G.

VENUGOPAL, Faculty, Department of Commerce, VVN Degree College, VV Puram, Bangalore - 560004

Unit-4: Income from Salaries:

The following incomes are chargeable to income tax under the head salaries under
Section 15.
a) Any salary due from a person or former employer to an assessee in the previous
year whether paid or not.

b) Any salary paid or allowed to him in the previous year by or on behalf of a present
or former employer though not due or before it becomes due to him. Ex: - Salary
paid in advance.

As regards to salary paid in advance, if it is included in the total income of

the previous year of any person, it should not be included again in his total income
when it becomes due.

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

NOTE: Salary is chargeable to tax either on ‘due’ basis or on ‘receipt’ basis,

whichever matures earlier.

Gross Salary: - The Gross salary of an employee includes basic salary, bonus,
commission and various allowances received from his employer.

Basic Salary: - It is also called as basic pay and is included in the income from salary.

Dearness Pay: - This is treated as part of the basic salary and is taxable.

Dearness Allowance: - This is an additional payment made by an employer to his

employee over and above the basic salary for meeting the increased cost of living. This is
also called high cost allowance and is taxable.

City Compensatory Allowance: - This type of allowance is generally granted to the

employees who are working in the cities and is included in the income from salary.

Bonus: - It is a payment made by an employer to his employee under any legal

obligation or otherwise. It is included in the income from salary.

Commission: - Some of the employers are making payment of commission to their

employees. Such commission paid may be as a fixed percentage based on the turnover
achieved by the employees during the year or it may be paid as a percentage of the basic
salary or a lump sum as per agreement. It is fully taxable and included in the income from
salary.

Definitions:- Section-17
Section 17 of the act defines Salary, Perquisites, and Profits in lieu of salary and
specifies as to what are the amounts to be included there on.

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1. Salary:- Section 17(1)

The ordinary meaning of salary is a periodic payment received for services rendered. But
for income tax purposes salary includes the following amounts received by an employee:
I. Wages, Annuity or Pension,
II. Gratuity, Fees, Commission,
III. Perquisites or Profit in lieu of salary or in addition to salary or wages,
IV. Advance salary,
V. Any payment received by an employee in respect of any period of leave not
availed by him,
VI. Annual accretion to the balance at the credit of an employee participating in a
Recognized Provident Fund to the extent to which it is chargeable to tax,
VII. The sums that are comprised in the transferred balance in a Recognized Provident
Fund from an Unrecognized Provident Fund to the extent that it is chargeable to
tax.

2. Perquisites:- Section 17(2)

Salary includes perquisites. Perquisites mean any casual emoluments, fees or profit
attached to an office in addition to salary or wages. The perquisites may be provided in
the form of cash or kind by the employer to his employees.
Perquisites include the following:
I. The value of Rent Free Accommodation provided to an employee by his employer.
II. The value of any concession in the matter of rent in respect of any accommodation
provided by the employer.
III. The value of any benefit or amenity granted or provided free of cost or at
concessional rate in any of the following cases of assesses who are called
specified assesses.

Specified assessee is-

a) an employee who is a director of a company or
b) an employee being a person carrying not less than 20% of the voting
rights (who is the owner of equity shares) or
c) an employee whose income under the head salaries exceeds
Rs.50,000 per annum exclusive of the value of all non-monetary
benefits.
IV. Any sum paid by the employer of obligation of employee Ex: - Employee club bills
paid by the employer.
V. Insurance premium paid by an employer on the employee or make a payment in
respect of a contract for annuity is taxable. However, it does not include medical
insurance and accident insurance.
VI. Value of prescribed fringe benefits: The value of any fringe benefits or amenities
such as provision of interest free or concessional loans, holiday travelling, touring
expenses, provision of free meals, gift vouchers etc., credit cards, and club
expenses, use of any movable assets or transfer of such assets as prescribed
under relevant rules.

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3. Profits in lieu of Salaries:- Section 17 (3)

It includes the following:-
I. The amount of any compensation due to or received by an assessee from his
employer in connection with the termination of his employment or the modification
of the terms and condition relating thereto.
II. Any payment due to or received by an assessee from his employer or from a
provident or other funds to the extent to which it is not consist of the assesses own
contribution and proportionate interest on such contributions. It also includes any
sum received under key man insurance policy and bonus there on.
III. Any payment due to or received by an employee from his employer in appreciation
of his service but not personal gifts.
IV. Any amount due to or received whether in a lump sum or otherwise by an
assessee from any person,
a) before joining any employment with that person or
b) after cessation of his employment with that person.

