Salary

Salary
Basics
When Income is taxable under the head salary
● Income under head salary is taxable only if there is an employer-employee relationship between payer and
payee.
● This relationship is also called master-servant or principal-agent relationship. This relationship is also called
an arm's length relationship. It does not matter whether the employee is a full-time employee or a
part-time one.
● Any amount received before joining employment or after cessation of employment with that person is
treated as "Profit in lieu " of salary & it is taxable.
● While if there is no control over the work of another person then the relationship is said to be on a
principal to principal basis.

Examples when there is no control of payer over payee

● Partner of a firm.
● Director who is not an employee.
● Members of Parliament.
● Guest Lecturers etc.

Commissions received by a Director from a company is salary if the Director is an employee of the company. If,
however, the Director is not an employee of the company, the said commission cannot be charged as salary but
has to be charged either as income from business or as income from other sources depending upon the facts

Contract of service/ Contract for service-

For "contract of service" means employee-employer relationship is there.
"Contract for service" on the other hand, is one, in which a person offers his services to any person who is willing
to pay the prescribed charges.

Foregoing of salary
Once salary accrues, the subsequent waiver by the employee does not absolve him from liability to income-tax.
Such waiver is only an application and hence, chargeable to tax.

Surrender of salary
However, if an employee surrenders his salary to the Central Government under section 2 of the Voluntary
Surrender of Salaries (Exemption from Taxation) Act, 1961, the salary so surrendered would be exempt while
computing his taxable income

Charging Section
● Salary is taxable on the basis of due or received whichever is earlier
● Any salary paid in advance is included in the total income of any person for any previous year; it shall
not be included again in the total income of the person when the salary becomes due.
● Any salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner
of a firm from the firm shall not be regarded as "salary" for the purposes of this section.

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Different Items and their treatment (Basic Items)

Basic Salary In General amount paid by the employer to the Fully Taxable
employee for the service of the employee is known
as basic salary.

Dearness allowance 1. Payments to compensate for the increase in Fully Taxable

prices.
2. Dearness allowance can be of two types
a. Dearness allowance forming part of
retirement benefits
b. Dearness allowance NOT forming part of
retirement benefits
3. Dearness allowance is fully taxable. The above
distinction is made only for calculation of
taxability of certain allowances, retirement
benefits, perquisites etc.
4. It can be given as a fixed percentage of Basic
salary or can be given as fixed amount per
month.

Commission For purpose of certain calculations, it can be further Fully Taxable

classified as
1. Commission of turnover basis. (Details in
lectures)
2. Other Commission

Bonus It is taxable in the year of receipt. Fully Taxable

Standard Deduction a deduction of Fifty thousand rupees or the amount To be discussed in class
u/s 16 of the salary, whichever is less

Salary in Grading System

Meaning of Pay scale: Mr. A is employed on a pay scale of Rs. 20,000-1,000-30,000. It means that his initial salary
is 20,000 and there will be an yearly increment of Rs.1, 000 till his salary reaches 30,000.

Compute the income under head salary in the following cases

Particulars Case 1 Case 2 Case 3 Case 4

Basic Salary 50,000 p.m. 50,000 50,000 p.m. 50,000 p.m.

p.m.

Dearness 10,000 p.m. 20% of Basic 20% of basic salary out which 60% forms
allowance Salary part of retirement benefits

Commission 1,00,000 1,00,000 (Annual) (70% is based on

(Annual) Turnover)

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Bonus 1,25,000 (Annual)

Case 1

Particulars Amount (₹)

Gross Salary

Deduction u/s 16 - Standard Deduction

Income under head salary

Case 2

Particulars Amount (₹)

Gross Salary

Deduction u/s 16 - Standard Deduction

Income under head salary

Case 3

Particulars Amount (₹)

Gross Salary

Deduction u/s 16 - Standard Deduction

Income under head salary

Case 4

Particulars Amount (₹)

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Gross Salary

Deduction u/s 16 - Standard Deduction

Income under head salary

Allowances
● Fixed monetary payment
● For meeting some particular requirements
● Taxable as per section 15.
● May be personal or official

Type of Allowances
● Fully Exempt
● Partly Taxable
○ Special Allowances
■ Official (Amount received or Spent whichever is less)
■ Personal (Amount received or limit specified whichever is less).
○ House rent allowance
○ Entertainment allowance
● Fully Taxable

Fully Exempt Allowances

➔ Allowance granted to Government Employees outside India.
➔ Sumptuary Allowance (for the special dresses of judges) granted to High Court or Supreme Court Judges.
➔ Allowance paid by the UNO to its employees
➔ Compensatory Allowance received by a judge.

Partly Taxable Allowances

Special Allowance
1. Official Allowances (Amount received or Spent whichever is less)
a. Travelling
b. Daily
c. Conveyance
d. Helper
e. Academic
f. Uniform
2. Personal Allowance
a. Children Education allowance - Rs. 100 p.m. p.c. (Max 2 Child)

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b. Hostel Expenditure Allowance - Rs. 300 p.m. p.c. (Max 2 Child)

c. Tribal area allowance - Rs. 200 p.m
d. Transport Allowance - In case of blind/handicapped employee Rs. 3,200 p.m.
e. Underground Allowance - Granted to employees working in uncongenial, unnatural climate in
underground coal mines shall be exempt upto Rs. 800 p.m.
f. Hill/ border/ remote area allowance. - Varying from Rs. 300 to Rs. 7,000 p.m. depending upon the
area of posting.
g. Any allowance granted to an employee working in any transport system to meet his personal
expenditure during his duty performed in the course of running such transport from one place to
another, provided that such employee is not in receipt of daily allowance - 70% of such allowance
upto a maximum of Rs. 10,000 per month

House Rent Allowance

Least of following shall be exempt:-
● Allowance actually received
● Rent paid in excess of 10% of salary
● 50% of salary - if house taken on rent is situated in Kolkata, Chennai, Delhi and Mumbai
○ 40% of salary- for other cities.

