.1,00,000/-

11. Interest free or Concessional Loan Facility[ Section 17(2)(viii) read

with Rule 3(7)(i) ]

Interest free loan or loan at concessional rate of interest given by an

employer to the employee (or any member of his household) is a
perquisite chargeable to tax in the hands of all employees on
following basis:

1. Find out the 'maximum outstanding monthly balance' (i.e. the

aggregate outstanding balance for each loan as on the last day
of each month);
2. Find out rate of interest charged by the SBI as on the first day of
relevant previous year in respect of loan for the same purpose
advanced by it;
3. Calculate interest for each month of the previous year on the
outstanding amount (mentioned in Step 1 at the rate of interest
given in Step 2
4. From the total interest calculated for the entire previous year
(step 3), deduct interest actually recovered, if any, from
employee
5. The balance amount (Step 3-Step 4) is taxable value of
perquisite

Page 37 of 46
 Nothing is taxable if:

a. Loan in aggregate does not exceed ₹ 20,000; or

b. Loan is provided for treatment of specified diseases (Rule 3A) like
neurological diseases, Cancer, AIDS, Chronic renal failure,
Hemophilia (specified diseases). However, exemption is not
applicable to so much of the loan amount as has been
reimbursed to the employee under any medical insurance
scheme.

12. Travelling, Touring Accommodation etc.[ Section 17(2)(viii) read

with Rule 3(7)(ii) ]
a. Taxable value of perquisite shall be expenditure incurred by the
employer less amount recovered from employee.
b. Where such facility is maintained by the employer, and is not
available uniformly to all employees, the value of benefit shall be
taken to be the value at which such facilities are offered by other
agencies to the public.

13. Free Food and Non-alcoholic beverages[ Section 17(2)(viii) read

with Rule 3(7)(iii) ]
1. Fully Taxable: Free meals in excess of ₹ 50 per meal less amount paid
by the employee shall be a taxable perquisite
2. Exempt from tax: Following free meals shall be exempt from tax:
a. Food and non-alcoholic beverages provided during working hours in
remote area or in an offshore installation;
b. Tea, Coffee or Non-Alcoholic beverages and Snacks during working
hours are tax free perquisites;
c. Food in office premises or through non-transferable paid vouchers
usable only at eating joints provided by an employer is not taxable,
if cost to the employer is ₹ 50(or less) per meal.
Page 38 of 46
14. Any Gift or Voucher or Token[ Section 17(2)(viii) read with Rule
3(7)(iv) ]

a. Gifts in cash or convertible into money (like gift cheque) are fully
taxable
b. Gift in kind up to Rs.5,000 in aggregate per annum would be
exempt, beyond which it would be taxable.

15. Membership Fees, Annual Fees for Credit Card[ Section 17(2)(viii)
read with Rule 3(7)(v) ]
a. Expenditure incurred by the employer in respect of credit card used
by the employee or any member of his household less amount
recovered from the employee is a taxable perquisite.
b. Expenses incurred for official purposes shall not be a taxable
perquisite provided complete details in respect of such expenditure
are maintained by the employer.

16. Membership of Clubs[ Section 17(2)(viii) read with Rule 3(7)(vi) ]

a. Expenditure incurred by the employer towards annual or

periodical fee etc. (excluding initial fee to acquire corporate
membership) less amount recovered from the employee is a
taxable perquisite
b. Expenses incurred on club facilities for the official purposes are
exempt from tax.
c. Use of health club, sports and similar facilities provided uniformly
to all employees shall be exempt from tax.

17. Use of Movable Assets[ Section 17(2)(viii) read with Rule 3(7)(vii) ]

Taxable value of perquisites shall be

• For use of Laptops and Computers: Nil

Page 39 of 46
 • For movable asset other than Laptops, computers and Motor
Car*: 10% of original cost of the asset (if asset is owned by the
employer) or actual higher charges incurred by the employer (if
asset is taken on rent) less amount recovered from employee.

