Chapter 5 – Income from Salaries

This is perhaps the most relatable chapter for you, as the first thing that you’ll do after becoming a
Chartered Accountant, is look for a job (in most cases); and after that, hundreds of things will come up
– the CTC, the in-hand salary, the provident fund, the gratuity, the leaves, and what not! Above all,
you’ll have to pay taxes on your salary income as well. In this chapter, we’ll be learning everything that
you need to know about the different modes in which salary can be received, and the different tax
implications that your salary might have on you.

Introduction
Income received from someone based on having an employer-employee relationship is chargeable in
the hands of the recipient under the head Income from Salaries.

However, there are two exceptions to the above.

1. The MPs/MLAs/MLCs – When they receive salary from the political party, it is taxable in their
hands under the head Income from Other Sources.
2. When a partner of a partnership firm receives salary from the firm, it is chargeable in the hands
of the partners under the head “Profits and Gains of Business or Profession”. The reason is
simple. The partners don’t have an employer-employee relationship with the firm. In fact,
partners are the owners of the firm, and, in true sense, running the business of the firm.
Therefore, any salary drawn by the partners from the firm is chargeable to tax in their hands
under the head PGBP.

The provisions relating to Income under the head “Salaries” are contained in sections 15, 16, and 17
of the Income Tax Act.

1. Section 15: Chargeability

2. Section 16: Deductions
3. Section 17: Meaning

“Contract of Service” and “Contract for Service”

• Contract of Service
o Contract of Service is when an employer-employee relationship gets established.
o For example, when you join a company, there’s a contract “of” service; you do
whatever your boss says, which may sometimes not be related completely to the work
you signed up for.
o Income received from such contract is chargeable under the head “Income from
Salaries”.
o Alfred, from Batman, had a contract “of” service.
• Contract for Service
o Contract for service is when you enter into an agreement only for a particular kind of
work.
o For example, I have a contract with Unacademy “for” the service of education.
o I only take classes on Unacademy, and don’t indulge in any other activities.
o Income received from such contract is chargeable under the head “Profits and Gains
from Business or Profession”.

Question 1

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Miss Y, an actress, in employed in Chopra Films wherein she gets the monthly salary of ₹1 lakh. She
acts in various films and all the producers pay directly to Chopra Films. Is this a contract of service, or
a contract for service?

Solution

Here, she is being paid a fixed amount every month by Chopra Films, and the producers are paying to
Chopra Films directly. Therefore, this is a contract of service.

Question 2

Would your answer be different if Miss Y received remuneration from different producers?

Solution

In case Miss Y did not get monthly remuneration from Chopra Films, but from different producers, it
would be a contract for service.

Section 15: Charging Section

• Salary is chargeable when it is due, or received, whichever is earlier.
• However, Advance Salary and Arrears of Salary are taxable on receipt basis.

Meaning of Salary
As per Section 17(1), Salary includes the following:

1. Wages
2. Any annuity or pension,
3. Any gratuity,
4. Any fees, commission, perquisites, or profits in lieu of or in addition to any salary or wages,
5. Any advance of salary,
6. Any payment received in respect of any period of leave not availed by him i.e., leave salary or
leave encashment,
7. Provident Fund:
a. the portion of the annual accretion in any previous year to the balance at the credit of
an employee participating in a recognised provident fund to the extent it is taxable
and
b. transferred balance in recognized provident fund to the extent it is taxable,
8. 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.

Fixed Pay Scale and Graded Pay Scale

• In fixed pay scale, the employee receives a certain fixed amount of salary for a specified period
whereas in case of graded pay scale, the employee gets an annual increment in his salary based
on the grade in which he is placed.
• For example, Ms. Muskan joined Indian Railways on 01-04-2014 for a pays scale of 20,000 –
1,500 – 23,000 – 2,000 – 33,000 – 2,500 – 43,000. Her salary would be as follows:
o 01-08-2014 – 31-07-2015 - ₹20,000 p.m.

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 o 01-08-2015 – 31-07-2016 - ₹21,500 p.m.
o 01-08-2016 – 31-07-2017 - ₹23,000 p.m.
o 01-08-2017 – 31-07-2018 - ₹25,000 p.m.
o 01-08-2018 – 31-07-2019 - ₹27,000 p.m.
o 01-08-2019 – 31-07-2020 - ₹29,000 p.m.
o 01-08-2020 – 31-07-2021 - ₹31,000 p.m.
o 01-08-2021 – 31-07-2022 - ₹33,000 p.m.
o 01-08-2022 – 31-07-2023 - ₹35,500 p.m.
o Therefore, Salary for P.Y. 2021-22 = (₹31,000 × 4) + (₹33,000 × 8) = ₹3,88,000

Advance Salary vs. Loan/Advance Against Salary

Advance Salary Loan/Advance Against Salary
It means that the employee It means that employee has taken a loan from the employer
receives the salary before it and has agreed to repay it in a certain number of instalments.
becomes due to him and hence, it Sometimes, an agreement can also be entered where the
is taxable in the year in which it is amount of each instalment is deducted from the employee’s
received. salary.
Advance Salary is taxable on receipt basis, but loan/advance against salary is not taxable.

Foregoing of Salary vs. Surrender of Salary

Foregoing of Salary Surrender of Salary
It means that the employee waives his It means that the employee surrenders his salary to the
salary after it becomes due or accrues Central Government under section 2 of the Voluntary
to him. It is taxable in the hands of Surrender of Salaries (Exemption from Taxation) Act,
employee. 1961. It is exempt from tax.

Annuity
• Annuity means the yearly sums payable to a person.
• It may be received from the present employer, or the past employer, or from someone else.
o If it is received from the present employer, it is taxable under the head “Income from
Salaries”, even if it is a voluntary payment and not against any contractual obligation.
o If it is received from the past employer, it is taxable under the head “Income from
Salaries” as ‘Profits in lieu of Salaries’.
o If it is received from someone else, it is taxable under the head “Income from Other
Sources”.

Some Other Issues Relating to Salary

• Commission on a fixed percentage of sales comes in the ambit of salary.
• For taxing an income under the head “Salaries”, it is irrelevant whether the assessee is in part-
time employment or full-time employment with his employer.
• If an employee receives salary from more than one employer during any previous year, then
the salary from each employer is taxable under the head “Salaries”.
• Any deductions made by the employer from salary like PF deduction, tax-deduction at source,
etc. shall also be included in “Salaries”.
• Salary is taxed on due or receipt basis, whichever is earlier.

Question 3

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X is an employee whose salary has been increased from ₹20,000 p.m. to ₹25,000 p.m. w.e.f. 1st July,
2022. The salary becomes due on the first day of next month. Calculate the salary of Mr. X for P.Y.
2022-23.

Solution

Since nothing is mentioned in the question about the receipt of salary, it is safe to assume that salary
is received by Mr. X only after it becomes due. Therefore, the salary is taxable on due basis.

Computation of Salary for P.Y. 2022-23

Particulars ₹
For the months of March, 2022 to June, 2022 (₹20,000 × 4) 80,000
From July, 2022 to February 2023 (₹25,000 × 8) 2,00,000
Gross Salary 2,80,000

Question 4

Would your answer change if the salary became due on the last date of every month? If yes, what
would it be?

Solution

Computation of Salary for P.Y. 2022-23

Particulars ₹
For the months of April, 2022 to June, 2022 (₹20,000 × 3) 60,000
From July, 2022 to March 2023 (₹25,000 × 9) 2,25,000
Gross Salary 2,85,000

Section 16: Deductions

Following are the three deductions which are allowed from Income from Salaries:

1. Standard Deduction [Section 16(ia)]: Deduction of actual salary, or ₹50,000, whichever is less.
2. Entertainment Allowance [Section 16(ii)]
a. Entertainment allowance is the fund given to an employee by the company to pay for
client meetings, drinks, food, hotel stay, etc.
b. Government employees can avail deduction on account of entertainment allowance.
c. Entertainment allowance is first included in Gross Salary, and then the deduction is
given.
d. Deduction allowed is least of the following:
i. Actual Amount Received
ii. Statutory Limit: ₹5,000
iii. 20% of Basic Salary (Salary exclusive of any allowance, benefit, or other
perquisite)
3. Employment Tax [Section 16(iii)]
a. Employees are required to pay something known as Employment Tax.
b. A deduction of ₹2,500 per month is allowed to the employee if he has paid the
employment tax.
c. If the employment tax is paid by the employer on behalf of the employee, no
deduction is allowed.

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Taxability of Allowances
• Allowance is defined as a fixed quantity of money or other substance given regularly in addition
to salary for meeting specific requirements of the employees.
• There are various rules for taxation of different types of allowances.
• The allowances received by employees are either Fully Taxable, Partly Taxable, or Fully Exempt.

Fully Taxable Allowances

• Dearness Allowance: It is some extra money given to employee as a percentage of his basic
salary to minimize the impact of inflation.
• City Compensatory Allowance: It is given to meet the increased cost of living in cities.
• Medical Allowance: It is a fixed allowance paid to the employees to meet the medical
expenses, whether the employee has incurred any medical expenses or not.
• Tiffin/Lunch/Dinner Allowance: It is given to meet the refreshment expenses of lunch, dinner,
etc.
• Servant Allowance: It is given to engage the services of a servant.
• Project Allowance: It is paid to the employees who are engaged in a specific project to
compensate for the expenses incurred due to their engagement in the project.
• Interim Allowance: It is paid in lieu of the final allowance.
• Non-practicing Allowance: It is given to the Doctors who are working under central
government health centers, railways or in other departments of union/state government.
• Family Allowance: It is given to an employee whose spouse has passed away and s/he has
dependent children.
• Overtime Allowance: It is given to employees for working more than specified hours.
• Warden Allowance: It is given to the employees working as Wardens in a hostel.
• Transport Allowance:
o It is given to cover the expenses of travelling from home to work and back.
o It is fully exempt for blind, deaf and dumb, and orthopedically handicapped
employees.
• Any other cash allowance.

Partly Taxable Allowances

As the name suggests, allowance which are partly taxable, are partly exempt as well. Partly Taxable
Allowances are of two types:

• Allowances which are exempt to the extent of expenditure

• Allowances which are exempt to the extent mentioned in Law

Allowances Exempt to the Extent of Expenditure

• Travelling Allowance: It is given to cover the cost of travel or tour or on transfer (including
packing and transportation)
• Daily Allowance: It is given when the employee is on tour to meet the ordinary daily charges
• Conveyance Allowance: It is given to employees to meet the expenditure on conveyance while
performing official duties if free conveyance is not provided by the employer.
• Uniform Allowance: It is given to meet the expenditure on purchase and maintenance of
uniform, which the employee is supposed to wear at his workplace.

CA NISHANT KUMAR 5
 • Research Allowance: It is given for encouraging the academic, research and training pursuits
in educational and research institutions.
• Helper Allowance: It is given to the employees to keep a helper which would help them in
performing official duties.

Allowances Exempt to the Extent Mentioned in Law

S.No. Allowances Amount Exempt
1 Any Special Compensatory Allowance in the nature of ₹800 or ₹300 per month
Special Compensatory (Hilly Areas) Allowance or High depending upon the specified
Altitude Allowance or Uncongenial Climate Allowance or locations ₹7,000 per month in
Snow Bound Area Allowance or Avalanche Allowance Siachen area of Jammu and
Kashmir
2 Any Special Compensatory Allowance in the nature of ₹1,300 or ₹1,100 or ₹1,050 or
border area allowance or remote locality allowance or ₹750 or ₹300 or ₹200 per
difficult area allowance or disturbed area allowance month depending upon the
specified locations
3 Special Compensatory (Tribal Areas/Schedule ₹200 per month
Areas/Agency Areas) Allowance [Specified States]
4 Any allowance granted to an employee working in any 70% of such allowance upto a
transport system to meet his personal expenditure during maximum of ₹10,000 per
his duty performed in the course of running such transport month
from one place to another, provided that such employee is
not in receipt of daily allowance
5 Children Education Allowance ₹100 per month per child
upto a maximum of two
children
6 Any allowance granted to an employee to meet the hostel ₹300 per month per child
expenditure on his child upto a maximum of two
children
7 Compensatory Field Area Allowance [Specified areas in ₹2,600 per month
Specified States]
8 Compensatory Modified Field Area Allowance [Specified ₹1,000 per month
areas in Specified States]
9 Any special allowance in the nature of counter insurgency ₹3,900 per month
allowance granted to the members of the armed forces
operating in areas away from their permanent locations.
10 Any transport allowance granted to an employee who is ₹3,200 per month
blind or deaf and dumb or orthopedically handicapped with
disability of the lower extremities of the body, to meet his
expenditure for commuting between his residence and
place of duty
11 Underground Allowance granted to an employee who is ₹800 per month
working in uncongenial, unnatural climate in underground
mines.
12 Any special allowance in the nature of High-Altitude
allowance granted to the member of the armed forces
operating in high altitude areas
• For altitude of 9,000 to 15,000 feet ₹1,060 per month
• For above 15,000 feet ₹1,600 per month

CA NISHANT KUMAR 6
 13 Any special allowance in the nature of special ₹4,200 per month
compensatory highly active field area allowance granted to
the member of the armed forces
14 Any special allowance in the nature of Island (duty) ₹3,250 per month
allowance granted to the member of the armed forces in
Andaman & Nicobar and Lakshadweep Group of Islands
15 House Rent Allowance Discussed later

Question 5 – ICAI SM – Illustration 2

Mr. Srikant has two sons. He is in receipt of children education allowance of ₹150 p.m. for his elder
son and ₹70 p.m. for his younger son. Both his sons are going to school. He also receives the following
allowances:

Transport Allowance ₹1,800 p.m.

Tribal Area Allowance ₹500 p.m.
Compute his taxable allowances.

Solution

Computation of Taxable Allowances in the hands of Srikant for A.Y. 2023-24

Particulars ₹
Children Education Allowance
Elder Son [(₹150 – ₹100) × 12] 600
Younger Son [(₹70 – ₹70) × 12] - 600
Transport Allowance (₹1,800 × 12) 21,600
Tribal Area Allowance [(₹500 – ₹200) × 12] 3,600
Taxable Allowances 25,800

Question 6 – November 2018 – 2 Marks

Examine with brief reasons, whether the following is chargeable to income-tax and the amount liable
to tax with reference to the provisions of the Income-Tax Act, 1961: Allowance received by an
employee Mr. Ram working in a transport system at ₹12,000 p.m. which has been granted to meet his
personal expenditure while on duty. He is not in receipt of any daily allowance from his employer.

Solution

Any allowance granted to an employee working in a transport system to meet his personal expenditure
during his duty is exempt provided he is not in receipt of daily allowance. The exemption is 70% of such
allowance, or ₹10,000, whichever is less.

70% of Allowance = 70% × ₹12,000 = ₹8,400

Therefore, ₹8,400 shall be exempt, being less than ₹10,000.