NOTES
● Meaning of salary: Basic + DA(includible for retirement benefits) + Comm. based on turnover
● Exemption is given only for that period for which house is taken on rent. Therefore, For exemption purposes
HRA and salary are taken only for that period during which the house is taken on rent.
● Calculation for that period can be made collectively during which all following are same:-
○ Actual HRA
○ Rent paid
○ Salary
○ Location of the house taken on rent

Example - Basic Salary Rs. 50,000 p.m. and dearness allowance of Rs. 10,000 p.m. 40% is part of retirement
benefits. HRA Rs. 15,000 p.m. Rent Paid Rs. 20,000 p.m. Compute Income Under Head Salary. Place of rent is
Delhi.

Example - Basic Salary Rs. 50,000 p.m. and dearness allowance of Rs. 10,000 p.m. 40% is part of retirement
benefits. HRA Rs. 15,000 p.m. Rent Paid Rs. 15,000 p.m. till 31/12/20XX and from 1/1/20YY rent paid is Rs. 20,000
p.m. Compute Income Under Head Salary.

Entertainment Allowance
● Allowed as deduction under section 16 only to Government employees
● Entertainment allowance received will be added in the salary of all the employee
● Will be allowed as deduction only to government employees, in other words will not be deducted from the
salary of non government employees.
● Deduction shall be least of the following
○ Actual Amount received
○ Rs. 5,000

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○ 20% of salary
● Salary means Basic salary only

Retirement Benefits

1. Pension
2. Gratuity
3. Leave Encashment
4. Provident Fund
5. VRS
6. Retrenchment compensation

Pension

Notes
● Judges of the Supreme Court and High Court will be entitled to exemption of the commuted portion.
● Any commuted pension received by an individual out of annuity plan of the Life Insurance Corporation of
India (LIC) from a fund set up by that Corporation will be exempted.

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Example - Basics Salary Rs. 50,000 p.m. Retired on 31/12/XX. Pension Rs. 10,000 p.m. From 1/1/YY

Particulars Amount (₹)

Gross Salary

Deduction u/s 16 - Standard Deduction

Income under head salary

Example - Basic Salary Rs. 50,000 p.m. DA Rs. 10,000 p.m. Retired on 31/12/XX. Pension amount Rs. 10,000 p.m.
1/4th of Pension commuted on 1/2/YY. Compute the income under the head salary. Commuted value received
20,00,000. Assume no gratuity was received.

Particulars Amount (₹) Amount (₹)

Gross Salary

Deduction u/s 16 - Standard Deduction

Income under head salary

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Gratuity

Basis POGA No POGA

Days in Months

Salary Components

Salary period

Year of service

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Compute the taxable gratuity, Gratuity received = Rs. 6,00,000, Duration of Service = 24 years 9 Months, Basic
Salary = 25,000, DA = 10000 (70% FPRB), POGA Applicable

Compute the average salary

Mr X Retired on 1/2/YY. Salary at the time of retirement = Rs. 5,000. He got an increment of Rs. 500 on
1/8/XX. Compute average salary for 10 months

Compute the average salary

Mr X Retired on 1/1/YY. Salary at the time of retirement = Rs. 5,000. He got an increment of Rs. 500 on
1/8/XX. Compute average salary for 10 months

Compute the taxable gratuity, Gratuity received = Rs. 6,00,000, Duration of Service = 25 years 8 Months,
Basic Salary = 20,000, DA = 5000 (20% FPRB), POGA Not Applicable

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Leave Encashment

Steps for computing Cash equivalent of unavailed leaves as per income tax
➔ Step-1: Leave salary actually allowed or 30 days/year whichever is less
➔ Step-2: Leave actually taken
➔ Step-3: (step-1 – step2)x average monthly salary/30

Meaning of salary
Basic + DA (Forming Part of retirement benefit) + Comm. based on turnover.
Average salary of the last 10 months preceding the date of retirement.

R an employee of XYZ Ltd. retired from service w.e.f. 1.1.20YY after serving for 16 years and 7 months. At the
time of retirement he received a sum of Rs. 50,000 as leave encashment for unavailed leave of 300 days. He was
entitled to 35 days leave for each year of completed service. He was getting a salary of Rs.5,000 per month at the
time of retirement. He received an increment of Rs.500 w.e.f. 1.7.20XX.

Compute the amount of leave encashment exempt from tax.

E, an employee of XYZ Pvt. Ltd. retired from the company on 30.11.20XX. At the time of his retirement, he
received Rs. 1,44,000 as leave salary from his employer. The following information is provided by the employee:

Salary at the time of retirement (per month) Rs.9,500

Period of Service 20 year & 3 months

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Leave encashment Rs. 1,44,000

Leave availed while in service 14 months
Balance unavailed leave at the time of retirement 16 months
Average salary for last 10 months preceding the date of retirement Rs.8,800
Leave entitlement 1.5 month for every completed year of service
Compute the amount of taxable leave encashment.

