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Unit - 2
Income from Salaries
BASIS OF CHARGE – Section 15
Any benefit due to the EMPLOYER-EMPLOYEE RELATIONSHIP is
taxable under head Salaries.
• Salary is taxable on RECEIPT OR DUE whichever is earlier.
• BONUS is taxable on RECEIPT basis.
• Employer-Employee Relationship - Taxable u/h SALARIES
• If an individual receives salary from more than one source/employer during

the same P/Y - All will be taxable
• Any arrears of salary paid or allowed. . . W.E.F from__________
SALARY includes –
– Wages
– Any annuity or pension
– Any Gratuity
– Any fees, commission, perquisite or profit in lieu of salary or in addition to
salary
– Any Advance Salary
– Leave Salary
– Amount transferred to RPF to the extent is taxable.
– Any other payment made or benefit extended due to the employer-employee
relationship.
TAX TREATMENT OF DIFFERENT FORMS OF SALARY INCOME

 ADVANCE SALARY: taxable on receipt basis in the A/Y relevant to
the P/Y in which it was received. (However relief can be claimed)
 ARREAR SALARY: TAXABLE ON RECEIPT BASIS, if the same
has not been subjected to tax earlier on due basis. (However relief can be
claimed)
 BONUS & COMMISSION RECEIVED: Both will be taxable in the
year of receipt, if it has not been taxed before. (However relief can be
claimed)
LEAVE SALARY
Encashment of leaves by surrendering leave standing to one’s credit is known as

LEAVE SALARY.
• Leave Salary paid to legal heirs in the case of Death of the employee is not
taxable.
• Leave Salary during the continuity of employment will be chargeable to tax
for all.
• However , leave salary is encashed on retirement by a Government employee
will fully exempt
• But for others it will be exempt up to a limit & balance shall be taxable.
EMPLOYEES PROVIDENT FUND
It is a retirement benefit wherein employer and employee contribute

certain percentage of employees’ salary to a fund, which shall be invested by
the provident fund authorities in gilt-edged securities, and such investments
shall earn interest and such interest shall be credited to PF a/c of the employee
on a regular basis.
Types of PF
 Statutory Provident Fund

 Recognized Provident Fund
 Unrecognized Provident Fund
 Public Provident Fund
Statutory Provident Fund (SPF):
 The local authorities, governmental bodies, railways, universities, etc.

manage these Provident Funds.
 This action falls under the Provident Funds Act, 1925.
 The employer does not have to pay taxes on their contributions, while
the employees’ contributions are taxable according to section 80c.
 No tax implications are made on the interest provided as it is not
considered as a part of the income.
 One need not pay tax while redeeming the complete amount after
retirement.
 If the individual deactivates their PF account, no further tax
implications are necessary, not even during the amount withdrawal
procedure.
Recognized Provident Fund (RPF):
Recognized Provident Fund is one of the most popular PF. All the
employees working in companies with more than 20 employees contribute to
RPF.
The employee can either self-create a scheme under the PF trust for their
contributions or can follow the scheme of the PF commissioner, but the CIT
(Commissioner of Income Tax) has to approve all the schemes.
In case, the employees’ contribution is more than 12%, then it is taxable

for the year in which the contribution is made.
The tax is deducted based on Section 80C for the employees’ share of
contribution.
The total amount during the redemption is not taxable only if the
employee has provided a continuous service of 5 years.
Unrecognized Provident Fund (UPF)
 The CTI (Commissioner of Income Tax) does not recognize these

funds.
 Under these provident funds, the contributions made in a particular
financial year are not taxable for the employer.
 The tax deductions are also not made for the employee, i.e., Section
80C is not implied.
 One need not pay tax on the interest.
 During the time of withdrawal, this amount is taxable under the name
of ‘Salary Income’. But, the contribution made by the employee is not
taxable under this section, and rather other taxes are implied for it.
Public Provident Fund (PPF)
 This scheme of Public Provident Fund is available for all in general,

whether employed or unemployed.
 The minimum contribution amount must be Rs. 500 and the maximum
amount extends up to Rs. 1.5 lacs.
 The repay of this amount so contributed takes place after a tenure of 15
years.
 This acts as one of the most beneficial schemes for future savings and
investments.
 The interest so earned on the amount contributed is also tax-free.
Unit – 2 – Problems
Income from Salaries
Example No: 1
Mr.A receives Rs.4,20,000 p.a. as net salary. Employer had deducted

Rs.4,000 p.m. as Employees’s contribution to R.P.F. Rs.5,000 p.a. as tax
deducted at source and Rs.2,000 p.a. as professional tax. During the year
employer had deducted Rs.2,500 p.m. towards the recovery of house building
advance taken by Mr.A.
Solution:
Employee Salary
Net salary received 4,20,000
Add: (i) Employee’s own contribution to P.F. 4,000p.m.
(4000 X 12 Months) 48,000
(ii) Tax deducted at source 5,000
(iii) Professional tax deducted at source 2,000
(iv) Recovery of House building Advance @ 2500 p.m. 30,000
----------------
Gross Salary 5,05,000
----------------
Problem:No: 2
Calculate the taxable amount of annual accretion to R.P.F. if following

information is provided by assesse.
(i) Pay @ Rs.40,000 p.m.

(ii) Commission received by him on the basis of turnover achieved by him
Rs.1,36,000
(iii) Employer’s contribution to R.P.F. @ 13% salary:
(iv) Interest credited during the year to R.P.F. Balance @12% is
Rs. 64,000.
Solution:
Calculation of taxable portion of annual accretion
(i)Employer’s contribution to R.P.F. @ 13% 80,080

of salary (13% of 4,80,000 + 1,36,000)
Less: 12% of salary being exempted 73,920
Taxable Portion ----------- 6,160
(ii) Interest credited to R.P.F. Balance
@12% 64,000
Less: Exempted upto @ 9.5% (64,000 X
9.5/ 12) 50,667
Taxable Portion ______ 13,333
Taxable portion of annual accretion 19,493

_______
Problem:No: 3
Calculate the taxable amount of annual accretion to R.P.F. if

following information is provided by assesse.
(i) Basic Salary @ Rs.20,000 p.m.
(ii) Dearness Allowance Rs.1000 p.m.
(iii) Commission on sales Rs.4,000.
(iv) Employer’s contribution to R.P.F. @ 14% on Rs.38,000
(v) Interest credited to RPF at 12% is Rs.12,000.
Solution:
(i)Employer’s contribution to R.P.F. @ 14% 38,000

Less: 12% of salary being exempted
(20,000X12+4000)=2,40,000+4000 29,280
=2,44,000X12/100 -----------
Taxable Portion 8720
@12% 12000
Less: Exempted upto @ 9.5% (12000 X
9.5 / 12) 9500
Taxable Portion ______ 2500

_______
Problem: No:4
Compute gross salary of Mr.Y for the assessment year 2018-19 from the
information given below:
 Basic salary - Rs.4,000/month
 Dearness Allowance – Rs.750/month out of which Rs.300/month enters
into pay for employment purposes.
 Advance salary for 2 months Rs.10,000.
 Employee’s contribution to RPF is Rs.800/month.
Step:1
Calculation of taxable portion of RPF
Employee’s contribution to R.P.F. (800X12 9600

Months)
Salary: BP+DA (4000X12 Months +300X12
Months)
:(48000+3600) = 51,600 6,192
Less: 12% of 51,600 3408
Taxable Portion _______
Step:2
Computation of Gross Salary
Basic Pay (4000X12 Months) 48,000

Dearness Allowance 300 X12 Months 3600
450 X12 Months 5400
----------- 9000
Advance Salary 10,000
Taxable Portion to RPF 3408
Gross Salary 70,408
Problem: No: 5
Compute taxable part of annual accretion from information given below:
(i) Salary Rs.48,000 p.m.

(ii) Commission @ 1% of turnover of Rs.80,00,000 achieved by
him during the previous year.
(iii) Employer’s contribution to R.P.F. @ 7,000 p.m.
(iv) Interest credited to R.P.F. balance @12% p.a. is Rs.72,000
Solution:
(i)Employer’s contribution to R.P.F. 84,000

(7000X12 Months )
(48,000 X12 = 5,76,000) + Commission -----------
=5,76,000 + 80000 = 6,56,000
Taxable Portion 5280
@12% 72,000
Less: Exempted upto @ 9.5% (72000 X
9.5% / 12) 57,000

_______
Transferred Balance:
The balance of unrecognized provident fund, which is transferred to

Recognized provident fund is called “Transferred Balance”.
The amount of taxable portion will be calculated as under:
(i) The fund will be treated as R.P.F. from the date fund was
instituted.
(ii) The employer’s contribution of URPF shall qualify for
exemption upto 12% of salary and excess shall be taxable.
(iii) The interest credited to the accumulated balance shall be
exempted if rate of interest was upto 9.5%. Excess if any, is
taxable.
(iv) The taxable amount under point (ii) and (iii) above shall be
deemed to be the income of the previous year in which fund
gets recognition. The remainder of the transferred balance
shall be ignored.
Problem: No: 1
Mr.A joined a new job on 1.4.2017 at Rs.15,000 p.m. due on last day of the
month. He started contributing to URPF @ Rs.2500 p.m. His employer was
also contributing same amount. The fund was recognized from 1.8.2018.
Interest credited during 2017-18 at the rate of 11% was Rs.4,400 and for
the period 1.4.2018 to 31.7.2018 was Rs.3,300. Compute the amount of
transferred balance of URPF to RPF as on 1.8.2018 and its taxable portion.
Solution:
Computation of transferred balance and taxable portion thereof
Previous year 2017-18 (Given) (1.4.2017 to 31.3.2018)
Employee’s ( Mr.A) Contribution (2500X12 Months) = Rs.30,000
Employer’s Contribution (2500X12 Months) = Rs.30,000
Interest on Balance @ 11% = Rs.4,400

(2500X12)
(15,000 X12 = 1,80,000 X 12/100 -----------
Taxable Portion 8,400
@11% 4,400
Less: Exempted upto @ 9.5% (4400 X 9.5
/ 11) 3,800

_______
Previous year 2018-19 (Given – Upto 31.07.2018 – 4 Months)
Employee’s Contribution (2500X4 Months) = Rs.10,000
Employer’s Contribution (2500X4 Months) = Rs.10,000
Interest on Balance @ 11% = Rs.3,300

(2500X4)
(15,000 X4 Months = 60,000 X 12/100 -----------
Taxable Portion 2,800

@11% 3,300
Less: Exempted upto @ 9.5% (3300 X 9.5/
11) 2,850

_______
Taxable portion of Transferred Balance is (9,000+3,250) = 12,250
Transferred balance to RPF on 1.8.2018 is 64,400+23,300 = 87,700

Chapter – 2
Allowance
Allowance is a fixed monetary amount paid by the employer to the

employee for meeting some particular expenses, whether personal or for the
performance of his duties. These allowances are generally taxable and are to be
included in the gross salary unless a specific exemption has been provided in
respect of any such allowance.
Allowances which are Exempt in case of certain Persons

1. Allowances to a citizen of India, who is a Government employee,
rendering services outside India. [Section 10(7)]
2. Allowances to High Court judges under section 22A(2) of the High Court
Judges (Conditions of Service) Act, 1954.
3. Sumptuary allowance given to High Court and the Supreme Court judges.
Sumptuary allowances are in the nature of entertainment allowance.
(Meaning: Daily Expenditure)
4. Allowance received by an employee of United Nations Organisation