Hence, taxable allowance = ₹12,000 – ₹8,400 = ₹3,600 p.m.

Total Taxable Allowance = ₹3,600 × 12 = ₹43,200

CA NISHANT KUMAR 7
Dearness Allowance
• Dearness Allowance is some extra money given to employee as a percentage of his basic salary
to minimize the impact of inflation.
• There are two types of DAs:
o DA (in Terms)
o DA (Not in Terms)
• DA (in terms) means that part of DA, that will be considered for calculating his retirement
benefits, i.e., Pension, Gratuity, etc.
• DA (not in terms) means DA doesn’t form part of the retirement benefits. Sometimes, when
the question says “DA does not form part of the basic salary”, it means it is DA (not in terms).

House Rent Allowance

1. House Rent allowance is granted to the employees to pay rent of their homes.
2. It is exempt u/s 10(13A).
3. The extent of exemption is least of the following:
a. HRA Actually Received
b. Rent Paid – 10% of “Salary”
c. 40%/50% of “Salary” for Relevant Period (Refer Note b)
4. Notes:
a. “Salary” means Basic Salary + DA (in Terms) + Commission on Turnover
b. If the employee works in metro cities (Delhi, Kolkata, Mumbai, Chennai), then 50% of
Salary is to be considered for point (c) above.
c. Relevant Period means the duration for which the house was occupied by the assessee
during the previous year.
d. Exemption is not available to an assessee who lives in his own house, or in a house for
which he has not incurred the expenditure of rent.

Question 7 – ICAI SM – Illustration 1

Mr. Raj Kumar has the following receipts from his employer:

1. Basic Pay ₹40,000 p.m.

2. Dearness Allowance (DA) ₹6,000 p.m.
3. Commission ₹50,000 p.a.
4. Motor car for personal use (expenses met by the employer) ₹1,500 p.m.
5. House rent allowance ₹15,000 p.m.
Find out the amount of HRA eligible for exemption to Mr. Raj Kumar assuming that he paid a rent of
₹16,000 p.m. for his accommodation at Kanpur. DA forms part of salary for retirement benefits.

Solution

Computation of Taxable HRA of Mr. Raj Kumar for A.Y. 2023-24

Particulars ₹
HRA Received (₹15,000 × 12) 1,80,000
Less: Exemption u/s 10(13A)
Least of the following:
(i) Actual Received 1,80,000
(ii) [Rent Paid – 10% of Salary] [(₹16,000 × 12) – (10% × ₹5,52,000)] 1,36,800
(iii) 40% of Salary (40% × ₹5,52,000) 2,20,800 1,36,800
Taxable HRA 43,200

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 Note - Computation of Salary
Particulars ₹
Basic Salary (₹40,000 × 12) 4,80,000
Dearness Allowance (₹6,000 × 12) 72,000
Commission on Turnover -
Total 5,52,000

Question 8

Arun, a resident of Meerut, receives ₹38,000 per annum as basic salary. In addition, he gets ₹12,000
p.a. as dearness allowance, which does not form part of basic salary, 5% commission on turnover
achieved by him (turnover achieved by him during the relevant previous year is ₹6,00,000) and ₹7,000
per annum as house rent allowance. He, however, pays ₹8,000 per annum as house rent.

Determine the quantum of house rent allowance exempt from tax.

Solution

Computation of Exempt HRA

Particulars ₹
HRA is Exempt to the extent of Least of the Following:
Actual Received 7,000
Rent Paid – 10% of Salary [₹8,000 – {10% × (₹38,000 + (5% × ₹6,00,000))}] 1,200
40% of Salary [40% × {₹38,000 + (5% × ₹6,00,000)}] 27,200
Exempt HRA 1,200

Question 9 – May, 2012 – 8 Marks; ICAI SM – Question 1

Mr. Mohit is employed with XY Ltd. on a basic salary of ₹10,000 p.m. He is also entitled to dearness
allowance @100% of basic salary, 50% of which is included in salary as per terms of employment. The
company gives him house rent allowance of ₹6,000 p.m. which was increased to ₹7,000 p.m. with
effect from 01.01.2023. He also got an increment of ₹1,000 p.m. in his basic salary with effect from
01.02.2023. Rent paid by him during the previous year 2022-23 is as under:

April and May, 2022 Nil, as he stayed with his parents

June to October, 2022 ₹6,000 p.m. for an accommodation in Ghaziabad
November, 2022 to March, 2023 ₹8,000 p.m. for an accommodation in Delhi
Compute his gross salary for assessment year 2023-24 assuming he has not opted for the provisions of
section 115BAC.

Solution

Computation of Gross Salary of Mr. Mohit for A.Y. 2023-24

Particulars ₹
Basic Salary [(₹10,000 × 10) + (₹11,000 × 2)] 1,22,000
Dearness Allowance (100% of Basic Salary) 1,22,000
House Rent Allowance (Note 1) 21,300
Gross Salary 2,65,300

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 Note 1 - Computation of Taxable House Rent
01-04- 01-06- 01-11- 01-01- 01-02-
2022 2022 2022 2023 2023
Particulars to to to to to
31-05- 31-10- 31-12- 31-01- 31-03-
2022 2022 2022 2023 2023
Least of the following:
Actual HRA Received (A) 12,000 30,000 12,000 7,000 14,000
Rent Paid – 10% of Salary (See - 22,500 13,000 6,500 12,700
Below)
40% of Salary 12,000 30,000
50% of Salary 15,000 7,500 16,500
Exempt HRA (Least of the Above) - 22,500 12,000 6,500 12,700
(B)
Taxable HRA (A) – (B) 12,000 7,500 - 500 1,300

Salary:
Basic Salary 20,000 50,000 20,000 10,000 22,000
DA (in Terms) 10,000 25,000 10,000 5,000 11,000
Commission on T/o - - - - -
Total 30,000 75,000 30,000 15,000 33,000

Therefore, Taxable HRA = ₹12,000 + ₹7,500 + ₹500 + ₹1,300 = ₹21,300

Note – Calculation of Rent Paid – 10% of Salary for different periods:

1. For 01-04-2022 to 31-05-2022: No Rent Paid

2. For 01-06-2022 to 31-10-2022: Rent Paid = ₹6,000 × 5 = ₹30,000; 10% of Salary = 10% × ₹75,000
= ₹7,500. Therefore, Rent Paid – 10% of Salary = ₹30,000 – ₹7,500 = ₹22,500
3. For 01-11-2022 to 31-12-2022: Rent Paid = ₹8,000 × 2 = ₹16,000; 10% of Salary = 10% × ₹30,000
= ₹3,000. Therefore, Rent Paid – 10% of Salary = ₹16,000 – ₹3,000 = ₹13,000.
4. For 01-01-2023 to 31-01-2023: Rent Paid = ₹8,000; 10% of Salary = 10% × ₹15,000 = ₹1,500.
Therefore, Rent Paid – 10% of Salary = ₹8,000 – ₹1,500 = ₹6,500
5. For 01-02-2023 to 31-03-2023: Rent Paid = ₹8,000 × 2 = ₹16,000; 10% of Salary = 10% × ₹33,000
= ₹3,300. Therefore, Rent Paid – 10% of Salary = ₹16,000 – ₹3,300 = ₹12,700

Wholly Exempt Allowances

• Allowance to Supreme Court/High Court Judges: Any allowance paid to a Judge of a High Court
and Supreme Court is not taxable.
• Allowance received from United Nations Organisation (UNO): Allowance paid by the UNO to
its employees is not taxable.
• Compensatory allowance under Article 222(2) of the Constitution: Compensatory allowance
received by judge under Article 222(2) of the Constitution is not taxable since it is neither salary
not perquisite.
• Sumptuary allowance: Sumptuary allowance given to High Court Judges and Supreme Court
Judges is not chargeable to tax.
• Allowances payable outside India [Section 10(7)]: Allowances or perquisites paid or allowed as
such outside India by the Government to a citizen of India for services rendered outside India
are exempt from tax.

CA NISHANT KUMAR 10
Taxability of Perquisites
The term “perquisites” means any extra benefit granted to the employee in addition to his salary. It
may be given in cash or kind.

Types of Perquisites
• Perquisites taxable in the case of all employees
• Tax free perquisites in case of all employees
• Perquisites taxable only in the hands of specified employees

Rent Free Accommodation

Accommodation includes a house, flat, farmhouse or part thereof, or accommodation in a hotel, motel,
service apartment, guesthouse, caravan, mobile home, ship, or other floating structure. Value of a
Rent free accommodation for taxation purposes is calculated as given in the following table:

Furnished Accommodation
Unfurnished Furniture Furniture
Circumstance
Accommodation Owned by Rented by
Employer Employer
(1) (2) (3) (4)
1. Provided by Government to License Fee Value as per Value as per
employees holding office/post (determined by Column (3) + Column (3) +
in Government affairs Government) – Actual 10% of Cost of Hire Charges of
Rent Paid Furniture Furniture
2. Provided by Other Employer
• Employer is the owner Population ≤ 10 lakhs: Value as per Value as per
of accommodation 7.5% of Salary Column (3) + Column (3) +
10 lakhs < Population ≤ 10% of Cost of Hire Charges of
25 lakhs: 10% of Salary Furniture Furniture
Population > 25 lakhs:
15% of Salary
• Accommodation is Lower of: Value as per Value as per
taken on lease or rent • Actual Rent Column (3) + Column (3) +
Paid by 10% of Cost of Hire Charges of
Employer Furniture Furniture
• 15% of Salary
3. Accommodation provided in Not applicable Lower of:
hotel • Actual Charges Paid/
Payable to the hotel
• 24% of salary
Notes:

1. In all the cases above, if the employer recovers any amount from the employee, be it for rent
or for furniture, it is deducted from the value of perquisite calculated above.
2. Salary =
a. Basic Salary
b. DA (in terms)
c. Bonus
d. Taxable Allowances
e. Commission (All types)

CA NISHANT KUMAR 11
 f. Monetary Income (Other than Perquisites)
3. For calculating the salary, perquisites shall not be considered.
4. The salary as per note 2 should be calculated on due basis, i.e., only the salary of current year
should be considered. Advance Salary or Arrears in Salary should be ignored.
5. Salary as per note 2 should be considered for the time for which assessee has occupied the
house.
6. Employer contribution towards PF and interest should be ignored.
7. For computing salary as per note 2, retirement benefits should not be considered, i.e., gratuity,
pension, leave salary, etc.
8. If hotel facility is provided at the time of transfer of employee and if it is upto 15 days, then it
is not taxable.
9. If the employee has been transferred to another place, and he has been provided an
accommodation at the new place, while still retaining the accommodation of the old place,
then:
a. For the first 90 days, the value of rent-free accommodation will be the value of that
accommodation the value of which is lower (as calculated as per rules)
b. After 90 days, the value of rent-free accommodation shall be the total value of both
the accommodations.

Question 10 – ICAI SM – Illustration 14

Mr. C is a Finance Manager in ABC Ltd. The company has provided him with rent free unfurnished
accommodation in Mumbai. He gives you the following particulars:

Basic Salary ₹6,000 p.m.

Dearness Allowance ₹2,000 p.m. (30% is for retirement benefits)
Bonus ₹1,500 p.m.
Even though the company allotted the house to him on 1.4.2022, he occupied the same only from
1.11.2022. Calculate the taxable value of the perquisite for A.Y.2023-24.

Solution

Computation of Taxable Perquisite

Particulars ₹
Basic Salary (₹6,000 × 5) 30,000
Dearness Allowance (30% × ₹2,000 × 5) 3,000
Bonus (₹1,500 × 5) 7,500
40,500
15% of this 6,075
Note: Since, Mr. C occupies the house only from 1.11.2022, we have to include the salary due to him
only in respect of months during which he has occupied the accommodation. Hence salary for 5
months (i.e., from 1.11.2022 to 31.03.2023) will be considered.

Question 11 – ICAI SM – Illustration 15

Mr. C is a Finance Manager in ABC Ltd. The company has provided him with rent free unfurnished
accommodation in Mumbai. He gives you the following particulars:

Basic Salary ₹6,000 p.m.

Dearness Allowance ₹2,000 p.m. (30% is for retirement benefits)
Bonus ₹1,500 p.m.

CA NISHANT KUMAR 12
Even though the company allotted the house to him on 1.4.2022, he occupied the same only from
1.11.2022. Compute the value of the perquisite if Mr. C is required to pay a rent of ₹1,000 p.m. to the
company, for the use of this accommodation.

Solution

Computation of Taxable Perquisite

Particulars ₹
Basic Salary (₹6,000 × 5) 30,000
Dearness Allowance (30% × ₹2,000 × 5) 3,000
Bonus (₹1,500 × 5) 7,500
40,500
15% of this 6,075
Less: Rent recovered from the employer (₹1,000 × 5) 5,000
Taxable Perquisite Value 1,075
Note: Since 15% of salary exceeds the rent recovered from the employee, there is a deemed concession
in the matter of rent, and hence the excess of 15% of salary over rent recovered by the employer will
be chargeable to tax.

Question 12 – ICAI SM – Illustration 16

Mr. C is a Finance Manager in ABC Ltd. The company has provided him with rent free unfurnished
accommodation in Mumbai. He gives you the following particulars:

Basic Salary ₹6,000 p.m.

Dearness Allowance ₹2,000 p.m. (30% is for retirement benefits)
Bonus ₹1,500 p.m.
Even though the company allotted the house to him on 1.4.2022, he occupied the same only from
1.11.2022. Compute the value of the perquisite if ABC Ltd. has taken this accommodation on a lease
rent of ₹1,200 p.m. and Mr. C is required to pay a rent of ₹1,000 p.m. to the company, for the use of
this accommodation.

Solution

Computation of Taxable Perquisite

Particulars ₹
Basic Salary (₹6,000 × 5) 30,000
Dearness Allowance (30% × ₹2,000 × 5) 3,000
Bonus (₹1,500 × 5) 7,500
40,500
15% of this 6,075
Hire Charges Paid by Employer (₹1,200 × 5) 6,000
Lower of the above 6,000
Less: Rent recovered from the employer (₹1,000 × 5) 5,000
Taxable Perquisite Value 1,000
Note: Since 15% of salary, or rent paid by the employer, whichever is lower, exceeds the rent recovered
from the employee, there is a deemed concession in the matter of rent, the excess will be chargeable
to tax.

Question 13 – ICAI SM – Illustration 17

CA NISHANT KUMAR 13
Mr. C is a Finance Manager in ABC Ltd. The company has provided him with rent free unfurnished
accommodation in Mumbai. He gives you the following particulars:

Basic Salary ₹6,000 p.m.