Death cum Retirement Gratuity:- Section-10(10)

An amount paid by an employer to his employee in appreciation of service after the death
or retirement is known as Gratuity.
According to Section 10(10), the following rules are applicable-
I. Any Gratuity received by the Govt. employees (employees of Central/Sate Govt.
/Local authorities) is fully exempted.
II. Any Gratuity received by the employees covered by the payment of Gratuity
Act,1972 (Amendment Act 1987) is exempted to the extent of least of the following-
a) Maximum Statutory limit of Rs.20,00,000. (less any amount exempted earlier)
b) Actual Gratuity received.
c) 15 days Salary based on salary last drawn for each completed year of service and
part thereof exceeding six months (7days in case of employees working in
seasonal factories.)
NOTE:
1. The payment of Gratuity Act 1972 is applicable to the employees who are
covered under the Factories Act or Non-managerial employees.
2. While calculating 15 days salary it must be taken as 26 days in a month.
3. Salary for 15 days means the last drawn salary which includes Basic pay,
Dearness pay and Dearness allowance and shall not include any other
allowances.
4. No of months service must be rounded off to the next year if it is more than
six months.
Problem-1. Mr. Sharuk, an employee retired in the month of March 2020, after
completing service of 35 years and 8 months with M/S S.M & Co. Ltd. He received
Rs.44,000 as gratuity under the payment of Gratuity Act 1972. His monthly salary on the
date immediately preceding the date of retirement was Rs.1560. Find out the exempted
and taxable gratuity.
Problem-2. Mr. Veerappan, an employee of M/S BRH Ltd, retired in March 2020, after
serving for 35 years and 10 months. He received Rs.50,000 as gratuity from the Co.
under gratuity (amendment) act 1987. His monthly salary on the date immediately
preceding the date of retirement was Rs.1,080 and DA Rs.1,000. Find out the exempted
and taxable gratuity.

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Problem-3. Sri Arjuna an employee completed 30 years and 5 months service with M/S
Bishma &Co. Ltd. At the time of retirement he received Rs.40,000 as gratuity under the
payment of Gratuity Act 1972. He retired on 31st Jan 2020. His monthly wages and DA on
the date immediately preceding the date of retirement was Rs.1,000 and Rs.950
respectively. Ascertain the taxable gratuity.

III. For other employees:- (Employees not covered under the payment of Gratuity Act
1972)
In case of these employees gratuity is exempted being the least of the following-
a) Maximum Statutory limit of Rs.20,00,000. (less any amount exempted earlier)
b) Actual Gratuity received.
c) Half a month average salary for each completed years of service only.
NOTE:
1. It is applicable for other employees who are working as Managers and not
covered under payment of Gratuity Act 1972.
2. Average salary means average salary of 10 months preceding to the month
of retirement or death.
3. Salary for 10 months means Basic Pay plus Dearness Pay plus any portion
of Dearness allowance which enters into pay for service benefit and
Commission received on fixed percentage of Turnover achieved by him and
shall not include any other allowances.
4. While taking No. of years of service, only completed years of service must
be taken but not months.
Problem-1. Mr. Jayanth retired from his service on 21st October 2019 after 36 years and
10 months service and received gratuity of Rs.2,50,000. His average salary was
Rs.6,000 per month and DA Rs.1,000 per month (50% enters into service benefit).
Compute the taxable gratuity.

Problem-2. Mr. Jagadeesh retired on 23rd December 2019. He joined the firm on 01-04-
1986. He has received Rs.3,00,000 as gratuity. During the year 2018-19 his salary was
Rs.7,000 per month. Later increased by Rs.1,000 per month. He has been getting 10% of
his basic pay as DA. Compute his taxable gratuity assuming that he is working as
Manager.

Problem-3. Mr. Ram retired on 3rd August 2019 after 37 years and 9 months service and
received Rs.1,20,000 as gratuity. From the following details of his salary income,
calculate taxable gratuity.
a) Basic pay Rs.7,000 per month up to 31st March 2019 and thereafter increased by
Rs.1,500 p.m.
b) DA 50% of Basic pay (50% enters into service benefit)
c) Commission of 2% on turnover, the turnover being Rs.6,00,000.

Problem-4. Mr. Jaishankar retired from service on 25th July 2019 after 40 years and 9
months service and received gratuity of Rs.3,20,000. His salary during the year 2018 was
Rs.8,000 per month and during the year 2019 Rs.9,000 per month. He has been getting
Dearness pay of Rs.1,000 per month since 2013. Calculate taxable gratuity assuming
that he is not covered under the payment of Gratuity Act 1972.

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G. VENUGOPAL, Faculty, Department of Commerce, VVN Degree College, VV Puram, Bangalore - 560004

Problem-5. Mr. Jayasimha retired on 27th November 2019, after 42 years of service and
received gratuity of Rs.3,00,000. His salary at the time of retirement was Rs.7,500 per
month. His increment of Rs.1,500 falls due on 1st August every year. Dearness pay is
Rs.500 per month and commission is Rs.6,000. Calculate taxable gratuity assuming that
he is not covered under the payment of gratuity act, 1972.

