SALARIES

Presentation by :
VISHAL SOMAI SIR
Sr. faculty of Direct and Indirect tax
 Topic
Reference
Basic Concept of Salaries

Taxability of Allowances

Taxability of Perquisites

Profits in lieu of salary, Gratuity, Earned leave salary,

Pension, Leave travel concession and VRS compensation

Tax Treatment of Provident Funds and Tax Relief

Miscellaneous Illustrations

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 For Convenience sake , we are dividing this
chapter into three parts

1 2 3
Miscellaneous Concepts
viz
Basic Concept and
Perquisites Gratuity,
allowances Provident Fund,
Commuted Pension, VRS,
LTC, etc.

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 BASIC CONCEPT OF SALARIES

1 Contract of service registered 3 Not a principal-agent

relationship

2 Relationship of master
& servant

4
Illustrations of employer Salary received by
and employee 3 MLA's / MP’s
relationship

Employee v.
Remuneration
1 Independent 4 received by Judges
professional

Paper-setter / Retainership fees

invigilator not an
2 employee
5 received by
Advocate General

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 Charging
(Section -15)

Salaries

Salary received
1 Advance salary by partner of
Salary taxable on not to be taxed firm to be taxed
due basis again on due under profit and
basis gains of business
2 or profession
Advance salary
taxable on receipt
basis

3
Arrears of Salary
taxable on receipt
6
basis
 Explain the following terms

1 2 3
Advance salary v/s
Fixed pay scale and
Tax-free salary Loan/advance
graded pay scale
against salary

4 5 6
Foregoing of salary Place of accrual of
v/s Surrender of Annuity salary income
salary

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 Annuity

Annuity means the yearly sums payable to a person. It may be received

from the present employer or past employer or a person other than
employer.
(a)If received from present employer - taxable as 'salary' irrespective of
the fact whether it is voluntary payment or in pursuance of any
contractual obligation.
(b) If received from past employer - taxable as 'profits in lieu of salary'.
(c) If received from a person other than employer - taxable as 'income
from other sources'.

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 Place of accrual of salary income

Employee - Employer - Where service is Whether taxable in India

rendered Salary Perquisite/
allowance
Case 1: Indian citizen (resident Government of Outside India YES NO(exempt u/s
or non-resident) India 10(7))

Case 2: Non-resident or Not Any Outside India NO NO

ordinarily resident (other than In India YES YES
case 1)
Case 3: Resident (other than Any Anywhere YES YES
case 1 and 2)

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 Accrual of salary

Rajesh Kumar, an Indian citizen, is posted in the Indian High commission at

London during the previous year 2018-19. His emoluments consist of basic
pay of Rs. 1,40,000 per month and overseas allowance of Rs. 40,000 per
month. Besides, he is entitled to airfare for going from and coming to India and
also to free use of Government's car at London. He has no taxable income
except salary income stated above. His employer did not deduct tax at source.
Rajesh Kumar argues that -
(i) he is not liable to pay tax on salary earned and received outside India
since he is a non-resident during the previous year 2018-19, and
(ii) even if any tax is due, it is the duty of his employer to deduct tax at
source and as such he has no responsibility to pay the tax.
Discuss whether his contention is correct.
Will it make any difference if Rajesh Kumar is a Foreign citizen?. Give reasons.

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(i) If Rajesh is an Indian Citizen: The argument of Rajesh Kumar is not
correct. Since he is an Indian citizen being government employee his salary
income is deemed to accrue or arise in India and is taxable in India. In case if
employer does not deduct tax at source, the tax is to be paid directly by
employee. The computation of Taxable Salary is as under (amounts in :

Salary (Rs. 1,40,000 x 12) 16,80,000

Overseas Allowance (Rs. 40,000 x 12) & Perquisites shall be Nil

exempt u/s 10(7)
Gross Salary 16,80,000

Less: Standard deduction u/ s 16(ia) 40,000

Income under the head Salaries 16,40,000

(ii) If Mr. Rajesh is a foreign citizen: In case Rajesh Kumar is

foreign citizen, then salary income shall not be deemed to
accrue or arise in India, and hence not taxable in India. 11
 The taxability of house rent allowance is discussed as under

1 . House Rent Allowance [Section 10(13A)]

HRA is an allowance granted to an employee for the payment of rent of his

residence. Section 10(13A) provides exemption to the assessee who is in
receipt of HRA from his employer.
Least of the following shall be exempt -

S.No In other cities In Mumbai, Delhi, Chennai and

. Kolkata

1. Actual HRA received Actual HRA received

2. Rent paid Less 10% of salary Rent paid Less 10% of salary

3. 40% of salary 50% of salary

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 The taxability of house rent allowance is
discussed as under

2 . Exemption not applicable

This exemption shall not apply in a case where -

(a) the residential accommodation occupied by the assessee is owned by him; or
(b) the assessee has not actually incurred expenditure on payment of rent in
respect of the residential accommodation occupied by him.

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 The taxability of house rent allowance is
discussed as under

3 . NOTES

(a) Salary = Basic pay + Dearness Allowance (if it enters into retirement
benefits) + Percentage-wise fixed commission on turnover.
(b) Salary is taken on due basis for the period for which HRA is granted.
(c) Computation of exempted HRA depends on—
(i) HRA actually received,
(ii) Amount of rent paid,
(iii) 'Salary' of employee and
(iv) Place of situation of rented house.
If there is change in any of the factors during the previous year, the exemption
should be worked out on 'monthly basis'.

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 Computation of exempted House Rent Allowance

Arun, a resident of Meerut, receives Rs. 38 000 per annum as basic salary. In
addition, he gets Rs. 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 Rs. 6,00,000) and Rs. 7,000 per
annum as house rent allowance. He, however, pays Rs. 8,000 per annum as
house rent. Determine the quantum of house rent allowance exempt from tax.