Dearness Allowance ₹2,000 p.m. (30% is for retirement benefits)
Bonus ₹1,500 p.m.
Even though the company allotted the house to him on 1.4.2022, he occupied the same only from
1.11.2022. Compute the value of the perquisite if ABC Ltd. has provided a television (WDV ₹10,000;
Cost ₹25,000) and two air conditioners. The rent paid by the company for the air conditioners is ₹400
p.m. each. The television was provided on 1.1.2023. However, Mr. C is required to pay a rent of ₹1,000
p.m. to the company, for the use of this furnished accommodation.

Solution

Computation of Taxable Perquisite

Particulars ₹
Value of Rent free unfurnished accommodation {15% of Salary (Note 1)} 6,075
Add: Value of Furniture provided by Employer (Note 2) 4,625
Value of rent free furnished accommodation 10,700
Less: Rent paid by employer (₹1,000 × 5) 5,000
Taxable Perquisite Value 5,700
Notes:

1. Calculation of 15% of Salary

Particulars ₹
Basic Salary (₹6,000 × 5) 30,000
Dearness Allowance (30% × ₹2,000 × 5) 3,000
Bonus (₹1,500 × 5) 7,500
40,500
15% of this 6,075
2. Calculation of Value of Furniture provided by Employer

Particulars ₹
Television (10% of Cost for 3 months) (10% × ₹25,000 × 3/12) 625
Air Conditioners (Rent Paid by Employer) (₹400 p.u. × 2 × 5 months) 4,000
Value of Furniture provided by Employer 4,625

Question 14 – ICAI SM – Illustration 18

Mr. C is a Finance Manager in ABC Ltd. The company has provided him with rent free unfurnished
accommodation in Mumbai. He gives you the following particulars:

Basic Salary ₹6,000 p.m.

Dearness Allowance ₹2,000 p.m. (30% is for retirement benefits)
Bonus ₹1,500 p.m.
Even though the company allotted the house to him on 1.4.2022, he occupied the same only from
1.11.2022. ABC Ltd. has provided a television (WDV ₹10,000; Cost ₹25,000) and two air conditioners.
The rent paid by the company for the air conditioners is ₹400 p.m. each. The television was provided
on 1.1.2023. However, Mr. C is required to pay a rent of ₹1,000 p.m. to the company, for the use of
this furnished accommodation. Compute the value of the perquisite if Mr. C is a government employee.
The license fees determined by the Government for this accommodation was ₹700 p.m.

CA NISHANT KUMAR 14
Solution

Computation of Taxable Perquisite

Particulars ₹
Value of Rent free unfurnished accommodation (₹700 × 5) 3,500
Add: Value of Furniture provided by Employer (Note 1) 4,625
Value of rent free furnished accommodation 8,125
Less: Rent paid by employer (₹1,000 × 5) 5,000
Taxable Perquisite Value 3,125

Note 1 - Calculation of Value of Furniture provided by Employer

Particulars ₹
Television (10% of Cost for 3 months) 625
(10% × ₹25,000 × 3/12)
Air Conditioners (Rent Paid by Employer) 4,000
(₹400 p.u. × 2 × 5 months)
Value of Furniture provided by Employer 4,625

Question 15

Calculate the value of perquisite, if any, chargeable to tax in respect of free accommodation provided
by the employer in a hotel to an employee:

1. For 10 days when he was transferred from Delhi to Mumbai

2. Throughout the year as per contract of employment

Solution

1. When the employee is provided accommodation in a hotel for a period not exceeding 15 days
on account of his transfer from one place to another, then the value of such perquisite shall
be NIL. In this case, since the period of hotel accommodation doesn’t exceed 15 days, and the
same has been provided on the transfer of employee from Delhi to Mumbai, the same shall be
exempt.
2. When hotel accommodation is provided throughout the year as per contract of employment,
the taxable value shall be lower of:
a. The actual charges paid/payable to such hotel, or
b. 24% of salary.
Any amount recovered from the employee shall be reduced.

Question 16

Compute the value of perquisite in respect of rent-free furnished house, if Ashok stays in a city with a
population of:

1. Not exceeding 10 lakh;

2. Exceeding 10 lakh but not exceeding 25 lakh; and
3. Exceeding 25 lakh

Ashok is in receipt of the following amounts from his employer during the previous year:

CA NISHANT KUMAR 15
 • Basic Pay: ₹1,80,000
• Dearness allowance: 25% of basic pay
• Commission: 5% of basic pay
• Bonus: ₹8,000

His employer has paid income tax of ₹5,000 and professional tax of ₹1,500 on his behalf. Besides, his
employer provided refrigerator and television costing ₹24,000 and paid ₹500 per month towards rent
of other furniture provided.

Solution

Computation of Value of Rent-Free Accommodation

Cities Having Population
Less More than 10 More
Particulars
than10 Lakhs Upto 25 than 25
Lakhs Lakhs Lakhs
Value of Rent-Free Accommodation 7.5% of 10% of Salary 15% of
Salary Salary
Perquisite Value of Rent-Free Accommodation (Note 1) 18,150 24,200 36,300
Add: Refrigerator and TV (10% × ₹24,000) 2,400 2,400 2,400
Add: Other Furniture (₹500 × 12) 6,000 6,000 6,000
Taxable Value of Furnished Accommodation 26,550 32,600 44,700

Note 1 - Calculation of Salary

Particulars ₹
Basic Pay 1,80,000
Dearness Allowance (assuming it forms part of retirement benefits) (25% × ₹1,80,000) 45,000
Commission (5% × ₹1,80,000) 9,000
Bonus 8,000
Income Tax and Professional Tax (since it is perquisite, it shall not be included) -
Total Salary for Rent Free Accommodation 2,42,000

Question 17 – CS June, 2008 – 5 Marks

Mrs. Padma (age 25 years) is offered an employment by Pritam Ltd. at a basic salary of ₹24,000 per
month; other allowances according to rules of the company are – Dearness allowance: 18% of basic
pay (not forming part of salary for calculating retirement benefits); Bonus: 1 month basic pay; and
Project Allowance: 6% of basic pay.

The company gives Mrs. Padma an option either to take a rent-free unfurnished accommodation at
Mumbai for which the company would directly bear the rent of ₹15,000 per month or to accept a
house rent allowance of ₹15,000 per month and find out her own accommodation. If Mrs. Padma opts
for house rent allowance, she will have to pay ₹15,000 per month for an unfurnished house. Which
one of the two options should be opted by Mrs. Padma in order to minimize her tax liability?

Solution

Computation of Total Taxable Income of Mrs. Padma

Particulars HRA RFA
Basic Salary (₹24,000 × 12) 2,88,000 2,88,000
Dearness Allowance (18% × ₹2,88,000) 51,840 51,840

CA NISHANT KUMAR 16
 Bonus (1 month Basic Pay) 24,000 24,000
Project Allowance (6% × ₹2,88,000) 17,280 17,280
House Rent Allowance (Note 1) 36,000
Rent Free Accommodation (Note 2) 49,392
Total Taxable Salary Income 4,17,120 4,30,512
Therefore, Mrs. Padma should opt for House Rent Allowance to minimize tax liability.

Note 1 - Taxable House Rent Allowance

Particulars ₹
HRA Received (₹15,000 × 12) 1,80,000
Less: Least of the following:
Less: Actual Received 1,80,000
Less: Rent Paid – 10% of Salary 1,51,200
Less: (₹1,80,000 – 10% × ₹2,88,000)
Less: 50% of Salary (50% × ₹2,88,000) 1,44,000 1,44,000
Taxable HRA 36,000

Note 2 - Taxable Value of Rent Free Accommodation

Particulars ₹
Least of the following:
Actual Rent Paid (₹15,000 × 12) 1,80,000
15% of Salary (Note 3) (15% × ₹3,29,280) 49,392
Value of Rent Free Accommodation 49,392

Note 3 - Salary for the purpose of Rent Free Accommodation

Particulars ₹
Basic Salary 2,88,000
Bonus 24,000
Project Allowance 17,280
Salary for the purpose of Rent Free Accommodation 3,29,280

Perquisite of Motor Car or Other Conveyance Facility

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CA NISHANT KUMAR 18
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Notes:

1. If the conveyance is used wholly and exclusively for the purposes of business, then it will be
fully exempt because then it won’t be a “perquisite”.
2. If more than one car is provided to the employee (not wholly for official purpose), then one of
those cars will be treated for private purpose, and the other car will be treated for partly
official and partly private purposes.
3. The perquisite is valued for each calendar month. Calendar month is the month starting from
any particular date of a month but ending on a date immediately preceding the corresponding
date of new month. For example, 21st September to 20th October is a calendar month.

CA NISHANT KUMAR 21
 4. If the car is used for commuting between office and residence, then it shall be considered as
official use.

Question 18 – November, 2004 – 4 Marks

Mr. A is provided with two cars, to be used for official and personal work by his employer ABC Ltd. The
following information is available from the company records:

Particulars Car 1 Car 2

Cost of Car 6,00,000 4,00,000
Running and Maintenance (borne by the company) 40,800 28,000
Salary of driver (borne by the company) 24,000 24,000
The taxable monetary emoluments of Mr. A are ₹90,000. Compute the taxable ‘Perk’ in respect of cars
on the assumption that Car 2 is used exclusively for personal purposes by A.

Solution

The perquisite in respect of motor car will be taxable in the hands of Mr. A, as he is a “specified
employee”. Since, in the question it is specifically mentioned that Car 2 is used for private purposes,
therefore, Car 1 shall be taken as used for partly official and partly personal purposes.

Computation of Taxable Value of Perquisite

Particulars ₹
Car 1 (Partly Official and Partly Personal) (Assuming Capacity > 1.6 cc) [(₹2,400
+ ₹900) × 12] 39,600
Car 2 (Personal Use Only)
Maintenance Charges 28,000
Driver's Salary 24,000
10% of Cost (10% × ₹4,00,000) 40,000 92,000
Total Value of Perquisite 1,31,600

Sweeper, Gardener, Watchman, or Personal Attendant

If any sweeper, gardener, watchman or personal attendant is provided to an employee or any of his
household member, then the value of perquisite shall be:

Salary paid or payable to such person – amount recovered from the employee.

Gas, Electricity or Water Facility

• If these things are supplied by the employer from his own sources, value of perquisite =
Manufacturing Cost Per Unit × Number of Units Consumed by the Employee
• If these things are supplied by the employer from outside agencies, value of perquisite = Hire
Charges paid to such agencies
• If any amount is recovered from the employee, the same shall be reduced to arrive at taxable
value, if any.

Free or Concessional Educational Facility

• Value of perquisite = actual expenditure incurred by the employer, if the employer incurs cost
of education
• Value of perquisite = cost of such education in a similar institution in or near the locality, if:
o the Educational Institution is owned and maintained by the employer, or

CA NISHANT KUMAR 22
 o free educational facility is provided in any other institution by reason of his
employment with that employer
• The perquisite is exempt if:
o Free education facility is provided to children of the employee, and
o Cost of education is upto ₹1,000 p.m. per child
otherwise, it is fully taxable.
• Any amount paid or recovered from the employee shall be reduced from value of perquisite.

Question 19

Vidya Bhawan is owned by ABC Ltd. Shri Ramesh is an employee of ABC Ltd. drawing salary of ₹2,00,000
and his following family members are studying in the said school. Find out the taxable value of
perquisite:

Particulars Rahul, son of Ramesh Kajri, daughter of Ramesh

Cost of education in a similar institution ₹3,500 p.m. ₹1,800 p.m.
Amount charged from Ramesh ₹2,500 p.m. -

Solution

The perquisite in respect of education facility is exempt if it is upto ₹1,000 p.m. If the value exceeds
₹1,000 p.m., then the entire amount is taxable. Further, if the value of concessional facility is upto
₹1,000 p.m., it will also be exempt.

In case of Rahul, the value of perquisite shall be ₹3,500 – ₹2,500 = ₹1,000 p.m. As the value of
perquisite doesn’t exceed ₹1,000 p.m., the perquisite shall not be taxable.

In case of Kajri, the value of perquisite is ₹1,800 p.m., which exceeds ₹1,000; therefore, the entire
amount shall be taxable. Value of taxable perquisite = 1,800 × 12 = ₹21,600.

Transport Facility to the Employees of Transport Undertaking

• If any transport facility is provided by an employer carrying transport business (of carrying
goods/passengers) to his employee in a conveyance owned, leased or made available by some
arrangement, then:
o Taxable value = Amount Charged from General Public for such facility – Amount
Recovered from the Employee, if any
o Exemption: This rule shall not apply to employees of an airline or the railways.

Taxation of Employee Stock Option Plans (ESOPs)/Sweat Equity

• Employee Stock Option Plan is an incentive scheme by the employers to retain employees for
a longer duration. In this scheme, employees are given option to purchase stocks of the
company valued at today’s value after a certain period of time with the condition that the
employee continues to stay employed in the company.
• “Sweat Equity Shares” means equity shares issued by a company to its employees or directors
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.
• The taxability of ESOPs/Sweat Equity Shares arises when they are allotted or transferred,
directly or indirectly, by the employer, or former employer.
• Taxable Value:

CA NISHANT KUMAR 23
 Particulars ₹
Fair Market Value (determined as per prescribed method) of the security or sweat xxx
equity shares on the date on which the option is exercised by the assessee/employee
Less: Amount actually paid by, or recovered from assessee in respect of such security xxx
or shares
Value of Such Security or Sweat Equity Shares xxx
• Deferment of Taxability in case of ESOP allotted to employee of eligible startup: If the shares
are allotted by a startup u/s 80IAC, the tax or interest on such income shall be payable within
14 days of the earliest of the following:
o After the expiry of 48 months from the end of the relevant assessment year; or
o From the date of the sale of such specified security or sweat equity share by the
assessee; or
o From the date of the assessee ceasing to be the employee of the employer who
allotted or transferred him such specified security or sweat equity share.
Thus, tax burden on such employees getting ESOPs has been reduced by deferring the payment
of tax by 5 years or till they leave the company or when they sell their shares, whichever is
earliest.
• Determination of Fair Market Value
Case Fair Market Value
1. Listed Equity Shares: If the shares of
the company are listed on the date of
exercising the option:
a) On only one recognised stock (Opening price on that date on that stock
exchange and shares are exchange + Corresponding Closing Price) ÷ 2
traded on that date on that
exchange
b) On only one recognized stock Closing price of the share on that recognised
exchange and shares are not stock exchange on an immediately preceding
traded on that date on that date closest to the date of exercising the
exchange option.
c) On more than one recognized (Opening price on that date on stock
stock exchanges and shares are exchange, which records the highest volume
traded on that day on any of of trading in the share + Corresponding
the exchanges Closing Price) ÷ 2
d) On more than one recognized Closing price of the share on any recognised
stock exchanges but shares are stock exchange, which records the highest
not traded on that date on any volume of trading in such share, as on
of the exchanges immediately preceding date closest to the
date of exercising of the option.
2. Unlisted Equity Shares: If the shares of Such value of the share in company as
the company are not listed on any determined by a ‘Category I Merchant Banker
recognised stock exchange on the date registered with the SEBI’ on the specified
of exercising of such option date.
3. Specified Security not being an Equity Such value as determined by a merchant
Share banker on the specified date.
o Closing price of a share on a recognized stock exchange on a date means the price of
the last settlement on such date on such stock exchange. However, where the stock
exchange quotes both buy and sell prices, the ‘sell price’ shall be the closing price.