18. Transfer of Movable Assets[ Section 17(2)(viii) read with Rule

3(7)(viii) ]
Taxable value of perquisites
a. Computers, Laptop and Electronics items: Actual cost of asset less
depreciation at 50% (using reducing balance method) for each
completed year of usage by employer less amount recovered from
the employee
b. Motor Car: Actual cost of asset less depreciation at 20% (using
reducing balance method) for each completed year of usage by
employer less amount recovered from the employee
c. Other movable assets: Actual cost of asset less depreciation at 10%
(on SLM basis) for each completed year of usage by employer less
amount recovered from the employee.

19. Any Other Benefit or Amenity, Service, Right or Privilege[ Section

17(2)(viii) read with Rule 3(7)(ix) ]

Taxable value of perquisite shall be computed on the basis of cost to

the employer (under an arm's length transaction) less amount
recovered from the employee.

However, expenses on telephones including a mobile phone incurred

by the employer on behalf of employee shall not be treated as
taxable perquisite.

Page 40 of 46
20. Medical facilities in India[ Proviso to section 17(2) ]

a. Expense incurred or reimbursed by the employer for the medical

treatment of the employee or his family (spouse and children,
dependent - parents, brothers and sisters) in any of the following
hospital is not chargeable to tax in the hands of the employee:

i. Hospital maintained by the employer.

ii. Hospital maintained by the Government or Local Authority or
any other hospital approved by Central Government
iii. Hospital approved by the Chief Commissioner having regard to
the prescribed guidelines for treatment of the prescribed
diseases.

b. Medical insurance premium paid or reimbursed by the employer is

not chargeable to tax.

c. Any other expenditure incurred or reimbursed by the employer for

providing medical facility in India is not chargeable to tax up to ₹
15,000 in aggregate per assessment year. This exemption is withdrawn
from the Assessment Year 2019-20.

21. Medical facilities outside India[ Proviso to section 17(2) ]

Any expenditure incurred or reimbursed by the employer for medical

treatment of the employee or his family member outside India is
exempt to the extent of following (subject to certain condition):

a. Expenses on medical treatment - exempt to the extent

permitted by RBI.
b. Expenses on stay abroad for patient and one attendant -
exempt to the extent permitted by RBI.

Page 41 of 46
 c. Expenditure incurred on travelling of patient and one attendant-
exempt, if Gross Total Income (before including the travel
expenditure) of the employee, does not exceed ₹ 2,00,000.

Leave Travel Concession (LTC/LTA)[ Provision to section 17(2) ]

The exemption shall be limited to fare for going anywhere in India

along with family twice in a block of four years:

• Where journey is performed by Air - Exemption up to Air fare of

economy class in the National Carrier by the shortest route
• Where journey is performed by Rail - Exemption up to air-
conditioned first class rail fare by the shortest route
• If places of origin of journey and destination are connected by
rail but the journey is performed by any other mode of transport
- Exemption up to air-conditioned first class rail fare by the
shortest route.
• Where the places of origin of journey and destination are not
connected by rail:
• Where a recognized public transport system exists -
Exemption up to first Class or deluxe class fare by the
shortest route
• Where no recognized public transport system exists -
Exemption up to air-conditioned first-class rail fare by
shortest route.

Notes:

1. Two journeys in a block of 4 calendar years is exempt

2. Taxable only in case of Specified Employees

Page 42 of 46
 Deduction from Salary Income (Section 16)

The income chargeable under the head “Salaries” is computed after

making the following deductions under Section 16 :

1. Standard Deduction ;
2. Entertainment Allowance Deduction ; and
3. Professional Tax .

1. Standard Deduction [Sec. 16(i)/(ia)] –

• Standard deduction is Rs. 40,000 (Rs. 50,000/- from Assessment Year

2020-21) ; or
• the Amount of Salary, whichever is Lower.