Solution: HRA is exempt to the extent least of the following (amount in Rs.) -
(1) Actual HRA received 7,000
(2) Rent paid -10% of salary (Rs. 8,000 - 10% of Rs. 68,000) 1,200
(3) 40% of the salary (40% of Rs. 68,000) 27,200
Exempted HRA 1,200

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 Computation of Taxable
HRA and Gross salary

Mr. Mohit is employed with XY Ltd. on a basic salary of Rs. 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 Rs. 6,000 p.m., which was
increased to Rs. 7,000 p.m. with effect from 01-01-2019. He also got an
increment of Rs. 1,000 p.m. in his basic salary with effect from 01-02-
2019. Rent paid by him during the previous year 2018-19 is as under
April and May, 2018 —Nil, as he stayed with his parents.
June to October, 2018 — Rs. 6,000 p.m for an accommodation in
Ghaziabad.
November, 2018 to March, 2019 — Rs. 8,000 p.m for an
accommodation in Delhi.
Compute his gross salary for assessment year 2019-20.
Period 01-04-2018 01-06-2018 01-11-2018 01-01-2018 01-02-2019
to to to to to
31-05-2018 31-10-2018 31-12-2018 31-01-2019 31-03-2019

Number of months 2 5 2 1 2

Basic Salary per month 10,000 10,000 10,000 10,000 10,000

Dearness allowance, to 5,000 5,000 5,000 5,000 5,000

the extent it forms part
of salary (@ 100% of
basic salary, 50% of
which is included in
salary as per terms of
employment)

Salary for the purpose of 15,000 15,000 15,000 15,000 15,000

HRA exemption

Rent paid per month - 6,000 8,000 8,000 8,000

HRA received 6,000 6,000 6,000 6,000 6,000

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HRA is exempt per
month upto least of
following -
(a) HRA received 6,000 6,000 6,000 7,000 7,000

(b) Rent paid -10% of 4,500 6,500 6,500 6,350

salary
(c) 40% of salary 6,000 6,000 7,500 7,500 8,250
(50% of salary, for
Delhi w.e.f. 1-11-
2017)
HRA exempt p.m. = 4,500 6,000 6,500 6,300
Least of the above
three (a), (b) or (c)

Taxable HRA p.m. 6,000 1,500 500 650

Total taxable HRA 12,000 7,500 500 1,300

Total taxable HRA 21,300

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Computation of gross salary (Rs.)
Basic Salary Rs. 10,000 x 10 + Rs. 11,000 x 2] 1,22,000
Dearness Allowance @ 100% of basic pay 1,22,000
House Rent Allowance 21,300

Gross Salary 2,65,300

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 Allowances

Fully Taxable Partly Taxable Wholly Exempt

Allowances Allowances Allowances

1 2 3

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 1
Fully Taxable Allowances

• Dearness allowance;
• City Compensatory allowance;
• Medical allowance;
• Tiffin allowance;
• Servant allowance;
• Project allowance;
• Interim Allowance;
• Non-practicing Allowance;
• Family allowance;
• Overtime allowance;
• Warden allowance;
• Transport allowance to employee other than blind/ deaf and dumb/
• orthopedically handicapped employee;
• Any other cash allowance etc.

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 2
Partly Taxable Allowances

Allowances exempt from tax to the extent of amount

expended for the purpose for which they are given
[Section 10(14)(i)]

(i) Travelling Allowance

(ii) Conveyance Allowance
(iii) Uniform Allowance
(iv) Daily Allowance
(v) Research Allowance
(vi) Helper Allowance

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 Partly Taxable Allowances

2
Allowances exempt from tax to the extent of amount notified in the Rules
[Section 10(14)(ii)]

Allowances Amount Exempt

Transport Allowance to employees of

transport system: Allowance granted to (i)70% of such allowance; or.
an employee working in transport (ii) Rs. 10,000 p.m.,
whichever is lower.
system to meet his personal expenditure
incurred in course of his official duty of
running the transport from one place to
another, provided he is not in receipt of
daily allowance
 Tribal Area Allowance : [in states of MP, Tamil Rs. 200 p.m
Nadu, UP, Karnataka, Tripura, Assam, West
Bengal, Bihar, Orissa]
Transport Allowance : It is granted to meet the Rs. 1,600 p.m. [Omitted by Notification
expenditure incurred on commuting between No. 17/2018, dated 06-04-2018 w.e.f. 01-
residence and office 04-2019 i.e. A.Y. 2019-20]
Transport Allowance : Transport allowance Rs. 3,200 p.m.
granted to an employee, who is blind or deaf and
dumb or orthopaedically handicapped for
commuting between the place of residence and
the place of duty
Underground Allowance : It is granted to the Rs. 800 p.m
employees working in unnatural climate in
underground mines
Children Education Allowance Rs. 100 p.m. per child for maximum 2
children
Hostel Expenditure Allowance Rs. 300 p.m. per child for maximum 2
children
 3
Wholly Exempt Allowances

(a) Allowances to Indian citizen who is a government employee and

rendering services outside India [Sec. 10(7)].
(b) Allowances to High Court judges.
(c) Sumptuary Allowance to judges of High Court and Supreme Court.
(d) Allowances to employees of UNO.

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 Transport Allowance to employee of
transport system

State with reasons the taxability of the following in context of Income-tax, 1961:
Allowance received by an employee working in a transport system at Rs. 10,000
p.m. to meet his personal expenditure while in duty. He is not receiving any daily
allowance. (2 Marks, PCC Nov. 2010)

Solution: Under section 10(14), 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 (i.e., Rs. 7,000 per month, being 70% of Rs. 10,000) or Rs. 10,000 per
month, whichever is less. Hence, Rs. 7,000 p.m. is allowable as exemption under
section 10(14); and the balance ^ 3,000 p.m. shall be taxable

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 Gratuity
[Section 10(10)]

Section Particulars of Employee Amount of exemption

Central Government employees/ Fully Exempt

10(10)(i) Members of civil services/ Local
authority employees etc.
Least of the following is exempt -
10(10)(ii) Other Employees : Employees
(i) Rs. 20 lakh [w.e.f. 29-03-2018]
covered under Payment of Gratuity [Prior to amendment it was Rs.
Act, 1972 10,00,000]; or

(ii)Actual gratuity received; or

(iii) (15 26) x Salary last drawn x

No. of completed years of service or
part thereof in excess of 6 months.
 Salary = Basic pay + Dearness
10(10)(ii) allowance (always included).

 In case of seasonal
establishment, 15 days shall be
substituted by 7 days.