CA NISHANT KUMAR 24
 o Opening Price of a share on a recognised stock exchange on a date means the price of
the first settlement on such date on such stock exchange. However, where the stock
exchange quotes both buy and sell prices, the ‘sell price’ shall be the opening price.
o Specified date means:
▪ Date on which the option is exercised; or
▪ Any date earlier than the date of exercising the option provided such date is
not more than 180 days earlier than the date of exercising the option.

Question 20

Mr. M is working with MNO Limited for the last 10 years. He was granted an option on 01-07-2021 by
the company to purchase 800 equity shares at a price of ₹250 per share. The period during which the
option can be exercised to purchase 800 shares at a pre-determined price of ₹250 per share
commencing on 01-07-2021 and ending on 31-03-2023. Mr. M exercised the option on 15-03-2022 to
purchase 500 shares. Fair market value on the said date was ₹6,490 on the Bombay Stock Exchange
and ₹6,500 on the National Stock Exchange. The NSE has recorded the higher volume of trading in that
share.

The company has allotted him 500 shares on 24th April, 2022. The fair market value on the date of
allotment was ₹7,100 per share on NSE and ₹7,110 on the BSE, that has recorded the higher volume
of trading in that share. The option was granted for making available rights in the nature of intellectual
property rights.

Determine the taxability of perquisite.

Does it make any difference if the option was granted for providing technical know-how?

Solution

The value of perquisite shall be as follows:

1. In this question, shares of M/s MNO Ltd. are traded on more than one stock exchange (both,
BSE and NSE) on the date of exercise of the option, i.e., on 15-03-2022, hence, as per Valuation
Rules, the average of the opening and closing prices on the recognized stock exchange, which
records highest trading volume shall be taken to be the fair market value of each option.
2. Since NSE recorded the higher trading volume, hence, FMV on that date on NSE = ₹6,500 shall
be taken to be the FMV for the purpose of valuation of perquisite.
3. Value of perquisite = (FMV – Exercise Price) × No. of Shares = (₹6,500 – ₹250) × 500 =
₹31,25,000.
4. The taxability of perquisite will arise in the year in which shares are allotted or transferred to
the employee, i.e., in the previous year 2022-23.

Even if the option is granted for providing know-how, the same will fall within the meaning of ‘sweat
equity shares’ and, therefore, the taxability provisions shall remain the same.

CA NISHANT KUMAR 25
Medical Facility
Medical Facility

Treatment in India Treatment Outside India

Government
Government Employer’s Benefit of
Recognized Otherwise Benefit of Stay Benefit of Travel
Hospital Hospital Treatment
Hospital

Exempt upto Exempt upto

GTI upto GTI above
Fully Exempt Fully Exempt Fully Exempt Fully Taxable Limit Prescribed Limit Prescribed
₹2,00,000 ₹2,00,000
by RBI by RBI

Fully Exempt Fully Taxable

Notes:

1. Exemption for treatment is allowed for Employee, Spouse, Children, and Dependent Relatives
(Mother, Father, Brother, Sister)
2. Exemption of Stay and Travel is allowed only for patient and one attendant.
3. Medical insurance premium paid by employer is fully exempt.
4. Any sum paid by the employer in respect of any expenditure actually incurred by the
employee on his medical treatment or treatment of any member of his family in respect of
any illness relating to COVID-19 would not be treated as a perquisite subject to conditions
notified by the Central Government.
Accordingly, the Central Government has specified that for claiming benefit of such
exemption, the employee has to submit the following documents to the employer:
a. the COVID-19 positive report of the employee or family member, or medical report
if clinically determined to be COVID-19 positive through investigations, in a hospital
or an in-patient facility by a treating physician of a person so admitted;
b. all necessary documents of medical diagnosis or treatment of the employee or his
family member for COVID-19 or illness related to COVID-19 suffered within 6 months
from the date of being determined as COVID-19 positive; and
c. a certification in respect of all expenditure incurred on the treatment of COVID-19
or illness related to COVID-19 of the employee or of any member of his family.

Question 21 – ICAI SM – Illustration 13

Compute the taxable value of the perquisite in respect of medical facilities received by Mr. G from his
employer during the P.Y. 2022-23:

Medical premium paid for insuring health of Mr. G ₹7,000

Treatment of Mr. G by his family doctor ₹5,000
Treatment of Mrs. G in a Government hospital ₹25,000
Treatment of Mr. G’s grandfather in a private clinic ₹12,000
Treatment of Mr. G’s mother (68 years and dependent) by family doctor ₹8,000
Treatment of Mr. G’s sister (dependent) in a nursing home ₹3,000
Treatment of Mr. G’s brother (independent) ₹6,000

CA NISHANT KUMAR 26
 Treatment of Mr. G’s father (75 years and dependent) abroad ₹50,000
Expenses of staying abroad of the patient and ₹30,000
Limit specified by RBI ₹75,000

Solution

Computation of Taxable Perquisites of Mr. G for A.Y. 2023-24

Particulars ₹
Medical premium paid for insuring health of Mr. G Exempt
Treatment of Mr. G by his family doctor 5,000
Treatment of Mrs. G in a Government hospital Exempt
Treatment of Mr. G’s grandfather in a private clinic 12,000
Treatment of Mr. G’s mother (68 years and dependant) by family doctor 8,000
Treatment of Mr. G’s sister (dependant) in a nursing home 3,000
Treatment of Mr. G’s brother (independent) 6,000
Treatment of Mr. G’s father (75 years and dependent) abroad 50,000
Add: Expenses of staying abroad of the patient 30,000
80,000
Less: Limit specified by RBI 75,000 5,000
Taxable Value of Perquisite 39,000

Question 22 – May, 2014 – 8 Marks; ICAI SM – Question 2

Ms. Rakhi is an employee in a private company. She receives the following medical benefits from the
company during the previous year 2022-23:

Particulars ₹
(1) Reimbursement of following Medical Expenses incurred by Ms. Rakhi:
a) On treatment of her self employed daughter in a private clinic 4,000
b) On treatment of herself by Family doctor 8,000
c) On treatment of her mother-in-law dependent on her, in a Nursing Home 5,000
(2) Payment of premium on Mediclaim Policy taken on her health 7,500
(3) Medical Allowance 2,000
p.m.
(4) Medical Expenses Reimbursed on her son’s treatment in a Government Hospital 5,000
(5) Expenses incurred by company on the treatment of her minor son abroad 1,05,000
including stay expenses
(6) Expenses in relation to foreign travel of Rakhi and her son abroad for Medical 1,20,000
treatment
Note – Limit prescribed by RBI for expenditure on medical treatment and stay
abroad is USD 2,50,000 per financial year under liberalized remittance scheme.
Examine the taxability of the above benefits and allowances in the hands of Rakhi.

Solution

Particulars
1. Reimbursement of medical expenses incurred by Ms. Rakhi
(a) The amount of ₹4,000 reimbursed by her employer for treatment of her self-employed
daughter in a private clinic is taxable perquisite.
(b) The amount of ₹8,000 reimbursed by the employer for treatment of Ms. Rakhi by
family doctor is taxable perquisite.

CA NISHANT KUMAR 27
 (c) The amount of ₹5,000 reimbursed by her employer for treatment of her dependant
mother-in-law in a nursing home is taxable perquisite.
The aggregate sum of ₹17,000, specified in (a), (b) and (c) above, reimbursed by the employer
is taxable perquisite.
2. Medical insurance premium of ₹7,500 paid by the employer for insuring health of Ms. Rakhi is
a tax-free perquisite.
3. Medical allowance of ₹2,000 per month i.e., ₹24,000 p.a. is a fully taxable allowance.
4. Reimbursement of medical expenses of ₹5,000 on her son’s treatment in a hospital maintained
by the Government is a tax-free perquisite.
5. As per the provisions of the law, the following expenditure incurred by the employer would be
& excluded from perquisite subject to certain conditions –
6. 1. Expenditure on medical treatment of the employee, or any member of the family of
such employee, outside India including stay expenses (₹1,05,000, in this case);
2. Expenditure on travel of the employee or any member of the family of such employee
for medical treatment and one attendant who accompanies the patient in connection
with such treatment (₹1,20,000, in this case).
The conditions subject to which the above expenditure would be exempt are as follows –
1. The expenditure on medical treatment and stay abroad would be excluded from
perquisite to the extent permitted by Reserve Bank of India;
2. The expenditure on travel would be excluded from perquisite only in the case of an
employee whose gross total income, as computed before including the said
expenditure, does not exceed ₹2 lakh.
Since the expenditure on medical treatment and stay abroad does not exceed the limit
permitted by RBI, they would be fully exempt. However, the foreign travel expenditure of Ms.
Rakhi and her minor son borne by the employer would be excluded from perquisite only if the
gross total income of Ms. Rakhi, as computed before including the said expenditure, does not
exceed ₹2 lakh.

Question 23

Himalaya Ltd. reimburses the following expenditure on medical treatment of the son of an employee
Karan. The treatment was done at UK:

1. Travelling expenses: ₹1,15,000

2. Stay expenses at UK permitted by RBI: ₹45,000 (Actual expenses ₹70,000).
3. Medical expenses permitted by RBI: ₹50,000 (Actual expenses ₹70,000).

Compute the taxable perquisites in the hands of Karan, if his annual income from salary (after standard
deduction) was:

1. ₹1,55,000;
2. ₹1,56,000

Solution

Case 1 - Income from Salary = ₹1,55,000

Computation of Taxable Value of Perquisite
Particulars ₹
Stay Expenses (₹70,000 – ₹45,000) 25,000
Medical Expenses (₹70,000 – ₹50,000) 20,000
Travelling Expenses (Note) -
Taxable value of Medical Perquisite 45,000

CA NISHANT KUMAR 28
Note: The gross total income before including travel expenses = ₹1,55,000 + ₹25,000 + ₹20,000 =
₹2,00,000, i.e., it does not exceed ₹2,00,000. Hence, travel expenses will be exempt.

Case 2 - Income from Salary = ₹1,56,000

Computation of Taxable Value of Perquisite
Particulars ₹
Stay Expenses (₹70,000 – ₹45,000) 25,000
Medical Expenses (₹70,000 – ₹50,000) 20,000
Travelling Expenses (Note) 1,15,000
Taxable value of Medical Perquisite 1,60,000
Note: The gross total income before including travel expenses = ₹1,56,000 + ₹25,000 + ₹20,000 =
₹2,01,000, i.e., it exceeds ₹2,00,000. Hence, travel expenses will be fully taxable.

Fringe Benefits Taxable for All Employees

Fringe benefit means an extra benefit supplementing an employee's money wage or salary. These are
considered as perquisites.

Interest Free or Concessional Loans

Taxable Perquisite = Loan Amount × [SBI Interest Rate on 1st April of P.Y. – Actual Rate of Interest]

Notes:

1. If aggregate loan is upto ₹20,000, then interest benefit is NOT taxable.

2. If loan is taken for treatment of specified disease, then interest benefit is not taxable even if
loan amount is more than ₹20,000.

Question 24 – November, 2002

Ram is working as a General Manager of A Ltd. on a monthly salary of ₹20,000. In the previous year
ending 31-03-2023, the company provided him the following:

1. Interest free loan (on 01-10-2022)

a. For purchase of residential flat (repayable in 8 years) (SBI Rate 12.25%): ₹5,00,000
b. Education loan (for son) (SBI Rate 11.5%): ₹15,000
2. Loan for purchase of computer on 01-10-2022 (8% interest p.a.) (SBI Rate 15.25%): ₹30,000

You are required to state the basis for calculation and compute the chargeable perquisite.

Solution

Computation of Value of Taxable Perquisite of Ram for A.Y. 2023-24

Particulars ₹
Interest on Housing Loan (12.25% × ₹5,00,000 × 6/12) 30,625.00
Education Loan (11.5% × ₹15,000 × 6/12) 862.50
Loan for Purchase of Computer [(15.25% – 8%) × ₹30,000 × 6/12] 1,087.50
Taxable Value of Perquisite 32,575.00
Note: Since the aggregate value of all the loans during the previous year exceeds ₹20,000, hence the
education loan, though less than ₹20,000 shall also be considered for valuation of perquisite.

CA NISHANT KUMAR 29
Travelling, Touring and Accommodation
1. If travelling, touring, accommodation etc. expenses are paid or reimbursed by employer: The
value of travelling, touring, accommodation and any other expenses paid for or borne or
reimbursed by the employer for any holiday availed of by the employee or any member of his
household, other than leave travel concession or assistance, shall be determined as the sum
equal to the amount of the expenditure incurred by such employer in that behalf.
2. If travelling, touring, accommodation etc. facilities are maintained by employer to particular
employees only: Where such facility is maintained by the employer, and is not available
uniformly to all employees, the value of benefit shall be taken to be the value at which such
facilities are offered by other agencies to the public.
3. Expenses on any member of household accompanying such employee on office tour: Where
the employee is on official tour and the expenses are incurred in respect of any member of his
household accompanying him, the amount of expenditure so incurred shall also be a fringe
benefit or amenity.
4. If official tour is extended as vacation: If any official tour is extended as a vacation, the value
of such fringe benefit shall be limited to the expenses incurred in relation to such extended
period of stay or vacation. The amount so determined shall be reduced by the amount, if any,
paid or recovered from the employee for such benefit or amenity.

Free or Concessional Food and Non-Alcoholic Beverages

1. Amount incurred by employer – Amount recovered from employee
2. The following would not be treated as a perquisite:
a. free food and non-alcoholic beverages provided by such employer during
i. working hours at office or business premises or
ii. through paid vouchers which are not transferable and usable only at eating
joints (exemption would not be available in case of an employee, being an
assessee, who opts for the provisions of section 115BAC) to the extent the
value thereof either case does not exceed fifty rupees per meal or
b. tea or snacks provided during working hours or
c. free food and non-alcoholic beverages during working hours provided in a remote area
or an off-shore installation

Value of Gift, Voucher or Token in Lieu of Such Gift

• Value of Benefit = Sum equal to amount of such gift.
• If the value of such gift or voucher is less than ₹5,000 in aggregate during the previous year,
the value of perquisite shall be taken as NIL; otherwise, it is fully taxable.

Credit Card Expenses

• Value of Perquisite = Actual Expenditure Paid by Employer (including membership fees and
annual fees) – Amount recovered from employee.
• However, such expenses incurred wholly and exclusively for official purposes would not be
treated as a perquisite if the following conditions are fulfilled:
o complete details in respect of such expenditure are maintained by the employer which
may, inter alia, include the date of expenditure and the nature of expenditure;
o the employer gives a certificate for such expenditure to the effect that the same was
incurred wholly and exclusively for the performance of official duties.