Problem-6. From the following particulars of 4 assessees working in a private concern

(not covered by the payment of gratuity act, 1972), retires on 31st March 2019. Calculate
exempted and taxable gratuity.
Mr. A Mr. B Mr. C Mr. D
Years of completed service 41 40 35 35
Average monthly salary for the past 10 months 1,200 1,400 1,600 8,000
Gratuity received 20,000 29,000 35,000 1,30,000

Pension:- Section 10(10A)

Periodic payment made by an employer to his employee after his retirement
is known as Pension. It is taxable fully.
Sometimes an employee may ask for a lump sum amount in place of
periodic payment. As such the lump sum amount in place of periodic payment received
by an employee from his employer is known as Commutation of Pension.
An employee may commute either whole of his pension or part of his
pension. If a part of the pension is commuted, the remaining part which is not commuted
is known as ‘Un Commuted Pension’ and taxable fully.
According to Section 10 (10A), the following rules are applicable in respect
of ‘Commuted Value of Pension’ received by an employee.
I. Commuted Value of Pension received by a Govt. employee is not taxable.
(Central/State/Local Authorities/Statutory Corporations)
II. In case of Non-Govt. employees-
a) If gratuity is received – Commuted value of 1/3 of full pension is exempted.
b) If gratuity is not received-- Commuted value of ½ of the full pension is
exempted.

Problem-1. Mr. Amar an executive engineer in Indian Railways retired on 01- 01- 2020.
His salary at the time of retirement was Rs.12,000 p.m. His pension was fixed as
Rs.6,000 per month. He commuted ¾ of his pension and received Rs.1,50,000. He has
also received gratuity of Rs.2,00,000. Calculate taxable commuted value of pension.

Problem-2. Mr. Akbar, a private employee retired after 30 years of service. His pension
was fixed as Rs.3,000 per month. He got his pension commuted for ¾ and received
Rs.45,000. Calculate taxable value of commuted pension, if
a) he received gratuity
b) he doest not receive gratuity and
c) he was an employee of Govt. of Karnataka.

Problem-3. Mr. Antony retired on 31-07- 2019, after 40 years of service. The salary at
the time of retirement was Rs.9,000 p.m. His pension was fixed as Rs.4,500 p.m. He got
his pension commuted for 4/5 on 01-10- 2019 and received Rs.80,000. Calculate taxable
commuted value of pension.

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G. VENUGOPAL, Faculty, Department of Commerce, VVN Degree College, VV Puram, Bangalore - 560004

Problem-4. Mr. Anand retired from service on 30-06-2019. His salary at the time of
retirement was Rs.4,500 p.m. His pension was fixed as 2/3 of his salary. He got his
pension commuted for 5/6 and received Rs.50,000. Calculate taxable commuted value of
pension and also un commuted pension.

Problem-5. From the following particulars of Mr. Anil, Compute his Gross salary.
a) Date of retirement: 30th September 2019.
b) Salary during 2019-20 Rs.8,000 per month.
c) Pension 25% of salary.
d) Commuted value of pension received Rs.60,000 ( 3/4 )
e) Date of commutation: 01-01-2020.
Problem-6 Mr. Baba gives you the following particulars-
a) Date of appointment: 01-12-1986.
b) Date of retirement: 31-07-2019.
c) Gratuity received Rs.1,35,200.
d) Salary during 2018-19 Rs.5,500 p.m.
e) Salary during 2019-20 Rs.6,200 p.m.
f) DA Rs.1,500 p.m. (50% enters into service benefit)
g) Commuted value of pension received Rs.80,000 ( 4/5 )
Calculate taxable commuted value of pension and taxable gratuity if a) he is a Manager
and b) Non-Manager.

Encashment of Earned Leave:- Section 10 (10AA)

Earned leave is a special privilege given to an employee by the employer. According to
Section 10 (10AA), the following rules are applicable-
1. Encashment made by an employee while he was in service is fully taxable.
2. Encashment made by the Govt. employees after the retirement including
resignation is not taxable. (Only Central/State).
3. Encashment made by the legal representatives of a deceased employee is not
taxable.
4. In case of other employees- Least of the following is exempted and remaining is
taxable.
a) Statutory limit of Rs.3,00,000
b) Actual encashment received
c) 10 months average salary
d) One month average salary for each completed year of service minus No. of
months EL already utilized.
NOTE:
1. Average salary means the average of 10 months’ salary preceding the month of
retirement.
2. Salary for 10 months means Basic Pay plus Dearness Pay plus any portion of
Dearness allowance which enters into pay for service benefit and Commission
received on fixed percentage of Turnover achieved by him and shall not include
any other allowances.
3. The No. of months earned leave utilized in service includes – the No. months
earned leave applied and No. months earned leave en cashed during the service.
4. While calculating the No. of years of service only completed years of service must
be taken and months should be ignored.

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G. VENUGOPAL, Faculty, Department of Commerce, VVN Degree College, VV Puram, Bangalore - 560004

Problem-1. From the following particulars, compute taxable encashment of EL.

