Income under the Head

CHAPTER4 "Salaries" and its

Computation

PROVISIONS IN BRIEF

Salary is taxable on due or receipt basis whichever is earlier as per section 15

Basis of charge
Computation of Salary XXXXx
income under the Allowances XXXXx
head "Salaries" Perquisites XXXXX
Gross salary XXXXx
Less: Deduction under section 16-
Standard deduction [Sec. 16(ia)] XXxxx
Entertainment allowance deduction [Sec. 16(n] XXXXX
Professional tax [Sec. 16(i)] XXXx
Income under the head "Salaries" XXXXX
Notes
1. Standard deduction is Rs. 50,000 or gross salary, whichever is lower.
2.Professional tax is deductible on "payment basis". If it is paid by the employer on behali
of the employee, it is first included in gross salary as perquisite and then deduction is
allowed under section 16(in).
Different forms of
salary
Basic salary Taxable.
Dearness allowance/pay Taxable.
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 Taxable
while in service
Leave encashment at 1. In case of Government
the time of retirement 2. In case of non-Government
employees, it is fully exempt from tax.
or at the time of the least of the following:
employees, it is exempt from tax to the extent of
leaving the job a. Cash
equivalent of leave salary in respect of the
credit of employee at the time of retirement period
of earned leave at the
(which cannot exceed 30 days
"average salary" for every completed year of service); or
b. 10 months
"average salary";
or
C. Amount specified by the Government,
i.e., Rs. 3,00,000; or
d. Leave encashment
Notes-
actually received at the time of retirement.
1. Government
employee for this purpose is a Central Government
Government employee. employee or a State
2." Average salary" for this
purpose is to be calculated on the basis of
during the period of 10 months average salary draw
immediately preceding the retirement.
Salary in lieu of notice Taxable

40
 ovisions in br
Salary to partner
Not
chargeable under the head "
gains of business or
Fees and commission
Taxable. profession".Salaries" but taxable under the head"Profits
and
Bonus
Taxable on receipt basis if not
Gratuity 1. In case of
taxed earlier on due
Government basis.
2. In case of employee fully exernpt from
it is
non-Government employee covered
1972 it is exempt from tax by the
tax.
to the extent of Payment of
salary for each year of service (or least of the following:Gratuity Act.
a. 15 days' the
b. Rs. 20,00,000; part thereof
exceeding 6 months)
c.
Gratuity actually received.
3. In case of
non-Government employee (not covered
Act) it is exempt from tax to the by
extent of the least of thethe Payment of Gratuity
a. Rs. 20,00,000; following:
b. Half month's
salary for each completed year of service; or
c.
Gratuity actually received.
Note-"Average salary" for this purpose is to be calculated on the basis of
salary drawn during the period of 10 months immediately average
in which the employee has retired. preceding the month
Pension Uncommuted pension is taxable in all cases. Commuted
from tax in the case of a Government employee pension is fully exempt
(i.e., employee of the Central
an
Government, State Government, local authority arnd statutory corporation). In the
case of non-Government employee, commuted pension is exempt to the extent
given below-
a. one-third of normal pension is exempt if the employee receives gratuity; or
b. one-half of normal pension is exempt from tax if the employee does not
receive gratuity.
Pension under National |1. Employer's contribution is first included in salary and then a deduction is
Pension System (poprularly available (to the extent of 14 per cent of salary in the case of a Central Government
known as NPS) employee or 10 per cent of salary in the case of any other employee) under section
in the case ofa Government|80CCD(2).
employee joining on or 2. Employee's contribution is deductible under section 8OCCD(1) to the extent of
after January 1, 2004 or 10 per cent of salary.
any other employee 3. When pension is received out of the aforesaid amount, it will be taxable in the
year of receipt.
Annuity from employer Taxable as salary.
Annual accretion to the 1. Excess ofemployer'scontribution over 12% of salary is taxable.
credit balance in recogni- 2. Excess of interest over notified interest is taxable (notified rate of interest is
zed provident fund
9.5 per cent)
Retrenchnment Exempt from tax to the extent of leastt of the following:
Compensation a. Amount calculatedf under section 25F(b) of the Industrial Disputes Act; or
b.Anamountspecified by the Government (i.e., Rs. 5,00,000).
Remuneration for Fully taxable under section 15.
extra duties
Compensation received Exempt up to Rs. 5 lakh, if a few conditions are satisfied. One of the conditions
under voluntary retire- is the amount payable on account ofvoluntary retirementor voluntary separation
ment scheme (VRS) of the employees does not exceed (a) the amount equivalent to three months
salary for each completed year of service, or (b) salary at the time of retirement
multiplied by the balance months of service left before the date of his retirement
on superannuation, whichever is more. Relief under section 89 is not available.
Salary from UNO Not chargeable to tax.

