Income under the head

Salary
 Heads of Income
• S 14- Heads of Income and Gross Total Income:
For the purpose of charge and computation of Total Income, income is classified under
following heads –
(1) Income from Salary (Section 15-17)
(2) Income from House Property ( Section 22-27)
(3) Profits and Gains of Business and Profession (Section 28-44DA)
(4) Income from Capital Gains (Section 45-55A)
(5) Income from Other Sources (Section 56-59)

• The aggregate of income under these 5 heads is GTI. Deductions under Ch. VIA are made
from GTI to calculate the taxable income.
 Computation of income under the head
Salary
• First head is income from “Salary”
• S. 15-17 deal with computation of salary

Meaning-
• Any payment or remuneration received by one person from another for services rendered in favour of him.

Essentials -
• Employer- Employee relationship (Can be full time or part time) (Employer can be anyone and can be of
any numbers)
• There should be due control and supervision by that employer – CIT v Lakshmipati Singhania (1973) 92 ITR
598 (All)
• Employer can be former, present and prospective all.
• There can be more than one employers.
• Employees may be full time or part time.
• Any income received by the employee from the person other than the employer is not salary.
 Basis of Charge
• Section 15 – Salaries:
The following income shall be chargeable to income- tax under the head" Salaries"-
(a) any salary due from an employer or a 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 an employer or a former
employer though not due or before it became due to him;
(c) any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a
former employer, if not charged to income- tax for any earlier previous year.
Explanation 1.- For the removal of doubts, it is hereby declared that where any salary paid in advance in
included in the total income of any person for any previous year, it shall not be included again in the total
income of the person when the salary becomes due.
Explanation 2.- Any salary, bonus, commission or remuneration, by whatever name called, due to, or received
by, a partner of a firm from the firm shall not be regarded as" salary" for the purposes of this section.
 Basis of Charge contd…

Salary is charged on following basis –

1. Due basis
2. Received basis
3. Arrear of salary
• Example of Arrears-
• If the Government announces increase in dearness allowance in the
P.Y. 2021-22 which is effective from 1.1.2012 then arrears from
1.1.2012-31.3.2022 were never due earlier. These arrears will be
taxed in the P.Y. in which these are paid or allowed although arrears of
the salary relate to the past years.
• Q.- X is an employee of ABC Ltd. getting a salary of Rs. 40,000 p.m.
which is due on the last day of the month but is paid on the 7th of next
month. Salary for which months will be taxable for the A.Y. 2022-23.
• Q.- X is an employee of ABC Ltd. getting a salary of Rs. 40,000 p.m.
which is due on the last day of the month but is paid on the 7th of next
month. Salary for which months will be taxable for the A.Y. 2022-23.

• Q.- In the above case, assume that salary becomes due on the 1st of
next month and is paid on the 7th of the next month. Salary for which
months will be taxable for the A.Y. 2022-23.
• Q.- X is an employee of ABC Ltd. getting a salary of Rs. 40,000 p.m.
which is due on the last day of the month but is paid on the 7th of next
month. Salary for which months will be taxable for the A.Y. 2022-23.

• Q.- In the above case, assume that he is paid the salary of April 2022
and May 2022 in advance in March 2022. Salary for which months will
be taxable for the A.Y. 2022-23.
 Deduction under head salary
Section 16 – Deductions from salary:
i. Standard deduction (Section 16(ia)) to the maximum extent of Rs. 50, 000 (introduced in 2018 with 40,000 and
10,000 rs. increased in 2019 i.e. 50,000)
• From 2023, available for new tax regime also.

i. Entertainment allowance (Section 16(ii)) –

- Only if received from Government
- The Govt. Employee is entitled for deduction of entertainment allowances to the extent of following 3 limits-
- (a) actual amount or
- (b) a sum equal to one-fifth (20%) of his salary (exclusive of any allowance, benefit or other perquisite i.e. BS) or
- (c) 5000 Rs
- whichever is less per annum

iii. Professional/ employment tax (Section 16 (iii))– A person earning an income from salary or otherwise by practicing a
profession. This tax is collected by states. Professional tax due but not paid shall not be allowed as deduction.
Article 276 of the Constitution which empowers the State Government to levy professional tax also has provided for a
maximum cap of Rs 2,500 beyond which professional tax cannot be charged on any person.
• X, an employee of the Central Government, gets Rs. 30,000 p.m. as basic
salary and is entitled to Rs. 1500 p.m. as entertainment Allowance. Compute
the deduction under section 16(ii) from gross salary in respect of
entertainment allowance.