Name: Mr. Ajith
Date of appointment: 01-08-1983.
No. of days EL entitled: 40 days per annum.
Date of retirement: 10-12- 2019.
Encashment received: Rs.65,000.
No. of days EL utilised: 900 days.
Basic pay: Rs.4,000 per month.
DA: Rs.1,000 per month.
Commission on turnover: 2% on turnover of Rs.5,00,000

Problem-2. Mr. Mohin retired on 30th September 2019, after 28 years of service. He is
entitled to 1and1/2 month earned leave. During his service he has utilized 16 months EL
and the remaining is en cashed for Rs.1,35,000. From the following salary details
calculate taxable encashment of earned leave.
a) Basic pay Rs.6,200 p.m. up to 31st March 2019 and thereafter increased by
Rs.1,500 per month.
b) DA- 30% of Basic pay (50% is under terms of appointment)
c) Commission under which fixed Rs.4,000 and 3% on Turnover, the turnover being
Rs.4,00,000.

Problem-3. Mr. Das retired on 10-07- 2019, after 18 years of service and received
Rs.75,000 as an amount of leave encashment for 15 months. His employer allows 45
days of EL for every one year of service. From the following particulars of his salary
income, calculate taxable encashment of earned leave.
a) His salary during 2018-19 was Rs.5,000 p.m. and 2019-20 Rs.6,000 p.m.
b) Dearness pay Rs.400 per month.
c) Commission on turnover at 4%, the turnover being Rs.3,00,000.

Problem-4. Mr. Sundar gives the following particulars. Calculate taxable encashment of
earned leave.
a) Date of appointment: 01-10-1988.
b) Date of retirement: 21-07-2019.
c) Entitlement of earned leave: 2 months per annum.
d) No. of months EL encashed: 20 months.
e) No. of months EL applied: 3 months.
f) Amount of encashment per month: Rs.2,000
g) Salary during 2018 Rs.4,500 per month and 2019 Rs.5,000 per month.
h) DA: 50% of Basic pay (25% enters into service benefit)
i) Commission on turnover- 2%. The turnover being Rs.3,00,000.

Problem-5. Mr. Cat eater retires on 10-07- 2019, after 28 years of service. He is entitled
to 1 and1/2 month EL. During his service he has en cashed 30 months EL and balance is
en cashed for Rs.75,000. He was on the pay scale of Rs.4,800-100-5,000-200 since
01-03-2014. Dearness pay Rs.300 p.m. Calculate taxable encashment of earned leave.

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G. VENUGOPAL, Faculty, Department of Commerce, VVN Degree College, VV Puram, Bangalore - 560004

Problem-6. Mr. Rat eater retired on 15th November 2019, after 30 years of service. He is
entitled to 1and 1/2 month EL. During his service he en cashed 22 months earned leave
and the balance is en cashed for Rs.85,000. From the following details of his salary
income calculate taxable encashment of earned leave.
a) Basic pay Rs.5000-200-5600-300 since 01-01-2015.
b) Dearness pay Rs.500 p.m.
c) Commission 2% on turnover, the turnover being Rs.5,00,000.

Problem-7. Mr. Head eater retired as a manager on 31-12- 2019, after 32 years and 8
months service. He has utilized 21 months EL and the remaining is en cashed for
Rs.60,000. He has also received gratuity of Rs.2,50,000. He commuted his pension for ¾
and received Rs.45,000. His salary details are as fallows-
a) Basic pay Rs.6,000 p.m. up to 31-08- 2019, there after increased to Rs.7,000 per
month.
b) Dearness pay Rs.1,000 p.m.
c) Commission 2% on turnover, the turnover being Rs.8,00,000.
Calculate taxable encashment of earned leave, taxable gratuity and taxable commuted
value of pension.

Provident Funds:-
These funds have been instituted for the purposes of compulsory saving and to provide
for the future. Accordingly the employee’s contribution is deducted from his salary every
month. The same amount will be deposited along with the contribution made by the
employer. The interest earned on the fund is also added to it. The accumulated amount
of the fund will be repaid after retirement of an employee or on his death or on leaving the
service as per rules.

The following are the different kinds of funds-

1. Statutory Provident Fund (SPF)
2. Recognized Provident Fund (RPF)
3. Unrecognized Provident Fund (URPF)
4. Public Provident Fund (PPF)
5. Approved Super Anuuation Fund (ASAF)

I. Statutory Provident Funds:- These are provident funds to which Provident Fund Act
1925 applies. Generally such provident funds are maintained by the Govt. or Semi-Govt.
departments like Local authorities, Railways, Universities etc. The following are the
provisions of the Income tax act regarding these funds.
a) Employees own contribution:- The contribution made by the employee to this
fund fully qualifies for deduction under Section 80 C.
b) Employer’s contribution:- The contribution made by the employer is fully exempt
and hence it should not be included in the employee salary income.
c) Interest earned:- The interest earned on the accumulated balance of the fund is
also fully exempt.
d) Refund:- The refund of this fund amount is fully exempt and not included in total
income.