t15 days' salary for each year of service (or part thereof exceeding 6 months).

When compensation is paid under any scheme approved by the Central Government, these limits are not applicable and the entire amount is
exempt.
 and its computation
under the head "Salarles"
Income

Salary eceived by a Not taxable up to 2 yearsS

teacher/researcler from
a SAARC member State
Different allowances
City compensatory Fully taxable under section 15.
allourance
extent of the
least of the following:
House rent allouwance Exempt from tax to the Calcutta, Madras
or 40% of sala
a. 50% of salary in Delhi, Bombay, aryin other
cases;
b. house rent allowance; or

C. the excess paid o v e r 10% of salary.

of rent
and thereafter a deduction is all.
Entertainment allowance This allowance is first included in salary is
of the followirng
allowed
deductible"d.
the case of Government employees, least
a. Rs. 5,000;
b. 20% of salary; or
C. entertainment allowance.
Children education tax to the extent it does
not exceed Rs. 100 per mor
onth
lt is exempt from
allowance in India child for a maximum of two children (actual expenditure
is not taken
nto
consideration).
Hostel expenditure It is exempt from tax to the extent it does not exceed Ks. 300 per month

allowance in India child for a maximum of two children (actual expenditure is not taken
nto
consideration). Exemption is in addition to the exemptionavailable in the caseo
children education allowance.
Transport allowance It i s given to an employee to meet his expenditure for the purpose of commuk
between officeand residence. It is exempt up Rs. 3,200 per month in the case ofa
employee who is blind or dumb and deaf or orthopaedically handicapped.
Allowance for transport It is given to employees of transport undertaking to meet their personal exper
employees diture during duty performed in the course of running of such transport fromone
place to another place. The amount is exempt to the extent it does not exceed(
70 per cent of the allowance or (b) Rs. 10,000 per month, whichever is lower
expenditure is not taken into consideration).
(actu
Tribal area allowance
Exempt up to Rs. 200 per month in some cases

Travelling allowance, These allowances are given to meet specific expenditure in performance ol
conveyance allowance, duties of an office. Exemption is available to the extent the amount is utilized
helper allowance, for the specific purpose for which the allowance is
research allowance, given.
uniform allowance
Transfer allowance It isexempt from tax to the extent expenditure is incurred in connection
transfer, packing and transportation of W
to another place. personal effects on transfer from one plue

Foreign allowance Exempt from tax if paid outside India by the Government to an Indian
rendering service outside India. citizert
Tiffin allowance Taxable.
Fixed medical allowance Taxable.
Allowance received by a Not taxable up to 2 years.
teacher/researcher from
a SAARC member State
 Provisions In brief
43

Sumptuary allowance to Not taxable

High Court/Supreme Court
Judge, Chief Election
Commissioner or other
Election Commissioner

Perquisites I n the case of Government employee (i.e., Central Government employee,