• (i) 1500 X 12 = 18,000

• (ii) 30,000 X 12 = 3,60,000 X 20% = 72,000
• (iii) 5,000

• Amount deductible = 5,000

• X, an employee of the Central Government, gets Rs. 30,000 p.m. as
basic salary and is entitled to Rs. 1500 p.m. as entertainment
Allowance. Compute the deduction under section 16(ii) from gross
salary in respect of entertainment allowance.
• Basic Salary (30,000 X 12)
• Entertainment Allowance (1,500 X 12)
• Gross Salary
• Less: Standard Deduction
• Deduction under section 16(ii)
• Total Salary
• X, an employee of the Gujarat State Government, gets Rs. 30,000 p.m. as basic
salary and is entitled to Rs. 1500 p.m. as entertainment Allowance. Compute
the deduction under section 16(ii) from gross salary in respect of
entertainment allowance.
• Basic Salary (30,000 X 12) 3,60000
• Add: Entertainment Allowance (1,500 X 12) 18,000
• Gross Salary 3,78,000
• Less: Standard Deduction 50,000
• Deduction under section 16(ii) 5,000 55000
• Total Salary 3,23,000
 What forms Salary?
Section 17 – “Salary”, “perquisite” and “profits in lieu of salary” defined:
(1) “salary” includes -
• (i) wages;
• (ii) any annuity or pension;
• (iii) any gratuity;
• (iv) any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages;
• (v) any advance of salary;
• (va) any payment received by an employee in respect of any period of leave not availed of by him;
• (vi) Employer’s contribution to RPF in excess of 12% of employee’s salary and interest credited to RPF in excess of 9.5%
p.a.;
• (vii) the aggregate of all sums that are comprised in the transferred balance as referred to in sub-rule (2) of rule 11 of Part
A of the Fourth Schedule of an employee participating in a recognised provident fund, to the extent to which it is
chargeable to tax under sub-rule (4) thereof; and
• (viii) the contribution made by the Central Government or any other employer in the previous year, to the account of an
employee under a pension scheme referred to in section 80CCD;
 Treatment of various Incomes
• Wages-
• Wages for manual work and salary for non manual work. But Conceptually no
difference between salary and wages. Therefore, wages are treated just like
salary and are taxable on the same basis as salary.
• Annuity or pension-
• Annuity is defined as a certain sum of money paid in equal intervals. That means
that a company would be paying you a certain amount of money that you will
receive either lump-sum or over a regular period of time. Annuity payments are
mostly done at a given interval, weekly, monthly, quarterly, or annually. When it
is payable by the present employer, it is taxable as salary but if it is received
from a former employer then it is taxed as Profit in lieu of Salary.
• Gratuity –
• It is a retirement benefit given by the employer to the employee In lieu of the past service
rendered by the employee. Any gratuity received beyond exempted limit would be taxable under
head salary.
• fees, commissions, perquisites (S. 17(2)) or profits in lieu of or in addition to any salary or wages
(S. 17 (3))
• Advance Salary –
• It would be included in the salary even if it has not become due.
• Leave Salary or Leave Encashment –
• If earned leaves are not utilised depending upon the service rules, these may either lapse or
allowed to be encashed every year or may be accumulated. The leaves accumulated throughout
the service period may be encashed at the time of retirement or leaving job. Such encashment of
leaves standing to the credit of employee is known as Leave Salary or Leave encashment.
• Beyond exempted limit would be taxable under head salary.
• Employer’s contribution to RPF in excess of 12% of employee’s salary and interest
credited to RPF in excess of 9.5% p.a
• Transferred Balance –
• When URPF is converted into RPF then the taxable amount from the date of
establishment of URPF till the date of conversion is known as Transferred balance
i.e –
• Annual contribution made by employer in excess of 12% salary of employee.
• Interest given on the total amount in excess of notified amount (i.e. 9.5%)
• contribution made by the Central Government or any other employer under a
pension scheme referred to in section 80CCD –
• Annual Contribution Under NPS
 What forms Salary? Contd…