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II. Recognized Provident Funds:- These are the funds which are recognized by the
Commissioner of Income taxes as required under Income tax act. These funds are
maintained by Banks, Companies and other Industrial undertakings. The following are the
provisions of IT act regarding these funds.
a) Employees own contribution:- The contribution made by the employee to this
fund fully qualifies for deduction under Section 80 C.
b) Employer’s contribution: - The contribution made by the employer up to 12% of
salary of employee is exempt but, the excess over 12% of salary if any is taxable
and included in the income from salary.
NOTE: For the above purpose Salary means Basic pay, Dearness pay, the Dearness
allowance if the terms of employment so provides and fixed percentage of
Commission if it is payable based on turnover achieved by the employee but does not
include any other allowances.
c) Interest earned: - The interest earned / credited on this fund up to 9.5% per
annum is exempt from tax but the excess if any is taxable and included in the
income from salary.
d) Refund:- The amount received from this fund by the employee is exempt from the
tax and not included in his total income provided-
i) The employee has rendered service for a continuous period of at least 5
years.
ii) He has left the service within 5 years for reasons beyond his control and
iii) The accumulated fund amount is transferred on leaving the employment to
the employee’s recognized provident fund maintained by his new employer.

III. Unrecognized Provident Funds:- These are the funds which are not recognized by
the Commissioner of Income taxes. However, such funds are also found with some of the
concerns. The following are the provisions of the Income tax act regarding these funds.
a) Employees own contribution: - The contribution made by the employee to this
fund will not qualify for deduction under Section 80 C.
b) Employer’s contribution: - The contribution made by the employer is exempt for
the present year and hence it is not included now in the income from salary.
c) Interest earned: - The interest credited to the fund is also not considered for the
present year.
d) Refund: - When the fund amount is received from the accumulated balance, the
portion pertaining to the employer’s contribution and the proportionate interest
there on of all those years is taxable and included in the income from salary of the
year during which it is refunded.
Similarly the proportionate interest of his contribution is taxable
under the head income from other sources. However, the amount received
representing his own share of principal amount is not taxable.

IV. Public Provident Fund:- This is a fund instituted by the Govt. which is open for any
person including self-employed persons like Doctors, Advocates, Accountants, Traders
etc. The following are the provisions of Income tax act regarding this fund.
a) His own contribution will qualify for deduction under Section 80 C.
b) The question of employer’s contribution does not arise.
c) Interest credited to this fund is totally exempt from tax.
d) Refund from the accumulated balance of the fund is also exempt from tax.

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G. VENUGOPAL, Faculty, Department of Commerce, VVN Degree College, VV Puram, Bangalore - 560004

V. Approved Super Annuation Funds:- These are funds which are established
according to the rules contained in Part-B of the IV schedule of the Income tax act. If the
fund fulfils the conditions specified in the rules approval will be given to the fund by the
Commissioner of the Income taxes. The following are the provisions of Income tax act
regarding these funds.
a) Employee’s contribution will qualify for deduction under Section 80 C.
b) Employer’s contribution is exempt from tax up to Rs.1,50,000 per annum and
the excess is taxable and included in the income from salary.
c) Interest credited to this fund is exempt.
d) The Refund amount received from the accumulated balance is totally exempt from
tax.

Total Summary:
a) Employee own contribution: to any provident fund except URPF will qualify for
deduction u/s – 80 C
b) Employer’s Contribution: to any provident fund is exempt except RPF and
ASAF. In case of RPF it is exempted up to 12% of employee salary and excess if
any is taxable and included in the salary income. In case of ASAF it is exempted
up to Rs.1,50,000.
c) Interest earned/credited: to any provident fund is exempt except RPF. In case of
RPF it is exempted up to 9.5%. The excess if any is taxable and included in the
salary income.
d) Refund: Refund from any provident fund is exempted except from URPF. In case
of URPF employer’s contribution and proportionate interest there on is taxable and
included in the income from salary. Interest on employee portion is taxable is
taxable under other sources.

Annual Accretion of Provident Fund:-

It includes employer contribution and interest on both employer and employee
contribution to the provident fund. The annual accretion of SPF, URPF, and ASAF is not
taxable. But in case of RPF the employer’s contribution in excess of 12% of employee
salary and interest on RPF in excess of 9.5% of interest is taxable.

NOTE: For calculation of 12% Salary- Salary includes Basic pay plus Dearness pay and
any portion of Dearness allowance which enters into service benefit and percentage of
Commission payable on turnover achieved by the employee and shall not include any
other allowances.

Problems on Annual Accretion of Provident Funds:-

Problem-1. Mr. Poojari working in a private company, drawing a salary of Rs.6,000 p.m.
He contributes Rs.10,000 per annum to RPF to which an equal amount is contributed by
his employer. An interest at 16% amounting to Rs.6,400 is credited to RPF. Calculate
taxable annual accretion.