CA NISHANT KUMAR 30
Club Expenditure
• Value of Benefit = Amount of Expenditure by employer (including the amount of annual or
periodical fee) – Amount recovered from employee.
• However, where the employer has obtained corporate membership of the club and the facility
is enjoyed by the employee or any member of his household, the value of perquisite shall not
include the initial fee paid for acquiring such corporate membership.
• Further, if such expenditure is incurred wholly and exclusively for business purposes, it would
not be treated as a perquisite provided the following conditions are fulfilled:
o complete details in respect of such expenditure are maintained by the employer which
may, inter alia, include the date of expenditure, the nature of expenditure and its
business expediency;
o the employer gives a certificate for such expenditure to the effect that the same was
incurred wholly and exclusively for the performance of official duties.
• There would be no perquisite for use of health club, sports and similar facilities provided
uniformly to all employees by the employer.

Use of Moveable Assets

Use of Moveable Asset

Computer/Laptop Car Any other Asset

Owned by
Fully Exempt Already Discussed Hired by Employer
Employer

Taxable Amount = Hire

Taxable Amount = 10%
Charges Paid by
of Cost
Employer

Transfer of Moveable Assets

Transfer of Moveable Asset

Computer/Laptop Car Any other Asset

Taxable Value = WDV – Taxable Amount = WDV – Taxable Amount = WDV –
Consideration Consideration Consideration

Depreciation @ 50% on WDV Depreciation @ 20% on WDV Depreciation @ 10% on SLM

Method Method Method

Depreciation should be calculated only for each completed year from the date on which employer
acquires the asset till transfer of asset.

CA NISHANT KUMAR 31
Question 25

Find out the taxable value of perquisites from the following particulars in case of an employee to whom
the following assets held by the company were sold on 13th September, 2022:

Particulars Car Laptop Furniture

Cost of Purchase (in May 2020) 8,72,000 1,22,500 35,000
Sale Price 5,15,000 25,000 10,000
The assets were put to use by the company from the day these were purchased.

Solution

Computation of Taxable Value of Perquisite

Car Laptop Furniture
Particulars
(20% WDV) (50% WDV) (10% SLM)
Cost of Asset 8,72,000 1,22,500 35,000
Less: Depreciation for 1st year ended May 2021 1,74,400 61,250 3,500
Balance as on 1st June, 2021 6,97,600 61,250 31,500
Less: Depreciation for 2nd year ended May 2022 1,39,520 30,625 3,500
Balance as on 1st June, 2022 5,58,080 30,625 28,000
Less: Sale Price 5,15,000 25,000 10,000
Taxable Value of Perquisites 43,080 5,625 18,000

Question 26 – May, 2008 – 6 Marks

Following benefits have been granted by Ved Software Ltd. to one of its employees Mr. Badri:

1. Housing Loan @ 6% per annum. Amount outstanding on 01-04-2022 is ₹6,00,000. Mr. Badri
pays ₹12,000 per month, on 5th of each month.
2. Air conditioners purchased 4 years back for ₹2,00,000 have been given to Mr. Badri for
₹90,000.

Compute the chargeable perquisite in the hands of Mr. Badri for the assessment year 2023-24.

The lending rate of SBI as on 01-04-2022 for housing loan may be taken as 10%.

Solution

Computation of Taxable Perquisites of Mr. Badri for A.Y. 2023-24

Particulars ₹
Concessional Loan (Note 1) 20,880
Transfer of Moveable Asset
Actual Cost of Air Conditioners 2,00,000
Less: 10% Depreciation on SLM Basis for 4 years (10% × ₹2,00,000 × 4) 80,000
Less: Amount paid by Mr. Badri 90,000 30,000
Taxable Value of Perquisite 50,880

Note 1 - Calculation of Perquisite pertaining to concessional loan

Opening Instalment Closing Perquisite Value
Month Balance Paid Balance [(10% – 6%) × (4) × 1/12]
(1) (2) (3) (4) (5)
April, 2022 6,00,000 12,000 5,88,000 1,960
May, 2022 5,88,000 12,000 5,76,000 1,920

CA NISHANT KUMAR 32
 June, 2022 5,76,000 12,000 5,64,000 1,880
July, 2022 5,64,000 12,000 5,52,000 1,840
August, 2022 5,52,000 12,000 5,40,000 1,800
September, 2022 5,40,000 12,000 5,28,000 1,760
October, 2022 5,28,000 12,000 5,16,000 1,720
November, 2022 5,16,000 12,000 5,04,000 1,680
December, 2022 5,04,000 12,000 4,92,000 1,640
January, 2023 4,92,000 12,000 4,80,000 1,600
February, 2023 4,80,000 12,000 4,68,000 1,560
March, 2023 4,68,000 12,000 4,56,000 1,520
Total 20,880

Question 27 – May, 2011 – 8 Marks

Shri Bala employed in ABC Co. Ltd. as Finance Manager gives you the list of perquisites provided by the
company to him for the entire F.Y. 2022-23:

1. Medical facility given to his family in a hospital maintained by the company. The estimated
value of benefit because of such facility is ₹40,000
2. Domestic servant was provided at the residence of Bala. Salary of domestic servant is ₹1,500
per month. The servant was engaged by him and the salary is reimbursed by the company
(employer).
In case, the company has employed the domestic servant, what is the value of perquisite?
3. Free education was provided to his two children Arthy and Ashok in a school maintained and
owned by the company. The cost of such education for Arthy is computed at ₹900 per month
and for Ashok at ₹1,200 per month. No amount was recovered by the company for such
education facility from Bala.
4. The employer has provided movable assets such as television, refrigerator and air-conditioner
at the residence of Bala. The actual cost of such assets provided to the employee is ₹1,10,000.
5. A gift voucher worth ₹10,000 was given on the occasion of his marriage anniversary. It is given
by the company to all employees above certain grade.

State the taxability or otherwise of the above said perquisites and compute the total value of taxable
perquisites.

Solution

Computation of Value of Taxable Perquisites

Particulars ₹
Medical facility to family in a hospital maintained by the company (Note 1) -
Salary of domestic servant of Bala reimbursed by the company (₹1,500 × 12) (Note 2) 18,000
Free education provided to children of Bala in a school maintained by the company 14,400
(₹1,200 × 12) (Note 3)
Movable assets provided by ABC Co. Ltd. (Note 4) 11,000
Gift voucher given by the company to Bala on his marriage anniversary 10,000
Value of taxable perquisites 53,400
Notes:

1. The medical facility provided to an employee in a hospital maintained by the employer is

exempt from tax.

CA NISHANT KUMAR 33
 2. Here, the servant is engaged by Bala, i.e., reimbursement by the employer company would be
employee's obligation met by employer, hence, taxable as perquisite. In case the company has
employed the domestic servant, then the same shall be taxable if Bala is a specified employee.
3. Free education provided in a school maintained and owned by the employer is exempt if the
cost of such education does not exceed ₹1,000 per month per child, otherwise, it is fully
taxable. In this case, free education for Arthy shall be exempt since it does not exceed ₹1,000
p.m.; but the free education for Ashok, which exceeds ₹1,000 p.m. shall be fully liable to tax.
4. In case employer allows use of movable asset, the value of perquisite shall be 10% p.a. of the
actual cost. Hence, taxable value = 10% × ₹1,10,000 = ₹11,000
5. Gifts, the value of which is below ₹5,000 are exempt from tax. Here, the value of the gift
voucher is ₹10,000, hence it is fully taxable.

Meaning of Specified Employees and Perquisites Taxable only in the

Case of Specified Employees
• “Specified Employee” means:
o An employee of a company who is also a director
o An employee who has substantial interest in the company, i.e., having 20% or more
voting rights
o An employee drawing in excess of ₹50,000 as his salary income.
While computing this limit of ₹50,000, following shall be deducted:
▪ All non-monetary benefits
▪ All monetary payments exempt u/s 10
▪ Deductions u/s 16, i.e., Standard Deduction, Entertainment Allowance, and
Professional Tax
• Perquisites Taxable only in the case of Specified Employees:
o Car Facility
o Provision for Sweeper
o Domestic Servant
o Facility for Gas, Electricity, or Water
o Education Facility
o Transport Facility

Tax Free Perquisites in All Cases

Perquisite Explanation
1. Telephone Telephone provided by an employer to an employee at his
residence
2. Transport Facility Transport facility provided by an employer engaged in the
business of carrying of passengers or goods to his employees
either free of charge or at concessional rate
3. Privilege passes and Privilege passes and privilege ticket orders granted by Indian
privilege ticket Railways to its employees
4. Perquisites allowed Perquisites allowed outside India by the Government to a citizen
outside India by the of India for rendering services outside India
Government
5. Employer’s contribution Employer’s contribution to staff group insurance scheme
to staff group insurance
scheme

CA NISHANT KUMAR 34
 6. Annual premium by Payment of annual premium by employer on personal accident
employer on personal policy effected by him on the life of the employee
accident policy
7. Refreshment Refreshment provided to all employees during working hours in
office premises
8. Subsidized lunch Subsidized lunch provided to an employee during working hours
at office or business premises provided the value of such meal is
upto ₹50
9. Recreational facilities Recreational facilities, including club facilities, extended to
employees in general i.e., not restricted to a few select employees
10. Amount spent on training Amount spent by the employer on training of employees or
of employees amount paid for refresher management course including
expenses on boarding and lodging
11. Sum payable by employer Sum payable by an employer to a RPF or an approved
to a RPF or an approved superannuation fund or deposit-linked insurance fund established
superannuation fund under the Coal Mines Provident Fund and Miscellaneous
provisions Act, 1948 or the Employees’ Provident Fund and
Miscellaneous Provisions Act, 1952 upto the limit prescribed
12. Leave travel concession Leave travel concession, subject to the conditions specified under
section 10 (discussed later)
Note: Value of Leave travel concession provided to the High Court
judge or the Supreme Court Judge and members of his family are
completely exempt without any conditions
13. Medical facilities Medical facilities subject to certain prescribed limits
14. Rent-free official Rent-free official residence provided to a Judge of a High Court or
residence the Supreme Court
15. Conveyance facility Conveyance facility provided to High Court Judges under section
22B of the High Court Judges (Conditions of Service) Act, 1954 and
Supreme Court Judges under section 23A of the Supreme Court
Judges (Conditions of Service) Act, 1958

Profits in Lieu of Salary

Profits in lieu of salary includes the following:

1. Compensation on account of termination of his employment: 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.
2. Compensation on account of modification of the terms and conditions of employment
3. Payment from provident fund or other fund
4. Keyman Insurance policy
5. Lumpsum Payment or otherwise: Any amount, whether in lumpsum or otherwise, due to the
assessee or received by him, from any person –
a. before joining employment with that person, or
b. after cessation of his employment with that person

Gratuity
Gratuity is a lump sum amount paid by the employer to the employee as a token of appreciation for
the services they have provided towards the company.

CA NISHANT KUMAR 35
In case of POGA employee, if fraction of months is more than 6 months, then it should be rounded off.

Example

1. 26 years 7 months → 27 years

2. 26 years 4 months → 26 years
3. 26 years 6 months → 26 years

In case of Non POGA employee, fraction of months should be ignored.

Example

1. 26 years 7 months → 26 years

2. 26 years 4 months → 26 years
3. 26 years 6 months → 26 years

Notes:

1. If gratuity is received from more than one employer in the same P.Y., then maximum
exemption claimed cannot exceed ₹20,00,000.
2. If gratuity is already received by employee from earlier employer in earlier P.Y. and in the
current P.Y., he receives gratuity from other employer, then limit of ₹20,00,000 is reduced by
the exemption claimed earlier.

Question 28 – ICAI SM – Illustration 4

Mr. Ravi retired on 15.6.2022 after completion of 26 years 8 months of service and received gratuity
of ₹15,00,000. At the time of retirement, his salary was:

Basic Salary : ₹50,000 p.m.

Dearness Allowance : ₹10,000 p.m. (60% of which is for retirement benefits)
Commission : 1% of turnover (turnover in the last 12 months was ₹1,20,00,000)
Bonus : ₹25,000 p.a.
Compute his taxable gratuity assuming:

1. He is private sector employee and covered by the Payment of Gratuity Act, 1972.

CA NISHANT KUMAR 36
 2. He is private sector employee and not covered by Payment of Gratuity Act, 1972.
3. He is a government employee.

Solution

Case 1 – He is private sector employee and covered by the Payment of Gratuity Act, 1972.

Particulars ₹
Gratuity received at the time of retirement 15,00,000
Less: Exemption u/s 10(10)
Least of the following:
(i) Gratuity Received 15,00,000
(ii) Statutory Limit 20,00,000
(iii) 15 days’ salary based on last drawn salary for each completed year
of service or part thereof in excess of 6 months 9,34,615 9,34,615

Taxable Gratuity 5,65,385

Case 2 – He is private sector employee and not covered by Payment of Gratuity Act, 1972.

Particulars ₹
Gratuity received at the time of retirement 15,00,000
Less: Exemption u/s 10(10)
Least of the following:
(i) Gratuity Received 15,00,000
(ii) Statutory Limit 20,00,000
(iii) Half month’s salary based on average salary of last 10 months
preceding the month of retirement for each completed year of service
(Note) 8,58,000 8,58,000
Taxable Gratuity 6,42,000

Note: Calculation of Half Month's Salary

Particulars ₹
Basic Salary (₹50,000 × 10) 5,00,000
Dearness Allowance (₹10,000 × 60% × 10) 60,000
Commission on Turnover (1% × ₹1,20,00,000 × 10/12) 1,00,000
Total 6,60,000
For Every Month 66,000
Half of it 33,000
For 26 Years 8,58,000

Case 3 – He is a government employee.

Particulars ₹
Gratuity received at the time of retirement 15,00,000
Less: Exemption u/s 10(10) 15,00,000
Taxable Gratuity -

CA NISHANT KUMAR 37
Question 29 – November, 2010 – 4 Marks

Mr. Shah, an Accounts Manager, has retired from JK Ltd. on 15.01.2023 after rendering services for 30
years 7 months. His salary is ₹25,000/- p.m. upto 30.9.2022 and ₹27,000/- thereafter. He also gets
₹2,000/- p.m. as dearness allowance (55% of it is a part of salary for computing retirement benefits).
He is not covered by the Payments of Gratuity Act, 1972. He has received ₹8 Lacs as gratuity from the
employer company. Compute the gratuity taxable in the hands of Mr. Shah.