Difference between allowance & perquisite –

Definition of allowances –
- Allowances are not defined in Section 17 but this section being an inclusive one includes
allowances under salary.
- Shailendra Kumar v UOI 1975 ITR 494, it was decided that perquisite is an advantage received by
the holder of an office over and above the salary. Allowances may be the same but allowances are
generally in cash and perquisites are generally in kind and occasionally in cash.
 PERQUISITES
• Perquisites means any payment or benefits to employee in addition to
a regular salary or wages. It is a personal advantage or may be given
in cash or other than cash. If it is given other than cash it should be
measured in terms of money for income tax purpose. All the
perquisites are divided into 3 parts-
• (1) Perquisites taxable for all employees
• (2) perquisites tax free for all employees
• (3) Perquisites taxable for specified employees
Section 17(2): Definition of ‘perquisites’-
i. Value of rent-free accommodation provided by employer to the assesse/employee
ii. Concessional rent accommodation provided by employer to assesse /employee
iii. Value of any benefit or amenity granted or provided either at free of cost or at concessional
rate only in the case of specified employee
iv. Obligation of the employee is paid by the employer
v. Any sum paid to get an assurance of life of the employee [But some insurance policies are not
taxable- Mediclaim Insurance, Personal Accident insurance, Fidelity Guarantee Insurance, and
Employees state insurance.]
vi. Any other fringe benefits provided by employer as may be prescribed under this Act [Clubs,
credit cards, gifts, loan etc.]
vii. Shares allotted to employee under Stock option plan/ sweat equity shares weather free of
cost or at concessional rate
viii. Employer’s contribution in approved Super- Annuation Fund in excess of Rs. 1.5 lakh
 Perquisite contd…
Specified employee? Either of these three -
1. Director of the company
2. Person having substantial interest (20% or more shares and voting rights)
3. Any employee whose monetary salary is 50,000 PA or more. (this salary includes monetary
benefits, taxable allowances post deductions under S. 16)

Taxability of Perquisite
4. Taxable in the hands of all employees
5. Taxable for specified employees
6. Tax free perquisites
 Perquisite contd…
Perquisites taxable in the hands of all employees [Rule 3(7)] –
• Rent free accommodation provided by the employer may be furnished or unfurnished.
• Concessional accommodation provided by the employer
• Sum paid by the employer in discharging monetary obligations of the employee which otherwise
would be payable by the employee eg. School fees of the children or income tax paid etc.
• Any sum payable by the employer directly or through a fund (other than RPF, approved
superannuation fund or deposit linked insurance fund) to effect an assurance on the life of the
assessee or to effect a contract for an annuity. Eg. Payment of LIC Premium.
• Fringe benefits.
• Allotment of ESOP (Employee Stock Ownership Plan) free or at concessional rates.
 Perquisite contd…
Perquisites not taxable –
• Food or beverage provided by employer to employees in office or place of work.
• Petty loans to employees
• Perquisites provided outside India
• Rent free house and conveyance facility to Judges of SC and HC.
• Residence to MPs, union ministers and leader of oppositions.
• Accommodation in remote areas.
• Educational facilities managed by employer not exceeding Rs. 1000
• Laptops and computers for official work.
etc
 Valuation of Perquisites
• RENT FREE ACCOMODATION –
A) Govt. Employees – as per Government Rules (License Fee)
B) Others – Value of RFA shall be-
POPULATION OWNED BY EMPLOYER NOT OWNED BY EMPLOYER

Upto 10 Lakhs 7.5% of the Salary 15% of the Salary

OR
10-25 Lakhs 10% of the Salary
Actual Rent

More than 25 Lakhs 15% of the Salary (Whichever is Less)

C) ACCOMODATION IN HOTEL :

24% of Salary (OR) ACTUAL CHARGES {whichever is less}

However nothing shall be taxable if the accommodation is provided for

not more than 15 days + provided on transfer of employees from one
place to other.
For all Government and Non-Government employees.
• Salary = Basic + DA + Bonus + Commission + Taxable portion of
all allowances + all monetary payments but does not include Provident
Fund.
• FURNISHED HOUSE :-
• If furniture is also provided by the employer to their employee, then
value of such furniture shall be
10% p.a. of the cost
or
Actual hire charges
• VALUE OF INTEREST FREE LOAN –
• Loan type = Any
• Rate = Rate charged by S.B.I. on 1st day of relevant P/Y
• Interest shall be calculated on the outstanding balance for each loan as on the
last day of each month.
• However nothing shall be taxable
• If Loan in aggregate do not exceed ₹20,000/- OR
• If the loan provided for the treatment of specified diseases (refer R 3A)
• But if such loan has been reimbursed under any medical insurance scheme & the
loan is not paid to the employer, it shall be taxable.
• Check only the last days balance & calculate interest thereon for the whole
month. Transactions within the month shall be ignored & if no balance at the end
of the month – No interest
• USE OF MOVEABLE ASSETS –
• LAPTOP & COMPUTERS : NIL VALUE
• OTHER ASSETS :
10% p.a. of the Actual Cost
OR
Actual Hire Charges
 Profits in lieu of Salary [Sec 17(3)]
• Profits in lieu of salary are payments received by an employee in addition to
the regular salary. Profits in lieu of salary is taxable under the Income Tax Act
and must be declared while filing income tax return. These payment includes
the following –
• the amount of any compensation due to or received by an assessee from his
employer or former employer at or in connection with the termination of his
employment or the modification of the terms and conditions
• Any amount due or received before joining or after cessation of employment
• Lumpsum Payment from an unrecognized Provident Fund
• Payment under Keyman insurance policy
• Any lumpsum due to or received by an assessee from his employer or
previous employer beyond exempted limit in following cases –
• Retrenchment Compensation (S. 10(10B))
• Recognised Provident Fund (S. 10(12))
• Approved superannuation fund (S. 10(13))
• HRA (S. 10(13A))
RETIREMENT BENEFITS:
Pension
(exemption
u/s 10(10A))