Provident Fund
Under this scheme, a specified sum is deducted from the salary of the employee as his contribution towards the
fund. The employer also generally contributes the same amount out of his pocket, to the fund.

The accumulated balance is paid to the employee at the time of his retirement or resignation. In the case of the
death of the employee, the same is paid to his legal heirs.

Recognised Provident Fund

Recognised provident fund means a provident fund recognised by the Commissioner of Income-tax for the purposes
of income-tax.

Unrecognised Provident Fund (URPF)

A fund not recognised by the Commissioner of Income-tax is Unrecognised Provident Fund.

Statutory Provident Fund

The SPF is governed by the Provident Funds Act, 1925. It applies to employees of government, railways, semi
government institutions, local bodies, universities and all recognised educational institutions.

During Job On retirement

Type of Employee’s Employer’s Interest on both Payments from fund
PF contribution contribution contributions.
SPF Taxable Not Taxable Not Taxable Not Taxable - Section 10(11)
Deductions
will be
allowed under
section 80C

URPF Taxable - but Not Taxable Not Taxable ● Employer s cont.- taxable u/h salary
no deduction ● Interest thereon- Taxable u/h salary
under section ● Employee's cont.- Not Taxable
80C ● Interest thereon- Taxable u/h other
sources

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RPF Taxable Taxable in Taxable in excess Section 10(12) - Nothing shall be taxable if
Deductions excess of of :-
will be 12% salary 9.5% p.a ● employee left the job after at least
allowed under 5 years of service or
section 80C ● due to ill health, discontinuance of
employer's business or reasons
beyond
his control or
● The balance is transferred to RPF
with the new employer. In such
cases for computing the period of 5
years under the new employer, the
period of service rendered under the
previous employer shall be included.
● Entire balance standing to the
credit of the employee transferred
to his NPS account referred to in
section 80CCD and notified by the
Central Government?

If none of the above conditions is satisfied

then the amount not taxed previously shall
become taxable (i.e. upto 12% of salary and
upto 9.5% interest), in the same manner
as is done in URPF.

Meaning of Salary
Basic + DA (includible for retirement benefits) + Comm. based on turnover.

Interest credited on contribution by such person/employee

Exemption u/s 10(11) or 10(12) not available for interest accrued during the PY to the extent it relates to the
contribution made by that person/employee exceeding ₹ 2,50,000 in any PY in that fund, on or after 01/04/21.

If in that fund employer not made any contribution, then, a higher limit of ₹ 5,00,000 would be applicable.
It may be noted that interest accrued on contribution to such funds upto 31/03/21 would be exempt without any
limit, even if the accrual of income is after that date..

From the following particulars of Shri Ram Kishan, a manager of a firm, compute his taxable income from salary
for the assessment year 20 _ _ - _ _

● Basic Salary (p.m.) Rs.20,000

● D.A. (included in Salary for retirement benefits (p.m.) Rs.4,000
● Own contribution towards recognised provident fund (p.m.) Rs.2,880
● Employer's contribution towards recognised provident fund (p.m.) Rs. 2,880
● Interest on RPF@13% (p.a.) Rs.46,800
● House Rent Allowance Rs. 7,200 (p.m.). rent paid for house at Delhi (p.m.) Rs.13,800
● Medical Allowance (p.m.) Rs.1,000

Computation of Taxable Salary for the Assessment Year 20YY-ZZ

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Particulars Rs.
Salary (Rs. 20,000 x 12) 2,40,000
DA (Rs. 4,000 x 12) 48,000
Interest on RPF (in excess of 9.5%) (Rs. 46,800 – 34,200) 12,600
House Rent Allowance ---
Medical Allowance 12,000
Gross Salary 3,12,600
Less: Deduction u/s 16 50,000
Income from Salary 2,62,600

Mrs. R was an employee in a company. The following particulars are available regarding her income for the year
ending 31.3.20YY.
● Salary Rs. 3,000 per month.
● Entertainment Allowance Rs.300 per month.
● She retired from service on 1.1.20YY after 26 years of completed service and received a pension of Rs. 1,500
per month and gratuity of Rs. 52,000.
● She also received Rs. 52,000 from an unrecognized provident fund of which she was a member (this
constitutes employees contribution Rs.20.000. employer's contribution Rs. 20,000, interest on employee's
contribution Rs.6,000, interest on employer's contribution Rs.6.000.

Compute the taxable income under the head "Salaries" of Mrs. R for the assessment year 20_ _ - _ _ assuming
that the salary and pension is due on the last day of the month. She is not covered under the Payment of
Gratuity Act.

Solution
Computation of Income under salaries of Mrs. R for the Assessment Year 20 _ _ - _ _
Rs.
Salary (3,000 x 9) 27,000
Entertainment allowance (300 x 9) 2,700
Pension (1,500 x 3) 4,500
Gratuity (52,000 – 39,000) 13,000
Lump Sum received from unrecognised provident fund (only employer’s 26,000
contribution and interest thereon)
Gross Salary 73,200
Less: Deduction 50,000
Income from Salaries 23,200
Income from other sources
Interest on employee’s contribution 6,000
Total Income 29,200

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Compensation on voluntary retirement Section 10(10C)

● Exemption
○ Least of the following amount is exempt:
■ Amount received or receivable or
■ Rs. 5,00,000
■ Salary p.m. × 3 months x No. of years of completion of service (Ignore fractions)
■ Salary p.m. × No. of remaining months of service;
● Meaning of salary
○ (Salary means Basic + DA (includible for retirement benefits) + Comm. based on turnover, at the
time of voluntary retirement).
● If exemption is claimed in one A/y then exemption shall not be allowed in another A/y.
● Exemption shall be allowed only to employees of central/state govt, public sector undertakings, any
company, statutory Corporation, local authority, university, IIT or notified institute of management.