Problem-2. Mr. Purohit working in a private company drawing a salary of Rs.5,000 p.m.
He contributes 15% of his salary to RPF. Employer also contributes 15% of his salary.
Interest at 17% is credited on accumulated balance of Rs.80,000. Calculate taxable
annual accretion.
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Problem-3. Mr. Pandit gives the following particulars of his income. Calculate taxable
annual accretion. Basic pay Rs.6,000 p.m, DA Rs.1,000 p.m, (50% enters into service
benefit), City compensatory allowance Rs.500 p.m, Bonus Rs.10,000 p.a, Commission
2% on turnover, the turnover being Rs.6,00,000. He and his employer contributes to RPF
Rs.12,000 per annum each. Interest credited to RPF is Rs.14,000 on accumulated
balance of Rs.80,000.

Problem-4. Mr. Eswar gives the following particulars of his income, Compute Gross
Salary.
Basic pay Rs.6,000 per month. DA- Rs.1,000 per month. (50% enters into service
benefit), Bonus- 2 months’ salary, CCA- 10% of salary, Commission- Rs.6,000 per
annum. He contributed 13% of his salary to RPF and same % is contributed by the
employer. Interest of Rs.4,500 is credited to RPF at 15%.

Problem-5. Mr. Maheswar gives the following particulars. Calculate Gross Salary. Basic
pay- Rs.3,000-100-3,300-200 since 01-01- 2016. DA- 20% of basic pay, Bonus - 2
months gross pay, Commission-2% on turnover, the turnover being Rs.4,00,000, CCA-
10% of basic pay. He and his employer contribute to RPF at 13%. Interest credited to
RPF at 15%- Rs.7,500.

Problem-6. Mr. Parameshwar gives the following particulars of his income. Basic pay-
Rs.6,400-200-6,800-400 since 01-10- 2016. DA-Rs.1,000 per month (50% enters into
service benefit), Bonus- 2 months gross paid, Commission- 3% on turnover, the turnover
being Rs.6,00,000. He contributed Rs.12,000 per annum to RPF and his employer
contributed Rs.14,000 per annum. Interest at 16% is credited on accumulated balance of
Rs.50,000. Calculate Gross Salary.

Problem-7. Mr. Jagadeeshwar gives the following particulars:

Salary received Rs.42,000 after deduction of Income tax Rs.8,000 and own contribution
to RPF Rs.12,000. DA- Rs.500 per month. Commission- Rs.10,000. Employer
contribution to RPF Rs.14,000 per annum. Interest credited to RPF Rs.9,000 at 15%.
Compute Gross Salary.

Problem-8. Mr. Rameshwar gives the following particulars:

Basic pay Rs.6,000 per month, DA- 100% of Rs.12,000 and ¼ of balance. (50% enters
into service benefit), Bonus- 2 months’ salary. He and his employer contributes to RPF
Rs.15,000 each. Interest credited to RPF at 14%- Rs.5,600. Calculate Gross Salary.

Transferred Balance:- The Unrecognized Provident Fund transferred to Recognized

Provident Fund is known as Transferred Balance. According to schedule IV rule 11 (4)
the amount of taxable portion will be calculated as fallows-
1. The URPF will be treated as RPF from the date of setting up of an URPF.
2. In all those years employer contribution in excess of 12% of salary of employee
and interest credited in excess of 9.5% of interest must be calculated.
3. The taxable amount so calculated shall be deemed to be the income of previous
year in which the Unrecognized Provident Fund was recognized.

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Problem-1. On 01-04- 2017 an employee starts contributing Rs.600 per month to URPF
and equal amount is credited by the employer. This practice continued till 30 th September
2019. Interest credited at 14% for 2017-18 Rs.700, for 2018-19 Rs.1,400 and up to 30th
September 2019 Rs.1,050. From 01-10-2019 this fund is recognized by the
Commissioner of Income tax. Calculate Taxable transferred balance if his salary was
Rs.2,000 per month.

Problem-2. On 01-08- 2017 an employee starts contributing Rs.800 per month to URPF
and interest of Rs.4,500 was credited at 15%. From 01-04- 2018 he starts contributing
Rs.800 per month to URPF and interest of Rs.10,500 was credited at 15%. From 01-04-
2019 it was increased to Rs.1,000 per month and interest of Rs.15,000 was credited to
URPF at 15%. In all the above years’ equal amount was contributed by his employer. On
31-12- 2019, it was transferred to RPF. His salary during 2017-18 Rs.3,000 per month,
2018-19 Rs.4,000 per month, 2019-20 Rs.4,500 per month. Calculate taxable transferred
balance.
Problem-3. Compute Taxable portion of transferred balance of URPF, when it becomes
RPF from 01-10- 2019.
a) Own contribution and Employer contribution to URPF Rs.600 per month from 01-
04- 2017 to 30-09- 2019.
b) Interest credited at 13% for the year 2017-18 - Rs.650, for 2018-19 - Rs.1,300 and
for 2019-20 - Rs.910.
c) He was getting consolidated salary of Rs.4,000 per month and DA- Rs.1,000 per
month.