(UNO) from his employer.
Allowances which are Fully Taxable

All other allowances excepting those discussed in preceding paras, are fully
taxable. Some of such allowances are enumerated as under:
1. Dearness Allowance (DA)

2. City Compensatory Allowance (CCA)
3. Medical Allowance: Fully taxable, irrespective of whether any amount
has been spent on medical treatment or not.
4. Lunch Allowance/tiffin allowance
5. Overtime Allowance
6. Servant Allowance
7. Warden Allowance
8. Non-practising Allowance
9. Family Allowance
10.Project Allowance
11.Entertainment Allowance
12.Marriage Allowance
13.Water and Electricity Allowance
14.Transport Allowance
15.Holiday trip allowance
16.Deputation allowance
Prescribed Special Allowances which are Exempt to a certain extent -

Section 10(14) / Partially Taxable Allowances
(i) Special Allowances for performance of official duties:
These allowances are not in the nature of a perquisite within the meaning of
section 17(2) and are specifically granted to meet expenses wholly, necessarily
and exclusively incurred in the performance of duties of an office or
employment of profit. These allowances will be exempt the extent such
expenses are actually incurred for that purpose. [Section 10(14)(i)].
These allowances are:
a. Travelling allowance/ Transfer Allowance
Any allowance granted to meet the cost of travel on tour or on transfer of

duty. "Allowance granted to meet the cost of travel on transfer" includes
any sum paid in connection with transfer, packing and transportation of
personal effects on such transfer.
Tax Exemption: It is exempted upto actual expenditure incurred for the

purpose of employment. Excess, if any, will be taxable.
b. Daily allowance:
Any allowance, whether granted on tour or for the period of journey in

connection with transfer, to meet the ordinary daily charges incurred by
an employee on account of absence from his normal place of duty.

c. Conveyance allowance:
Any allowance granted to meet the expenditure incurred on conveyance

in performance of duties of an office or employment of profit, provided
that free conveyance is not provided by the employer. Expenditure
incurred on journey from residence to office and back to residence shall
not be treated as expenditure incurred on conveyance in performance of
official duties.

d. Helper allowance:
Any allowance, by whatever name called, granted to meet the

expenditure incurred on a helper where such helper is engaged for the
performance of the duties of an office or employment of profit.

e. Academic allowance:
Any allowance, by whatever name called, granted for encouraging

academic, research and training pursuits in educational and research
institutions.

f. Uniform allowance:
Any allowance, by whatever name called, granted to meet the

expenditure incurred on the purchase or maintenance of uniform for wear
during the performance of the duties of an office or employment of
profit.

The above allowances shall be exempt to the extent of minimum of the

following:
1. Actual allowance received.

2. Actual amount spent for the purposes of duties of office or employment.
(ii) Allowances to meet Personal Expenses
These allowances can be of the following two types:
1. Allowances which are exempt to the extent of amount received or the limit
specified, whichever less is:
A. Children education allowance:
Exempt upto actual amount received per child or ₹100 p.m. per child
upto a maximum of 2 children, whichever is less.
B. Hostel expenditure allowance:
Exempt upto actual amount received per child or ₹300 p.m. per child
upto a maximum of two children, whichever is less.
C. Tribal area, Scheduled Area/Agency area allowance:
Exempt upto actual amount received or ₹200 per month, whichever is

less.
D. Special compensatory hilly area allowance or high altitude allowance

etc.:
Exemption varies from ₹300 to ₹7,000 per month.
E. Border area, remote area allowance, disturbed area allowance, etc.: (as
per given later):
Exemption varies from ₹200 p.m. to ₹1,300 p.m.

F. Compensatory field area allowance:
Exempt to the extent of ₹2,600 p.m.
G. Compensatory, modified field area allowance:
H. Counter insurgency allowance granted to members of armed forces:
I. Transport allowance:
Any 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, to the extent of ₹1,600 per month.
However, such transport allowance granted to an employee, who is blind

or deaf and dumb or orthopaedically handicapped with disability of lower
extremities, is exempt to the extent of ₹3,200 p.m. instead of ₹1,600.
J. Underground allowance:
Any underground allowance granted to an employee who is working in

uncongenial, unnatural climate in underground mines shall be exempt to
the extent of ₹800 p.m.
K. High altitude (uncongenial climate) allowance:
Given to the member of the armed forces for altitude of 9000 ft to 15000
ft ₹1,060 p.m. and for altitude above 15000 ft ₹1,600 p.m.
L. Special compensatory highly active field area allowance granted to

members of armed forces:
M. Island (duty) allowance:
Given to the member of the armed forces in the Andaman & Nicobar and
Lakshadweep Group of Islands exempt to the extent of ₹3,250 p.m.
Allowance which is exempt to the extent of certain
percentage of amount received
Allowance allowed transporting employees working in any
transport system:
If any fixed allowance is given by the employer to the employee who is
working in any transport system, to meet his personal expenditure during his
duty performed in the course of running of such transport from one place to
another,
 the amount of exemption shall be 70% of such allowance or

 ₹10,000 p.m.,
o whichever is less.
Note : Exemption will be allowed to the transport employees only when they
are not in receipt of daily allowance.
Treatment of Entertainment Allowance

This deduction is allowed only to a Government employee. Non-Government
employees shall not be eligible for any deduction on account of any
entertainment allowance received by them.
In case of entertainment allowance, the ssesse is not entitled to any

exemption but he is entitled to a deduction under section 16(ii) from gross
salary. Therefore, the entire entertainment allowance received by any
employee is added in computation of the gross salary. The Government
employee is, then, entitled to deduction from gross salary under section 16(ii)
on account of such entertainment allowance to the extent of minimum of the
following 3 limits.
1. Actual entertainment allowance received during the previous year.

2. 20% of his salary exclusive of any allowance, benefit or other perquisite.
3. ₹5,000.
Note :
1. For purpose of deduction in respect of entertainment allowance, the

actual amount spent towards entertainment expenses is irrelevant.
Even if the Government employee spends the entire amount of
entertainment allowance or even an amount greater than the
entertainment allowance received is spent on entertainment for official
purposes, the deduction shall be minimum of the above 3 limits.
2. Amount actually spent out of entertainment allowance is irrelevant for

claiming deduction.
3. Sumptuary allowance has to be treated as an entertainment allowance.
1. House Rent Allowance-HRA [Section 10(13A)

and Rule 2A]
Quantum of Exemption: Minimum of following three limits:
Mumbai / Kolkata / Delhi / Chennai Other Cities

(i) Allowance actually Received Allowance actually
Received
(ii) Rent Paid in excess of 10% of Salary Rent Paid in excess of
10% of Salary
(iii) 50% of Salary 40% of Salary
Note :
The exemption in respect of HRA is based upon the following factors:
(1) Salary
(2) Place of residence
(3) Rent paid
(4) HRA received.
Since there is a possibility of change in any of the above factors during

the previous year, exemption for HRA should not always be calculated on
annual basis. As long as there is no change in any of the above factors it can be
calculated together for that period. Whenever there is a change in any of the
above factors, it should be separately calculated till the next change.
Meaning of salary for different purposes:

1. For HRA/P.F/ Gratuity and leave encashment: Basic Pay + Dearness Pay
+ D.A. (which enters) + Commission on turnover achieved by him.
2. For specified cases: All what he gets in cash less exemptions, if any, less
deductions u/s 16, must be more than Rs.50,000.
3. For deductions u/s 16(ii): Only Basic salary
4. For gratuity under payment of Gratuity Act: Pay + Full D.A.
5. For rent free house: Pay+D.P+D.A. (Which enters)+ any fee,
commission, bonus ( Except gratuitous bonus) + All Fully taxable
allowances + Taxable portion of other allowances + Taxable E.A. +
Leave encashment pertaining to current year.
Problem: No: 1
X receives salary of Rs.40,000 p.m. and DA @ Rs.10,000 p.m.. His

employer declares half of D.A. as pay (i.e., enters into pay for service benefits).
Compute his salary.
Solution:
His salary shall be computed as under:
Salary @ 40,000 p.m. 4,80,000
D.A. (which enters into pay for service benefits) 60,000
Total salary 5,40,000

Problem: No: 2
Mr. Aman is working with ABC Ltd. at a Basic Salary of 25,000 pm, Dearness
Allowance which enters to service benefits is 5,000 pm. Calculate his Salary
Income of the PY 2018-19.
Solution:
Salary shall be computed as under:
Salary @ 25000 p.m. 3,00,000
D.A. (which enters into pay for service benefits) 60,000
HRA:
Sometimes the employer does not provide rent-free accommendation but

instead makes provisions to pay some amount in cash; so that the employee may
be compensated to some extent as far as rent is concerned. The amount of cash
paid is known as HRA. Out of the total H.R.A. received an amount equal to the
minimum of the following three items is exempted from tax u/s 10 (13A) read
with rule 2A and balance, if any, will be added in the salary of the employee for
tax purpose. The three items are:
(i) 50% of salary in case of Mumbai, Kolkatta, Delhi and Chennai and
40% of salary in case of all other cities (Or)
(ii) Actual House rent Allowance received (Or)
(iii) The amount by which the actual rent paid by the employee exceeds
10% of his salary.
Problem No: 3
Mr.Hari is employed at Amritsar on a salary of Rs.30,000 p.m. The

employer is paying H.R.A. of Rs.8,000 p.m. but the actual rent paid by him
(employee) is Rs.12,000 p.m. He is also getting 2% commission on turnover
achieved by him and turnover is Rs.50,00,000.
Calculate the gross salary.
Solution:
Computation of gross salary of Mr.Hari
Salary (30000X12 Months) 3,60,000

Commission on Turnover 1,00,000
(50,00,000X2/100)
House Rent Allowance received 96000 Nil
(8000X12 Months)
Less: Exempted u/s 10(13A) (see Note) 96000
Working Note:
(i) Actual HRA received 96,000 (or)

(ii) Excess of rent paid over 10% of salary
(1,44,000 – 46,000) 98,000 (OR)
(iii) 40% of salary (Amritsar) 1,84,000 (OR)
Exempted H.R.A. is Rs.96,000
Problem No: 4 (10 Marks)

Compute gross salary from the information given below for each situation
separately:
(i) Salary @ Rs.30,000 p.m.

(ii) D.A. @ Rs.6,000 p.m.
(iii) C.C.A @ Rs.1,000 p.m.
(iv) House Rent Allowance @ Rs.8,000 p.m.
(v) Commission on turnover achieved by him is Rs.40,000.
Situation: 1 Living in own house
Situation: 2 Living in rented houses at Delhi and D.A. enters into pay for
retirement benefits and rent paid is Rs.7,000 p.m.
Situation: 3 Living in rented house at Chandigarh and D.A. does not enter into
pay for retirement benefits and rent paid is Rs.10,000 p.m.
Solution:
Situation: 1 Living in own house
Computation of gross salary
Salary (30000X12 Months) 3,60,000

D.A. (6,000X12 Months) 72,000
C.C.A @ (1,000X12 Months) 12,000
Commission on Turnover 40,000
HRA received(8000X12months) 96,000
Situation: 2 Living in rented houses at Delhi and D.A. enters into pay for
Salary (30000X12 Months) 3,60,000

D.A. (6,000X12 Months) 72,000
C.C.A @ (1,000X12 Months) 12,000
Less: Exempted u/s 10(13A) (see Note) 36,800 59,200
Note:
(i) Actual HRA received(8000X12months) 96,000 (or)
Actual Rent Paid (7,000X12 = 84,000) – (4,72,000@10%))
84,000 – 47,200 = 36,800
(OR)
(iii) 50% of salary (Delhi) (3,60,000+72,000+40,000)
(4,72,000X50/100) 2,36,000 (OR)
Exempted H.R.A. is Rs.35,6000
Situation: 3
Living in rented house at Chandigarh and D.A. does not enter into pay for
Salary (30000X12 Months) 3,60,000

D.A. (6,000X12 Months) 72,000
C.C.A @ (1,000X12 Months) 12,000
Less: Exempted u/s 10(13A) (see Note) 80,000 16,000
Note:
(i) Actual HRA received(8000X12months) 96,000 (or)
Actual Rent Paid (10,000X12 = 1,20,000) – (Salary + Commission @10%))
1,20,000 – 40,000 = 80,000
(OR)
(iii) 40% of salary
4,00,000@40% = 1,60,000
Problem No: 5: (for Allowance) (10 Marks)
Mr.Ramesh is employed at Hyderabad at a Basic Salary of Rs.25,000 p.m. and he is

also getting following allowances:
1. Dearness Allowance 2,000 p.m.