Voluntary
Gratuity
Retirement
(exemption
(exemption
u/s 10(10))
u/s 10(10C))
RETIREMENT
BENEFITS

Retrenchment Leave
Compensation Encashment
(exemption (exemption
u/s 10(10B)) u/s 10(10AA))
 Gratuity
• Gratuity is a lump sum amount that employers pay their employees as
a sign of gratitude for the services provided.
• Sum received by an employee on his retirement is taxable under head
“Salary” and if received by legal heir of the deceased employee then
taxable under head “other sources”
• It is exempt under S. 10(10) and excess amount only shall be added in
salary.
• A person is eligible to receive gratuity only if he has completed
minimum five years of service with an organisation.
• As per the gratuity rules, an employee will be eligible to avail gratuity
upon –
• Retirement/Super annuation
• Resignation.
• Demise.
• Disablement due to an accident or a disease.
• VRS.
• Termination.
• Lay off due to retrenchment.
 Gratuity
• Taxable –
• (a) Govt Employees – NIL

• (b) Employees covered under the Payment of Gratuity Act 1972- least of the following will
be exempted -
• (i) 15/26 (×) Salary at the time of retirement (×) Completed years of service
• (In case of monthly rated employees for calculating 15 days salary, the no. of days in month
will be taken as 26 working days. Therefore monthly salary shall be divided by 26 and
multiplied by 15 to get 15 days salary. Eg. If monthly salary is 2600 Rs. Then 2600/26 *15 =
1500 Rs. )
• [Salary = BS + DA (100%)] (does not include any bonus, commission, HRA, overtime wages,
and any other allowances.)
• (ii) Rs. 20,00,000 (before 2018 - 10,00,000)
• (iii) The amount of Gratuity actually received.
• I) BS+DA = 15,000+5000 = 20,000/26
• 20,000 X 15/26 X 20 years = 2,30,769
• 30,00,000
• II) 20,00,000
• III) Actual gratuity received = 40,00,000 – 20,00,000 =

• 4,00,000 – 2,30,769 = XXX

• Example: If an employee had joined a job on 01-08-2005 and
retired or got his job terminated on 30-04-2019, with last drawn
basic Salary of Rs 20,000 and DA of Rs 12000, his Gratuity will
be:

• (Rs 20,000+Rs 12000)x 15/26 x 14 = Rs 258,461.5

• Note: Here the employee has completed 14 years of service.

The seven months of his first year (August 2005 to March 2006)
is to be counted as one year as it is more than six months of
service.
• (C) Employees not covered under the Payment of Gratuity Act 1972- least
of the following –
• (i) 1/2 (x) Average salary of last ten months (x) Completed years of service
• (ii) Rs. 10,00,000
• (iii) The amount of Gratuity actually received.

• Salary = BS + DA (if the term of employment so provide) [excludes all other

allowances and perquisites]

• (D) Any gratuity paid to an employee while he continues to remain in

service not exempt in any case
• 31st July – 50,000
• 1st April – 50,000
• 4 Months
• 40,000
• 2,40,000 + 2,00,000 = 4,40,000/10 = 44000/2 = 22000 X 20 = 4,40,000
 Pension (exempted u/s 10(10A))
• Pension is a payment made by the employer after the
retirement/death of the employee as a reward for past service.
• Pension is normally paid as a periodical payment on monthly basis but
certain employers may also allow an employee to forgo a portion of
the pension and receive a lump sum amount by surrendering such
portion of pension. This is known as commutation of pension.
• The pension may be fully or partly commuted i.e. in lieu of the
pension, a lump sum payment is made to the employee.
 Pension (exempted u/s 10(10A))
• Uncommuted Pension: Fully taxable for all employees, whether Government or non-
Government.

• Commuted pension (getting pension in lump-sum amount):

(a) Government employee: The amount of commuted pension shall be fully exempted

(b) Non-Government employee receiving gratuity: 1/3rd of full value of pension shall be exempt.
Full value: commuted pension divided by % age of commuted multiplied by 100
(c) Non-Government employee not receiving gratuity: 1/2 of full value of pension shall be exempt
 Commuted pension

Govt. employee Non-govt. employee

Fully exempt
non-govt. Non-govt. employee
employee receiving gratuity not receiving gratuity

1/3rd of full value of pension ½ of the full value of

shall be exempt. Pension shall be exempt
Mr. A retired on 10/4/2018 from KLM Pvt. Ltd. He was entitled to a pension of Rs.
4000 p.m. At the time of retirement, he got 75% of the pension commuted and
received Rs. 1,20,000 as commuted pension. Compute the taxable portion of the
commuted pension if –
- He is entitled to gratuity = 1/3rd of the full value
- Not entitled to gratuity = ½ of the full value

• Answer- monthly – 4000 rs.