Rameshwaram is employed in a public company and is paid a sum of Rs. 7, 00,000 on Voluntary Retirement from
service. The normal age of retirement in the company is 60 years and Rameshwaram who was 46 years at the
time of retirement had completed 22 years of service. His monthly salary at the time of retirement was as follows
● Basic Pay 10,000 (All amounts per month)
● Dearness Allowance (40% includible for pension) 7,000
● H.R.A. 4,000
● Conveyance Allowance Rs. 1,000
What is the amount taxable under the Income-tax Act?

Solution
● Minimum of the following shall be exempt
○ Rs. 7,00,000.
○ Rs. 5,00,000.
○ As per guidelines = 8,44,800.
■ (10,000 + 7,000 x 40%) x 3 x 22 = 8,44,800.
■ (10,000 + 2,800 ) x (60-46) x 12 = 21,50,400 Which is less (a. or b.) = 8,44,800

● Taxable VRS = Rest. (7,00,000 – 5,00,000) = 2,00,000.

Retrenchment Compensation - Section 10(10B)

● Exemption
○ Least of the following amount is exempt
■ 15/26 days salary, for every completed year of service or any part thereof in excess of 6
months (as per Industrial Disputes Act)
■ amount notified by government, (presently amount notified is 5,00,000)
■ amount received

● Salary means
○ Salary includes all but does not include bonus and employer’s PF contribution.
○ Average salary for preceding 3 months preceding the date of retirement is taken.

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Mr. Gobind received retrenchment compensation of Rs. 10,00,000 after 30 years and 4 months of service. At the
time of retrenchment, he was receiving basic salary of Rs. 20,000 p.m. and dearness allowance of Rs. 5,000 p.m.
Compute his taxable retrenchment compensation. (4 Marks).

As per section 10(1OB), exemption available to Mr. Gobind in respect of retrenchment compensation, in this case,
will be the least of the following limits:
1. Compensation actually received Rs. 10,00,000
2. Statutory limit = Rs. 5,00,000
3. Amount calculated in accordance with the provisions of 25F of the Industrial Disputes Act, 1947.
15 (20,000 𝑥 3)+(5,000 𝑥3)
= 26
x 3
x 30 years = Rs. 4,32,692

Therefore Rs. 4.32.692. Being the least of the above would be exempt under section 10(10B).
The taxable compensation will be = 567308

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Perquisites
The term “perquisite” is defined under section 17(2). The definition of perquisite is an inclusive one.

Type
● 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

It is important to note that only those perquisites which the employee actually enjoys have to be valued and taxed
in his hand.

In respect of all the perquisites whenever any concession is given or any amount is recovered from the employee,
the value of the perquisite shall be calculated as follows:-
● Step 1 Determine value of the perquisite as if nothing has been recovered from the employee.
● Step 2 Determine the amount recovered from the employee.
● Step 3 Step 1 - Step 2 shall be the taxable value of the perquisite.

RFA - Rent free accommodation

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If furniture is also provided along with house

● If the employer has also provided furniture (including T.V., refrigerators, other household appliances, air
conditioning plant or equipment), in such a case the value determined above shall be increased by 10% p.a.
of cost of furniture.
● And if such furniture is hired from a third party, the value of unfurnished accommodation shall be
increased by the actual hire charges payable.
● In other words increase the RFA value with
○ In case furniture is owned by the employer then 10% of actual cost.
○ In case furniture is taken on rent then by actual hire charges.

Accommodation provided at two places

If accommodation is provided to an employee on account of his transfer from one place to another, at a new place
of posting while retaining the accommodation at the old place, the value of perquisite shall be determined with
reference to only one such accommodation which has the lower value (calculated according to the above provisions)
for a period not exceeding 90 days and thereafter the value of perquisite shall be charged for both such
accommodations.

For the first 90 Days. Any one at the option of assessee. After 90 days both will be taxable.

Accommodation provided in a hotel

Where accommodation is provided by the employer in a hotel except where the employee is provided such
accommodation for a period not exceeding in aggregate 15 days on the transfer from one place to another, in such
a case perquisite value shall be 24% of salary paid or payable for the period during which the accommodation was
provided or the actual charges paid or payable to such hotel, whichever is lower.

Accommodation provided in remote area

If the accommodation is provided to an employee working at a mining site, onshore oil exploration site, project
execution site, dam site, power generation site or offshore site, the facility shall be exempt if the facility has been
provided at any of the following places:
● being of a temporary nature and having plinth area not exceeding 800 square feet, is located not less than
eight kilometers away from the local limits of any municipality or a cantonment board or
● is located in a remote area.