2. Lunch Allowance 1,000 p.m.
3. Servant Allowance (He is paying Rs.1,200 p.m. to a servant) 1,000 p.m.
4. Transport Allowance 2,000 p.m.
5. Education Allowance @ 200 p.m. per child for three children
6. Hostel allowance to one child 500 p.m.
7. Conveyance Allowance 800 p.m.
8. Overtime Allowance 2,000 p.m.
9. Officiating Allowance 2,000 p.m.
10. Cash Allowance 1.200 p.m.
11. Entertainment Allowance 2,000 p.m.
12. Medical Allowance 800 p.m.
13. City Compensatory Allowance 600 p.m.
14. House Rent Allowance 5,000 p.m.
He is having a family house at the place of his posting but he is living in a rented
house and is paying a rent of Rs.7,000 p.m. Find out his Gross Salary.
Solution:
Computation of Gross Salary of Mr.Ramesh
Basic Salary (Rs.25,000X12 Months) 3,00,000

Dearness Allowance (Rs.2,000 X12 Months) 24,000
Lunch Allowance (Rs.1,000 X 12 Months) 12,000
Servant Allowance (Rs.1,000 X 12 Months) 12,000
Transport Allowance (Rs.2,000 X12 Months) 24,000
Education Allowance Received (200 X 3 Children X 12 7,200
Months)
Less: Exempted (Rs.100X2 Children X12 Months 2,400 4,800
Hostel allowance to one child (Rs.500 X 12 Months) 6,000
Less: Exempted (Rs.300 X12 Months 3,600 2,400
Conveyance Allowance (Rs.800 x 12 Months) 9,600
Overtime Allowance (Rs.2000 X 12 Months) 24,000
Officiating Allowance (Rs.2000 X 12 Months) 24,000
Cash Allowance (1,200 X 12 Months) 14,400
Entertainment Allowance (Rs.2,000 X 12 Months) 24,000
Medical Allowance (Rs.800 X 12 Months) 9,600
City Compensatory Allowance (Rs.600 X 12 Months) 7,200
House Rent Allowance Received (Rs.5,000 X 12 Months) 60,000
Less: Exempted 54,000 6,000
Working Note:
(i) Actual Rent Received Rs.60,000 (or)

(ii) 40% of Salary (3,00,000 X 40%) = 1,20,000 (or)
(iii) Rent paid – 10% of salary
(Rs.7,000 X 12 Months – 10% of Rs.3,00,000)
(84,000 – 30,000) = Rs.54,000
Chapter – 3
Perquisites
“Perquisite” may be defined as any casual emolument or benefit
attached to an office or position in addition to salary or wages.
“Perquisite” is defined in the section 17(2) of the Income tax Act

as including:
(i) Value of rent-free/concessional rent accommodation provided by the

employer.
(ii) Any sum paid by employer in respect of an obligation which was

actually payable by the assessee.
(iii) Value of any benefit/amenity granted free or at concessional rate to

specified employees etc.
(iv) 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 assesssee.
(v) The amount of any contribution to an approved superannuation fund

by the employer in respect of the assessee, to the extent it exceeds one
lakh rupees; and
(vi) the value of any other fringe benefit or amenity as may be prescribed.
Perquisites Exempted from Tax for all Employees and Not Added in
Salary Income
1. Medical facility:
The value of any medical treatment provided to an employee or any

member of his family in a hospital, dispensary or a nursing home
maintained by the employer shall be a tax free perquisite.
2. Medical reimbursement:
Any sum paid by the employer in respect of any expenditure incurred by

the employee on his medical treatment or treatment of any member of his
family subject to maximum of ₹15,000 in the previous year .
3. Recreational facilities:
Any recreational facility provided to a group of employees (not being
restricted to a select few employees) by the employer is not taxable.
4. Training of employees:
Any expenditure incurred by the employer, for providing training to the

employees or by way of payment of fees of refresher courses attended by
the employees.
5. Use of health club, sports and similar facilities provided uniformly to

all employees by the employer.
6. Expenses on telephone, including a mobile phone, actually incurred on

behalf of the employee by the employer.
7. Employer's contribution: Employer's contribution to superannuation

fund of the employee or provided such contribution does not exceed
₹1,50,000 per employee per year.
8. The premium paid by the employer on an accident policy taken out by it

in respect of the employee would not be a perquisite.
9. Amount given by employer of assessee to assessee's child as

scholarship is exempt under section 10(16).
10.Food and beverages provided to employees:
The following shall be a tax free perquisite in the hands of the

employees—
a. free food and non-alcoholic beverages provided by the

employer to his employees during working hours:
i. at office or business premises or
ii. through paid vouchers which are not transferable and
usable only at eating joints. Provided the value of such
meal is upto ₹50 per meal.
b. Any tea or snacks provided during working hours.
c. Free food and non-alcoholic beverages during working hours
provided in a remote area or on offshore installation.
11.Loans to employees:
In the following cases the value of benefit to the assessee resulting from
the provision of interest free or concessional loan shall be nil:
a. where the amount of loans are petty, not exceeding in the aggregate
₹20,000;
b. loans made available for medical treatment in respect of diseases
specified in rule 3A of the Income-tax Rules. However, the
exemption so provided shall not apply to so much of the loan as
has been reimbursed to the employee under any medical insurance
scheme.
12.Perquisites provided outside India:
Perquisites provided by the Government to its employees, who are

citizens of India for rendering services outside India, are not taxable.
[Section 10(7)]
13.Rent free House/Conveyance facility:
Rent free official residence and conveyance facilities provided to a Judge

of the Supreme Court/High Court is not a taxable perquisite.
14.Residence to officials of Parliament, etc.:
15.Rent free furnished residence (including maintenance thereof) provided

to an officer of the Parliament, a Union Minister or Leader of
Opposition in Parliament, is not a taxable perquisite.
16.Accommodation in a remote area:
The accommodation provided by the employer shall be a tax free

perquisite if the accommodation is provided to an employee working at
mining site or an onshore oil exploration site or a project execution site,
or a dam site or a power generation site or an offshore site which—
a. being of a temporary nature and having plinth area not exceeding
800 square feet, is located not less than eight kilometres away from
the local limits of any municipality or a cantonment board; or
b. is located in a remote area.
17.Educational facility for children of the employee:
Where the educational institution itself is maintained and owned by

the employer and free educational facilities are provided to the
children of the employee or where such free educational facilities
are provided in any institution by reason of his being in
employment of that employer, there shall be no perquisite value if
the cost of such education or the value of such benefit per child
does not exceed ₹1,000 p.m.
18.Use by the employee or any member of his household of laptops and

computers belonging to the employer or hired by him.
19.Leave Travel Concession
20.Tax paid by the employer on non-monetary perquisites:
Tax paid by the employer on nonmonetary perquisites of the

employee shall be exempt in the hands of the employee. [Section
10(10CC)]
Perquisites taxable for all Employees
1. Value of Rent-Free Accommodation (RFA)

2. Value of concession in rent.
3. Amount paid by employer in respect of any obligation which
otherwise would have been payable by employee.
4. Value of any security or sweat equity shares allotted or transferred
by employer/former employer as free or concessional cost.
5. An amount of contribution to an approved superannuation fund by
the employer, to an extent it excess Rs. 1,00,000/-.
6. Any sum payable either directly or through a fund by employer
(other than recognised PF, approved superannuation fund etc.) to
effect an assurance on the life of the employee or to effect a contract
for an annuity.
7. Determination of the value of prescribed fringe benefit or amenity
i. Interest free or concessional loan
Value of perquisite w.e.f. 1-4-2000, of the loan given to the

employee or any member of his household shall be at the rates charged by
State Bank of India in respect of the loans for the same purpose advanced
by the employer, on the maximum outstanding monthly balance as
reduced by interest actually paid by employee – However, perquisite
value for loans (net of amount reimbursed under medical insurance
scheme) given for medical treatment of specified disease or petty loans
up to Rs. 20,000 is not taxable.
ii. Use of movable assets
Value of benefit shall be 10% p.a. of the actual cost of asset or the
rent charges paid by the employer as reduced by amount paid by the
employee.
iii. Transfer of movable assets
Value of benefit on transfer of movable asset shall be the actual

cost of the asset to the employer as reduced by the amount calculated at
10% of such cost for each completed year of use by the employer and
further reduced by the payments made by the employee. The normal wear
and tear would be computed at 50% in case of computers and electronic
items, and 20% in case of motor cars on the reducing balance method.
Perquisites taxable only in hands of specified employees
An employee is said to be a specified employee in any of the

following cases:
i. If he is Director of the company (or)
ii. Employee having substantial interest in the affairs of the company

i.e. he holds at least 20% of the voting power in the company (or)
employer-company
iii. His monetary annual salary income is more than Rs. 50,000 p.a.
1. Valuation of Perquisites in respect of Motor Car
and other Modes of Conveyance [Rule 3(2)]
1. When the Motor Car is Owned or Hired by the
Employer
(A). Motor Car is used wholly and exclusively in the
performance of Official Duties:
 When the CC is less than / or more than 1600 CC: -
o Perquisites Value is NIL
B. Motor Car is used exclusively for Private / Personal

Purposes:
 When the CC is less than / or more than 1600 CC: -
o Perquisites value is actual Expenditure incurred by the employer
on the running and maintenance of Car + Salary of Chauffeur +
Normal Wear and Tear ( i.e. 10% p.a. of the Vehicle Cost) or Hire
Charges.
o In case Expenses on Maintenance and running are met by the
Employee: Perquisites Value is confined to Salary paid to
Chauffeur and normal Wear and Tear ( i.r. 10% p.a. of the
Vehicle Cost).
o If any amount is recovered from employee the same shall be
Deducted from the Perquisite Value.
C. Motor Car is Used Partly in the performance of Duties and

Partly for Private / Personal Purposes.
1. When CC does not exceed 1600 CC :
 When Expenses on maintenance and running are met by the Employer
..
o Perquisites Value is Rs. 1800 p.m. ( plus Rs.900 if Chauffeur is
provided)
 When Expenses on maintenance and running are met by the Employee
..
provided)
o If any amount is recovered from employee is Not Deductible
2. When CC excees 1600 CC:

 When Expenses on maintenance and running are met by the Employer
..
provided)
 When Expenses on maintenance and running are met by the Employee
..
provided)
2. When the Motor Car is Owned by the Employee

1. When Expenses on maintenance and running are met by the
Employee..
 Perquisites Value is NIL
2. When Expenses on maintenance and running are Met or