Rent-freeunfurnished State Government employee or a Government employee on deputation to a
house public sector undertaking if house is allotted by the Government): Taxable value
is the license fees of the house as per house allotment scheme of the Government
In the case of non-Government employees:
- If the house is owned by employer: Taxable value is 15 per cent of salary of
if is 10 lakh or less or
employee of the relevant period (7.5 per cent population than 25 lakh).
10 per cent if population is above 10 lakh but
not more
Taxable value is either 15 per cent of the
If house is taken on lease by employer:
whichever is lower.
salary or lease rent,
value of rent-free unfurnished house
Value of "furniture" will be added to the
Rent-free furnished Value offurniture is 10per cent per annum ofcost
offurniture
as computed above.
house of the furniture by the employer, as the case
to the employer or rent paid/payable
may be.
house will
of rent-free furnished/unfurnished
Concession 1n rent Value of the perquisite in respect
the amount so calculated, rent charged by
be calculated as given above. From taxable value of the
balance (if it is positive) is
employer shall be deducted. The
concession in rent.
perquisite in respect of
ina "remote area".
Rent-free/concessional Not chargeable to tax if provided accommodation provided to an employee
Hotel accommodation/guesthouse
furnished/unfurnished of salary of the relevant period or hotel tariff,
house in special cases is taxable at the rate of 24 per cent
whichever is lower.
in a previous year) can be
Hotel accommodation for 15 days (in aggregate
transfer at the new location as a tax-free perquisite.
provided immediately after
and housing facility is provided to him at
Further, if an employee is transferred
at the old location), for a
the n e w location (he has yet to vacate a house given
period of 90 days immediately after
transfer only one house (at the option of the
to tax.
employee at the old location or new location) is chargeable
Rent-free house is not taxable if it is provided to a High CourtJudge, Supreme
Election Com-
CourtJudge, Union Minister, Chief Election Commissioner/other Parliament.
Official in
missioners, Leader of Opposition in Parliament, and an
Actual expenditure of the employer as reduced by any amount paid by the
Free domestic servants
employee is a taxable perquisite in the hands of an employee.
Gas, electricity or water Actual amount spent the employer as reduced by any amount recovered
by
from the employee is a taxable perquisite in the hands of an employee.
supplied after purchas-
ingfrom outside agency
Free education facility Expenditure relating to providing training to employees is not taxable. If educa
tion facility is provided to the family members ofemployee, expenditure incurred
by the employer is the taxable value ofperquisite. Ifeducation facility is provided
to the family members in an educational institute owned or maintained by the
employer, then reasonable cost of education in a similar institute in or near the
locality is taxable. Up to Rs. 1,000 per month per child is not taxable if the employer
provides education facility to the children of an employee in an educational
institution owned/maintained by the employer
 Tautie r al cas*
rtht
Fand u t t e maaum cutstarnduns alarav n the kast day ot e
S a e muaplend w SR ladirng ratt on the tist «day ot the n
m vunt *
ntenst u
A t rmoerai trom the emploree
Feruse ne tanade tf the aggregae amount ot original liNn dv
Rs MN NAoreover. if ken is given br emgover tor maiwal troatm
e A ) of the emplovee or his tamily mernbers. it s not chanceti

T the
nt per arnam ot actual cost of ast o
emplover or hine
a d y any araunt revovered tromtheempioyeeisa tanable penu h
hanis of an empiovee. Nothing is however. taxable in the case o te

Actual avt v the empiover miveS TNOTrmal wear and tear mAs sale cons.
paii by the empiovee. is taxable (normal wear and tear tor each vear
cakulatei as folows- compute/electronic items: 0 Per cent p.a. by
staiment method car 0percentp.a. by reduing instalment method. an
asset 10 per cent pa d cust)
Moidaitis . edical farility provided in a hospital owned or maintained bytheem-
s not dhargeable to t a emploiz
2 Medical facilitv
provided by an employer in a
Government hospital, appr
hospital (if a few conditions are satisfied) or a private hospital (if such ne
hospital is recommended by the Govemment tor the medical treatmen
Govennent employees) is not chargeable to tax.
3. Medical insurance
premium paid or reimbursed by the emplover is n
chargeable to tax.
4 Any other
expenditure incurred or reimbursed by the employer for provida
medical facility in India is chargeable to tax.
5.
Expenditure on medical treatment outside india is not chargeable to tax, ifate.
Conditions are satisfied.
6. Further, the
perquisite in respect of medical facility is not taxable if
employeeis a non-specified employee
Motor ca Car ouwred or hired byemployer, expenses incurredbyemnployer andused for
and partly personal partlyoi
purposes - Rs. 1,800 per month (1600 cc or less)/Rs. 2400 pe
month (above 1600 cc) for car and Rs. 900
per month for driver. Expenditur
recovered from employee is not deductible.
Car owned or hired by
employer, expenses incurred employer and used wholly
personai purposes Entire expenditure incurred bybyemployer
-