Meaning of Salary
● 'Salary' includes the pay, allowances, bonus or commission payable monthly or otherwise or any monetary
payment, by whatever name called from one or more employers, as the case may be, but does not include
the following, namely:-
○ dearness allowance or dearness pay unless it enters into the computation of superannuation or
retirement benefits of the employee concerned;
○ employer's contribution to the provident fund account of the employee;
○ allowances which are exempted from payment of tax;
○ the value of perquisites specified in section 17(2) of the Income-tax Act;
○ reimbursement of medical expenses.
○ any lump sum payment like gratuity, leave encashment, commuted pension, etc. received at time of
termination of service or at the time of voluntary retirement or superannuation.

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● Salary (items to be included )shall be taken only for the period for which RFA is taken.
● Salary from all the employers during the period of RFA shall be taken.
● Advance salary, arrears salary should be ignored.

Accommodation at concessional rent

If the accommodation is not provided free of cost, rather employer has charged some concessional rent from the
employee, in that case perquisite value shall be calculated in the similar manner as in case of rent free
accommodation however amount paid by the employee to the employer shall be deducted from the perquisite so
computed.

Valuation of motor car

Situation Valuation
CAR OWNED BY EMPLOYEE
Car expense met by employee Nothing is taxable
Car Expense met by employer

a. Used wholly for official purpose Nothing shall be taxable

b. Fully private purpose Amount incurred by the employer

c. Partly official, Partly personal Amount incurred by employer

Less: Rs. 1800 (up to 1.6cc) / 2400 per month
Less: Rs. 900 per month (for Chauffeur)
If the actual expenditure for official purpose is more than
limits specified then actual expenditure can be deducted
if the employee has maintained the specified documents.
CAR OWNED BY EMPLOYER
Expense met by employer

a. Used wholly for official purpose Nothing shall be taxable

b. Fully private purpose Actual amount incurred by the employer for running and
maintenance & chauffeur
ADD: 10% of actual cost of the car for normal wear and
tear or actual hire charges

c. Partly official, Partly personal Rs.1800/2400 per month

Rs. 900 pm for Chauffeur
Nothing is deductible for any amount recovered from the
employee.

Expenses met by employee

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a. Used wholly for official purpose Nothing shall be taxable.

b. Fully private purpose 10% of actual cost of the car for normal wear and tear
or actual hire charges

c. Partly official, Partly personal Rs. 600 (up to 1.6cc)/ 900 per month.
ADD: Rs. 900/month for Chauffeur
Nothing is deductible for any amount recovered from the
employee.

When motor car is provided by employer and expenses on

running and maintenance for official use are met by
employer and private use are met by employee, the case
will be covered by the above situation only (Rs. 600 &
Rs. 900)
Employee owns any other automotive conveyance running maintenance done by employee

a. Fully official Nothing shall be taxable.

b. Partly official partly personal Actual expenditure incurred
LESS: 900 per month (higher deduction can also be
taken with records)
c. Fully Personal Actual running and maintenance shall be taxable.

NOTES
● For proving official purpose
○ Full details of journey undertaken etc (Maintain Log Book)
○ Certificate from employer
● Other relevant points
○ Vehicle provided by the employer for commuting from residence to office and back. Nothing shall be
taxable.
○ If the employee is permitted to use more than one car for partly official and partly personal
purpose at the option of the assessee
■ one car shall be considered as used partly for official purpose and partly for personal
purpose.
■ The other car will be deemed to be used for fully personal purposes.
● If nothing is mentioned assume car is up yo 1.6cc
● If nothing is mentioned assume expenses are borne by Employer

Compute the perquisite value of the car for the assessment year 20 _ _ - _ _ in the following
situation if the taxable monetary emoluments of X are Rs. 3,00,000
1. The car is owned by X but the running and maintenance expenses amounting to Rs. 40,000
during the previous year are met by the employer. The car is used for
a. personal benefit of X
b. only for official duties
c. 30% for personal benefit and 70% for official use

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2. The employer provides a car of 1.5 ltr. engine cubic capacity costing Rs. 5,00,000 exclusively for
the personal benefit of X. The expenses incurred on the car are Rs.52,000. (nothing is mention
assume expense is by employer)
3. The employer provides a car (below 1.6 Ltr.) along with a driver to X partly for official and
partly for personal purpose. The expenses incurred by the company are
a. running and maintenance expenses 32,000
b. driver's salary 36,000
4. In case (3) the employer maintains a log book and it is established that 30% of the total
mileage of the car is for personal use of X and 70% for official duties.
5. The employer provides a car (above 1.6 It.) to X which is used for official work and is also used
by X for commuting from his residence to office and back.
6. Motor car (engine cubic capacity above 1.6 litres) owned by Employer. was given to Mr. EE for
both official and personal use, for the whole year. Running expenses for personal use was fully
met by Mr. EE. Actual expenses Rs. 32,400. The car was self-driven by Mr. EE .
7. X is provided with 2 cars to be used for official and personal work and the following information
is available from the companies.
Car I Above 1.6ltr Car II Below 1.6ltr
Cost of the car 6,00,000 4,00,000
Running and maintenance 60,800 98,000
Salary of the driver 44,000 44,000

Sweeper, gardener, watchman or personal attendant

● Actual cost to the employer shall be taxable value in the hands of the employee.

Gas, Electricity or Water

● If from own sources: Manufacturing cost per unit taxable
● In other case: Amount paid to outside agency shall be the taxable value.