 Part of a year exceeding 6

months is taken as a full year.
Least of the following is exempt —
10(10)(iii) Employees not covered by the
payment of Grauity Act, 1972 (i) Rs. 10 lakh, being the specified
limit; or
(ii) Actual gratuity received; or

(iii) 1/2 x Average Salary x

Completed years of service (fraction of a
year not to be considered)
 Average salary = Average of salary in
10(10)(iii) last 10 months preceding the month of
retirement. For example: Retirement is
on 15th February 2019, then average
salary will be average of salary from 1st
April 2018 to 31st January 2019.

Salary = Basic pay + Dearness

allowance (to the extent it forms part of
retirement benefits) + % wise fixed
commission on turnover.
 Notes
(1) Gratuity received by an employee while in employment is fully
taxable.
(2) If an individual receives gratuity from more than one employer in the
same previous year, then the total amount of exemption claimed in that
previous year shall not exceed Rs. 20 lakhs/Rs. 10 lakhs .
(3) If an assessee has already availed exemption in respect of any
gratuity received from previous employer in earlier years, then while
computing the exemption in the current year, the maximum exemption limit of
Rs. 20 lakhs/Rs. 10 lakhs shall be reduced by the amount of exemption already
availed.
(4) In case if the employee has rendered services to any other employer
in the earlier years and did not receive any gratuity from him, then such period
of services rendered to his former employer shall also be included while
calculating 'completed years of service'. - CIT v. PNMehra [1993] 201 ITR 930
(Bom.)

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 Computation of taxable
Gratuity

Mr. Raj is an employee of XYZ Ltd. He received Rs. 25,00,000 as

gratuity. He retired on 16th February 2021 after rendering 25 years
and 7 months of service. His basic salary w.e.f. 01-10-2020 was Rs.
60,000 per month (prior to that Rs. 50,000 p.m.). His dearness
allowance was Rs. 30,800 p.m. Calculate the amount of gratuity
exempt from tax if -
(i) Mr. Raj is a government employee.
(ii) Mr. Raj is covered by the Payment of Gratuity Act, 1.972;
(iii) Mr. Raj is not covered by the Payment of Gratuity Act, 1972;
(40% of dearness allowance forms part of salary for retirement
benefits)

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Solution: Computation of taxable gratuity shall be as under -
(i) If Mr. Raj is a Government Employee: The whole of the gratuity shall be
exempt from tax.
(ii) If Mr. Raj is covered by Payment of Gratuity Act: The amount of
exemption shall be

(amounts in Rs.)
Completed years of service (Part thereof in excess of 6 months shall be 26
rounded off to higher side)
Exemption u/s 10(10): Least of the following is exempt -
(a) Gratuity received 25,00,000
(b) 15/26 x Salary last drawn x Completed years of service (Salary 13,62,000
Last Drawn = Basic + DA (fully included) = Rs. 60,000 + Rs. 30,800
= Rs.90,800)

(c) Specified limit 20,00,000

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Taxable Gratuity = Gratuity Received - Exemption 11,38,000
(iii) If Mr. Raj is not covered by the Payment of Gratuity Act: The amount of
exemption shall be

(amounts in Rs.)
Gratuity received 25,00,000
Exemption u/s 10(10): Least of the following is exempt -
(a) Gratuity received 25,00,000
(b) ½ x Average Salary 66,320) x Completed years (25) 8,29,000
[WN]

(c) Specified limit 10,00,000 8,29,000

Taxable Gratuity = Gratuity Received - Exemption 16,71,000

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(iii) If Mr. Raj is not covered by the Payment of Gratuity Act: The amount of
exemption shall be

Working notes
Ten months immediately preceding the month of retirement 01-04-2020 to
31-01-2021
Basic Salary for the said ten months [Rs. 50,000 x 6 + Rs. 60,000 x 4] 5,40,000
DA (to the extent it forms part of retirement benefits), 40% of Rs. 1,23,200
30,800 x 10
Total Salary during the said ten months 6,63,200
Average salary for the said ten months 66,320
Completed years of service ignoring any fraction 25

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 Compute taxable gratuity

Mr. Shah, an Accounts Manager, has retired from JK Ltd. On 15-1-2021 after
rendering services for 30 years 7 months. His salary is Rs. 25,000 p.m. upto 30-09-
2020 and Rs. 27,000 thereafter. He also gets Rs. 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 Rs. 8 lacs as gratuity from
the employer company. Compute taxable gratuity.

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Solution: Computation of taxable gratuity: The relevant computations are as
follows

(amounts in Rs.)
Gratuity received 8,00,000
Exemption u/s 10(10): The least of the following is exempt -
(a) Gratuity received 8,00,000
(b) 1/2 x Average Salary (Rs. 26,700) x Completed years 4,00,500
(30) [WN]
(c) Specified limit 10,00,000 4,00,500
Taxable Gratuity = Gratuity Received - Exemption 3,99,500

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Working notes
Ten months immediately preceding the month of retirement 1-3-2020 to
31-12-2020
Basic Salary for the said ten months [Rs. 25,000 x 7 + Rs. 27,000 x 3] 2,56,000
DA (to the extent it forms part of retirement benefits), 55% of Rs. 11,000
2,000 x 10
Total Salary during the said ten months 2,67,000
Average salary for the said ten months 26,700
Completed years of service ignoring any fraction 30

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 Commuted Pension
[Section 10(10A)]

Particulars of employee Amount of exemption

(1) Employees of the Central

Government/ local authorities/ Wholly Exempt
Statutory Corporation/ Members of
the Defence Services

(2) Other employees - Exemption = 1/3rd of Total value of

(a) In receipt of gratuity pension
Exemption = 1/2 of Total value of
(b) Not in receipt of gratuity pension
 Notes
(1) Commuted value of pension = Pension received + % of pension
commuted
(2) Uncommuted pension is fully taxable for all kind of employee (i.e.
whether government employee or non-government employee)
(3) Pension received from UNO is exempt.
(4) Commuted Pension received from pension from pension fund
established by LIC or any other approved insurer under section 10(23AAB) is
exempt from tax for all employee.
(5) Family person recived by legal is not income from salaries it shall be
taxed as Income from other sources.