Problem-4. On 01-04- 2018 Mr. Aravind got an appointment in a private concern on a

salary of Rs.3,000 per month. He and his employer contributes 14% of salary to
Unrecognized provident fund and interest of Rs.3,000 at 15% is credited to Unrecognized
provident fund.
On 01-04- 2019, he joined another company on a salary of Rs.6,000 per
month. He and his employer contributes 15% of his salary to Recognized provident fund
and interest of Rs.9,600 is credited at 16%. He decided to transfer unrecognized
provident fund to Recognized provident fund. Calculate Gross Salary for the previous
year 2019-20.

Allowances:-
The term allowance means any amount or sum allowed regularly. These allowances are
divided into 3 categories on the basis of their tax treatment. They are-
A. Fully exempted allowances.
B. Fully taxable allowances.
C. Partly taxable allowances.

A. Fully Exempted allowances:-

1. Foreign allowance only in case of Govt. employees posted outside India.
2. House rent allowance given to Judges of High Court and Supreme Court.
3. Sumptuary allowance given to Judges of High Court and Supreme Court.
4. Allowance from UNO to its employees.

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B. Fully Taxable allowances:- The following are fully taxable allowances-

1. Dearness allowance/ Additional DA/ High cost of living allowance/ Interim relief.
2. City Compensatory allowance/ Capital Compensatory allowance.
3. Lunch allowance.
4. Tiffin allowance.
5. Marriage allowance.
6. Family allowance.
7. Deputation allowance.
8. Warden ship allowance.
9. Non practicing allowance.
10. Project allowance.
11. Overtime allowance.
12. Fixed Medical allowance.
13. Water and Electricity allowance.
14. Servant allowance.
15. Entertainment allowance.

C. Partly Taxable allowances:-

I. House Rent allowance:- Section- 10 (13A)
II. Special allowances covered U/S- 10 (14)
1. Helper allowance.
2. Uniform allowance.
3. Academic Research allowance.
4. Conveyance allowance.
5. Travelling or Transfer or Daily allowance- In all these cases actual expenditure
incurred (for official purpose) is exempted and balance if any will be taxable.
6. Transport allowance in case of employee who is blind or deaf and dumb or
handicapped is exempted up to Rs.3,200 per month. Excess if any is fully
taxable. In case of other employees it is fully taxable.
7. Tribal area allowance is exempted up to Rs.200 per month in the states of MP,
Tamil Nadu, UP, Karnataka, Tripura, Assam, West Bengal, Bihar and Orissa.
8. Children education allowance is exempted up to Rs.100 per month per child for
two children only.
9. Hostel allowance on employees children is exempted up to Rs.300 per month
per child for two children only.
10. Any running flight allowance to an employee working in transport system to
meet his personal expenditure on duty, where daily allowance is not paid to
him is exempted up to 70% of such allowance or Rs.10,000 per month
whichever is less.
11. Compensatory field area allowance is exempted up to Rs.2,600 per month.
12. Compensatory modified field area allowance is exempted up to Rs.1,000 per
month.
13. Counter insurgency allowance is exempted up to Rs.3,900 per month.
14. Highly active field area allowance is exempted up to Rs.4,200 per month.
15. Underground allowance given to Coal Mine workers is exempted up to Rs.800
per month.
16. Is land duty allowance given to Armed forces posted in Andaman and Nicobar
and Lakshadweep group of Islands is exempted up to Rs.3,250 per month.

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17. Any special allowance in the nature of composite hill compensatory / High
altitude / Uncongenial climate / Snowbound area allowance is exempted up to
Rs.300 per month to Rs.7,000 per month.
18. Border area / Difficult area / Remote area / Disturbed area allowance is
exempted up to Rs.200 per month to Rs.1,300 per month.

Problems on Allowances:-

Problem-1. From the following particulars of Mr. Bali, Compute his Gross Salary.
Basic pay- Rs.6,000 p.m. DA- Rs.1,200 p.m. (50% enters into service benefit),
Commission- 2% on turnover, the turnover being Rs.3,00,000. Bonus- Rs.15,000. CCA-
Rs.5,000. Travelling allowance- Rs.200 p.m. (100% spent), Education allowance- Rs.500
p.m. (2 children), Overtime allowance- Rs.150 p.m. Tribal area allowance- Rs.400 p.m.
He and his employer contributed Rs.1,200 p.m to RPF, Interest credited to RPF Rs.9,000
at 15%.