Valuation in respect of free or concessional educational facilities to any

member of employees' household

● Education facility is owned by the employer or Free education is provided in any other educational
institution by reason of employee being in employment of that employer.
○ The value shall be fees charged by a similar school in a similar locality.
● However nothing shall be taxable in the above two cases if value per child does not exceed Rs.1,000 p.m.
● If the value is in excess of Rs. 1,000 p.m. then an amount in excess of Rs. 1,000 only shall be taxable.
● If school fees of children are reimbursed by the employer then it shall be taxable in the hands of all the
employees and no exemption will be given. In other words, exemption will be given only in the two cases
mentioned in the first point.
● In any other case (other than children) - actual expenditure incurred by the employer shall be its value. In
such cases no exemption shall be allowed.
● Note: Children shall include a step or adopted child.
● Meaning of household – Spouse, Children & their spouses, parents, servants and dependants.
● Amount incurred by the employer for providing/free education facility or training to an employee is not
taxable.

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Free or concessional tickets

The value of any benefit or amenity resulting from the provision by an employer
● who is engaged in the carriage of passengers or goods,
● to any employee or to any member of his household for personal or private journey free of cost or at
concessional fare,
● in any conveyance owned, leased or made available by any other arrangement by such employer for the
purpose of transport of passengers or goods
shall be taken to be the value at which such benefit or amenity is offered by such employer to the public as
reduced by the amount, if any, paid by or recovered from the employee for such benefit or amenity.

However, there would be no such perquisite to the employees of an airline or the railways.

Obligation of Employee
Any monetary obligation of the employee which is discharged by the employer is perquisite in the hands of all
employees as per section 17(2)(iv).

Life insurance Premium

Any Sum payable by the employer to effect assurance on the life of the assessee shall be taxable in the hands of
the employee.

However, there are schemes like group annuity scheme, employees state insurance scheme and fidelity insurance
scheme, under which insurance premium is paid by employer on behalf of the employees. Such payments are not
regarded as perquisites.

Sweat equity shares or specified securities

Valuation of shares
● Listed on a single recognized stock exchange.
○ Average of opening and closing price of date of exercising the option
● Listed on more than one recognized stock exchange.
○ Average of opening and closing price of stock exchange which records highest volume of trading.
● No trading on the date of exercising the option.
○ Preceding and closest date.
● The Sale price is to be used.
● Not listed shares
○ Value as determined on the specified date by the merchant banker
○ Specified date: date of exercising the option or any date within preceding 180 days of exercising the
option
Other security
● Value as determined on the specified date by the merchant banker.

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Interest free or concessional loans

● The value of benefit shall be the amount calculated at the rate charged by SBI on the 1st day of the
relevant previous year for a similar loan given to an employee or any member of his household.
● Interest shall be calculated on maximum outstanding monthly balance.
● The above value shall be reduced by any amount which is recovered from employee
● However, no value would be charged if such loans are made available for medical treatment in respect of
diseases specified in rule 3A or where the amount of loans are petty not exceeding in the aggregate Rs.
20,000
● Provided that where the benefit relates to the loans made available for medical treatment referred to above,
the exemption so provided shall not apply to so much of the loan as has been reimbursed to the employee
under any medical insurance scheme.
● If a loan is taken from RPF maintained by the employer, then nothing shall be taxable because it is not
any benefit given by the employer.

Travelling, touring and accommodation

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.

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.

If an official tour is extended as vacation -However, where 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.

Expenses on any member of the 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 incurred shall also be a fringe benefit or amenity.

Free or concessional food and non-alcoholic beverages

The value of free food and non-alcoholic beverages provided by the employer to an employee shall be the amount
of expenditure incurred by such employer. The amount so determined shall be reduced by the amount, if any, paid
or recovered from the employee for such benefit or amenity:

However, the following would not be treated as a perquisite -

● free food and non-alcoholic beverages provided by such employer during
○ working hours at office or business premises or
○ through paid vouchers which are not transferable and usable only at eating joints, to the extent the
value thereof either case does not exceed fifty rupees per meal or
● tea or snacks provided during working hours or

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● free food and non-alcoholic beverages during working hours provided in a remote area or an off-shore
installation.

Gift, vouchers or token

● Gift given by the employer in kind upto Rs. 5,000 in aggregate during a particular year is exempt and excess
over it is taxable. If the employer has given any voucher or token in lieu of which such gift may be
received, it will also be exempt in the similar manner.
● CBDT has clarified that
○ The amount only in excess of Rs. 5,000 shall be taxable
○ If the gift is by way of cash or by way of cheque, then the entire amount shall be taxable.

Credit card Facility & Club Expenditure

● If expenditure is wholly and exclusively for official purpose - Nothing is taxable, if
○ Complete details of such expenditure including the date, nature and necessity expenditure, is
maintained.
○ Employer certifies that such expenditure was exclusively for official purposes
● In other cases - the actual expenditure

Notes
● If the employer has obtained membership of the club in his name (popularly known as corporate
membership), the fees paid for acquiring such membership shall not be taxable for employees.
● However if the membership is in the name of employee or any member of his household then it shall be
taxable.
● Expenditure on use of health club, sport facilities provided uniformly to all employees, shall not be taxable.

Use of movable assets

The value of benefit to the employee resulting from the use by the employee or any member of his household of
any movable asset (other than cars, laptops and computers) belonging to the employer or hired by him shall be
determined at 10% per annum of the actual cost of such asset or the amount of rent or charges paid or payable
by the employer, as the case may be, as reduced by the amount, if any recovered from the employee for such use.