Reimbursed by the Employer..
(A) Motor Car is used wholly and exclusively in the
performance of Official Duties :
 When the CC is less than / or more than 1600 CC : -

o Perquisites Value is NIL
(B) Motor Car is used Partly in the performance of Official

Duties and Partly for Private / Personal purposes:
 When the CC of Motor Car does not exceed 1600 CC :-
o Perquisites value is Actual Expenditure incurred by the Employer
as Reduced by the amount of Rs. 1800 p.m. plus (+) Rs.900 p.m.
if chauffeur is provided Less amount recovered from the
employee.
 When the CC of Motor Car excees 1600 CC :-
o Perquisites value is Actual Expenditure incurred by the Employer
as Reduced by the amount of Rs. 2400 p.m. plus (+) Rs.900 p.m.
if chauffeur is provided Less amount recovered from the
employee.
(C) Motor Car is used exclusively for Private Purposes

 When the CC is less than / or more than 1600 CC : -
o Perquisites value is Actual Expenditure incurred by the Employee
Less amount recovered from the employer.
3. Perquisites in case of Other Conveyance like Scooter,
Motor Cycle etc. but not Motor Car
1. When Conveyance is provided and expenses are met by the
Employer :
(A) Used exclusively for Official Purposes
 Perquisites Value is Nil
(B) Used exclusively for Private Purposes
 Perquisites value is actual amount spent by the employer on running &

maintenance and normal wear and tear of the vehicle.
(C) Used partly for Official and partly for Private Purposes
 Reasonable proportion of expenses on running and maintenance and

normal wear and tear attributable to private use.
2. When Conveyance is owned by the employee and expenses

are met by the Employer
(A) Used exclusively for Official Purposes
 Perquisites value is Nil
(B) Used Partly for Official and Partly for Private Purposes
 Perquisites value is acutal expenditure incurred by the Employer as

reduced by Rs.900 p.m. or such higher sum as certified by Employer
and reduced by the amount recovered from the employee.
(C) Used exclusively for Private purposes
 Perquisites value is actual amount spent by the employer
Documentation, a must:—
Specified documentation is required to be maintained when the Conveyance

is used either wholly or partly in the performance of the official duties.
1. The Employer has maintained the records pertaining to the details of
journey such as date ofjoumey, destination, mileage, amount of
expenditure incurred.
2. The Employer gives a certificate to the effect that the expenditure was
incurred wholly and exclusively for the performance of official duties.
Notes :
1. When the employer recovers any amount from the employee, such
amount shall be reduced from the Perquisite value arrived as above
except specifically prohibited as stated.
2. When the conveyance is owned by the employee, he can claim inore
than the eligible expenditure specified under the respective categories
subject to maintenance of Documentation as a proof thereof.
3. When the employer provides two cars to the employee, the perquisite
value of one car shall be calculated as if the same has been used
exclusively for private purposes.
2. Valuation of Perquisites in respect of Free

Domestic Servants [Rule 3(3)]
The value shall be the actual cost to the employer i.e. the total amount of
salary paid or payable by the employer or any other person on his behalf for
such services as reduced by any amount paid by the employee for such
services.
 If the above servants are engaged by the employer and the facility of
such servants are given to the employees it will be a perquisite for
specified employees only.
 On the other hand, if these servants are employed by the employee and
wages of such servants are paid or reimbursed by the employer, it will
be a perquisite for all categories of employees.
However, in both the cases the valuation of perquisites shall be done in the
same manner as discussed above.
3. Valuation of Perquisite in respect of Gas,
Electricity or Water Supply provided Free Of Cost
[Rule 3(4)]
The Valuation is explained in the following chart :
Circumstances Value of Benefit

(a) Where such supply is made from It shall be the manufacturing cost per
resources owned by the employer unit incurred by the employer
without purchasing from the outside
agency
(b) In any other case Amount paid on this account by the
employer to the agency supplying the
gas, electric energy or water
 However, in both the above cases, if employee is paying any amount in

respect of such services, the amount, so paid, shall be deducted from
the value so arrived at.
If the gas, electricity/water connections are in the name of the employees and
the expenses on the supplies are met by the employer, it is an obligation of
the employee being discharged by the employer and therefore this perquisite
is taxable in the hands of all employees.
4. Valuation of Perquisites in respect of Free or

Concessional Education Facilities to any member
of Employees' household : [Rule 3(5)]
The Valuation is explained in the following chart :
Circumstances Value of Benefit
(a) Where the educational  The cost of education in a similar

institution is itself maintained and institution in or near the locality.
owned by the employer  However, if educational facilities are
provided to the children of the
employee (any other member of the
household not covered here), the
value of this perquisite shall be
NIL... if the cost of such education
or the value of benefit per child does
not exceed Rs. 1,000 p.m.
(b) Where free education facilities  The cost of education in a similar
for such members of employees' institution in or near the locality.
household are allowed in any  However, if educational facilities are
other educational institution by provided to the children of the
reason of his being in employment employee (any other member of the
of that employer household not covered here), the
value of this perquisite shall be NIL
... if the cost of such education or
the value of benefit per child does
not exceed Rs. 1,000 p.m.
1. However, in all the above cases, if any amount is paid or recovered

from the employee on this account, the value of benefit computed
above shall be reduced by the amount so paid or recovered.
2. Where cost of education exceeds ₹1,000 p.m. per child, the whole
amount shall be taxable in the hands of the employee and no deduction
of ₹1,000 p.m. shall be allowed.
1. Payment of fee by the employer directly to educational institution for the

education of members of household including children or
reimbursement of such fee to the employee shall be taxable in the
hands of all employees.
2. Amount incurred by the employer for providing free education facility or
training to an employee is not taxable.
5. Valuation of Perquisites in respect of Free

Transport provided by a Transport undertaking to
its Employees [Rule 3(6)]
Particulars Value of Perquisites
Provision of transport to the employee or

to a member of his household by the
employer who is engaged in the carriage
of passengers or goods—
(a) in the case of employee of an airline NIL
or the railways
(b) in the case of any other employee :
Value at which such benefit or
(i) if provided free of cost amenity is offered by such
employer to the public
Reduce from the above value, the
amount paid by or recovered from
(ii) if provided at concessional rate
the employee for such benefit or
amenity.
6. Valuation of Perquisites in respect of Sweat
Equity Shares or Employees Stock Option Plan
(ESOP) [ Section 17(2)(vi) & Rule 3(8) & (9)]
The perquisite in respect of “sweat equity shares” or ESOP is chargeable to
tax in the hands of employees, if such shares are allotted or transferred to the
concerned employee after March 31, 2009.
What is “sweat equity shares” :

It means shares issued by a company to its employees (including directors,
former employees) at a discount or for consideration other than cash for
providing know-how or making available rights in the nature of intellectual
property rights or value additions, by whatever name called”. Such shares
may be equity shares, any other shares, scrips, debentures, derivatives or
units. These may be transferred/allotted directly or indirectly to the employee.
What is ESOP (Employees Stock Option Plan) :

ESOP is an abbreviation which stands for employee stock option plans. Under
the ESOP plan, an employee (at his option) can acquire shares in the
employer-company at a reduced price after completion of a specified period of
service.
In which year it is Chargiable to Tax :

Value of perquisite on the above basis will be taxable in the hands of
employee in the previous year in which shares or securities are allotted or
transferred to him. It may be noted that fair market value shall be calculated
on the date on which the employee exercises the option but perquisite will be
taxable in the year in which shares are allotted.
How to find out Taxable Value of Perquisites :

The value of such specified security or sweat equity shares shall be the "Fair
Market Value" of the specified security or sweat equity shares, as the case
may be, on the date on which the option is exercised by the assessee as
reduced by the amount actually paid by, or recovered from the assessee in
respect of such security or shares.
"Fair Market Value"
 In the case of shares listed in India, the fair market value shall be the
average of the opening stock exchange price and closing stock
exchange price of the share on the date of exercise of option.
 Where, however, on the date of exercise of the option, the share is
listed on more than one recognized stock exchanges, the fair market
value shall be the average of opening price and closing price of the
share on the recognised stock exchange which records the highest
volume of trading in the share.
 Where on the date of exercise of the option, there is no trading in the
share on any recognized stock exchange in India, the fair market value
shall be the closing price of the share on any recognised stock
exchange on a date closest to the date of exercise of the option and
immediately preceding such date.
 In the case of unquoted shares, the fair market value shall be
determined by a merchant banker.
7. Employer’s contribution towards Approved

Superannuation Fund
The amount of any contribution to an approved superannuation fund by the
employer in respect of the assessee, to the extent it exceeds ₹1,50,000 shall
be taxable perquisite in the hands of the employee.
8. Valuation of Medical Facilities [Proviso to
Section 17(2)]
(A). Medical Facilities / Reimbursement in INDIA
The provisions are given below—
1. Employer’s hospital/Government hospital/approved hospital -

The perquisite in respect of medical facility provided by an employer in the
following hospitals/clinic is NOT Chargeable to Tax—
a. hospital owned/maintained by the employer,

b. hospital of Central Government/State Government/local authority,
c. private hospital if it is also recommended by the Government for the
treatment of Government employees,
d. specified medical facility (given in rule 3A) in a hospital approved* by
the Chief Commissioner.
2. Health insurance premium -
Medical insurance premium paid or reimbursed by the employer is NOT
Chargeable to Tax.
3. Any other facility in India -

Any other expenditure incurred or reimbursed by the employer for providing
medical facility in India is chargeable to tax (exemption of Rs. 15,000 was
available for such reimbursement up to the assessment year 2018-19).
(B). Medical Facilities Outside INDIA

Any expenditure incurred by the employer (or reimbursement of expenditure
incurred by the employee) on medical treatment of the employee or any
member of the family of such employee outside India, is taxable subject to the
conditions given below —
1. Perquisites Not Chargeable to Tax

 Medical treatment of employee or any member of family of such
employee outside india
 Cost on travel of the employee/any member of his family and one
attendant who accompanies the patient in connection with treatment
outside India
 Cost of stay abroad of the employee or any member of the family for
medical treatment and cost of stay of one attendant who accompanies
the patient in connection with such treatment
Condition to be satisfied
i. Expenditure shall be excluded from perquisite only to the extent
permitted by the Reserve Bank of india
ii. Expenditure shall be excluded from perquisite only in the case of an
employee whose gross total income, as computed before including
therein the expenditure on travelling, does not exceed Rs. 2,00,000
iii. Expenditure shall be excluded from the perquisite only to the extent
permitted by the Reserve Bank of India
9. Valuation of Leave Travel Concession or
Assistance (LTC/LTA) in India. [Section 10(5) &
10(6)(i)]
The employee is entitled to exemption under section 10(5) in respect of the
value of travel concession or assistance received by or due to him from his
employer or former employer for himself and his family, in connection with his
proceeding—
a. on leave to any place in India.
b. to any place in India after retirement from service or after the
termination of his service.
The exemption shall be allowed subject to the following
Different Situations Amount of Exemption if journey is

performed on or after 1,1997
 Where journey is performed by 1. Amount of air economy class