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 Retrenchment Compensation
Exemption in respect of Retrenchment
Compensation [Section 10(10B)]

1 2 3

Specified 𝟏𝟓
𝒙 𝐀𝐯𝐠 𝐬𝐚𝐥𝐚𝐫𝐲
𝟐𝟔
Actual amount Amount 𝐨𝐟 𝐥𝐚𝐬𝐭
received Rs. 𝟑 𝐦𝐨𝐧𝐭𝐡𝐬 𝐱 𝐂𝐨𝐦𝐩𝐥𝐞𝐭𝐞𝐝
or 5,00,000 or 𝐲𝐞𝐚𝐫 𝐨𝐟 𝐬𝐞𝐫𝐯𝐢𝐜𝐞

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Whichever is lower
 Retrenchment Compensation

Mr. Gobind received retrenchment compensation of Rs. 10,00,000

after 30 years 4 months of service. At the time of retrenchment, he
was receiving basic salary of Rs. 20,000 p.m; dearness allowance of
Rs. 5,000 p.m. Compute his taxable retrenchment compensation.

Solution: Computation of taxable retrenchment compensation (amount in Rs.) -

Retrenchment compensation received 10,00,000
Less: Exemption under section 10(10B) [WN] 4,32,692
Taxable retrenchment compensation 5,67,308

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 Working Notes

Exemption is to the extent of least of the following -

(i) Compensation actually received: Rs. 10,00,000

(ii) Statutory Limit Rs. 5,00,000

(iii) Amount calculated in accordance with provisions of

the Industrial Disputes Act,

15
𝑖. 𝑒. = 𝑥 Avg salary of last 3 months x Completed year
26
𝑅𝑠. 4,32,692
of service

15 𝑅𝑠. 20,000 𝑥 3 ÷ (𝑅𝑠. 5,000 𝑥 3)

= + 𝑥 30 𝑌𝑒𝑎𝑟𝑠
26 3

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 Leave Travel Concession
[LTC]

(1) Leave Travel Concession [Section 10(5)] : Sectionl0(5) gives

the exemption to an assessee in respect of Leave Travel Concession (LTC)
received by or due to him, from his current or former employer, for
himself and his family, in connection with his proceedings on leave to any
place in India either during his employment or after the retirement/
termination of his employment.
"Family" means,—
(a) the spouse and children of the individual; and
(b) the parents, brothers and sisters of the individual or any of them,
wholly or mainly dependent on the individual. In case of children born
after 1-10-1998, the exemption is available for only two surviving children
and in case of birth of multiple children after one child, the multiple
children shall be regarded as one child.

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(3) Claim of Exemption:
(a) The assessee can claim exemption for any two journeys in a
block of 4 calendar years.
(b) The current blocks are: Ninth block 2018-2021.
(c) Carry-over of Concession: In case no concession or only one
concession is availed in the previous block, then the assessee can claim
one additional exemption in the first year of next block.

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1 1 2
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2 1 3
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 Voluntary retirement

Exemption in respect of compensation received on

voluntary retirement or separation [Section 10(10C)]

(1) Eligible Employees: Only the employees of following undertakings

are eligible -
(a) A public sector company;
(b) Any other company;
(c) An authority established under a Central/State or Provincial Act;
(d) A local authority;
(e) A co-operative society;
(f) A University established or incorporated under a Central/State or
Provincial Act and an institute declared to be a University by University Grants
Commission;

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(g) An Indian Institute of Technology;
(h) Institute of management as the Central Government may specify in
this behalf through a notification in the Official Gazette;
(i) Central or State Government; or
(j) An institution having importance throughout India or in any state as
the Central Government may specify by notification in the Official Gazette.

(2) Limit of Exemption: Least of the following is exempt -

(a) Actual amount received;
(b) Rs. 5,00,000.
The exemption shall be given even if the compensation is receivable in
instalments.

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(3) Guidelines for claiming exemption [Rule 2BA]:
(a) the scheme applies to an employee who has completed 10 years of
service or completed 40 years of age except in case of employees of public
sector company;
(b) it applies to all employees including workers and executives except
directors of a company or co-operative society;
(c) scheme has been drawn to result in overall reduction in the existing
strength of the employees;
(d) the vacancy caused by the voluntary retirement or voluntary
separation is not to be filled up;
(e) retiring employee is not employed in another company/concern
belonging to same management;
(f) Amount of compensation does not exceed -
(i) 3 months x salary last drawn x completed year of service; or
(ii) Salary last drawn x Balance of months left before retirement or
superannuation.
Salary = Basic pay + DA (forming part of retirement benefits) + %-wise fixed
commission on turnover.

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(4) Exemption only once: If exemption has been allowed to an employee
under this section in any assessment year, no exemption shall be allowed to him
in relation to any other assessment year.

(5) No exemption if relief availed u/s 89 : Where any relief has been
allowed to an assessee under section 89 for any assessment year in respect of
any amount received or receivable on his voluntary retirement or termination
of service or voluntary separation, no exemption under this section shall be
allowed to him in relation to such, or any other, assessment year.
Thus, relief under section 89 and exemption under this section cannot be
availed of simultaneously. Further, once relief is claimed under section 89, the
right to claim exemption in respect of VRS compensation is lost forever.

61
 VRS compensation

R is employed in a public company and is paid a sum of Rs. 6,00,000 on

Voluntary Retirement from service. The normal age of retirement in the
company is 60 years and R who was 45 years at the time ofretirement had
completed 20 years of service. His monthly salary at the time of retirement
was as follows -

Rs
Basic Pay 10,000
Dearness Allowance (50% is includible for pension) 6,000
HRA 3,000
Conveyance Allowance 800

What is the amount of compensation taxable under the Income-tax Act?

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Solution: As per section 10(10C) read with rule 2BA the exemption is available
of Rs. 5,00,000 only if the amount received as compensation does not exceed
higher of the following limits - (amount in Rs.)

(a) 3 months x salary last drawn x completed years of service 7,80,000

i.e., (3 x Rs. 13,000 x 20) [WN]
(b) Salary last drawn x No. of months of service left for retirement 23,40,000
i.e., (Rs. 13,000 x 15 x 12)

Rs. 5,00,000 will be exempt, since the amount received is less than the
aforesaid limits, Consequently, Rs. 1,00,000 will be taxable.

Working Notes: Salary means = Rs. 10,000 + Rs. 3,000 (50% of DA of Rs. 6,000)
= Rs. 13,000.