Transfer of movable assets

The value of the benefit shall be the actual cost to the employer as reduced by the following % for each
completed year during which the asset was put to use by the employer.

Therefore depreciation shall be allowed only if used for 12 months. Any period less than 12 months shall be
ignored.

a. Computers and electronic items 50% on the basis of WDV

b. Motor Cars 20% on the basis of WDV

c. Any other assets 10% on the basis of SLM

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Electronics Item
- Means data storage and handling device - e.g. - computer, digital diary, printer etc.
- Does not include household appliances - e.g. - washing machine, microwave oven etc.

Employer purchased an asset for Rs. 1,00,000 on 1.7.20 _ _ . He sold the same asset to an employee on 1.12. _ _ for Rs.
10,000. Calculate the value of perquisite in the hands of the employee.

Mr. Radhey is allowed to use the video camera belonging to the company. The company had purchased this camera for Rs.
60,000 on 1.5.20_ _ . This camera was sold to him on 1.8.20_ _ for Rs. 30,000. Calculate the value of perquisite in the
hands of the employee.

Other benefit or amenity

The value of any other benefit or amenity, service, right or privilege provided by the employer shall be determined
on the basis of cost to the employer under an arms' length transaction as reduced by the employee's contribution,
if any.

Medical Perquisites
● In India
○ Expenditure incurred or reimbursed on any medical treatment provided to an employee or any
member of his family is fully exempt without limit for treatment in any hospital, dispensary etc.
■ Maintained by the employer.
■ Maintained by the Govt.,
■ Maintained by any local authority or
■ Approved by Government for treatment of Government, and other employees or
■ Approved by commissioner of income tax for a specified disease only for treatment of
specified disease
○ Health insurance premium (Accident insurance policy, group insurance of employees) incurred or
reimbursed for insurance on the health of employee or any member of his family is fully exempt
without limit.
○ Reimbursement of mediclaim insurance premium by an employer for a policy taken in the name of
the employee or his family member is exempt.
○ Medical allowance is fully taxable.

● Outside India
○ Medical expenses incurred by employer shall be tax free to the extent permitted by RBI
○ Expenses on stay abroad of
■ the employee or any member of his family for medical treatment
■ with one attendant who accompanies the patient In connection with such treatment, shall
be tax free to the extent permitted by RBI
○ Travel expenses shall be fully exempt, if gross total income does not exceed Rs. 2,00,000(excluding
such travel expenses but after including taxable medical and boarding)If GTI exceeds 2, 00,000 Rs.
then total amount of travel expenses incurred by employer shall be taxable i.e. included in salary.

Payment of premium on personal accident insurance policies

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If an employer takes personal accident insurance policies on the life of employees and pays the insurance premium,
no immediate benefit would become payable and benefit will accrue at a future date only if certain events take
place.

Moreover, the employers would be taking such policy in their business interest only, so as to indemnify themselves
from payment of any compensation. Therefore, the premium so paid will not constitute a taxable perquisite in the
employees’ hands.

Family for valuation of medical & LTC means

● Family for valuation of medical facilities & LTC means:
○ Spouse and children (Married, unmarried, dependant not dependant).
○ Parents, brothers and sisters of the employee who are mainly dependent on the employee.

Leave travel Concession

● Condition for exemption
○ Any concession received by employee for himself or his family for traveling to any place in India is
exempt, to the extent amount spent, subject to the following conditions:
■ The exemption shall be available to an individual two times in a block of four calendar years
starting from the calendar year 1986.The date of joining with the employer is not relevant.
■ Two recent blocks are 1/1/14 to 31/12/17 and 1/1/18 to 31/12/21
■ Out of two journeys, exemption for one journey can be claimed in the calendar year
succeeding the end of the block.
■ Exemption is available only for two children. But exemption will be available for all the
children born before October 1, 1998. Also in case of multiple births after the first one
exemption shall be given for all the children.
● Amount of exemption
○ If journey is performed
■ By air then air economy fare of the National Carrier by the shortest route shall be exempt.
■ By any mode other than air and
● destination is connected by rail then first AC rail fare by the shortest route shall be
exempt.
● destination is not connected by rail then:-
○ If recognized public transport system exist e.g. buses, boats etc., First class
or deluxe class fare shall be exempt.
○ If recognized public transport system does not exist, first AC rail fare shall
be exempt,assuming that destination is connected by rail.
● Other Points
○ Shortest Route:-Where journey is performed from the place of origin to different places, the
exemption will be limited to what is admissible for the journey from the place of origin to the
farthest point reached, by the shortest possible route.
○ In case the LTC is encashed without performing the journey, the entire amount received by the
employee would be taxable.
○ Exemption is allowed for travelling expenses only. Expenses on boarding, lodging etc are taxable.

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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.

Rajesh went to Srinagar on a holiday on 15.11.20XX with his wife and two children (one son - age 6 years; twin
daughters - age 3 years). They went by aeroplane (economy class) and the total cost of tickets by his employer
was Rs. 58,000 (Rs. 43,000 for adults and Rs. 15,000 for the three minor children). Compute the amount of Leave
Travel Concession exempt.

Will the answer be any different if, among his three children, the twins are 6 years old and son 3 years old?
Discuss. (4 Marks)

Sec 17(2)(vii)
Employer contribution towards Recognized Provided Fund (RPF), New Pension Scheme (NPS) referred u/s 80CCD,
Approved Superannuation Fund (ASF) in excess of ₹ 7,50,000 is treated as perquisite in hands of EE and Taxable.