AIR fare of the National Carrier by
the shortest route; or
2. the amount spent,
whichever is less
 Where journey is performed by 1. Amount of air-conditioned first
RAIL class rail fare by the shortest
route; or
2. the amount spent,
whichever is less
 Where the places of origin of 1. Amount of air-conditioned first
journey and destination are class rail fare by the shortest
connected by Rail and journey route; or
is performed by any other mode 2. the amount spent
of Transport
whichever is less
 Where the places of origin of
journey and destination (or part
thereof) are not connected by
RAIL
o Where a recognised 1. First class or deluxe class fare
public transport system by the shortest route; or
exists 2. the amount spent,
whichever is less.
o Where No recognised 1. Air-conditioned first class rail
public transport system fare by the shortest route (as if
exists the journey had been performed
by rail); or
2. the amount actually spent,
whichever is less.
One should also keep in view the following Points—
1. Meaning of “Family” -
 For this purpose, “family” includes spouse and children of the employee.
It also includes parents, brothers and sisters of the employee, who are
wholly or mainly dependent upon the employee.
 However, family does not include more than two surviving children of an
individual born on or after October 1, 1998
2. Only 2 journeys in a Block of 4 years is Exempt -

Exemption on the aforesaid basis is available in respect of 2 journeys
performed in a block of four calendar years commencing from 1986.
3. “Carry-over” Concession -
If an assessee has not availed travel concession or assistance during any of
the specified four-year block periods , exemption can be claimed in the first
calendar year of the next block (but in respect of only one journey). This is
known as “carry over concession”.
4. Exemption is based upon Actual Expenditure -

The quantum of exemption is limited to the actual expenses incurred on the
journey. In other words, without performing any journey and incurring
expenses thereon, no exemption can be claimed.
5. Exemption is available in respect of Fare -

The exemption is strictly limited to expenses on air fare, rail fare, bus fare
only. No other expenses, like scooter or taxi charges at both ends, porterage
expenses during the journey and lodging/boarding expenses will qualify for
exemption.
6. Exemption is available in respect of Shortest Route -

Where the journey is performed by a circuitous route, the exemption is limited
to what is admissible by the shortest route.
7. Fixed allowance is not subject to Exemption -

Fixed sum paid to employees by way of leave travel allowance on basis of
self-declaration made by employees would not be exempt under section
10(5)—
8. Family Member Travelling Separately -

Exemption shall not be available if the family members are travelling
separately without the employee who is not on leave.
Rent Free Accommodation is one of the perquisites provided to employees by employer
The term accommodation includes the following:

1. Flat
2. Farm House
3. Hotel
4. Guest House
5. Service apartment
6. Caravan
7. Mobile home
8. Ship or other floating structures
Employees are divided in the following two categories:
1. Central and State Government employees
2. Private sector employees or other employees
What is the type of rent free accommodation?
1. Furnished rent free accommodation
2. Unfurnished rent free accommodation
Taxability of Rent Free Accommodation
A] Value of Furnished rent free accommodation
Value of Unfurnished accommodation Plus 10% per annum of cost of furniture, if the
furniture is owned by the employer or actual rent of furniture
B] Value of Unfurnished rent free accommodation
i) Central and State Government employees

License fee of House determined will be taxable
ii) Private sector employees or other employees
a) If it is owned by employer
City having population upto 10 lakhs as per 2001 census – 5% of Salary
City having population exceeding 10 lakhs but upto 25 lakhs as per 2001 census – 10% of
Salary
City having population exceeding 25 lakhs as per 2001 census – 15% of Salary
b) If taken on leased by employer
Actual lease rent paid by employer
15% of Salary
Whichever is less will be taxable
Taxability for Hotel Accommodation
a) If Hotel Accommodation is unfurnished
It is not taxable
b) If Hotel Accommodation is furnished
Actual charges paid or payable for such hotel 24% of the salary
Whichever is less will be taxable
Note: If the hotel accommodation is provided for not more than 15 days on
transfer of employee from one place to another then it will not be taxable.
Meaning of Salary for purpose of Taxability of Rent free accommodation
Salary includes
 Basic Salary
 Dearness Pay, Dearness Allowance enters into value of service or
retirement benefits
 Commission
 Bonus
 Fess
 Value of all taxable allowances
 Any other monetary payment, which is chargeable to tax
 Leave encashment of salary only if it pertains to the leave earned during
the previous year in which rent free house is provided to the employee.
Problem: No: 1 (5 Marks)
From the following particulars, calculate salary for the purpose of

calculation of value of Rent Free Accommodation (RFA).
 Basic Salary @ Rs.60,000 p.m.

 Dearness Allowance @ Rs.10,000 p.m. (60% enters)
 Dearness Pay @ Rs.2,000 p.m. (Not part of salary for

calculation of pension)
 Bonus - One month’s basic salary.
 Commission – Employee earned Rs.1,00,000 commission
during the year on the basis of turnover achieved by him.
 Income tax of employee paid by employer Rs.66,500
 Education allowance @ Rs.300 per child for 3 children.
 Advance salary – Salary of 2 months received in advance.
 Lunch allowance @ Rs.250 per day for 300 days.
 Arrears of salary Rs.2,00,000. Arrears of salary belong to an
earlier year when there was a dispute regarding fixation of his
salary.
Solution:
Computation of salary for calculation of value of Perk of

Rent Free Accommodation
Basic Salary @ Rs.60,000 p.m. 7,20,000

Dearness allowance @ Rs.10,000 p.m. (only 60% 72,000
enters)
Dearness Pay Nil
Bonus (One Month salary) 60,000
Commission (on the basis of turnover achieved by 1,00,000
him)
Income tax of employee paid by employer – it is a Nil
perk
Education allowance @ Rs.300 p.m. for 3 children 10,800
Less: Exempted @ Rs.100p.m. for 2 children 2,400 8,400
Lunch allowance @ Rs.250 per day for 300 days 75,000
Salary of employee for calculating the value of 10,35,400
rent free accommodation
Note: Salary does not include Income tax of employee if paid by employer
: Advance salary and arrears of salary is not included as it does not relates to that
previous year but any salary which has accrued but is not received in that year will be
included.
Mr.Vipin is working in a Central Government office at Shimla. His salary

particulars are as follows:
Salary 3,60,000
D.A. (Fully enters into pay for retirement benefits) 96,000
Hill compensatory Allowance 24,000
Transport Allowance 24,000
Provided with rent free house: Annual License fee 72,000
Cost of furnishing 3,00,000
Calculate value of rent free house
Solution:
Computation of value of Perk of Rent Free Accommodation
For Government employees the value of rent free 72,000

house is License fee fixed by it which is present
case is
Add: 10% of cost of furnishing (10% of 30,000
Rs.3,00,000)
Value of Rent Free Furnished House 1,02,000
Mr.A gets salary of Rs.40,000 p.m. and is provided with rent free
unfurnished accommodation at Ludhiana (Population 20 lakhs as per latest
census) whose fair rental value is Rs.15,000p.m. He gets leave encashment
for the current previous year of Rs.20,000 during the year. House was
provided to him with effect from 1-7-2018. His salary is due on 1st day of
every month. Calculate the value of rent-free accommodation and gross
salary.
Solution:

Salary @ Rs.40,000 p.m. 4,80,000
Leave encashment for the current previous year 20,000
Value of perquisite: Rent free unfurnished
accommodation
Salary = (4,80,000+20,000 = 5,00,000)
10% of salary = 50,000
Received to 8 months (1-7-18 to 1-3-19) =
33,333
50,000X(8/12)
Note: Leave encashment shall be treated as part of salary for calculations of

value of rent-free accommodation only if pertains to the leave earned during the
previous year in which rent free accommodation is provided to the employee.
Mr.Z gets a salary of Rs.33,000 p.m. and he has been provided with rent-free
furnished accommodation at Karnal (Population 7.5 lakhs). The fair rental value
of the unfurnished house is Rs.60,000 p.a. He gets DA @40% of salary which is
given as per terms of employment. He gets education allowance of Rs.500 p.m.
for education of his son. The cost of furnishing of the house is Rs.2,30,000. The
employee has been provided with hired air conditioner for five months and hire
charges of Rs.1,000 p.m. are paid by the employer.
Solution:
Salary for the year (33000 X 12 Months) 3,96,000

D.A. (40% enters into pay) 1,58,400
Education Allowance (500X12 Months) 6,000
Less: Exempted (100X12 Months) 1,200
______ 4,800
Value of rent free house: House owned by

employer at Karnal
7.5% of Salary (3,96,000+1,58,400+4,800 =
41,940
5,59,200)
23,000
Add:10% of cost of furnishing
5,000
Add: Rent of Air Conditioner (1000X5 Months)
______ 69,940
Mr.Anup Sen has furnished following particulars:
(i) Salary @ Rs.25,000 p.m.
(ii)Dearness Allowance @ Rs.5000 p.m. (It enters into pay for retirement
benefits)
(iii) Entertainment Allowance @ Rs.600 p.m.
(iv) Bonus Rs.16,000
(v) Cost of furnishing Rs.1,20,000
Calculate the value of rent-free house if:
Case 1: Mr.Anup Sen is Government employee and rent of house fixed by

Government is Rs.2,500 p.m.
Case 2: Mr.Anup Sen is working in a semi-Govt undertaking at Chennai

(Population more than 25 lakhs) and Fair Rental Value of the house is
Rs.8,000 p.m.
Case 3: Mr.Anup Sen is working in private sector at Chandigarh (population

below 10 lakhs) and rent of the house hired by employer is Rs.6,000 p.m. He is
also provided with hired refrigerator whose hire charges of Rs.600 p.m. are paid
by employer.
Case 4: Mr.Anup Sen is working in private sector at Delhi (Population above
25 lakhs) and actual rent of the house not owned by employer is Rs.6,000 p.m.
Rent charged by employer is only Rs.3,000 p.m.
Case 1: Govt. Employee

The value of perquisite of rent-free house is the
rent fixed by Govt. for such house which in the
30,000
present case is (2500X12 Months)
12,000
Add: 10% of cost furnishing (10/100 X1,20,000)
Value of Rent-free furnished house 42,000
________
Case: 2 Semi-Government Employee

The value of rent-free house at Chennai
Salary of employee =
(3,00,000+60,000+16,000+7,200) = 3,83,200
57,480
15% of salary
Add: 10% of cost of furnishing (10% of
12,000
Rs.1,20,000)
Value of Rent-free Furnished House 69,480
________
Case: 3 Any other employee (City having

population below 10 lakhs)
Value of rent free house hired by employer:
3,00,000+60,000+16,000+7,200 =3,83,200
15% of salary = Rs.57,480 (Or)
Rent paid by employer = Rs.72,000
57,480
Whichever is less shall be the value of rent free
house
Add: 10% of cost of furnishing 12,000
Add: Actual Hire Charges of refrigerator 7,200
Value of Rent-free Furnished House 76,680
________
Case:4 Any other employee (City having

population above 25 lakhs)
Value of rent free accommodation at Delhi:
(3,00,000+60,000+16,000+7,200=3,83,200)
15% of salary = Rs.57,480 (Or)
Rent paid by employer = 6,000 p.m. = Rs.72,000
15% of salary or rent paid by employer
Whichever is less shall be the value of rent free
house i.e., 57,480
Add:10% of cost of furnishing
12,000
Value of rent free furnished house
69,480
Less: Rent charged by employer @Rs.3,000 p.m.
36,000
Value of concessional accommodation ______
33,480
______
Mr.J is in receipt of annual salary of Rs.2,00,000. He is provided with a

furnished accommodation at Gurgaon (Population is 11 lakhs) for which his
employer pays rent of Rs.4,000 p.m. and deducts Rs.1000 p.m. from employee’s
salary. The cost of furnishing of the residence amounts to Rs.30,000. Calculate
the value of perquisite if house is occupied for 9 months only.
Solution:
Salary for the year 2,00,000