2. Entertainment Allowance [Sec. 16(ii)]-

Entertainment allowance is first included in salary income under the

head “Salaries” and thereafter a deduction is given on the basis
enumerated in the following paragraphs:

(A). In the case of a Government employee (i.e., a Central

Government or a State Government employee), the least of the
following is Deductible:

1. Rs. 5,000;
2. 20 % of Basic Salary; or
3. Amount of Entertainment Allowance granted during the
previous year.

In order to determine amount of entertainment allowance deductible

from salary, the following points need consideration:

1. For this purpose “salary” excludes any allowance, benefit or

other perquisites.

Page 43 of 46
 2. Amount actually expended towards entertainment (out of
entertainment allowance received) is not taken into
consideration.

(B). In the case of a Non-Government Employee (including

employees of Statutory Corporation and Local Authority), :

Entertainment Allowance is NOT deductible.

3. Professional Tax or Tax on Employment [Sec. 16(iii)] –

Professional Tax or Tax on Employment, levied by a State under article

276 of the Constitution, is Allowed as Deduction.

The following points should be kept in view —

1. Deduction is available only in the year in which professional tax

is paid.
2. If the professional tax is paid by the employer on behalf of an
employee, it is first included in the salary of the employee as a
“perquisite” and then the same amount is allowed as deduction
on account of “professional tax” from gross salary.
3. There is no monetary ceiling under the Income-tax Act. Under
article 276 of the Constitution, a State Government cannot
impose more than Rs. 2,500 per annum as professional tax. Under
the Income-tax Act, whatever professional tax is paid during the
previous year, is deductible.

Example :

Suppose Mr. A, posted at Kolkata, is required to pay Rs. 2,000 every

year as professional tax. On May 31, 2019, he pays Rs. 4,000 on
account of professional tax (i.e., Rs. 2,000 for the year 2018-19 and Rs.
2,000 for the year 2019-20). In this case, Rs. 4,000 is deductible for the

Page 44 of 46
previous year 2019-20 (it is incorrect to state that in such a case only
Rs. 2,500 is deductible).

Relief when Salary is paid in Arrear or in Advance, etc. [Section 89 /

Rule 21A]

Where, by reason of any portion of an assessee’s salary being paid in

arrears or in advance or by reason of his having received in any one
financial year salary for more than twelve months or a payment which
under the provisions of section 17(3) is a profit in lieu of salary, his
income is assessed at a rate higher than that at which it would
otherwise have been assessed, the relief to be granted under section
89 shall be as under:

(A) Where any portion of the Assessee’s Salary is Received in Arrears

or in Advance.

Step 1: Calculate the Tax Payable of the Previous Year in which the
Arrears/ Advance Salary is Received on:

1. Total Income inclusive of additional salary.

2. Total Income exclusive of additional salary.

The difference between (a) and (b) is the tax on additional salary
included in the total income.

Step 2: Calculate the Tax Payable of every Previous Year to which the
Additional Salary relates :

1. on total income including additional salary of that particular

previous year.
2. on total income excluding additional salary.

Calculate the difference between (a) and (b) for every previous year
to which the additional salary relates and aggregate the same.

Page 45 of 46
Step 3: The Excess between the Tax on Additional Salary as calculated
under Step 1 and 2 shall be the Relief Admissible under Section 89.

If there is no excess, no relief is admissible. If the tax calculated in step

1 is less than tax calculated in step 2, the assessee need not apply for
relief.

REFERENCES

• https://www.charteredclub.com/
• https://www.legalraasta.com/itr/income-from-salary/
• https://www.teachoo.com/144/50/What-is-Income-from-
Salaries-/category/Basic-Concepts/
• http://incometaxmanagement.com/tax-treatment-of-pension-
monthly-and-commuted-for-computing-salary-income-section-
171ii//
• https://blog.cleartax.in/leave-encashment-exemption/
• https://www.finotax.com/income-tax/info/perquisites#i3
• http://incometaxmanagement.com/

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