• Commuted Pension 75% = 1,20,000
• 1,20,000/75 X 100 = 1,60,000 X 1/3 (1/2) = 53,333 (80,000)
• 1,20,000 – 53,333 (80,000)(Exempted) = 66,667 (40,000)(Taxable)
• Monthly = 4000 X 75/100 = 3,000
• Now, Monthly Pension = 4000 – 3000 = 1000 pm
 LEAVE ENCASHMENT
• While an employee is in service, he is allowed various types of leaves like
Medical Leave, Gazetted Holidays, Casual Leaves etc. There are some types
of leaves which can be carried forward to the next year whereas there are
some leaves which cannot be carried forward to the next year.
• In case an employee does not avail all the leaves which were allowed to him,
he may also encash these leaves and earns salary for the no. of the days
which were allowed to be taken as leaves but were not availed as leave.
• The policy of no. of leaves allowed to be taken and the leave encashment
depends on the employer for whom you are working, and different
employers have different policies for leave encashment.
 Taxation of Leave Encashment
• Leave encashment received during service - Any leave encashed during service is
fully taxable and forms part of ‘income from Salary’.
• Leave encashed at the time of retirement or resignation-
• (a) Government Employee [Sec. 10(10AA)(i)]- fully exempt
• (b) Other Employees [Sec. 10(10AA)(ii)] - Exempt from tax to the extent of least of
the following:-
• (i) 25 Lakhs (before 2023 Three lakh rupees)
• (ii) Leave salary actually received
• (iii) Average Salary of Last 10 months (Salary = BS+DA+Fixed Commission)
• (iv) Salary per day *unutilised leave (considering maximum 30 days leave per year)
for every year of completed service
• Leave encased received by legal heir – Fully exempt
• Example -
• Mr A is retiring after 15 years of service.
• Mr A was entitled to 35 days of paid leave per annum from his employer, i.e.,
overall 525 days of leave during his entire service (35*15).
• Out of the same, Mr A has already utilised 200 days of paid leave and is left
with 325 days of unutilised leave. Mr A was drawing basic salary + DA of Rs
33,000 per month at the time of retirement and received Rs 3,57,500 as leave
encashment calculated based on 325 days * Rs. 1,100 (salary per day =
Rs.33,000/30 days).
Particulars Amount (in Rs)

Leave encashment received 3,57,500 (325 days* Rs 1,100)

Less : exempt 2,75,000

Least of the following:

(i) Amount notified by the 25,00,000
Government
(ii) Actual leave encashment 3,57,500
(iii) Average salary for 10 months (Rs 3,30,000
33,000 * 10 months)
(iv) Rs 1,100 * (30 days * 15 completed 2,75,000 (450 – 200 = 250 days X 1100 )
year of service minus 200 days of
utilised leave)

Leave encashment taxable as ‘income (3,57,500 – 2,75,000) = 82,500

from salary’
• Salary for this purpose includes basic salary, dearness allowance and commission
based on fixed percentage of turnover secured by employee.
• Question – E, an employee of XYZ pvt. Ltd. retired from the company on
30.11.2019. At the time of his retirement, he received Rs. 2,88,000 as leave salary
from his employer. The following information is provided by the employee-
• Salary at the time of retirement – Rs. 18,000 p.m.
• Period of Service – 20yrs 8 months
• Leave encashment – Rs. 2,88,000
• Leave availed while in service – 14 months
• Balance unavailed leave at the time of retirement – 16 months
• Average salary of 10 months’ – Rs. 17,600 p.m.
• Leave entitlement – 1 ½ month of every completed year of service.
• Solution –
• (1) 3,00,000 Rs.
• (2) Rs. 2,88,000
• (3) 17,600 X 10 =1,76,000
• (4) Leaves= 20 X 30 = 600 days
• Leave availed = 14 X 30 = 420
• Leaves unavailed = 600 – 420 = 180
• Salary for unavailed leaves = 180 x [17,600/30 = 587] = 1,05,660
• Exemption = 1,05,660
• Balance = 2,88,000 – 1,05,000
 Retrenchment Compensation
• ‘Retrenchment’ means the termination of the service, by the
employer, of a workman for any reason other than punishment
imposed by way of disciplinary action. Termination of an employee in
such a manner is financially compensated by the employer, and such
financial compensation is termed as ‘retrenchment compensation’.
• Section 10(10B) of the Income Tax Act provides exemption towards
such retrenchment compensation received by the workman.
• An amount of exemption available under section 10(10B) of the Income
Tax Act–
• Lower of the following amount is available as an exemption under
section 10(10B)–
• 1. The amount of retrenchment compensation received; or
• 2. The amount specified by the Central Government (i.e. INR 5 Lakhs); or
• 3. an amount equal to 15 days average pay for each completed year of
the service or part thereof in excess of 6 months. [15/26 X completed
years of service X Average salary of last 3 months’ ]
Voluntary Retirement Compensation [Sec.
10(10C)]
• voluntary retirement scheme is an option given by an organization to
its current employees to take early retirement before the actual date
of retirement.
• The amount of exemption is the actual amount of the compensation
received or Rs. 5,00,000, whichever is less.
 Allowances
DEFINITION: Fixed monetary amount paid by the employer to the employee to meet some expenses.