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 Computation of taxable
compensation

Computation of taxable compensation : What will be the amount of

taxable compensation in the illustration above, if instead of compensation
of Rs. 6,00,000, R receives a compensation at the time of his retirement of -
(i) Rs. 10,00,000; or
(ii) Rs. 29,80,000.

Solution:
(i)Here, the amount received is within the limit of Rs. 23,40,000. Therefore,
the exemption under section 10(10C) will be available. The amount taxable
at the time of retirement = Rs. 10,00,000 - Rs. 5,00,000 = Rs. 5,00,000.
(ii)Since the compensation received exceeds Rs. 23,40,000, the payment is
not in accordance with Rule 2BA and therefore no exemption will be
available under section 10(10C). Therefore, entire compensation will be
taxable i.e. Rs. 29,80,000.
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The provisions relating to tax relief under Section 89 are as under

Relief when available

Section 89 read with Rule 21A grants relief to the assessee who receives -
(a) salary, being paid in arrears or in advance; or
(b) salary for more than 12 months in any one financial year; or
(c) profits in lieu of salary under section 17(3); or
(d) family pension as referred to in Section 57(iia) being paid in arrears,
due to which his total income is assessed at a rate higher than that at which it
should have been assessed.

65
 Calculation of relief

The admissible relief will be calculated as per the following steps -

(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).
(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 under section 89 = Tax computed at (3) - Tax computed at (6).

66
 No relief, if exemption claimed u/s 10(10C) in
respect of VRS compensation

No relief shall be granted under this section in respect of any amount received
or receivable by an assessee on his voluntary retirement or termination of his
service under Voluntary Retirement or Separation Scheme if an exemption u/s
10(10C) has been claimed in respect of such or any other assessment year.
Effect: The cumulative effect of sections 10(10C) and 89 is -
(a) The assessee cannot avail of exemption u/ s 10(10C) and
simultaneously claim relief u/ s 89 in respect of the un-exempt portion in the
same assessment year;
(b) Once exemption is claimed u/s 10(10C), no exemption u/s 10(10C)
and no relief u/s 89 can be claimed for any other assessment year in respect of
VRS compensation;
(c) Once relief is claimed u/ s 89 in respect of VRS compensation
received, no exemption u/ s 10(10C) can be claimed for any other assessment
year. However, if any VRS compensation is received subsequently from any
other employer, relief u/s 89 can be claimed. Therefore, relief u/s 89 can be
claimed more than once.

67
 Discuss the tax implications in
respect of various Provident Funds

Provident fund scheme

In a Provident Fund Scheme, employer deducts a certain amount from the

salary ofemployee for the purpose of contribution towards a fund and the
employer also contributes to the same. Both thecontributions are invested in
securities and interest earned thereon is credited to the fund.
Hence, Provident Fund consists of-
(a) employer's contribution and interest thereon; and
(b) employee's contribution and interest thereon.

68
 The various provident funds are -

(a)Statutory Provident Fund (SPF) : Statutory provident fund is set up under

the provisions of the Provident Funds Act, 1925. This fund is maintained by
Government and semi-Government organizations, local authorities, railways,
universities and recognised educational institutions.

(b)Recognised Provident Fund (RPF): A provident fund scheme to which the

Employee's Provident Fund and Miscellaneous Provisions Act, 1952 applies is
Recognised Provident Fund. Besides, these funds are recognized by the
Principal CIT or CIT or Principal CC1T or CCIT under the provisions of the
Income Tax Act, 1961. The Principal CIT or CIT recognizes only those funds
which follow the rules given in the Fourth Schedule of Income-tax Act.
(c)Unrecognised Provident Fund (URPF): If a provident fund is not
recognized by the Principal CIT or CIT of Income tax, it is known as
unrecognized provident fund.
69
(3) Tax treatment of various Provident Funds:
Tax incidence of - SPF RPF URPF PPF

(1) Employer's Exempt Exempt upto 12% Not taxable when the contribution Exempt
contribution of salary [Note-1] is made.

(2)Employee's Taxable Taxable Taxable Taxable

contribution
(3) Deduction u/s Available Available Not available Available
80C on
employee's
contribution
(4)Interest credited Exempt Exempt upto Not taxable when interest is Exempt
to PF interest calculated credited
@ 9.5% p.a.

(5)Lump sum Exempt u/s Exempt from tax ⇒ Employer's contribution & Exempt
payment at the 10(11) in some cases. interest thereon: Taxable as
time of When not exempt salary. Relief can be claimed u/s
retirement or provident fund 89.
termination of will be treated as ⇒ Employee's own contribution:
service an unrecognised Exempt, as taxed earlier.
fund from the ⇒ Interest on employee's
beginning. [Note- contribution : Taxable as 'Income
2] from Other Sources'.

70
 NOTES

(1) Salary = Basic + Dearness allowance, if the terms of employment so provide +

percentage-wise fixed commission on turnover.
(2) Lump sum payment at the time of retirement or termination of service is
exempt from tax if :
 (a) the employee has rendered continuous service with his employer for a period
of 5 years or more.
 (b) Service is terminated due to ill health of employee or discontinuance of
employer's business or any other reason beyond his control; or
 (c) On cessation of employment, he takes employment with another employer,
exemption is allowed to the extent such accumulated balance transferred to his RPF
account maintained by other employer; or
 (d) The entire balance standing to the credit of the employee is transferred to his
account under a pension scheme referred to in section 80CCD and notified by the
Central Government.

71
 Define "Perquisites" as per Section 17(2)

The term "perquisites"

(1) Rent free accommodation The value of rent-free accommodation provided

to the assessee by his employer.
(2) Accommodation provided The value of any concession in the matter of
at concessional rate rent in respect of any accommodation provided
to the assessee by his employer.

(3) Perquisites taxable in The value of any benefit or amenity granted or

case of specified provided free of cost or at concessional rate to
employee specified employees.

72
(4) Employee's obligation Any sum paid by the employer in respect of any
met by employer obligation, for which such payment would have
been payable by the assessee [other than tax
exempt under section 10(10CC)].
(5) Life insurance/ annuity Any sum payable by the employer, whether
contract payments directly or through a fund other than a RPF or
an approved Superannuation fund (or a
Deposit-linked Insurance Fund), to effect an
assurance on the life of the assessee or to effect
a contract for an annuity.