Value of perquisite
15% of salary (15% of 2,00,000) = 30,000
Rent paid by employer @ Rs.4,000 p.m. = 48,000
15% of salary or rent paid by employer, whichever
is less
30,000
Add: 10% of cost of furniture (10% of Rs.30,000)
3000
Value of rent free house

33,000
Less: Rent paid by the employee @ Rs.1000 p.m.
12,000
Value of Concessional accommodation
21,000
Reduced to 9 months = (21,00X9/12)
15,750
2,15,750
Mr.M. is an Executive Director of a company and has been provided two cars.
One of the car is costing Rs.16 lacs is meant for his family use and the other one
is meant for official use. The running and maintenance of car for private use are
under:
Petrol 48,000
Insurance 16,000
Driver 60,000
Running and maintenance expenses on the car being used for official duties are
as under:
Petrol exps 72,000
Cost of car 16,00,000
Solution:
(i)1st car being used for the private/family purposes of the employee
Since employer’s car is being used only for private/family purposes of the
employee, so the value of the perk shall be the amount of expenses incurred by
the employer on the running and maintenance of the car.
Expenses on petrol 48,000
Insurance expenses 16,000
Salary of Driver 60,000
10% of the cost of car. i.e.,10% of 16,00,000 1,60,000
-------------
Value of perk to be used 2,84,000
---------------
(ii) Second car being used only for official duties
Value of car perk shall be treated as nil as car is being used only for his
official work and the employee or his family is not deriving any benefits
from this car.
Chapter – 4
Profits in Lieu of Salary – Income Tax
Profits in lieu of salary are payments received by an employee in

addition to the regular salary. The profits in lieu of salary can include both
monetary and other forms of compensation. Profits in lieu of salary are taxable
under the Income Tax Act and must be declared while filing income tax return.
The various concept of profits in lieu of salary.
1. Terminal Compensation
Any amount of compensation received by an employee from his
employer or former employer in connection with the termination of employment
or modification of terms and conditions of employment is regarded as profits in
lieu of salary. An example of terminal compensation could be the amount paid
on retirement, premature termination, resignation or other circumstances.
2. Keyman Insurance Policy
Any payment received by an employee, under a keyman insurance policy

including the sum allocated by way of bonus on such policy, will be regarded as
profits in lieu of salary.
3. Unrecognised Provident Fund or Unrecognised Superannuation Fund
Payment due or received by an employee from an unrecognised provident

fund or unrecognised superannuation fund to the extent to which such payment
does not consist of contributions by the employee or interest on such
employee’s contributions are profits in lieu of salary. The accumulated balance
of an unrecognised provident fund or unrecognised superannuation fund
consists of the employee’s contribution plus interest thereon and the employer’s
contribution plus interest thereon. Employers contribution and interest thereon
and interest on the employee’s contribution are not taxed during the period of
employment. Hence, when the accumulated balance of such a fund is paid to
the employee either on retirement or on termination of service, the untaxed
portion is taxed as profits in lieu of salary. The interest component available as
part of employees’ contribution would be taxed as “Income from other sources”.
4. Other Payments from Employer considered as Profits in lieu of Salary
Any other payment made by an employer to an employee is taxable under

the head profits in lieu of salary. This is a comprehensive provision by virtue of
which all payments made by an employer to an employee whether made in
pursuance of a legal obligation or voluntarily are brought under the category of
profits in lieu of salary. Also, taxpayers should note that any amount received
by an employee, whether in a lump sum or otherwise before joining any
employment or after cessation of employment is taxable as profits in lieu of
salary.
5. Payments NOT Profits in Lieu of Salary
The following payments received by an employee will not be termed as

profits in lieu of salary to the extent they are exempt under Section 10:
 Death cum retirement gratuity

 Commuted value of pension
 Retrenchment compensation received by a workman
 Payment received from a statutory provident fund
 Payment received from recognised provident fund
 Any payment from an approved superannuation fund
 House rent allowance (HRA)
Gratuity:-
 Gratuity’ is a retirement benefit.
 Gratuity Act, 1972 act envisages in providing retirement benefit to the
workman who have rendered long and unblemished service to the
employer.
 Gratuity is a reward for long and meritorious service.
 Earlier, it was not compulsory for an employer to reward his employee at
the time of his retirement or resignation.
 But in 1972 the government passed the Payment of Gratuity Act that
made it mandatory for all employers with more than 10 employees to pay
gratuity.
Applicability of the Gratuity Act, 1972:
 The act provides for the payment of gratuity to workers employed
in every factory, mine, oil field, plantation, port, railways, shop &
Establishments or educational institution employing 10 or more
persons on any day of the proceeding 12 months.
 A shop or establishment to which the Act has become applicable
shall continue to be governed by the Act even if the numbers of
persons employed falls below 10 at any subsequent stage.
Here employees are defined as those hired on the company’s payroll. Trainees
and interns are not eligible for this compensation.
Eligibility criteria for Gratuity
Gratuity shall be payable to an “employee” on the termination of his
employment after he has rendered continuous service for not less than five
years.
 On his superannuation.
 On his retirement or resignation.
 On his death or disablement due to accident or disease.
Note: However, the condition of five years of continuous service is not
necessary if service is terminated due to death or disablement.
To whom is Gratuity Payable?
Gratuity is normally payable to the employee himself, however in the
case of death of the employee it shall be paid to his nominee & nomination has
been made to his heirs. In case the nominee is a minor; share of the minor shall
be deposited with the controlling authority who shall invest the same for benefit
of the minor, until he/she attains majority.
Maximum amount payable under the Gratuity Act, 1972:-

Gratuity payable to government employees is fully exempt.
For non-government employee covered under Payment Of Gratuity Act,1972,
the maximum limit for exemption is Rs 20 lakhs and for any other employees,
the maximum limit of exemption is Rs 10 Lakhs. [Section 4(3)] [Of course,
employer can pay more. Employee has also right to get more if obtainable under
an award or contract with employer, as made clear in section 4(5)].
Nomination facility: – Yes, by filling Form “F” at the time of new joinee
formality, each employee is required to nominate one or more member of his
family, as defined in the Act, who will receive the gratuity in the event of the
death of the employee.
Forfeiture of Gratuity:- The gratuity of an employee whose service have been
terminated for any Act of willful omission or negligence causing any damage or
loss to or destruction of property belonging to the employer, gratuity shall be
forfeited to the extent of the damage or loss caused. The right of forfeiture is
limited to the extent of damage.
The gratuity payable to an employee shall be wholly forfeited:
1. If the services of such employee have been terminated for his riotous or
disorderly conduct or any other act of violence on his part, or
2. If the service of such employee have been terminated for any act which
constitutes an offense involving moral turpitude, provided that such offense is
committed by him in the course of his employment.
Applicability to contract Employee:- Yes, the only criterion is to serve at least
5 years of service at a stretch.
Calculating gratuity
a) In respect of Employees covered Under the Payment of Gratuity Act,
1972:
As per the Act, the gratuity amount is 15 days’ wage multiplied by the
number of years put in by you. Here wage refers to basic salary plus dearness
allowance. Take the monthly salary drawn by employee last (basic + dearness
allowance) at the time of resignation or retirement. Divide this by 26. This gives
you your daily salary. Multiply this amount by 15 days, and further by the
number of years of service you have put in.
If the employee have put in 10 years and seven months in an organisation,
then, the service period will be taken to be 11 years. But if your service tenure
is 10 years and five months, then for the purpose of this calculation your tenure
will be taken to be 10 years only.
Take an example. Suppose that your average monthly salary is Rs 26,000.
Your daily salary will be Rs 1,000. Multiply this by 15 and then by 10. The
gratuity you are entitled to after 10 years of service will be Rs 1.5 lakh.
Gratuity Problem
Mr.Babu retired on 30th November 2018 from a coal mine after putting a
service of 28 years and 10 months. At the time of his retirement he was getting
a salary of Rs.16,000 p.m. and he use to get an increment of Rs.500 p.m. on
1st April every year. His D.A. was Rs.2000 p.m. Gratuity received Rs.3,40,000.
Find out his taxable gratuity, if he is covered under gratuity Act, 1972.
Solution:
Computation of taxable Gratuity
Average Monthly Salary:
Salary last drawn 16,000 p.m.
Add: DA @ Rs.2000 p.m. 2000 p.m.
---------
Total Salary 18,000 p.m.

----------
15 days salary = 18,000X15/26 = 10,385
Exemption shall be least of 3 amounts:
(i) Maximum Statutory limits = 20,00,000

(ii) Actual received = 3,40,000
(iii) 15 days salary for each year of service = 3,01,165
Exempted gratuity = 3,01,165
Therefore, taxable Gratuity = 3,40,000 - 3,01,165 = 38,835
Gratuity not covered under Payment of Gratuity Act 1972
Employees working in any shop or establishment in which less than 10

persons are employed or were employed on any day of the preceding 12
months
1. Calculation of length of service/service period
While calculating length of service, only completed years are to be counted.

Thus, any fraction or part of the year is to be ignored. For example
(i) If service period = 25 years 9 months, it is to be taken

as 25 years.
(ii) If service period = 25 years 4 months, it is also to be
taken as 25 years.
2. How to calculate ½ (half) month’s salary: ½ month’s salary is to be

calculated on the basis of average salary drawn the 10 months immediately
preceeding the month of retirement. For example, if an employee retires on
November 15, 2018, average salary is to be calculated by taking total salary
drawn during past 10 months (i.e. from January 1, 2018 to October 31,
2018).
3. Meaning of salary:
Salary = Basic salary + D..A. (enters) + Commission payable at a fixed

percentage of turnover achieved by employee.
D.A. shall be part of basic salary if it enters
into salary for calculating all retirement benefits. In case a part of D.A.
enters only to calculate some of the retirement benefits then that part of
D.A. will not be taken as part of basic salary for this purpose.
4. Whole life limit: Same as discussed in case of employees covered under

payment of Gratuity Act, 1972.
5. Relief u/s 89(1) Same as discussed in case of employees covered under

payment of Gratuity Act, 1972.
PROBLEM: NO: 2 (10 Marks)
Mr.Damodar retired on 15.6.2018 from a manufacturing company after

putting service of 30 years and 7 months. He received a Gratuity of
Rs.3,60,000. Basic salary of Mr.Damodar was Rs.20,000 p.m. during 2017
and 22,000 p.m. during 2018. He was also getting D.A. @ Rs.5,000 p.m.
which was increased from 4,000 on 1-4-2018. 50% of D.A. is presumed to
enter into salary for computation of all retirement benefits but 100% of
D.A. is part of basic salary for calculation of pension benefits. Compute his
taxable gratuity, if he is not covered under payment of Gratuity Act, 1972.
SOLUTION:
Salary = Basic Salary + DA ( Which enters into retirement benfits)
Computation of taxable Gratuity
Computation of Basic salary for 10 month preceding the month of

retirement: Ignore the month of June in which he retired and calculate
salary of 10 months prior to the month of June, i.e., August 2017 to May
2018.
Basic Salary:
August 2017 to Dec 2017 20,000 X 5 Months = 1,00,000
January 2018 to May 2018 22,000 X 5 Months = 1,10,000
D.A.:
August 2017 to March 2018 4,000X8 = 32,000
April 2018 to May 2018 5,000X2 = 10,000
----------
42,000
---------
50% enters into salary 21,000
-------------
2,31,000
Average Monthly Salary = 2,31,000/10 Months = 23,100
Exemption allowed shall be least of the following 3 amounts:
1. Maximum limit 20,00,000
2. Actual amount received 3,60,000
3. ½ month’s salary for each year of completed service 23,100X1/2 X 30
years
= 3,46,500
Exemption allowed = Rs.3,46,500
Taxable Gratuity = Rs.3,60,000 – 3.46.500 = Rs. 13.500
Note: Only that part of D.A. which enters for calculation of all retirement
benefits has been taken as part of basic salary for calculation of salary for
this purpose.
Pension:
The amount received as pension from the employer or from the pension fund
or from any other source as pension would be liable to income tax.
Computation of Income Tax on Pension Income has been explained below.
Before understating the computation of tax on pension, it is important to

understand that there are 2 types of Pension:-
1. Uncommuted Pension: Uncommuted Pension refers to Pension received
periodically. Any amount received as Uncommuted Pension is fully taxable
in the hands of both govt and non-govt employees.
2. Commuted Pension: Commuted means Interchange. Many employers

allow the employee to forgo a portion of the pension and receive a lump-sum
amount by surrendering a portion of the Pension. Such amount received is
known as Commuted Pension. The pension may be fully or partly commuted.
For example, suppose a person is entitled to receive a pension of