Problem-2. From the following particulars of Sukumar, Compute his Gross Salary-
Net salary received after deduction of income tax and own contribution to Statutory
Provident fund Rs.42,000. Tax deducted at source Rs.2,000 and own contribution to SPF
Rs.8,000. DA- 100% of Rs.10,000 and 1/3 of balance. Bonus-30% Salary. Employer
contribution to SPF- Rs.10,000 and Interest of Rs.5,200 is credited @ 13%. Children
Education allowance- Rs.500 per month (50% spent), Uniform allowance- Rs.300 per
month (60% spent), Project allowance- Rs.200 per month (100% spent), Deputation
allowance- Rs.100 per month (40% spent).

Problem-3. Mr. Sadguna gives the following particulars-

Basic pay- Rs.4,200-300-4,800-500 since 01-01- 2014. DA- 25%, Commission-Rs.6,000,
CCA- Rs.4,000, Conveyance allowance- Rs.200 per month (4/5 spent), Children
Education allowance- Rs.350 per month, Hostel allowance- Rs.400 per month (2
children), Tribal area allowance- Rs.500 per month, Transport allowance- Rs.1,000 per
month, Medical allowance- Rs.300 per month (50% spent), Family allowance- Rs.400 per
month (20% savings), Helper allowance- Rs.300 per month (50% spent), Tiffin
allowance- Rs.100 per month (100% savings), Uniform allowance- Rs.200 per month
(100% spent), Lunch allowance- Rs.400 per month (1/4 spent). He and his employer
contributes to RPF Rs.12,000 per annum each. Interest credited to RPF @ 16%
Rs.9,600. Salaries are paid on 1st of every month. Compute his Gross Salary.

House Rent Allowance:- Section 10 (13A)

This allowance is given to compensate rent paid by an employee on the house occupied
by him. It is exempted to the extent of Least of the following:-
a) The actual HRA received.
b) 50% of salary if the house is situated in Mumbai, Delhi, Kolkata and Chennai or
40% of salary if the house is situated at any other place.
c) The actual rent paid by the assessee in excess of 10% of salary.

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NOTE:
1. Meaning of Salary for 50% or 40% or 10%: Salary includes Basic pay, Dearness
pay and any portion of Dearness Allowance if it enters into service benefit and fixed
percentage of Commission payable on turnover and shall not include any other
allowances.

2. If any employee stays in his own house actual HRA received is fully taxable.

3. HRA received by the Judges of High Court and Supreme Court is not taxable.

4. If the rent paid by the assessee doesn’t not exceeds 10% of salary, he will not get
the benefit of this exemption.

Problem-1. Mr. Aswathappa gives the following particulars- Basic pay- Rs.5,000 p.m.
DA-Rs.1,000 p.m. HRA- Rs.1,500 p.m. Rent paid Rs.1,000 per month. Place of working-
Kolkata. Calculate taxable HRA.

Problem-2. Mr. Belliappa of Kerala draws a salary of Rs.4,000 p.m, DA- Rs.1,500 p.m,
HRA- Rs.1,000 p.m, Rent paid Rs.1,200 p.m. Calculate taxable HRA.

Problem-3. Mr. Chikkappa of Delhi draws a salary of Rs.6,000 p.m. Dearness pay-
Rs.1,000 p.m, CCA- Rs.500 p.m, HRA- Rs.2,000 p.m, Rent paid Rs.2,000 p.m. Calculate
taxable HRA.

Problem-4. Mr. Doddappa working in Hyderabad drawing salary of Rs.5,000 per month.
DA- Rs.1,000 p.m (3/4 enters into service benefit), Commission- Rs.10,000. HRA-
Rs.1,000 per month, Rent paid Rs.800 per month. Calculate taxable HRA.

Problem-5. Mr. Eswarappa working in Bangalore drawing salary of Rs.3,000 per month.
DA- Rs.1,000 p.m (50% enters into service benefit), Commission 2% on turnover, the
turnover being Rs.5,00,000. Bonus- Rs.6,000, HRA- Rs.750 per month, Rent paid
Rs.1,000 per month. Calculate taxable HRA.

Problem-6. Mr. Fakeerappa gives the following particulars- Basic pay Rs.5,000 p.m.
Dearness pay Rs.1,000 per month, Commission on turnover- 6%, the turnover is
Rs.5,00,000. HRA- Rs.1,000 per month up to 31-07- 2019, there after increased by 25%.
He pays rent of Rs.1,500 per month. Calculate taxable HRA.

Problem-7. Mr. Gundappa of Chennai gives the following particulars- Basic pay Rs.4,000
p. m up to 30-09-2019 and thereafter increased to Rs.5,000 p.m. DA- Rs.1,000 p.m.
(50% enters into service benefit), Commission 2% on turnover, the turnover being
Rs.2,00,000. HRA- Rs.1,500 p.m. Rent paid Rs.1,200 p.m. up to 31-12- 2019 and later
increased by 10%. Calculate Taxable HRA.

Problem-8. Mr. Hanumanthappa gives the following particulars- Basic pay Rs.4,000-200-
4,600-500 since 01-06- 2015. DA- 50% of Basic pay, HRA- 20% of Basic pay, Rent paid-
120% of HRA. Calculate taxable HRA.

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