tion at the rate of 10 per cent annum of

including depre:
per actual cost of the car, is taxable in t:
hands of employee. Expenses recovered from
Car ouned or hired by employee are deductible.
enployer, used for partly
official and
personal(16t0
expenses for private purposes incurred by employee - Rs. 600partly
per month pur C
less)/ Rs. 00 per month (above 1600 c) for car and Rs. 900 per month for úrne
Expenditure recovered from employee is not deductible.
Car owned by employee,
expenses incurred by employer and used
partly personal purpOses Actual expenditure
- for partly of
diture pertaining to official use incurred by employer minuis exper
minus anything recovered from
taxable in the hands of empioyee. emplo
calculated per logbook of the car.
as Expenditure pertaining to official use
can

official use can be caiculated at the rateAlternatively,

of expenditure pertas
Rs. 2400 per month (above 1600 Rs. 1,800 per month
(1600
cc) for car and Rs. 900 per month
CC
iriver
for

45
Free transport
Lunch, refreshment, etc.
Travelling, touring,
accommodation
token
Gift, voucher or
Credit card
Club
Specified security or
sweat equity shares
or ESOP
Employer's contribution
towards recognised
provident fund, NPS
and superannuation
fund and annual accre-
tion to these funds
Perquisite received by a
teacher/researcherfrom
a SAARC member State
Telephone/mobile phone
Any other facility (not
being telephone/mobile
phone and not being
reimbursement of
The Finance Act, 2020 has reduced the tax burden on employees of starts up (qualified for deduction under section 80-1AC) by deferring the
ax payment by 5 years or till they leave the employer company or when they sell their shares, whichever is earliest.
See Circular No. 8/2012, dated October 5, 2012.
Provisions in brief
Conveyance facility when not taxable - Conveyance facility between office and
residence is not chargeable to tax in the case of any employee of any organization.
Moreover, conveyance facility to High Court judges, Supreme Court judges,
Chief Election Commissioner/other Election Commissioners is not chargeable to
tax.
Taxable as a perquisite in thehands of an employee on the basis of value at which
the employer offers such benefit to the public as reduced by any amount
free perquisite in the hands of employees of
recovered from the employee (tax
railways/airlines).
are provided in working hours in remote a r e a
Food and non-alcoholic beverages
installation: Fully exempt from tax.
or in an off shore
other place: Cost to the
Lunch/refreshment is provided in working hours any
at
50 (as
meal reduced by the amount recovered from
employer in excess of Rs. valueper
in the hands of the employee (tea
the employee) is the taxable of perquisite
hours is tax-free perquisite).
and snacks in working
to all employees: Taxable as a perquisite
When such facility is available uniformly of the employer a s
on the basis of actual expenditure
in the hands of a n employee
recovered from the employee.
reduced by any amount Taxable a s a perquisite
available uniformly to all employees:
When such facility is not at which such facilities a r e
hands of a n employee on
the basis of value
in the amount recovered from
the public a s reduced by any
offered by other agencies to
the employee.
the basis of actual
perquisite in the
hands of an employee on
Taxable as or any member
a
be made either to employee
expenditure of the employer (gift may
a n n u m is exempt).
Gift-in-kind up to Rs. 5,000 per
of his household. to official
the employer minus expenditure pertaining
Expenditure incurred by is taxable.
recovered from the employee,
u s e minus anything
minus
annual o r periodical fees) by the employer
Expenditure incurred (including u s e minus the e m -
official anything recovered from
expenditure pertaining to club facility given uniformly to all employ-
ployee, ist xable. Health club/sports
taxable. The initial one time deposits
o r fees for
eesin emnployer's premises, is not with
where benefit does not remain
corporate o r institutional membership,
after cessation of employment, a r e exempt.
particular employee date
value of shares/securities on the
on
Amount taxable is the fair market
recovered from
which is exercised the employee. Amount, if any,
by
option
the employee is deductible.t
Not chargeable to tax up to Rs. 7.5 lakh per year
Not taxable up to 2 years.
Not taxable
Taxable as a perquisite in the hands of an employee on the basis of actual expen-
diture of the employer as reduced by any amount paid by the employee.
 computalln