• Unless a specific exemption is provided, these allowances are to be included in the gross salary.
 Allowances contd…
• Allowances which are fully taxable-
- Dearness Allowance (DA)
- City Compensatory Allowance (CCA)
- Medical Allowance: Fully taxable, irrespective of amount spent or not on treatment.
- Lunch allowances/tiffin allowances
- Overtime allowances
- Servant allowance
- Warden allowance
- Non-practicing Allowance
- Family Allowance

• Deducted allowances – Provided under S. 16.

 ALLOWANCES
• Allowance is a fixed monetary amount paid by the employer to the
employee for meeting some particular expenses, whether personal or
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.

• Specific Exemptions in respect of allowances are provided under

following sections-
• (i) House Rent Allowance – Section 10(13A)
• (ii) Prescribed Special Allowances – Section 10(14)
 House Rent Allowance
• Paid by the employer to employee to meet the expenditure relating to accommodation rent.
• It is taxable under the head ‘salaries’ to the extent it is not exempt under S.10(13A)

• S. 10(13A) – for the expenditure actually incurred on the payment of rent in respect of residential
accommodation occupied by the assesse, to the such extent as prescribed under Rule 2A of IT
Rules, 1962.
Explanation – It shall not apply to the cases when –
a. Residential accommodation is owned by assesse.
b. He has not actually incurred any expense under HRA.
 House Rent Allowance contd…
[Limits for the purposes of section 10(13A) .
RULE 2A. The amount which is not to be included in the total income of an assessee in respect of the special allowance
referred to in clause (13A) of section 10 shall be—
(a) the actual amount of such allowance received by the assessee in respect of the relevant period; or
(b) the amount by which the expenditure actually incurred by the assessee in payment of rent in respect of residential
accommodation occupied by him exceeds one-tenth of the amount of salary due to the assessee in respect of the relevant
period; or
[(c) an amount equal to—
(i) where such accommodation is situate at Bombay, Calcutta, Delhi or Madras, 50% of the amount of salary due to the
assessee in respect of the relevant period; and
(ii) where such accommodation is situate at any other place, 40% of the amount of salary due to the assessee in respect of
the relevant period,
whichever is the least.
Explanation : In this rule—
(i) “salary” shall have the meaning assigned to it in clause (h) of rule 2 of Part A of the Fourth Schedule; ("salary" includes
dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites.)
(ii) “relevant period” means the period during which the said accommodation was occupied by the assessee during the
previous year.]
 MUMBAI/KOLKATA/DELHI/CHENNAI OTHER CITIES

(i) Allowance actually received Allowance actually received

Rent paid in excess of 10% of

(ii) Salary (Rent Actually Paid – 10% Rent paid in excess of 10% of Salary
of Salary)

(iii) 50% of Salary 40% of Salary

 House Rent Allowance contd…
• In the above rule, salary includes DA + Basic and relevant period means the period during which
the said accommodation was occupied.
• Computation –
HRA received minus HRA exempt = taxable HRA

Example – Basic salary of Mr. X is 7,00,000 p.a. in Mumbai.

He receives 2,00,000 as HRA. He pays Rs. 1,50,000 for house.
• Actual HRA received = 2L
• Rent paid – 10% of salary
1,50,000 – 70,000 = 80,000
• 50% of salary = 3,50,000

• Lowest is 80,000 hence exempt amount is this.

• 2,00,000 – 80,000 = 1,20,000 is taxable HRA.
• Salary for HRA = Basic + DA
• For Public Sector Employees = 100% DA
• For Private Sector Employees = Forming Part of DA

• Gestetner Duplicators Pvt. Ltd. v CIT (1979) 117 ITR 1(SC)

• Commission, if received as a fixed percentage of turnover achieved
by employee, would form part of salary.