Solution

Computation of Taxable Gratuity of Mr. Shah for A.Y. 2023-24

Particulars ₹
Gratuity received at the time of retirement 8,00,000
Less: Exemption u/s 10(10)
Least of the following:
(i) Gratuity Received 8,00,000
(ii) Statutory Limit 20,00,000
(iii) Half month’s salary based on average salary of last 10 months
preceding the month of retirement for each completed year of service
(Note) 4,00,500 4,00,500
Taxable Gratuity 3,99,500

Note: Calculation of Half Month's Salary

Particulars ₹
Basic Salary for last 10 months {(₹25,000 × 7) + (₹27,000 × 3)} 2,56,000
Dearness Allowance (₹2,000 × 55% × 10) 11,000
Commission on Turnover -
Total 2,67,000
For Every Month 26,700
Half of it 13,350
For 30 Years 4,00,500

Leave Encashment (Encashment of Unutilized Leave)

• Sometimes, the employee doesn’t avail the leaves which are granted to him.
• The employer, in lieu of that, grants the employee some monetary benefit.
• This monetary benefit, which is received by the employee for not taking the leaves is known
as Leave Salary, and, of course, it is taxable.

CA NISHANT KUMAR 38
 Leave Salary
Received During
Received at the Time of Retirement
Employment

Taxable for All

Exempt u/s 10(10AA)
Employees

Government Employee Other Employee

Fully Exempt Least of the Following is Exempt

Statutory Limit 10 months × Average Leave Credit (months)

Actual Received
₹3,00,000 Salary p.m. × Average Salary p.m.

Notes:

1. Average Salary per month → Average of last 10 months upto date of retirement

Particulars ₹
Average Basic Salary of last 10 months xxx
Average DA (Terms) of last 10 months xxx
Average T/o on Commission of last 10 months xxx
2. Leave Credit = Leave Allowed – Leave Taken
3. Leave Allowed cannot exceed 30 days per completed year.

Question 30 – ICAI SM – Illustration 5

Mr. Gupta retired on 1.12.2022 after 20 years of service and received leave salary of ₹5,00,000. Other
details of his salary income are:

Basic Salary: ₹5,000 p.m. (₹1,000 was increased w.e.f. 01-04-2022)

Dearness Allowance: ₹3,000 p.m. (60% of which is for retirement benefits)

Commission: ₹500 p.m.

Bonus: ₹1,000 p.m.

Leave availed during the service: 480 days

He was entitled to 30 days leave every year.

You are required to compute his taxable leave salary assuming:

1. He is a government employee
2. He is a non-government employee

Solution

Case 1 – He is a Government Employee

Particulars ₹
Leave Salary Received 5,00,000

CA NISHANT KUMAR 39
 Less: Exempt u/s 10(10AA) 5,00,000
Taxable Leave Salary -

Case 2 – He is a non-government employee

Particulars ₹
Leave Salary 5,00,000
Less: Exempt u/s 10(10AA)
Least of the following:
(i) Actual Leave Salary Received 5,00,000
(ii) Statutory Limit 3,00,000
(iii) 10 months’ salary based on average salary of last 10 months (Note 2) 66,000
(iv) Cash equivalent of leave standing at the credit of the employee based
on the average salary of last 10 months’ (max. 30 days per year of service)
(Note 3) 26,400 26,400
4,73,600
Notes:

1. Calculation of Average Salary p.m. based on last 10 months

Particulars ₹
Basic Salary {(₹4,000 × 2) + (₹5,000 × 8)} 48,000
Dearness Allowance (60% × ₹3,000 p.m. × 10) 18,000
Turnover on Commission -
Total 66,000
Per Month 6,600
2. 10 Months' Salary based on Average Salary of Last 10 Months (10 × ₹6,600) = ₹66,000
3. Leave Credit = Leave Allowed – Leave Availed
Leave Credit = (20 × 30) – 480 = 120
(120 ÷ 30) × ₹6,600 = ₹26,400

Question 31

Mr. NISH10 retired from Bajaj Pvt. Ltd. on 01-02-2023 after rendering service of 20 years. His average
salary of last 10 months is ₹15,000 p.m. Company paid leave salary of ₹7,00,000 for a leave credit of
12 months. As per company policy, employees are allowed 1.5 months’ leave for every completed year
of service. Compute taxable leave salary.

Solution

Computation of Taxable Leave Salary of Mr. NISH10

Particulars ₹
Leave Salary 7,00,000
Less: Exempt u/s 10(10AA)
Least of the following:
(i) Actual Leave Salary Received 7,00,000
(ii) Statutory Limit 3,00,000
(iii) 10 months’ salary based on average salary of last 10 months (₹15,000 1,50,000
× 10)

CA NISHANT KUMAR 40
 (iv) Cash equivalent of leave standing at the credit of the employee based 30,000 30,000
on the average salary of last 10 months (max. 30 days per year of service)
(See Note)
6,70,000
Note:

As per the company policy, leave allowed is 1.5 months per year.

Therefore, leave allowed = 1.5 × 20 = 30 months

Also, leave credit as per company policy = 12 months

Therefore, leave taken = 30 months – 12 months = 18 months.

Now, as per Income Tax Act, maximum 30 days' leave is only allowed in any year.

Therefore, leave allowed as per Income Tax Act = 30 × 20 = 600 days = 20 months.

Leave taken = 18 months.

Leave credit as per Income Tax Act = 2 months

Cash Equivalent = 2 × ₹15,000 = ₹30,000

Pension
Pension
Uncommuted Pension
Commuted Pension (Lumpsum Pension)
(Monthly Pension)

Taxable for All

Exempt u/s 10(10A)
Employees

Government Employees Other Employees

If Gratuity is also If Gratuity is Not

Fully Exempt
Received Received

Exemption = 1/3 ×
Exemption = ½ × Pension
Pension

Question 32 – ICAI SM – Illustration 3

Mr. Sagar who retired on 1.10.2022 is receiving ₹5,000 p.m. as pension. On 1.2.2023, he commuted
60% of his pension and received ₹3,00,000 as commuted pension. You are required to compute his
taxable pension assuming:

1. He is a government employee.
2. He is a private sector employee and received gratuity of ₹5,00,000 at the time of retirement.
3. He is a private sector employee and did not receive any gratuity at the time of retirement.

Solution

Case 1 – He is a Government Employee

CA NISHANT KUMAR 41
 Particulars ₹
Uncommuted Pension Received 24,000
{(₹5,0000 × 4) + (40% × ₹5,000 × 2)}
Commuted Pension Received 3,00,000
Less: Exempt u/s 10(10A) 3,00,000 -
Taxable Pension 24,000

Case 2 – He is a Private Sector Employee and received Gratuity of ₹5,00,000 at the time of retirement.

Particulars ₹
Uncommuted Pension Received 24,000
{(₹5,0000 × 4) + (40% × ₹5,000 × 2)}
Commuted Pension Received 3,00,000
Less: Exempt u/s 10(10A) 1,66,667
(1/3 × ₹3,00,000/60%) 1,33,333
.
Taxable Pension 1,57,333

Case 3 – He is a private sector employee and did not receive any gratuity at the time of retirement

Particulars ₹
Uncommuted Pension Received 24,000
{(₹5,0000 × 4) + (40% × ₹5,000 × 2)}
Commuted Pension Received 3,00,000
Less: Exempt u/s 10(10A) 2,50,000
(1/2 × ₹3,00,000/60%) 50,000
.
Taxable Pension 74,000

Leave Travel Concession (LTC)

An employer can reimburse the traveling expenses of the employee or his relatives. This is known as
Leave Travel Concession. It is exempt u/s 10(5) subject to certain conditions. The conditions are given
below:

Travel by Air – Least of

Travel by Other Modes
the following is exempt:

Railway Facility Available at

Actual Economy
the Destination – Least of Railway Facility Not Available
Expenses Class Fare
the following is exempt:

Recognized Public Transport Recognized Public Transport

Actual 1st Class AC
Facility Available – Least of the Facility Not Available – Least
Expenses Railway Fare
following is exempt: of the following is exempt:

1st Class
Actual Deluxe Class Actual Railway Fare
Expenses Bus Fare Expenses of Similar
Distances

Notes:

CA NISHANT KUMAR 42
 1. LTC exemption is available only for the travel of assessee, his spouse, children, and dependent
relatives (mother, father, brother, sister).
2. Exemption of LTC is available only for 2 children born on or after 01-10-1998. This limit is not
applicable in case of multiple births after one child.
a. Agar pehli baar ek bachcha hua, next time twins ho gaye, toh total 3 ho gaye, but
exemption mil jaayega teeno ke liye.
b. Agar pehli baar hi twins ho gaye, next time ek hua, toh teeno ke liye nahi milega. Pehli
hi baar me do ho gaye the toh ruk jana chahiye tha na!
3. LTC exemption is available for 2 years during the block of 4 years. If exemption is not claimed
in any block, then one year can be carried forward to next block. [Current Blocks: F.Y. 2018 -
2021, 2022 - 2025] For example, if in 2018-2021 block, LTC exemption is not utilized, then 1
year benefit can be carried forward to 2022-2025 block. It means in 2022-2025, assessee can
claim benefit for three years.

Question 33 – ICAI SM – Illustrations 11 and 12; May, 2013 – 4 Marks; November, 2016 – 4 Marks

Mr. D went on a holiday on 25.12.2022 to Delhi with his wife and three children (one son – age 5 years;
twin daughters – age 3 years). They went by flight (economy class) and the total cost of tickets
reimbursed by his employer was ₹60,000 ₹45,000 for adults and ₹15,000 for the three minor children).
Compute the amount of LTC exempt. Will there be any difference if among his three children the twins
were 5 years old and the son 3 years old? Discuss.

Solution

Since the son’s age is more than the twin daughters, Mr. D can avail exemption for all his three children.
The restriction of two children is not applicable to multiple births after one child. The holiday being in
India and the journey being performed by air (economy class), the entire reimbursement met by the
employer is fully exempt.

If the twins’ age was more than the son, Mr. D would not be able to avail for exemption for all his three
1
children. LTC exemption can be availed in respect of only two children. Taxable LTC = 15,000 × 3 =
₹5,000.

LTC exempt would only be ₹55,000 (i.e., ₹60,000 – ₹5,000)

Retrenchment Compensation
• When an organization lays off its employees, it gives them some compensation, known as
Retrenchment Compensation.
• It is taxable in the hands of employees.
• Exemption u/s 10(10B) is available to the extent of least of the following:
o Actual Received
o Statutory Limit: ₹5,00,000
o Compensation as per Industrial Dispute Act
• Compensation as per Industrial Dispute Act = 15/26 × Average Salary of last 3 months × No. of
years of completed service (fraction of months to be ignored)
• Average Salary = Basic + DA (in terms) + Commission on Turnover

Question 34 – May, 2013 – 4 Marks

CA NISHANT KUMAR 43
Mr. Gobind received retrenchment compensation of ₹10,00,000 after 30 years 4 months of service. At
the time of retrenchment, he was drawing basic salary ₹20,000 p.m.; dearness allowance ₹5,000 p.m.
Compute his taxable retrenchment compensation.

Solution

Calculation of Taxable Value of Retrenchment Compensation of Mr. Gobind for A.Y. 2023-24
Particulars ₹
Retrenchment Compensation Received 10,00,000
Less: Exemption u/s 10(10B)
Less: Least of the Following:
Less: Actual Received 10,00,000
Less: Statutory Limit 5,00,000
Less: Compensation as per Industrial Dispute Act (Note) 4,32,692 4,32,692
Taxable Value of Retrenchment Compensation 5,67,308

Note: Calculation of Compensation as per Industrial Dispute Act

Particulars ₹
Basic Salary for last 3 months (₹20,000 × 3) 60,000
Dearness Allowance (₹5,000 × 3) 15,000
Commission on Turnover -
Total 75,000
For Every Month 25,000
15/26 of it 14,423
For 30 Years 4,32,692

Voluntary Retirement Compensation Scheme

• When employees are asked to retire voluntarily and a lumpsum payment is made to them, it
is known as Voluntary Retirement Scheme Compensation.
• Such amount is taxable in the hands of employee.
• Exemption u/s 10(10C) is available to the extent of least of the following:
o Compensation Actually Received
o Statutory Limit: ₹5,00,000
o 3 × Salary p.m. × No. of completed years of service
o Last Drawn Salary × Remaining Months of Service Left
• Salary = Basic + DA (in terms) + Commission on Turnover

Question 35 – ICAI SM – Illustration 9

Mr. Dutta received voluntary retirement compensation of ₹7,00,000 after 30 years 4 months of service.
He still has 6 years of service left. At the time of voluntary retirement, he was drawing basic salary
₹20,000 p.m.; Dearness allowance (which forms part of pay) ₹5,000 p.m. Compute his taxable
voluntary retirement compensation, assuming that he does not claim any relief under section 89.

Solution

Calculation of Taxable VRS Compensation of Mr. Dutta for A.Y. 2023-24

Particulars ₹
Voluntary Retirement Compensation Received 7,00,000
Less: Exemption u/s 10(10C)
Less: Least of the Following:

CA NISHANT KUMAR 44
 Less: Compensation Actually Received 7,00,000
Less: Statutory Limit 5,00,000
Less: 3 months' salary × Completed Years of Service 22,50,000
Less: {(₹20,000 + ₹5,000) × 3 × 30}
Less: Last Drawn Salary × Remaining Months left of service 18,00,000
Less: {(₹20,000 + ₹5,000) × 12 months × 6 years} 5,00,000
Taxable Voluntary Retirement Compensation 2,00,000

Tax on Non-Monetary Perquisites Borne by Employer on Behalf of

Employee
Section 10(10CC) provides the exemption to an employee in respect of the tax paid by his employer
on his behalf on the non-monetary perquisites received by such employee. Hence, such tax paid shall
not form part of the employee’s gross salary.

However, as per Section 40(a)(v), tax paid by the employer is not a deductible expenditure. Therefore,
the employer cannot claim deduction of the tax paid for non-monetary perquisites.

Tax Treatment of Provident Funds

• Provident Fund is basically an investment vehicle, which is generally used by the public to build
wealth and save taxes.
• In a Provident Fund Scheme, employer deducts a certain amount from the salary of employee
for the purpose of contribution towards a fund and the employer also contributes to the same.
Both the contributions are invested in securities and interest earned thereon is credited to the
fund.
• Hence, Provident Fund consists of:
o Employer’s Contribution and Interest thereon; and
o Employee’s Contribution and Interest thereon
• There are four types of Provident Funds
o Statutory Provident Fund
o Recognized Provident Fund
o Unrecognized Provident Fund
o Public Provident Fund
• The first three funds are for employees, and hence are also known as “Employee Provident
Fund”.
• PPF is for everyone.