(6) ESOP/ Sweat equity The value of any specified security or sweat
shares equity shares allotted or transferred, directly or
indirectly, by the employer, or former employer,
free of cost or at concessional rate to the
assessee.

73
(7) Contribution to approved
superannuation fund The amount or the aggregate of amounts of any
contribution made to the account of the assessee by the
employer—
(a) in a recognised provident fund;
(b) in the scheme referred to in Section 80CCD(1);
and
(c) in an approved superannuation fund, to the
extent it exceeds Rs. 7,50,000 in a previous year.

(8) Interest/Dividend etc. on

taxable contributions under The annual accretion by way ot interest, dividend or
RPF/ NPS/Approved any other amount of similar nature during the previous
Superannuation Fund year to the balance at the credit of the fund or scheme
referred above to the extent it relates to the
contribution which is included in total income in any
previous year computed in such manner as may be
prescribed.

74
(9) Other fringe benefits The value of any other fringe benefit or
amenity as may be prescribed. The following
perquisites have been specified -

 Interest-free or concessional loan;

 Travelling, touring for holiday;
 Food and beverage facility;
 Gifts;
 Credit card facility;
 Club facility;
 Use of movable asset;
 Sale of movable assets at concessional
rates; and
 Other facilities.

75
How is value of Rent Free Accommodation (RFA) determined while
computing the gross salary?

Meaning of Accommodation [Explanations to

Section 17(2) read with Rule 3]

As per Rule 3, "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.

76
 Valuation of Rent Free Accommodation

The value of residential accommodation provided by the employer directly

or indirectly to the assessee or to any member of his household by reason
of his employment, shall be determined in the following manner:

Circumstances When accommodation is When accommodation is

unfurnished furnished
(1) (2) (3) (4)

1. When accommodation is License fee determined by the Value calculated under

provided by the Government Government as reduced by the column (3) as increased by -
to its employees holding rent actually paid by the 10% p.a. of the cost of
office/ post in connection employee. furniture if owned by
with Government affairs employer or actual hire
charges payable in case the
furniture is taken on hire. Any
charges recovered from the
employee shall be deducted.

77
2. (a) When the (i) In cities having Value calculated under
accommodation is population exceeding 25 lakhs column (3) as increased by -
provided by any other as per 2001 census : 15% of 10% p.a. of the cost of
employer and such salary furniture if owned by
accommodation is (ii) In cities having employer or actual hire
owned by the employer - population exceeding 10 lakhs charges payable in case the
but not exceeding 25 lakhs : furniture is taken on hire.
10% of salary Any charges recovered from
(iii) In cities having the employee shall be
population not exceeding 10 deducted.
lakhs : 7.5% of salary
Any charges recovered from the
employee shall be deducted.

78
 (b) Such accommodation is Lower of - Value calculated under
taken on lease or rent by (i)actual rent paid by the column (3) as increased by -
the employer - employer; or 10% p.a. of the cost of
(ii) 15% of salary; furniture if owned by
Any amount recovered from the employer or actual hire
employee shall be reduced. charges payable in case the
furniture is taken on hire.
Any charges recovered from
the employee shall be
deducted.

3. When the accommodation Not applicable. Lower of -

is provided by the above (i) the actual charges paid/
employers in a hotel- payable to such hotel; or
(ii)24% of salary;
Any amount recovered from
the employee shall be
reduced.

79
 NOTES

(1) Salary = Basic pay + Dearness allowance/pay (if forms part of superannuation or
retirement benefits) + Bonus + Commission + Fees + All taxable allowances + All
monetary payments chargeable to tax; from one or more employers,
Salary does not include -
 (a) dearness allowance or dearness pay unless it enters into the computation of
superannuation or retirement benefits of the employee concerned;
 (b) employer's contribution to the provident fund account of the employee;
 (c) allowances which are exempted from payment of tax;
 (d) the value of perquisites specified under section 17(2);
 (e) any payment or expenditure specifically excluded under proviso to Section
17(2)(iii) or proviso to Sec. 17(2);
 (f) lump sum payments received at the time of termination of service or
superannuation or voluntary retirement, like gratuity, severance pay, leave
encashment, voluntary retrenchment benefits, commutation of pension and
similar payments.

80
 Exemption

The perquisite shall be exempt in the following cases-

(a) Hotel accommodation not exceeding 15 days

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.
 (b) Accommodation of temporary nature/ remote area

Accommodation provided to employee working at mining site or an onshore oil

exploration site, or a project execution site or a dam site or a power generation
site or an offshore site -
 (i) which, being of a temporary nature and having plinth area not exceeding
800 sq. feet, is located not less than 8 kms. A way from the local limits of any
municipality or a cantonment board; or
 (ii) which is located in a remote area. ['Remote area' means an area that is
located at least 40 kilometres away from a town having a population not
exceeding 20,000 based on latest published all-India census.]

82
 Double accommodation on
account of transfer

Where on account of his transfer from one place to another, the

employee is provided with accommodation at the new place of posting
while retaining the accommodation at the other place, the value of
perquisite shall be determined as follows -

(i) For First 90 The value of perquisite shall be the value of such
days accommodation whose value is lower when computed as per
the above rules.
(ii) After 90 days The value of perquisite shall be aggregate of the value of
both such accommodations as per the above rules.
 Government Employees sent on deputation - Valuation

Where the accommodation is provided by the Central Government or any State

Government to an employee who is serving on deputation with any body or
undertaking under the control of such Government,-
 (a) the employer of such an employee shall be deemed to be that body or
undertaking where the employee is serving on deputation; and
 (b) the value of perquisite of such an accommodation shall be the amount
calculated as if the accommodation is owned by the employer.

84
 Valuation of rent free accommodation in hotel

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.

85
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 -
 (i) the actual charges paid/ payable to such hotel; or
 (ii) 24% of salary;
Any amount recovered from the employee shall be reduced.