• Now, Salary for HRA = Basic + DA + Commission

Practice questions:
Q 1. Compute the exemption available under section 10(13A) in the following cases:

Employee A B C D E
Place of Delhi Noida Mumbai Patna Bangalore
residence
Salary P.M 4,000 6,000 8,000 3,000 5,000

HRA P.M 1,500 1,200 5,000 1,000 1,500

Rent paid P.M Nil 1,000 6,000 800 400

HRA received – 1200 X 12 = 14400

Rent paid – 12000 – (72000 X 10% = 7200) = 4,800
40% of salary – 72,000 X 40% = 28,800
(C) HRA Received = 60,000
Rent Paid – 10% of Salary = 72,000 – (96,000 X10% = 9600) = 62400
50% of Salary = 48,000
• Q 2. In 2018-19, A is entitled to a basic salary of 25,000/ month and
DA of 5,000/month., (60% of which forms part of salary). He is
entitles to HRA of 10,000/ month. He actually pays 10,000/month as
rent for a house in Delhi. Compute the taxable HRA for the assessment
year 2019-20.
• Salary = Basic + DA (60%) = 25000 + 3,000 =28000 X 12 = 3,36,000
• HRA recd. = 1000 X 12 = 1,20,000
• Rent Paid – 10% of Salary = 1,20,000 – 33,600 = 86,400 (Exempted)
• 50% of Salary = 1,68,000
• 1,20,000 – 86,400 = 33,600 (Taxable)
 Dearness Allowance
• DA is provided for converse the inflationary effect from the cost of living of
the people.
• dearness allowance is defined as the cost of living adjustment allowance
which the government offers to public sector employees, as well as
pensioners of the same.
• DA is fully taxable for salaried employees.
• Public sector employees are entitled to DA.
• It will be included in the salary for the purpose of retirement benefits if it is
provided by the employment. It is called as forming part.
Prescribed allowances which are exempt to
a certain extent [S. 10(14) & R. 2BB]
Special Allowances for the performance Allowances to meet personal expenses
of official duties [10(14)(i)] [10(14)(ii)]

These allowances are not in the nature of a These allowances are granted to the employee
perquisite within the meaning of s. 17(2) and are to meet his personal expenses either at the place
specifically granted to meet expenses wholly, where the duties of his office or employment of
necessarily and exclusively incurred in the profit are ordinarily performed by him or at the
performance of duties of an office or place where he ordinarily resides. These
employment of profit. These allowances will be allowances are exempt to the extent
exempt the extent such expenses are actually prescribed.
incurred for that purpose.
 Allowances to meet office expenses
• For the purposes of sub-clause (i) of clause (14) of section 10, prescribed allowances,
by whatever name called, shall be the following, namely –
• (a) Travelling Allowance - any allowance granted to meet the cost of travel on tour
or on transfer. It includes any sum paid in connection with transfer, packing and
transportation of personal effects on such transfer.
• Received = 10,000
• Actual Expenditure = 6000/ 12000
• Taxable = 4000/ NIL Exempted= 6000/10,000

• (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.
• (d) Helper Allowance - any allowance 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 granted for encouraging the
academic, research and training pursuits in educational and research
institutions.
• (f) Uniform Allowance - any allowance 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 amount received
• (2) Actual spent for the purpose of duties of office or employment.
 Allowance to meet personal expenses
• Following allowances are exempt to the extent of amount received or
the limit specifies, whichever is less (R. 2BB)-
S. No. Allowance Specified Limit
a. Children Education Allowance ₹ 100 p.m. per child upto a maximum of 2 children (2400)
b. Hostel Expenditure Allowance ₹ 300 p.m. per child upto a maximum of 2 children (7200)
c. Tribal area/schedule area/agency area ₹ 200 p.m
allowance

d. Special Compensatory hilly area allowance Varies from ₹ 300 to ₹ 7000 p.m.
or high-altitude allowance

e. Border area, remote area, disturbed area Varies from ₹ 200 to ₹ 1300 p.m.
allowance etc.

f. Compensatory field area allowance ₹ 2600 p.m.

g. Compensatory Modified Field Area ₹ 1000 p.m.
Allowance

h. counter-insurgency allowance granted to the ₹ 3900 p.m.

members of armed forces operating in areas
away from their permanent locations
i. Transport allowance granted to an employee, who is blind [or deaf ₹ 3200 p.m.
and dumb] or orthopedically handicapped with disability of lower
extremities, to meet his expenditure for the purpose of commuting
between the place of his residence and the place of his duty

j Underground Allowance ₹ 200 p.m.

k high altitude (uncongenial climate) allowance (a) For altitude of 9,000 to 15,000 feet –
₹ 1060 p.m.
(b) For altitude above 15,000 feet- ₹ 1600
p.m.

l special compensatory highly active field area allowance ₹ 4200 p.m.