Rs. 2000 pm for the rest of his life. He may commute 1/4th i.e. 25% of this
amount and get a lump-sum of Rs. 30,000. After commutation, his pension
will now be the balance 75% of Rs. 2000 pm i.e. Rs. 1500 pm
Exempted Pension
There are very few pension income which are exempted from tax. These are
1. Pension from United Nations Organizations

2. Pension received by the family of a dead armed force personnel
3. Commuted Pension by Govt. Employee
4. Commuted Pension by Family Member
5. Pension received by the family other than armed force personnel up to
lower of, Rs.15000 or 1/3 of annual pension.
Income Tax on Commuted Pension
Computation of income tax on Commuted Pension at the time of filing

of Income Tax Return under Section 10(10A) would be as follows:-
Amount received as Commuted Pension xxx

(Less)Amount exempted (xxx)
Amount chargeable to Tax as per Income Tax Slabs xxx
Computation of Pension amount exempted

1. Received from Govt employer: Fully Exempt from Income Tax. In other words,
no income tax on pension received from Govt.
2. Received from Non Govt Employer: The following amount shall be exempted
from the levy of Tax on Pension Income
Tax on Pension Income
The pension received shall be “taxable under head Salary” in the

manner as shown above
As per Section 57(ii)(a), if uncommuted family pension is being received

after the death of the employee by the family members, the pension so
received would be taxable under the head – “Income from Other Sources” as
employer-employee relationship does not exist in this case. In such a
case, where uncommuted family pension is being received by the family
members – 1/3rd of the Pension received or Rs. 15,000 whichever is less shall
be exempt.
However, as per Circular No. 573 dated 21/08/1990, if any commuted

pension is being paid to the family members, no tax would be levied on
commuted pension.
Tax Treatment
(a)Tax Treatment of Uncommuted Pension:
Uncommuted pension refers to the periodic regular pension

(generally monthly) received by an employee from ex-employer after
retirement and until such an employee dies.
Tax Treatment: Fully taxable whether the employee is a government

employee or non-government employee.
It is taxable as salary income of such an ex-employee.
(b)Tax treatment of commuted pension:

Commuted pension refers to lumpsum amount received by an
employee from his employer in lieu of periodical pension. When an
employee receives such lumpsum amount, it is called commuted pension.
(b)(i) For all types of Government Employees - Fully exempted
(b)(ii)For Non-Government Employees – Any amount received on

commutation of pension shall be exempt as per the provisions of
section 10(10A)
(b)(ii)(a)If employee receives gratuity also – The exempted amount shall be

commuted value of one-third of pension which he is normally entitled to
receive.
(b)(ii)(b)If employee does not receive gratuity – The exempted amount shall
be commuted value of one-half of such pension.
Problem:No:1 (10 Marks)
Find out the taxability of pension in the following cases:
(i) Mr.Raja retires from a public limited company on 31st August 2018 and
his pension was fixed at Rs.1500 p.m. He does not commute any part of
pension.
(ii)Mrs.Naresh retires from Government service on 30th September 2018

and her pension was fixed at Rs.1000 p.m. She does not commute any
portion of pension.
(iii)Mr.Hari retires from Punjab Government service on 30th June 2018 and
his pension has been fixed at Rs.1,200 p.m. He gets 1/3rd of his pension
commuted for Rs.60,000.
(iv) Mr.Reddy retires from private service on 30th April 2018 and his
pension has been fixed at Rs.1,500 p.m. He gets ½ of his pension commuted
and gets Rs.80,000. He also received Rs.75,000 as gratuity. He gets his
pension commuted during January, 2019.
In all cases, pension becomes payable on the 1st day of each month.
Solution:
(i)Uncommuted pension received from public limited company is fully
taxable.
Mr.Raja’s taxable pension shall be Rs1500X 5 Months = Rs.9,000 i.e., from

1st September payable on 1st October to 31st March.
(ii) Uncommuted pension received by Mrs.Naresh is fully taxable.
Retirement date: 30th September 2018
Pension received 1st Nov to March 31st
Her taxable pension shall be Rs.1,000 X 5 Months = Rs.5,000.
(iii)Commuted portion of pension received by Mr.Hari i.e., Rs.60,000 is

fully exempted.
Uncommuted portion of pension @ Rs.800 p.m. will be fully taxable.

Mr.Hari’s uncommuted portion of pension shall be Rs.800X8 Months =
Rs.6,400 during the previous year 2018-19.
(iv)Commuted portion of Pension of Mr.Reddy shall be taxable as under:
For ½ portion of pension he gets = Rs.80,000
For full portion of pension he gets = Rs.80,000X2Months (Feb, Mar)
1/3rd portion of commuted pension shall be exempted = Rs.80,000X2

Months X1/3 = Rs.53,333
Taxable portion of commuted pension shall be = Rs.80,000 – 53,333 =

26,667
Problem:No:2 (5 Marks)
Mr.Varinder retired on 31st December 2018 and his pension was fixed at
Rs.3,600p.m. He got 3/4th of the pension commuted for which he received
Rs.1,80,000 from his employer, a Ltd Co. Find out the taxable amount of
commuted value of pension if:
(a) He gets gratuity

(b)He does not get gratuity.
Solution:
(a) If he gets gratuity:
Exempted upto commuted value of 1/3rd of pension
For 3/4th of pension commuted value = Rs.1,80,000
For full of pension commuted value is = Rs.1,80,000 X 4/3 = Rs.2,40,000
For 1/3 of pension commuted value is = Rs.2,40,000X1/3
Exempted = Rs.80,000
Taxable = Rs.1,80,000 – 80,000 = Rs.1,00,000
If he doesnot get gratuity
Exempted upto commuted value of ½ of pension
For 3/4th of pension commuted value is Rs.1,80,000
For full pension commuted value is = Rs1,80,000X4/3 = Rs.2,40,000
For ½ of pension commuted value is Rs.2,40,000 X 1/2
Exempted = Rs.1,20,000
Taxable = Rs.1,80,000 – 1,20,000 = 60,000
Leave Encashment:
As per terms of employment, generally, an employee is granted certain

period of leave(s) on yearly basis. Such leave(s) may be casual leaves, medical
leaves and privileged leaves or earned leaves. Generally, an employee can
accumulates his medical leaves and privileged leaves and can avail such leaves
in subsequent years as per his necessity. However, in some cases, an employee
can even encash his accumulated priviledged/earned leaves and can get salary
for the said period of leave. Such receipt of salary by an employee from his
employer in lieu of his accumulated leaves is called “Leave encashment”
Such encashment can be done by an employee either during the service or

at the time of leaving job due to retirement or any other reason. However, in
case of death of an employee, the salary for his/her accumulated leave is given
to his/her legal heirs.
Tax Treatment of Leave Encashment
(A)Leave Encashment during service: Any encashment of leaves by an

employee during continuance of service is “Fully Taxable” for all employees
whether government employees or non-government employees. Such
encashment may either be of current year leaves or of past accumulated leaves.
It is taxable as salary income of the employee for the previous year in which
amount is received by employee.
(B)Leave Encashment on leaving job/retirement
(B1) For government employees: Any payment received as leave encashment at

the time of retirement or on leaving job otherwise shall be “fully exempt” u/s
10(10AA)(i)
Meaning of Government Employee: Government Employee includes:
(a)Employees of Central Government
(b) Employees of State Government
(B)(ii) For Non-Government Employees: Any payment received as leave

encashment at the time of retirement or on leaving job otherwise shall be
exempt upto the least of following amounts u/s 10(10AA)(ii)
(i)Maximum 10 months salary on the basis of average salary drawn during 10

months immediately preceeding his retirement/leaving job otherwise.
(ii)Salary for approved period of leave standing to his credit at the time of
retirement/leaving job otherwise.
(iii)Maximum notified limit Rs.3,00,000 (As specified by the Central

Government)
(iv)Actual amount received as leave encashment and balance shall be taxable
Taxable amount of leave encashment= Amount of leave encashment

received – Exempt amount, i.e. least of 4 limits
Meaning of salary:
Salary = Basic salary + D.A. (enters) (or) D.P + Commission on turnover
Calculation of average salary of 10 months:

Average salary of 10 months is to be calculated on the basis of average salary
drawn by the employee during the period of 10 months immediately preceeding
his retirement whether on superannuation or otherwise.
For example, If employee retires on December 31, 2018 then average salary of
10 months will be calculated by taking salary drawn during March 1, 2018 to
December 31, 2018.
Meaning of Approved Period of Leave:
Approved period of leave = 30 days/ 1 month leave for every completed year of
service.
Note: Service period in fraction of the year shall be ignored.
Meaning of Approved leave(s) left on leaving job
It shall be calculated as follows:
The approved leave(s) on the basis of completed year of service XXXX
Less: Leave(s) taken during service XXX
Less: Leave(s) encashed during service xxx
Approved leave(s) left on leaving job/at the time of retirement xxxxxx
Whole life exemption limit:
The notified maximum exemption limit of Rs.3,00,000 is a whole life

exemption limit for an employee in respect of leave encashment received at the
time of leaving job. It can be explained as follows:
(a)If employee receives leave encashment for the first time in his life at the time
of leaving job. While calculating exemption, the maximum notified limit of
Rs.3,00,000 shall be applicable and he shall be granted exemption as per the
least of 4 limits.
(b)If employee receives leave encashment for the second/third or subsequent

times: While calculating exemption in respect of leave encashment on
subsequent occasions, the maximum notified exemption limit shall be reduced
by the exemption claimed in the past.
Thus,
Maximum Exemption Limit on subsequent occasions = Maximum notified
limit of Rs.3,00,000 – Exemption claimed in past
(c)Leave encashment after death: In case the amount of leave encashment is

given to legal heirs of deceased employee, it will be fully exempt.
Problem:No:1
Mr.P retires on 1st July 2018 after 18 years of service and receives
Rs.75,000 as amount of leave encashment for 15 months. His employer allows
45 days leave for every one year of service. During service he has already
encashed leave for 12 months. Calculate the taxable amount of leave
encashment if his salary during 1-7-2017 to 1-7-2018 was Rs.5,000 p.m.
Solution:
Calculation of taxable amount of leave encashment of Mr.P
Leave due as per section 10 (10AA) @ one month leave for every one year of
service = 18 Months
Less: Leave already availed =12 Months
-------------
Leave due at the time of retirement 6 Months
-------------
Limits: (i) Notified limit 3,00,000
(ii) 10 Month’s average salary (10X5000) 50,000
(iii) Cash equivalent of leave due at the time of retirement 30,000
(6X5,000)
(iv) Actual Amount Received 75,000
Least of the above Rs.30,000 is exempted
Taxable= Rs.75,000 – Rs.30,000 = Rs.45,000
Chapter – 5
Deductions out of Gross Salary (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. 50,000 ; or
 the Amount of Salary Earned / Pension Earned

whichever is Lower.
the taxpayer can claim a standard deduction of Rs. 40,000* or the amount
of pension, whichever is less. *Increased to Rs 50,000 for FY 2019-2020(AY
2020-21) through the Interim Budget 2019.
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:
a. Statutory Limit of Rs. 5,000;
b. 20 % of Basic Salary; or 1/5th of Basic Salary
c. Actual 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.
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.
Deductions Under Section 80C out of Gross Total Income
The following investments and payments are eligible for deduction under
Section 80C of the Income Tax Act, 1961:
Life Insurance: Premiums paid toward all life insurance policies are eligible
for tax benefits under Section 80C. This deduction can be claimed for premiums
paid towards insuring self, spouse, dependent children and any member of
Hindu Undivided Family. An important point to be noted is that if the policy is
issued on or prior to March 31, 2012, annual premium up to a maximum of 20%
of the sum assured becomes tax deductible. For insurance policies issued on or
after April 1, 2012, annual premium up to a maximum of 10% of the sum
assured is tax deductible.
For insurance policy issued on or after 1st April 2013 on the life of person with
diability or disease
Actual premium paid (or) 15% of actual capital sum assured - Whichever is less
Sukanya Samriddhi Yojana: Investments made in Sukanya Samriddhi