86
 Rent free accommodation

Compute the value of perquisite in respect of rent-free furnished house, if Ashok

stays in a city with a population of -
(i) not exceeding 10 lakh;
(ii) exceeding 10 lakh but not exceeding 25 lakh; and
(iii) exceeding 25 lakh.
Ashok is in receipt of the following amounts from his employer during the
previous year —
Basic pay : Rs. 1,80,000;
Dearness allowance : 25% of basic pay;
Commission : 5% of basic pay; and
Bonus : Rs. 8,000.
His employer has paid income tax of Rs. 5,000 and professional tax of Rs. 1,500 on
his behalf.
Besides, his employer provided refrigerator and television costing Rs. 24,000 and
paid Rs. 500 per month towards rent of other furniture provided.

87
Solution: Taxable value of Rent Free furnished Accommodation (amount in Rs.):
Particulars Cities having population

Not exceeding Exceeding 10 lakhs Exceeding 25

10 lakh but not exceeding lakh
25 lakh
Valuation of rent free accommodation 7.5% of salary 10% of salary 15% of salary

Perquisite value of RFA [WN] 18,150 24,200 36,300

Add: Furniture (10% p.a. of original cost 2,400 2,400 2,400

of furniture)

Rent of furniture (Rs. 500 x 12) 6,000 6,000 6,000

Taxable value of furnished 26,550 32,600 44,700

accommodation

88
 Working Notes
Salary for rent free accommodation (amount in Rs.):
Basic Pay 1,80,000
DA (assuming DA form part of retirement benefits) 45,000

Commission (5% of basic pay) 9,000

Bonus 8,000

Income tax & professional tax paid by employer (not includible in salary, as they Nil
are 'perquisites')

Salary for rent free accommodation 2,42,000

89
 Computation of salary income

Mrs. Padma (age: 25 years) is offered an employment by Pritam Ltd. at a basic

salary of Rs. 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 Rs. 15,000 per month or to accept a house rent allowance of
Rs. 15,000 per month and find out her own accommodation. If Mrs. Padma
opts for house rent allowance, she will have to pay Rs. 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?

90
Solution: Computation of total taxable income of Mrs. Padma (amount in Rs.) :
Particulars Receipt of HRA Rent-free
accommodation

Basic Salary (Rs. 24,000 x 12) 2,88,000 2,88,000

Dearness Allowance (18% of basic 51,840 51,840

salary i.e. 18% of Rs. 2,88,000)
Bonus (1 month basic pay) 24,000 24,000

Project Allowances (6% of basic salary 17,280 17,280

i.e. 6% of Rs. 2,88,000)
House Rent Allowance [WN-1] 36,000 —

Rent Free Accommodation [WN-2] — 49,392

Salary Income 4,17,120 4,30,512

91
 Working notes

(1) Computation of taxable HRA: (amount in Rs.)

HRA received 1,80,000
Least of following amount is exempt

(a) Actual amount received 1,80,000

(b) Rent paid less 10% of salary i.e. Rs. 1,80,000 - Rs. 1,51,200
28,800
(c) 50% of salary 1,44,000 1,44,000

Taxable HRA 36,000

92
(2) Value of rent free accommodation shall be least of the following -(amount in Rs.)
(a) Actual rent paid or payable or 1,80,000
(b) 15% of salary i.e. 15% of 13,29,280 49,392

3) Salary for rent free accommodation (amount in Rs.)

Basic Salary 2,88,000
Bonus 24,000
Project Allowance 17,280
Total 3,29,280

93
 ESOP
Mr. M is working with MNO Limited for the last 10 years. He was granted an
option on 01-7-2017 by the company to purchase 800 equity shares at a price of
Rs. 250 per share. The period during which the option can be exercised to
purchase 800 shares at a pre-determined price of Rs. 250 per share
commencing on 01-7-2017 and ending on 31-3-2019. Mr. M exercised the
option on 15-3-2018 to purchase 500 shares. Fair market value on the said date
was Rs. 6,490 on the Bombay Stock Exchange and Rs. 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, 2018. The fair market
value on the date of allotment was Rs. 7,100 per share on NSE and Rs. 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?
94
Solution: The value of perquisite shall be computed as follows -
(i) 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 15-3-2018, hence, as per Valuation Rules, the average of the opening
and closing prices on the recognised stock exchange, which records highest
trading volume shall be taken to be the fair market value of each option.
(ii) Since NSE recorded the higher trading volume, hence, FMV on that
date on NSE = Rs. 6,500 shall be taken to be the FMV for the purpose of
valuation of perquisite.
(iii) Value of perquisite = (FMV - Exercise Price) x No. of shares = (Rs.
6,500 - Rs. 250) x 500 shares = Rs. 31,25 000
(iv) The taxability of perquisite will arise in the year in which shares are
alloted or transferred to employee z e in the previous year 2018-19.
Even if the option is granted for providing know-how, the same will fall within
the meaning of 'sweat equity shares' and, therefore, section 1/(2)(vi) shall
apply in the same manner as given above.

95
 Perquisites taxable in the hands of
specified employees

1 2 3
Sweeper, gardener,
Motor car or other Gas, electricity or
watchman or
conveyance facility water facility
personal attendant

4 5
Transport facility to
Free or Concessional the employees of
educational facility transport
undertaking
 Specified Employee [Section 17(2)(iii)

(a) An employee who is a director of the company; or

(b) An employee being a person who has a substantial interest in the
company i.e. who is the beneficial owner of equity shares carrying 20% or more
of the voting rights in the company; or
(c) Any other employee whose income chargeable under the head
"Salaries" (whether due from, or paid or allowed by, one or more employers),
exclusive of the value of all benefits or amenities not provided for by way of
monetary payment, exceeds Rs. 50,000.