Statutory Provident Fund

• This is applicable to Government Companies, only, such as Railways, etc.
• The taxability of various incidences is discussed below:
o Employer’s Contribution: Exempt
o Employee’s Contribution: Taxable, but deduction is allowed u/s 80C
o Interest on Employer’s Contribution: Exempt
o Interest on Employee’s Contribution: Exempt
o Lumpsum payment on retirement or termination: Exempt u/s 10(11)

CA NISHANT KUMAR 45
Recognized Provident Fund (RPF)
• Funds which are approved by the Commissioner of Income Tax are known as Recognized
Provident Funds.
• The taxability of various incidences is discussed below:
o Employer’s Contribution: Exempt upto 12% of Salary
▪ Salary = Basic Salary + DA (in Terms) + Commission on Turnover
o Employee’s Contribution: Taxable, but deduction is allowed u/s 80C
o Interest on Employer’s Contribution: Exempt upto 9.5% p.a.
o Interest on Employee’s Contribution: Exempt upto 9.5% p.a.
o Lumpsum payment on retirement or termination: Exempt u/s 10(12)
• Lumpsum amount received from RPF is exempt u/s 10(12) if employee has rendered service
of 5 years or more. If employee rendered service less than 5 years, then exemption allowed in
respect of employer's contribution and interest shall be withdrawn. However, in the following
3 cases, exemption shall not be withdrawn even though service is less than 5 years:
o Employee retired due to ill health
o Employee retired due to shutting down of employer's business
o Employee has retired with the instruction that his balance in RPF should be transferred
to new employer, or to NPS A/c referred u/s 80CCD.

Question 36 – ICAI SM – Illustration 8

Mr. B is working in XYZ Ltd. and has given the details of his income for the P.Y. 2022-23. You are
required to compute his gross salary from the details given below:

Basic Salary ₹10,000 p.m.

DA (50% is for retirement benefits) ₹8,000 p.m.
Commission as a percentage of turnover 0.1%
Turnover during the year ₹50,00,000
Bonus ₹40,000
Gratuity ₹25,000
His own contribution in the RPF ₹20,000
Employer’s contribution to RPF 20% of his basic salary
Interest accrued in the RPF @ 13% p.a. ₹13,000

Solution

Computation of Gross Salary of Mr. B for the A.Y. 2023-24

Particulars ₹
Basic Salary (₹10,000 × 12) 1,20,000
Dearness Allowance (₹8,000 × 12) 96,000
Commission on Turnover (0.1% × ₹50,00,000) 5,000
Bonus 40,000
Gratuity (Note 1) 25,000
Employer's Contribution to RPF 24,000
Less: Exempt (Note 2) 20,760 3,240
Interest accrued on RPF @13% p.a. 13,000
Less: Exempt upto 9.5% 9,500 3,500
Gross Salary 2,92,740

CA NISHANT KUMAR 46
Notes:

1. Gratuity received during employment is taxable.

2. Calculation of Exemption on Employer’s Contribution to RPF

Particulars ₹
Basic Salary 1,20,000
DA (Forming Part of Retirement Benefits) 48,000
Commission on Turnover 5,000
Total 1,73,000
12% of this 20,760
3. Employee's Contribution to RPF is not taxable. It is eligible for deduction u/s 80C.

Unrecognized Provident Fund

• Funds which are not approved by the Commissioner of Income Tax are known as Recognized
Provident Funds.
• The taxability of various incidences is discussed below:
o Employer’s Contribution: Exempt
o Employee’s Contribution: Taxable; no deduction is allowed u/s 80C
o Interest on Employer’s Contribution: Not taxable when interest is credited
o Interest on Employee’s Contribution: Not taxable when interest is credited
o Lumpsum payment on retirement or termination:
▪ Employer’s Contribution: Taxable under the head “Income from Salaries”;
Relief u/s 89 can be claimed
▪ Interest on Employer’s Contribution: Taxable under the head “Income from
Salaries”; Relief u/s 89 can be claimed
▪ Employee’s Contribution: Exempt, as it was taxed earlier
▪ Interest on Employee’s Contribution: Taxable under the head “Income from
Other Sources”

Question 37 – ICAI SM – Illustrations 6 and 7

Mr. A retires from service on December 31, 2022, after 25 years of service. Following are the particulars
of his income/investments for the previous year 2022-23:

Particulars ₹
Basic pay @ ₹16,000 per month for 9 months 1,44,000
Dearness pay (50% forms part of the retirement benefits) ₹8,000 per month for 9 months 72,000
Lumpsum payment received from the Unrecognized Provident Fund 6,00,000
Deposits in the PPF account 40,000
Out of the amount received from the unrecognized provident fund, the employer’s contribution was
₹2,20,000 and the interest thereon ₹50,000. The employee’s contribution was ₹2,50,000 and the
interest thereon ₹60,000. What is the taxable portion of the amount received from the unrecognized
provident fund in the hands of Mr. A for the assessment year 2023-24? What would be your answer if
the fund was a recognized provident fund?

Solution

Computation of Taxable Amount from URPF

Particulars ₹

CA NISHANT KUMAR 47
 Income from Salary
Employer Contribution 2,20,000
Interest on Employer Contribution 50,000 2,70,000
Income from Other Sources
Interest on Employee Contribution 60,000
Taxable Income 3,30,000

If the fund is a recognized provident fund, and the maturity is taking place after a service of 25 years,
the entire amount received on the maturity of the RPF will be fully exempt from tax.

Public Provident Fund

• Public provident fund is operated under the Public Provident Fund Act, 1968.
• A membership of the fund is open to every individual though it is ideally suited to self-
employed people.
• A salaried employee may also contribute to PPF in addition to the fund operated by his
employer.
• An individual may contribute to the fund on his own behalf as also on behalf of a minor of
whom he is the guardian.
• For getting a deduction under section 80C, a member is required to contribute to the PPF a
minimum of ₹500 in a year.
• The maximum amount that may qualify for deduction on this account is ₹1,50,000 as per PPF
rules.
• A member of PPF may deposit his contribution in as many installments in multiples of ₹500 as
is convenient to him.
• The amount of contribution may be paid at any of the offices or branch offices of the State
Bank of India or its subsidiaries and specified branches of banks or any Post Office.
• The taxability of various incidences is discussed below:
o Employer’s Contribution: Not Applicable, as this is only assessee’s own contribution
o Employee’s Contribution: Taxable, but deduction u/s 80C is allowed
o Interest on Employer’s Contribution: Not Applicable
o Interest on Employee’s Contribution: Fully Exempt
o Lumpsum payment on retirement or termination: Fully Exempt u/s 10(11)

Relief u/s 89
• If an employee receives arrears of salary (pertaining to any preceding previous year(s)) in the
relevant previous year, there’s a possibility that it’ll get taxed at a higher slab rate.
• This excess taxability is relieved to the assessee in the previous year, in which the arrears of
salary are received.
• When the amount is received due to voluntary retirement, relief u/s 89 shall not be available
if the employee has claimed exemption u/s 10(10C).
• Steps for calculating Relief u/s 89:
1. Calculate the tax payable on the total income, including the additional salary, of the
previous year in which the same is received.
2. Calculate the tax payable on the total income, excluding the additional salary of the
previous year in which the same is received.
3. Find out the difference between the tax at (1) and (2).

CA NISHANT KUMAR 48
 4. Compute tax on total income after including the additional salary in the previous year to
which such salary relates.
5. Compute tax on total income after excluding the additional salary in the previous year to
which such salary relates.
6. Find out the difference between tax at (4) and (5).
7. Relief u/s 89 = Tax computed at (3) – Tax computed at (6)

Question 38 – ICAI SM – Illustration 25

In the case of Mr. Hari, who turned 70 years on 28.3.2023, you are informed that the salary (computed)
for the previous year 2022-23 is ₹10,20,000 and arrears of salary received is ₹3,45,000. Further, you
are given the following details relating to the earlier years to which the arrears of salary received is
attributable to:

Previous Year Taxable Salary (₹) Arrears now received (₹)

2010-11 7,10,000 1,03,000
2011-12 8,25,000 1,17,000
2012-13 9,50,000 1,25,000
Compute the relief available under section 89 and the tax payable for the A.Y. 2023-24. Assume that
Mr. Hari does not opt for section 115BAC.

Note: Rates of Taxes:

Assessment
Slab rates of income-tax
Year
For resident individuals of the age of 60
years or more at any time during the For other resident individuals
previous year
Slabs Rate Slabs Rate
2011-12 Upto ₹2,40,000 Nil Upto ₹1,60,000 Nil
₹2,40,001 - ₹5,00,000 10% ₹1,60,001 - ₹5,00,000 10%
₹5,00,001 - ₹8,00,000 20% ₹5,00,001 - ₹8,00,000 20%
Above ₹8,00,000 30% Above ₹8,00,000 30%
2012-13 Upto ₹2,50,000 Nil Upto ₹1,80,000 Nil
₹2,50,001 - ₹5,00,000 10% ₹1,80,001 - ₹5,00,000 10%
₹5,00,001 - ₹8,00,000 20% ₹5,00,001 - ₹8,00,000 20%
Above ₹8,00,000 30% Above ₹8,00,000 30%
2013-14 Upto ₹2,50,000 Nil Upto ₹2,00,000 Nil
₹2,50,001 - ₹5,00,000 10% ₹2,00,001 - ₹5,00,000 10%
₹5,00,001 - ₹10,00,000 20% ₹5,00,001 - ₹10,00,000 20%
Above ₹10,00,000 30% Above ₹10,00,000 30%
Note – Education cess @ 2% and secondary and higher education cess @ 1% was attracted on the
income-tax for all above preceding years.

Solution

Computation of tax payable by Mr. Hari for the A.Y. 2023-24

Particulars Including Arrears of Salary Excluding Arrears of Salary

Current Year Salary (Computed) 10,20,000 10,20,000
Add: Arrears of Salary 3,45,000 -
Taxable Salary 13,65,000 10,20,000
Income Tax thereon 2,19,500 1,16,000

CA NISHANT KUMAR 49
 Add: Health and Education Cess @ 4% 8,780 4,640
Total Payable 2,28,280 1,20,640

Computation of tax payable on arrears of salary if charged to tax in the respective AYs

A.Y. 2011-12 A.Y. 2012-13 A.Y. 2013-14

Particulars Including Excluding Including Excluding Including Excluding
Arrears Arrears Arrears Arrears Arrears Arrears
Taxable Salary 7,10,000 7,10,000 8,25,000 8,25,000 9,50,000 9,50,000
Add: Arrears of Salary 1,03,000 - 1,17,000 - 1,25,000 -
Taxable Salary 8,13,000 7,10,000 9,42,000 8,25,000 10,75,000 9,50,000
Tax on the above 97,900 76,000 1,34,600 99,500 1,47,500 1,15,000
Add: Cess @ 3% 2,937 2,280 4,038 2,985 4,425 3,450
Tax payable 1,00,837 78,280 1,38,638 1,02,485 1,51,925 1,18,450

Computation of relief under section 89

Particulars ₹ ₹
i Tax payable in A.Y. 2023-24 on arrears
Tax on income including arrears 2,28,280
Less: Tax on income excluding arrears 1,20,640 1,07,640
ii Tax payable in respective years on arrears:
Tax on income including arrears (₹1,00,837 + ₹1,38,638 + ₹1,51,925) 3,91,400
Less: Tax on income excluding arrears (₹78,280 + ₹1,02,485 + ₹1,181,450) 2,99,215 92,185
Relief under section 89 – difference between tax on arrears in A.Y. 2023- 15,455
24 and tax on arrears in respective years

Tax payable for A.Y.2023-24 after relief under section 89

Particulars ₹
Income-tax payable on total income including arrears of salary 2,28,280
Less: Relief under section 89 as computed above 15,455
Tax payable after claiming relief 2,12,825

Miscellaneous Questions
Question 39 – ICAI SM – Question 5

From the following details, find out the salary chargeable to tax for the A.Y.2023-24 assuming he has
not opted for the provisions of section 115BAC.

Mr. X is a regular employee of Rama & Co., in Gurgaon. He was appointed on 1.1.2022 in the scale of
₹20,000 – ₹1,000 – ₹30,000. He is paid 10% D.A. & Bonus equivalent to one month pay based on salary
of March every year. He contributes 15% of his pay and D.A. towards his recognized provident fund
and the company contributes the same amount. DA forms part of pay for retirement benefits.

He is provided free housing facility which has been taken on rent by the company at ₹10,000 per
month. He is also provided with following facilities:

1. Facility of laptop costing ₹50,000.

CA NISHANT KUMAR 50
 2. Company reimbursed the medical treatment bill of his brother of ₹25,000, who is dependent
on him.
3. The monthly salary of ₹1,000 of a housekeeper is reimbursed by the company.
4. A gift voucher of ₹10,000 on the occasion of his marriage anniversary.
5. Conveyance allowance of ₹1,000 per month is given by the company towards actual
reimbursement of conveyance spent on official duty.
6. He is provided personal accident policy for which premium of ₹5,000 is paid by the company.
7. He is getting telephone allowance @ ₹500 per month.

Solution

Computation of Taxable Salary of Mr. X for A.Y. 2023-24

Particulars ₹
Basic Salary {(₹20,000 × 9) + (₹21,000 × 3)} 2,43,000
Dearness Allowance (10% × ₹2,43,000) 24,300
Bonus 21,000
Employer’s Contribution to RPF in excess of 12% 8,019
{(15% – 12%) × (₹2,43,000 + ₹24,300)}
Use of Laptop (Note 1) Exempt
Reimbursement of Medical Bill (Note 2) 25,000
Reimbursement of Salary of Housekeeper (₹1,000 × 12) 12,000
Gift Voucher on Marriage Anniversary (Note 3) 10,000
Conveyance Allowance (Note 4) Exempt
Premium paid for Personal Accident Policy (Note 5) Exempt
Telephone Allowance (₹500 × 12) 6,000
Rent Free Accommodation (Note 6) 44,145
Gross Salary 3,93,464
Less: Standard Deduction u/s 16 50,000
Taxable Salary 3,43,464
Notes:

1. Facility of use of laptop is not a taxable perquisite.

2. Since it is not mentioned that the treatment is done in Government Hospital, or Employer
owned Hospital, Government Recognised Hospital, it shall be taxable.
3. The value of any gift or voucher or token in lieu of gift received by the employee or by member
of his household below ₹5,000 in aggregate during the previous year is exempt. In this case,
the gift voucher was received on the occasion of marriage anniversary and the sum exceeds
the limit of ₹5,000. Therefore, the entire amount of ₹10,000 is liable to tax as perquisite.
4. Conveyance allowance is exempt since it is based on actual reimbursement for official
purposes.
5. Premium of ₹5,000 paid by the company for personal accident policy is not liable to tax.
6. Calculation of Taxable Value of Rent Free Accommodation

Particulars ₹
Basic Salary 2,43,000
Dearness Allowance (in Terms) 24,300
Bonus 21,000
Allowances (Taxable) 6,000
Commission (All Types) -
Monetary Income (Other than Perquisites) -
2,94,300

CA NISHANT KUMAR 51
 15% of this 44,145
Rent Paid by Employer (₹10,000 × 12) 1,20,000
Lower of the above 44,145

Question 40 – November, 2011 – 8 Marks; ICAI SM – Question 4

Mr. Balaji, employed as Production Manager in Beta Ltd., furnishes you the following information for
the year ended 31.03.2023:

1. Basic salary upto 31.10.2022: ₹50,000 p.m.

Basic salary from 01.11.2022: ₹60,000 p.m.
Note: Salary is due and paid on the last day of every month.
2. Dearness allowance @ 40% of basic salary.
3. Bonus equal to one month salary. Paid in October 2022 on basic salary plus dearness allowance
applicable for that month.
4. Contribution of employer to recognized provident fund account of the employee @16% of
basic salary.
5. Professional tax paid ₹2,500 of which ₹2,000 was paid by the employer.
6. Facility of laptop and computer was provided to Balaji for both official and personal use. Cost
of laptop ₹45,000 and computer ₹35,000 were acquired by the company on 01.12.2022.
7. Motor car owned by the employer (cubic capacity of engine exceeds 1.60 litres) provided to
the employee from 01.11.2022 meant for both official and personal use. Repair and running
expenses of ₹45,000 from 01.11.2022 to 31.03.2023, were fully met by the employer. The
motor car was self-driven by the employee.
8. Leave travel concession given to employee, his wife and three children (one daughter aged 7
and twin sons aged 3). Cost of air tickets (economy class) reimbursed by the employer ₹30,000
for adults and ₹45,000 for three children. Balaji is eligible for availing exemption this year to
the extent it is permissible in law.