Yojana, which is a saving scheme for the girl child, are eligible for tax
deduction under Section 80C of the Income Tax Act, 1961. A parent or legal
guardian of a girl child, who has not reached the age of 10 years, can open this
account. Sukanya Samriddhi Yojana account can be opened for two girl
children (one account per girl child) and can be extended to a third if twins are
involved.
Public Provident Fund: Public Provident Fund (PPF) contributions are eligible
for tax deductions under Section 80C. PPF accounts have a maximum deposit
limit of Rs. 1,50,000 per year, therefore, all deposits made to your PPF account
can be claimed as deductions under Section 80C. The money that you put into a
PPF account will be locked-in for a period of 15 years. Partial withdrawals are
permitted after 7 years.
 RPF – qualified for deductions

 URPF – Not Qualified for deductions
Equity Linked Saving Scheme: Investments in equity linked savings scheme

qualify for tax deduction under section 80C of the Income Tax Act. Now, an
essential point to be noted about equity linked savings scheme is that they have
a mandatory lock-in period of three years from the date of investment. If you
are considering investing in this scheme, make sure to invest for longer periods
like five to seven years as they are equity schemes. Equity schemes are an ideal
option for wealth creation over a long period.
Five Year Bank Deposit: Most banking institutions offer tax saving fixed
deposits where deductions can be claimed under Section 80C of the Income Tax
Act. The condition associated with tax saver fixed deposits is that they come
with a lock-in period of 5 years. Premature withdrawal is not allowed under this
investment. Interest earned on tax saver fixed deposits, however, are taxable and
will be deducted at source.
Stamp Duty and Registration Charges: While buying a property, one of the
largest expenses you will have to bear is the stamp duty and registration
charges. To give taxpayers some relief, the government has included these
expenses under Section 80C of the Income Tax Act, 1961. The deduction can
only be claimed once the property construction is complete and you have legal
possession of the house.
Senior Citizens Savings Scheme: Investments in Senior Citizens Saving

Scheme, which as the name would suggest is suitable for senior citizens, qualify
for deduction under Section 80C of the Income Tax Act. This scheme has a
tenure of 5 years. To participate in the Senior Citizens Saving Scheme, an
individual has to be at least 60 years of age. Those who have taken VRS
(voluntary retirement scheme) can opt for it after the age of 55.
National Savings Certificate: To encourage taxpayers to park their money in

National Savings Certificate scheme, the government has allowed tax
deductions to be claimed under Section 80C on the investments made in it.
Interest earned on National Savings Certificates are liable to tax. However, if
this interest is reinvested, it will be eligible for deduction under Section 80C.
The interest rate on this scheme is similar to that of tax savings fixed deposits,
PPF and other fixed income earning instruments.
Home Loan Principal Repayment: The amount that goes into repaying the
principal on a home loan is eligible for deduction under Section 80C. To claim
this tax benefit, construction of the property should be complete. If you transfer
the property before the end of 5 years from the year you had taken its
possession, no tax benefits will be awarded. Additionally, the amount claimed
as deduction in the earlier years shall become taxable in the year that the
property is transferred.
Payment made towards group insurance
Any amount deducted and deposited by employer towards employee’s

group insurance shall fully qualify for deduction.
Any subscription in deposit scheme of Central Government:
- Fully qualified for deductions
From the following particulars, find out the taxable salary of Mrs.Babita
working at Coimbatore (Population 11 Lakhs)
(a)Salary Rs.12,000 p.m.
(b)D.A. @ 100% of salary
(c)Employer’s contribution to Employee’s Recognized Provident fund –

14% of basic salary
(d) Rent-free accommodation (unfundable) – far rental value is
Rs.80,000 p.a. Expenses on maintenance of garden met by employer
Rs.3,000.
(e)Interest on Provident Fund balance @13% p.a. – Rs.3,900.
(f)A car (1.4 litre capacity) is provided by employer. All expenses are borne
by employer. It is used both for performance of duties and private
purposes. Car was used by employee for only 11 months during the year.
(g)She paid professional tax of Rs.1,200
(h)She received Rs.500 p.m.as fixed medical allowance.
Solution:
Computation of Salary Income of Mrs.Babita
Salary @ Rs.12,000 p.m. (12,000 X 12 1,44,000

Months)
D.A. @ 100% of Salary 1,44,000
Employers’ Contribution towards RPF 20,160
Less: Exempted upto 12% of salary 17,280 2,880
Interest credited on R.P.F. Balance @13% 3,900
Less: Exempted (3900X9.5/13) 2,850 1,050
Fixed Medical Allowance (Rs.500 X 12 6,000
Months)
Value of Rent-free Accommodation: 15,000
Unfurnished
Salary = Rs.1,44,000+ 6,000 = 1,50,000
@10% of Salary)
Value of Car perquisite – Taxable @ 19,800
Rs.1,800 p.m. X 11 months
Less: Deductions u/s 16
Standard deductions u/s 16(a) 50,000
Professional Tax paid u/s 16 (iii) 1,200 51,200
Salary Income 2,81,530
Note: D.A. is not added on salary for the calculation of value of rent-free
accommodation because it does not enter into retirement benefits.
Problem:No: 2
Mr.A an employee of Ranchi (Population 15 lakhs) based company

provides the following particulars of his salary income:
(i) Basic Salary Rs.12,000 p.m.

(ii) Profit Bonus Rs.12,000
(iii) Commission on turnover Rs.42,000
(iv) Entertainment allowance Rs.2000 p.m.
(v) Club facility Rs.6,000
(vi) Transport allowance Rs.1,800 p.m.
(vii) Free use of car of more than 1.6 lt capacity for both
personal and employment purposes: Expenses are met by
the employer
(viii) Rent free house provided by employer. Lease rent paid by
employer 6000 p.m.
(ix) Free education facility for three children of the employee:
( bills issued in the name of the employer) 22,500
(x) Gas, water and electricity bills issued in the name of
employee but paid by employer 16,800
Compute income under the head salary for the assessment

year 2019-20
Solution:
Computation of Salary Income of Mr.A
Salary @ Rs.12,000 p.m. (12,000 X 12 1,44,000

Months)
Profit Bonus 12,000
Commission on turnover 42,000
Entertainment Allowance ( 2000 X 12 24,000
Months)
Club facility 6,000
Transport allowance (1800 X 12 Months) 21,600
Car perquisites (Big Car) 2,400 X 12 months 28,800
Education facility 22,500
Gas, water and electricity bills 16,800
Rent free house 36,540
Value of rent paid by the employer 72,000
Salary of employee for the purpose of
calculation of RFA
(1,44,000+12,000+42,000+24,000+21,600 =
Rs.2,43,600)
15% of employee’s salary = Rs.36,540 36,540
(Whichever is less)
Gross salary 3,54,240
Less: Deductions under section 16 50,000
Standard deductions u/s 16(a)
Income under the Head Salaries 3,14,240

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Unit - 2

Income from Salaries

BASIS OF CHARGE – Section 15

Any benefit due to the EMPLOYER-EMPLOYEE RELATIONSHIP is

taxable under head Salaries.

• Salary is taxable on RECEIPT OR DUE whichever is earlier.

• BONUS is taxable on RECEIPT basis.

• Employer-Employee Relationship - Taxable u/h SALARIES

• If an individual receives salary from more than one source/employer during

• Any arrears of salary paid or allowed. . . W.E.F from__________

TAX TREATMENT OF DIFFERENT FORMS OF SALARY INCOME

Encashment of leaves by surrendering leave standing to one’s credit is known as

EMPLOYEES PROVIDENT FUND

It is a retirement benefit wherein employer and employee contribute

 Statutory Provident Fund

Statutory Provident Fund (SPF):

 The local authorities, governmental bodies, railways, universities, etc.

Recognized Provident Fund (RPF):

In case, the employees’ contribution is more than 12%, then it is taxable

Unrecognized Provident Fund (UPF)

 The CTI (Commissioner of Income Tax) does not recognize these

Public Provident Fund (PPF)

 This scheme of Public Provident Fund is available for all in general,

Income from Salaries

Mr.A receives Rs.4,20,000 p.a. as net salary. Employer had deducted

Net salary received 4,20,000

Add: (i) Employee’s own contribution to P.F. 4,000p.m.

(4000 X 12 Months) 48,000

(ii) Tax deducted at source 5,000

(iii) Professional tax deducted at source 2,000

(iv) Recovery of House building Advance @ 2500 p.m. 30,000

Gross Salary 5,05,000

Calculate the taxable amount of annual accretion to R.P.F. if following

(i) Pay @ Rs.40,000 p.m.

Calculation of taxable portion of annual accretion

(i)Employer’s contribution to R.P.F. @ 13% 80,080

Taxable portion of annual accretion 19,493

Calculate the taxable amount of annual accretion to R.P.F. if

(i) Basic Salary @ Rs.20,000 p.m.

(ii) Dearness Allowance Rs.1000 p.m.

(iii) Commission on sales Rs.4,000.

(iv) Employer’s contribution to R.P.F. @ 14% on Rs.38,000

(v) Interest credited to RPF at 12% is Rs.12,000.

Calculation of taxable portion of annual accretion

(i)Employer’s contribution to R.P.F. @ 14% 38,000

Taxable portion of annual accretion 11,220

Employee’s contribution to R.P.F. (800X12 9600

Basic Pay (4000X12 Months) 48,000

Compute taxable part of annual accretion from information given below:

(i) Salary Rs.48,000 p.m.

Calculation of taxable portion of annual accretion

(i)Employer’s contribution to R.P.F. 84,000

Taxable portion of annual accretion 20,280

The balance of unrecognized provident fund, which is transferred to

The amount of taxable portion will be calculated as under:

Computation of transferred balance and taxable portion thereof

Previous year 2017-18 (Given) (1.4.2017 to 31.3.2018)