In other words, while computing limit of Rs. 50,000, following shall be

deducted/ excluded :
(i) All non-monetary benefits;
(ii) All monetary payments exempt under section 10;
(iii) Deductions under section 16 [i.e. Standard deduction, Entertainment
allowance and professional tax],

97
 Motor car or other conveyance facility

Circumstances (Col. 1) Used wholly for private Partly for official and partly for
purposes (Col. 2) private purposes (Col. 3)

I. When motor car is owned or hired by the employer -

(A) When maintenance Amount incurred or re- If cubic capacity If cubic capacity
and running expenses imbursed by employer + does not exceed exceeds 1.6 litres
are met or reimbursed Chauffeur's salary + 1.6 litres : Rs. : Rs. 2,400 p.m.
by employer. Normal wear & tear @ 1,800 p.m. (plus (plus Rs. 900
10% p.a. of actual cost of Rs. 900 p.m. if p.m. if chauffeur
car or hire charges - chauffer is is provided)
Amount recovered from provided) [Note 4]
employee

98
(B) When maintenance Normal wear and tear If cubic capacity If cubic capacity
and running expenses @ 10% p.a. of the actual does not exceed exceeds 1.6 litres:
1.6 litres: Rs. 600 Rs. 900 p.m. (plus
are met by employee. cost of the car or hire
p.m. (plus Rs. 900 Rs. 900 p.m. if
charges. chauffeur is
p.m. if chauffer is
provided) provided)

II. Where motor car is Actual expenditure If cubic capacity If cubic capacity
owned by employee and incurred by employer does not exceed exceeds 1.6 litres:
maintenance and Less: Amount, if any, 1.6 litres: Rs. 600 Rs. 900 p.m. (plus
p.m. (plus Rs. 900 Rs. 900 p.m. if
running expenses paid or recovered from
p.m. if chauffer is chauffeur is
including remuneration the employee. provided)
provided)
of the chauffeur are met
or reimbursed by the
employer.
III. Conveyance other Amount actually Actual expenditure incurred by
than motorcar (Scooter, incurred by employer the employer less Rs. 900 p.m.
motorcycle etc.), is for maintenance and
owned by the employee running less Amount
and the employer meets recovered from
its running expenses. employee
99
 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 shall be -
Salary paid or payable to such person less amount recovered from the employee,
if any.

100
 Gas, electricity or water facility

(i) If supplied by employer from his own sources: Manufacturing cost

per unit x Number of units consumed by employee
(ii) If taken by employer from outside agencies: Hire charges paid to
such agencies.
Note: If any amount is recovered from the employee the same shall be reduced
to arrive at taxable value, if any.

101
 Free or Concessional educational facility

Circumstance Valuation of perquisite

(a)Employer incurs cost of Actual expenditure incurred by the

education. employer.

(b)(i) Educational institution is Cost of such education in a similar

owned and maintained by the institution in or near the locality.
employer; or (ii) Free educational
The perquisite is exempt if –
facility is provided in any other
(a) free education facility is provided
institution by reason of his to children of the employee and
employment with that employer. (b) cost of education is upto Rs. 1,000
p.m. per child, otherwise it is fully
taxable.]
Note: Any amount paid or recovered from the employee shall be reduced
from value of perquisite.

102
 Transport facility to the employees of transport
undertaking

If any transport facility is provided by an employer carrying transport business

(of carrying passengers/ goods) to his employee in a conveyance owned, leased
or made available by some arrangement, then—
Taxable Value = Amount charged from general public for such facility less
amount recovered from the employee, if any.
Exemption: This rule shall not apply to employees of an airline or the railways.

103
 Car facility

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 -

Carl Rs. Car 2 Rs.

Cost of the 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 Rs. 90,000. Compute the taxable
'Perk' in respect of Cars on the assumption car 2, is exclusively used by 'A' for
personal purpose.

104
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 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 purpose:

(amount in Rs.)
Car 1 (Partly official and partly personal, assumed to be above 1.6 39,600
litres cc) [(Rs. 2,400 + Rs. 900) x 12]
Car 2 (Private use only) [Expenses actually incurred Rs. 28,000 and 92,000
Rs.24,000 +10% of cost of car]
Total value of perquisite 1,31,600

105
 Medical Facility

(1)Treatment in hospital maintained by employer – Exempt

(2)Treatment in government hospital – Exempt
(3)Treatment of prescribed disease in a hospital approved by the
Principal Chief Commissioner or Chief Commissioner – Exempt
(4)Health insurance premium paid by the employer – Exempt
(5)Health insurance premium reimbursed by the employer – Exempt
(6)Medical treatment abroad: Expenditure incurred or reimbursed by
the employer for,
(a) Medical treatment of employee or his family member outside India
and stay abroad of such employee or his family member for medical treatment
and one attendant shall be exempt to the extent permitted by RBI- and
(b) Cost of travel of employee or his family member and one attendant
who accompanies the patient in connection with such treatment is exempt only
if gross total income of such employee, as computed beforeincluding this
expenditure, does not exceed Rs. 2 lakh.

106
 Medical facility

Himalaya Ltd. reimburses the following expenditure on medical treatment of the

son of an employee Karan. The treatment was done at UK :
(i)Travelling expenses Rs. 1,15,000.
(ii)Stay expenses at UK permitted by RBI Rs. 45,000 (Actual expenses Rs.
70,000).
(iii)Medical expenses permitted by RBI Rs. 50,000 (Actual expenses Rs. 70,000).

Compute the taxable perquisites in the hands of Karan, if his annual income
from salary (after standard deduction) was - (i) Rs. 1,55,000; (ii) Rs. 1,56,000.

107
Solution: Computation of taxable value of medical perquisite (amount in Rs.)
In case salary is Rs. 1,55,000, taxable value of medical
perquisite will be -
Stay expenses 70,000 - Rs. 45,000 (exempt)] 25,000
Medical expenses 70,000 - Rs. 50,000 (exempt)] 20,000

Travelling expenses (See note) Nil

Taxable value of Medical perquisite 45,000

Note: The gross total income before including travel expenses = Rs. 1,55,000 +
Rs. 25,000 + Rs. 20,000 = Rs. 2,00,000, i.e. does not exceed Rs. 2 lakh. Hence, the
travel expenses will be exempt in this case.

108
In case salary is Rs. 1,56,000, taxable value of medical perquisite will be —

Stay expenses Rs. 70,000 –Rs. 45,000 (exempt)] 25,000

Medical expenses 70,000 - Rs. 50,000 (exempt)] 20,000

Travelling expenses (See Note) 1,15,000
Taxable value of Medical perquisite 1,60,000

Note: The gross total income before including travel expenses = Rs. 1,56,000 +
Rs. 25,000 + Rs. 20,000 = Rs. 2,01,000, Le. greater than Rs. 2 lakh. Hence, the
travel expenses will be taxable in this case.

109
THANK
YOU!
Presentation by :
VISHAL SOMAI SIR
Sr. faculty of
Direct and Indirect tax
Phone

8588808615/16
website
www.vidyasthal.com