Compute the salary income chargeable to tax in the hands of Mr. Balaji for the assessment year 2023-
24 assuming he has not opted for the provisions of section 115BAC.

Solution

Computation of Income from Salaries of Mr. Balaji for A.Y. 2023-24

Particulars ₹
Basic Salary {(₹50,000 × 7) + (₹60,000 × 5)} 6,50,000
Dearness Allowance (40% × ₹6,50,000) 2,60,000
Bonus {₹50,000 + (40% × ₹50,000)} (Note 1) 70,000
Employer's Contribution to RPF in excess of 12% {₹6,50,000 × (16% – 12%)} 26,000
(Note 2)
Professional Tax paid by Employer (Note 3) 2,000
Use of Laptop and Computer (Note 4) Exempt
Perquisite of Motor Car (₹2,400 × 5) (Note 5) 12,000
Leave Travel Concession (Note 6) Exempt
Gross Total Salary 10,20,000
Less: Deductions u/s 16
Less: Standard Deduction 50,000
Less: Professional Tax (Note 3) 2,500 52,500
Income from Salary 9,67,500
Notes:

CA NISHANT KUMAR 52
 1. Since bonus was paid in October, and October's salary was ₹50,000, the same has been
considered.
2. It is assumed that Dearness Allowance does not form part of retirement benefits.
3. A “perquisite” includes any sum paid by the employer in respect of any obligation which, but
for such payment, would have been payable by the assessee. Therefore, professional tax of
₹2,000 paid by the employer is taxable as a perquisite in the hands of Mr. Balaji.
A deduction from the salary is provided on account of tax on employment i.e., professional tax
paid during the year. Therefore, in the present case, the professional tax paid by the employer
on behalf of the employee ₹2,000 is first included in the salary and deduction of the entire
professional tax of ₹2,500 is provided from salary.
4. Facility of use of laptop and computer is a tax free perquisite, whether used for official or
personal purpose or both.
5. In case a motor car (engine cubic capacity exceeding 1.60 litres) owned by the employer is
provided to the employee without chauffeur for personal as well as office use, the value of
perquisite shall be ₹2,400 per month. The car was provided to the employee from 01.11.2022,
therefore the perquisite value has been calculated for 5 months.
6. Mr. Balaji can avail exemption on the entire amount of ₹75,000 reimbursed by the employer
towards Leave Travel Concession since the same was availed for himself, his wife and three
children and the journey was undertaken by economy class airfare. The restriction imposed
for two children is not applicable in case of multiple births which take place after the first child.
It is assumed that the Leave Travel Concession was availed for journey within India.

Question 41 – ICAI SM – Question 3

Mr. X is employed with AB Ltd. on a monthly salary of ₹25,000 per month and an entertainment
allowance and commission of ₹1,000 p.m. each. The company provides him with the following
benefits:

1. A company owned accommodation is provided to him in Delhi. Furniture costing ₹2,40,000

was provided on 1.8.2022.
2. A personal loan of ₹5,00,000 on 1.7.2022 on which it charges interest @ 6.75% p.a. The entire
loan is still outstanding. (Assume SBI rate of interest on 1.4.2022 was 12.75% p.a.)
3. His son is allowed to use a motor cycle belonging to the company. The company had purchased
this motor cycle for ₹60,000 on 1.5.2019. The motor cycle was finally sold to him on 1.8.2022
for ₹30,000.
4. Professional tax paid by Mr. X is ₹2,000.

Compute the income from salary of Mr. X for the A.Y. 2023-24 assuming Mr. X has not opted for the
provisions of section 115BAC.

Solution

Computation of Income from Salary of Mr. X for A.Y. 2023-24

Particulars ₹
Basic Salary (₹25,000 × 12) 3,00,000
Entertainment Allowance (₹1,000 × 12) 12,000
Commission (₹1,000 × 12) 12,000
Rent Free Accommodation (Note 1) 48,600
Add: Value of Furniture (10% × ₹2,40,000 × 8/12) 16,000 64,600

CA NISHANT KUMAR 53
 Interest on Personal Loan {₹5,00,000 × (12.75% – 6.75%) × 9/12} 22,500
Use of Motor Cycle (10% × ₹60,000 × 4/12) 2,000
Transfer of Motor Cycle (Note 2) 12,000
Gross Salary 4,25,100
Less: Deductions u/s 16
Less: Standard Deduction 50,000
Less: Professional Tax 2,000 52,000
Income from Salary 3,73,100
Notes:

1. Rent Free Accommodation

Particulars ₹
Basic Salary 3,00,000
Dearness Allowance (in Terms) -
Bonus -
Allowances (Taxable) 12,000
Commission (All Types) 12,000
Monetary Income (Other than Perquisites) -
3,24,000
15% of this 48,600
2. Transfer of Motor Cycle

Particulars ₹
Cost 60,000
Less: Depreciation @ 10% (01-05-2019 - 30-04-2020) 6,000
54,000
Less: Depreciation @ 10% (01-05-2020 - 30-04-2021) 6,000
48,000
Less: Depreciation @ 10% (01-05-2021 - 30-04-2022) 6,000
WDV 42,000
Less: Consideration 30,000
Taxable Perquisite 12,000

Question 42 – ICAI SM – Illustration 20

Mr. X retired from the services of M/s Y Ltd. on 31.01.2023, after completing service of 30 years and
one month. He had joined the company on 1.1.1993 at the age of 30 years and received the following
on his retirement:

1. Gratuity ₹6,00,000. He was covered under the Payment of Gratuity Act, 1972.
2. Leave encashment of ₹3,30,000 for 330 days leave balance in his account. He was credited 30
days leave for each completed year of service.
3. As per the scheme of the company, he was offered a car which was purchased on 30.01.2020
by the company for ₹5,00,000. Company has recovered ₹2,00,000 from him for the car.
Company depreciates the vehicles at the rate of 15% on Straight Line Method.
4. An amount of ₹3,00,000 as commutation of pension for 2/3 of his pension commutation.
5. Company presented him a gift voucher worth ₹6,000 on his retirement.
6. His colleagues also gifted him a Television (LCD) worth ₹50,000 from their own contribution.

Following are the other particulars:

CA NISHANT KUMAR 54
 1. He has drawn a basic salary of ₹20,000 and 50% dearness allowance per month for the period
from 01.04.2022 to 31.01.2023.
2. Received pension of ₹5,000 per month for the period 01.02.2023 to 31.03.2023 after
commutation of pension.

Compute his gross total income from the above for Assessment Year 2023-24 assuming he has not
opted for the provisions of section 115BAC.

Solution

Computation of Gross Total Income of Mr. X for A.Y. 2023-24

Particulars ₹
I - Income from Salaries
Basic Salary (₹20,000 × 10) 2,00,000
Dearness Allowance (50% × ₹20,000 × 10) 1,00,000
Gratuity (Note 1) 80,769
Leave Encashment (Note 2) 1,30,000
Transfer of Car (Note 3) 56,000
Commuted Pension (Note 4) 1,50,000
Uncommuted Pension (₹5,000 × 2) 10,000
Gift Voucher (Note 5) 6,000
Gross Salary 7,32,769
Less: Standard Deduction u/s 16(ia) 50,000
Taxable Salaries 6,82,769
II - Income from Other Sources
Television from Colleagues (Note 6) -
Taxable Income from Other Sources -
Gross Total Income 6,82,769
Notes:

1. Gratuity

Particulars ₹
Gratuity received at the time of retirement 6,00,000
Less: Exemption u/s 10(10)
Least of the following:
(i) Gratuity Received 6,00,000
(ii) Statutory Limit 20,00,000
(iii) 15 days’ salary based on last drawn salary for each completed 5,19,231 5,19,231
year of service or part thereof in excess of 6 months
{15/26 × (₹20,000 + ₹10,000) × 30}
Taxable Gratuity 80,769
2. Leave Encashment

Particulars ₹
Leave Encashment 3,30,000
Less: Exempt u/s 10(10AA)
Least of the following:
(i) Actual Leave Salary Received 3,30,000
(ii) Statutory Limit 3,00,000
(iii) 10 months’ salary based on average salary of last 10 months
(10 × ₹20,000) 2,00,000

CA NISHANT KUMAR 55
 (iv) Cash equivalent of leave standing at the credit of the employee
based on the average salary of last 10 months’ (max. 30 days per
year of service) 2,20,000
(330 ÷ 30 × ₹20,000)
2,00,000
1,30,000
3. Transfer of Car

Particulars ₹
Purchase Price (30-01-2020) 5,00,000
Less: Depreciation @ 20% 1,00,000
WDV as on 29-01-2021 4,00,000
Less: Depreciation @ 20% 80,000
WDV as on 29-01-2022 3,20,000
Less: Depreciation @ 20% 64,000
WDV as on 29-01-2023 2,56,000
Less: Amount Recovered 2,00,000
Value of Perquisite 56,000
4. Pension

Particulars ₹
Amount Received (2/3 of Pension) 3,00,000
Less: 1/3rd of Total Pension {1/3 × ₹3,00,000 ÷ (2/3)} 1,50,000
Taxable Amount 1,50,000
5. The value of any gift or voucher or token in lieu of gift received by the employee not exceeding
₹5,000 in aggregate during the previous year is exempt. In this case, the amount was received
on his retirement and the sum exceeds the limit of ₹5,000. Therefore, the entire amount of
₹6,000 is liable to tax as perquisite.

Question 43

Mr. Tushar Kapoor, Finance Manager of KLM Ltd., Mumbai, furnishes the following particulars for the
financial year 2022-23:

1. Salary ₹46,000 per month

2. Value of medical facility in a hospital by the company ₹7,000
3. Rent free accommodation owned by the company
4. Housing loan of ₹6,00,000 given on 01-04-2022 at the interest rate of 6% p.a. (No repayment
made during the year). The rate of interest charged by State Bank of India (SB) as on 01-04-
2022 in respect of housing loan is 10%.
5. Gifts in kind made by the company on the occasion of wedding anniversary of Mr. Tushar
Kapoor ₹4,750.
6. A wooden table and 4 chairs were provided to Mr. Tushar Kapoor at his residence (dining
table). This was purchased on 01-05-2019 for ₹60,000 and sold to Mr. Tushar Kapoor on 01-
08-2022 for ₹30,000.
7. Personal purchases through credit card provided by the company amounting to ₹10,000 was
paid by the company. No part of the amount was recovered from Mr. Tushar Kapoor.
8. An ambassador car which was purchased by the company on 16-07-2019 for ₹2,50,000 was
sold to the assessee on 14-07-2022 for ₹80,000.

CA NISHANT KUMAR 56
Compute the income from salary of Mr. Tushar Kapoor for the Assessment Year 2023-24.

Solution

Computation of Income from Salaries of Mr. Tushar Kapoor for A.Y. 2023-24
Particulars ₹
Basic Salary (₹46,000 × 12) 5,52,000
Medical Facility provided in company's hospital Exempt
Interest benefit on Housing Loan {₹6,00,000 × (10% – 6%)} 24,000
Gift in Kind (value < ₹5,000) Exempt
Wooden Table provided (Use of Asset) (₹60,000 × 10% × 4/12) 2,000
Transfer of Wooden Table and Chair (Note 1) 12,000
Credit Card Facility 10,000
Transfer of Car (Note 2) 80,000
Rent Free Accommodation (Note 3) 82,800
Gross Salary 7,62,800
Less: Deduction u/s 16 (Standard Deduction) 50,000
Net Taxable Salary 7,12,800
Notes:

1. Transfer of Wooden Table

Particulars ₹
Cost 60,000
Less: Depreciation @ 10% (01-05-2019 - 30-04-2020) 6,000
54,000
Less: Depreciation @ 10% (01-05-2020 - 30-04-2021) 6,000
48,000
Less: Depreciation @ 10% (01-05-2021 - 30-04-2022) 6,000
WDV 42,000
Less: Consideration 30,000
Taxable Perquisite 12,000
2. Transfer of Car

Particulars ₹
Cost 2,50,000
Less: Depreciation @ 20% (16-07-2019 - 15-07-2020) 50,000
2,00,000
Less: Depreciation @ 20% (16-07-2020 - 15-07-2021) 40,000
1,60,000
Less: Consideration 80,000
Taxable Perquisite 80,000
3. Rent Free Accommodation

Particulars ₹
Basic Salary 5,52,000
Dearness Allowance (in Terms) -
Bonus -
Allowances (Taxable) -
Commission (All Types) -
Monetary Income (Other than Perquisites) -
5,52,000
15% of this 82,800

CA NISHANT KUMAR 57
Question 44 – ICAI SM – Illustration 19

Mr. X and Mr. Y are working for M/s. Gama Ltd. As per salary fixation norms, the following perquisites
were offered:

1. For Mr. X, who engaged a domestic servant for ₹500 per month, his employer reimbursed the
entire salary paid to the domestic servant i.e., ₹500 per month.
2. For Mr. Y, he was provided with a domestic servant @ ₹500 per month as part of remuneration
package.

You are required to comment on the taxability of the above in the hands of Mr. X and Mr. Y, who are
not specified employees.

Solution

In the case of Mr. X, it becomes an obligation which the employee would have discharged even if the
employer did not reimburse the same. Hence, the perquisite will be covered under section 17(2)(iv)
and will be taxable in the hands of Mr. X. This is taxable in the case of all employees.

In the case of Mr. Y, it cannot be considered as an obligation which the employee would meet. The
employee might choose not to have a domestic servant. This is taxable only in the case of specified
employees covered by section 17(2)(iii). Hence, there is no perquisite element in the hands of Mr. Y.

CA NISHANT KUMAR 58