"Salarles"
and ite
the
head 47
under
Income

employee's
section 8C on ontr
e a p e n d i t u r on h w s
Deduction
under sum payrnent nent eezem
- ns/interest/lump
prorndent frund
c o n t r i b u t i o n s ,

f r officr purpoe) other

Statutory All employee's cont rih
Employee's provident
available.

b u t i o n is
on
s e c t i o n 80C tav
is
12% of salary
under

fund from tax. Deduction over

frund- contribution
taxable. Lumn.
Recogmizedprovident

Excess of employer s over

9.5% is uTT
available. Excess of interest
tion is salary). cases.
12% of in c e r t a i n e m p l o y e e ' s cont.
(exempt up to r e t i r e m e n t , exempt
80C o n ntr
t i m e of
payment
at the LDeduction under
section
a r e exempt from ta
provident fund - and interest
Unrecognized
contribution
time of retirement.
Employer's at the
is not available. contribution)
bution
(except employee's
sumpayment
Lump
taxable.

Rs. 1,50,000.
Up to (not bein
Deduction under
house rent
allowance, (b) gTatuity the time i
section 8OC (a)
of calculatingGratuity leave
encasament
at
the purpose
Act), (c) towaras recognize
Meaning of
"salary" for|For under fhe Payment of contribution

gratuity
NPS contribution and
(e) employer's means basir
purposes, "salary
different calculations
retirement, (d) For these retiremen:
tax
not chargeable to for computing
-

provdent fund, of salary by

allowance /pay if part
achieved an
turnover
dearness
percentage
of
salary, commission (if paid as a
and
benefits
the Payment of Gratuity
Act
employee). gratuity
received under basic salary and
the
FOr notpurpose ofcalculating
For this purpose,
"salary"
m e a n s
The s a m e rule is
chargeable to tax allowance is paid.
-

1972, dearness
dearness allowance whenever
compensation. house For this
of r e t r e n c h m e n t
-

applicable in the c a s e rent-free/concessional

perquisite value of if part of salary
F o r the purpose ofcalculating dearness
allowance*/pay
m e a n s basic salary, taxable allowances
commission, fees,
purpose, "salary" bonus,
for computing
r e t i r e m e n t benefits,
to tax. However,
"salary" does
benefit otherwise chargeable contribution
and any monetary perquisite and employer's
not include tax-free
allowances, value of a received at the time
of termi-
fund and lump-sum payments
towards provident retirement, like gratuity, sever
or voluntary
superannuation commutation of
nation of service o r retrenchment benefits,
leave encashment, voluntary
ance pay,
pension and similar payments. allowance, not chargeable to
tax -
For this purpose,
F o r the purpose ofentertainment

"salary" m e a n s basic salary.

as Government employees
(Govt.) or non-Government
The following are treated
Meaning of "Govern-
ment employee" for employees (N Govt.)-
different purposes Other
For the purpose of Central/State Employees Employees
Government oflocal ofstatutory employees
computation of authorities
taxable amount employees corporations
Leave encashment Govt. N Govt. NGovt. NGovt.
Govt. Govt. N Govt. N Govt.
Gratuity
Commuted pension Govt. Govt. Govt. NGovt.
Rent-free house Govt.' N Govt. N Govt. N Govt.

Dearness allowance/payshallbeconsidered only whenitis part of salary for computing all retirement benefits (like pension, leave encashment
gratuity, provident fund, etc.). f dearness allowance/pay is part of salary for computing only some (not all) of the retirement benefits, then it
not taken into consideration for this purpose.
1. For valuation of perquisite in respect of rent-free house, a Central/State Government employee who is
treated as a Government employee if house is allotted on deputation to a pubiic sector,
by the Central/State Government.