m Island (duty) allowance to the member of armed forces ₹ 3250 p.m.

n Any allowance granted to an employee working in any transport 70 per cent of such allowance up to a
system to meet his personal expenditure during his duty performed in maximum of [Rs. 10,000] per month.
the course of running of such transport from one place to another
place, provided that such employee is not in receipt of daily
allowance
• Allowances which are fully taxable-
- Dearness Allowance (DA)
- City Compensatory Allowance (CCA)
- Medical Allowance: Fully taxable, irrespective of amount spent or not on treatment.
- Lunch allowances/tiffin allowances
- Overtime allowances
- Servant allowance
- Warden allowance
- Non-practicing Allowance
- Family Allowance

• Deductible Allowances Under Section 16

• Allowances which are exempt in case of certain persons –
- Allowances to citizen of India who is a govt. employee, rendering
services outside India. (S.10(7))
- Allowances to HC Judges under S. 22A(2) of the HC Judges (Conditions
of Services) Act, 1954 (Where a Judge does not avail himself of the use
of an official residence, he may be paid every month an allowance
of two thousand five hundred rupees)
- Sumptuary Allowances given to HC and SC Judges.
- Allowances received by employees of UN.
PRACTICE QUESTIONS:
Q 1. R is working XYZ pvt. Ltd. R furnishes following information for the previous year 2019-20:
Basic Salary 15,000 p.m
Dearness Allowance (60% of which is a part of salary) 6,000 pm
Entertainment allowance 500 pm
House Rent Allowance 6,000 pm
Actual Rent paid in Delhi 7,000 pm
Education allowance for 3 children 200 p.m per
child
Transport Allowance (though he spends 1,400 pm for such purpose) 2,400 pm
Medical Allowance (he spends 5,000 for his medical treatment) 1,000 pm
Lunch Allowance (he spends 2,000 for his lunch in the office) 200 pm

Compute taxable salary of R for the assessment year 2020-21.

(Note: exemption in education allowance is allowed for Rs. 100 p.m upto 2 children)
• Basic Salary (15000X12) 1,80,000
• DA (6000X12) 72,000
• Entertainment Allowance (500X12) 6000
• HRA (6000X12) 72,000
• Less: Exemption 61680 10,320

• Gross Salary 2,68,320

• Less: Std. Deduction 50,000
• Entertainment Allowance NIL 50,000

• Net Taxable Salary 2,18,320

• Exempted HRA –

• (a) 72000
• (b) HRA Paid – Excess 0f 10% of Salary
• 10% of Salary = Basic Salary + DA (60% Forming part of Salary)
• 1,80,000 + 43200 = 2,23,200 X 10% = 22320
• 84000 – 22320 = 61680
• (c) 1,11,600
Q 2. Mr. Likhit is a government employee. He furnishes following information for the previous year 2019-20:

Basic Salary 20,000 p.m

Dearness Allowance (40% is the forming part of Salary) 10,000 pm
Entertainment allowance 1000 pm
House Rent Allowance 5,000 pm
Actual Rent paid in Jaipur 5,000 pm
Education allowance for 2 children 200 p.m per
child
Transport Allowance 2,500 pm
Medical Allowance 2,000 pm
Lunch Allowance 200 pm

Compute taxable salary of Mr. Likhit for the assessment year 2020-21.
(Note: exemption in education allowance is allowed for Rs. 100 p.m upto 2 children)
Q 3. Mahesh Babu is working in a private educational institute. He furnishes following information for the previous
year 2019-20:

Basic Salary 20,000 p.m

Dearness Allowance 5,000 pm
Entertainment allowance 500 pm
House Rent Allowance 5,000 pm
Actual Rent paid in Ahmedabad 6,000 pm
Warden Allowance 3,000 pm
City Compensatory Allowance 2,000 pm
Medical Allowance 1,000 pm
Overtime Allowance 2000 pm

Compute taxable salary of Mr. Mahesh for the assessment year 2020-21.
Q 4. Mr. Rohan is a Central Government employee. He furnishes following information for the previous year 2019-20:

Basic Salary 10,000 p.m

Dearness Allowance 5,000 pm
Entertainment allowance 500 pm
House Rent Allowance 5,000 pm
Actual Rent paid in Bangalore 4,000 pm
Travelling Allowance 3,000 pm
City Compensatory Allowance 2,000 pm
Medical Allowance 1,000 pm
Children education allowance for 2 children 230 pm per
child
Hostel Expenditure Allowance for 2 Children 550 pm per
child

Compute taxable salary of Mr. Rohan for the assessment year 2020-21.
(Note: exemption in education allowance is allowed for Rs. 100 p.m upto 2 children)
(Note: exemption in Hostel expenditure allowance is allowed for Rs. 300 p.m upto 2 children)