Sec 17(2)(viia)
Annual Accretion by way of Interest/dividend/similar amount on contribution of more than 7,50,000 by ER also
treated as perquisite in hands of EE and Taxable.

Calculation of Annual Accretion of Interest, dividend etc in PY

TP = (PC/2)*R + (PC1 + TP1)*R

- TP : Taxable perquisite under section 17(2)(via)for the current PY.
- PC : Amount or aggregate of amounts of ER's contribution in excess of ₹ 7.5 lakh to RPF, NPS and ASF
during the PY.
- PC1 : Amount or aggregate of amounts of ER's contribution in excess of ₹ 7.5 lakh to RPF, NPS and ASF
for the PY or years commencing on or after 01/04/20 other than the current PY.
- TP1: Aggregate of taxable perquisite u/s 17(2)(via) for the PY or years commencing on or after 01/04/20
other than the current PY.
- R I/ Favg
- I : Amount or aggregate of amounts of income accrued during the current PY in RPF, NPS and ASF.
- Favg : Amount or aggregate of amounts of balance to the credit of RPF, NPS and ASF on 01/04/XX
+ Amount or aggregate of amounts of balance to the credit of RPF, NPS and ASF on 31/03/XX)/2
(Opening + Closing / 2 in the current year)

Perquisites taxable only in the hands of specified employees

● Any monetary obligation of the employee which is discharged by the employer is perquisite in the hands of
all employees as per section 17(2)(iv).
● However, sometimes instead of discharging an employee's obligation, the employer provides perquisites in the
form of facility to the employee. Such perquisites are taxable in the hands of specified employees only.
● Followings are the example of such perquisite which will taxable in the hands of specified employee only (if
provided as facility)
○ Provision of sweeper, gardener, watchman or personal attendant
○ Facility of use of gas, electricity or water supplied by employer

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○ Free or concessional tickets

○ Use of motor car
○ Free or concessional educational facilities
● If above perquisites are provided as reimbursement then these perquisites will be taxable for all.

Meaning of Specified Employee

1. Director employee: An employee of a company who is also a director is a specified employee. It is
immaterial whether he is a full-time director or part- time director.
2. An employee of the company who has substantial interest in a company if he is the beneficial owner of the
equity shares carrying 20% or more of the voting power in the company.
3. An employee other than an employee above, whose income chargeable under the head ‘salaries’ exceeds ₹
50,000 is a specified employee. The above salary is to be considered exclusive of the value of all benefits or
amenities not provided by way of monetary payments and all the deduction allowed under section 16 is also
required to be deducted. Only taxable portions of allowances are to be considered in computing the salary
for this purpose.

Member of Household
Shall include-
● spouse(s),
● children and their spouses,
● parents, and
● servants and dependants;

Tax Free Perquisite

Telephone
Telephone provided at the residence of the employee and payment of bill by the employer is a tax free prerequisite.

Others
● Scholarship to employee's children.
● Goods sold by employers to employees at reasonable prices.
● Tax on Non Monetary perquisites paid by employer.

Deductions
Standard Deduction
A standard deduction of ₹ 50,000 or the amount of salary, whichever is lower, is to be provided to the employees.

Entertainment allowance
Discussed Earlier

Professional Tax
● Any amount paid by the employee shall be allowed as deduction in the year of payment.
● Deduction is allowed in the year of actual payment whether it is related to current, past or future years.
● If professional tax of an employee is paid by the employer then first it shall be included in the gross salary
of all employees and then deduction shall be allowed u/s 16.

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Example – Discuss the treatment of professional tax in the following cases

● Professional tax due for the year Rs. 6,000. – In this case no deduction shall be allowed.
● Professional tax due for the year Rs. 6,000, paid only Rs. 3,250. – In this case deduction shall be allowed
only of Rs. 3,250.
● Professional tax paid during the year 15,000 out of which 5,000 is for the current year, 5,000 is for the last
year and 5000 is for the upcoming year. – In this case Rs. 15000 shall be allowed as deduction.
● Professional tax total paid Rs. 3,000. Entire professional tax was paid by the employer – In this case Rs.
3,000 shall be added in the salary and then deduction shall be allowed of Rs. 3,000.
● Professional tax total paid Rs. 3,000 out of which Rs. 2,000 was paid by employer and 1,000 was paid by
employee. In this case Rs. 2,000 shall be added in the salary of the employee and Deduction shall be
allowed of Rs. 3,000.

Salary From United Nations Organisation

Section 2 of the United Nations (Privileges and Immunities) Act, 1947 grants exemption from income-tax to
salaries and emoluments paid by the United Nations to its officials. Besides salary, any pension covered under the
United Nations (Privileges and Immunities) Act and received from UNO is also exempt from tax.

RELIEF UNDER SECTION 89

To calculate the relief, the following steps should be taken:
1. Calculate the tax due in the current year by including the arrears in your total income.
2. Calculate the tax due in the current year by excluding the arrears from your total income.
3. Compute the difference of the two figures of Step 1 & 2. Let us term this as “A”
4. Now Calculate your tax due in the year for which the arrears have been received by including the arrears in
your total income.
5. Then Calculate your tax due in the year for which the arrears have been received by excluding the arrears
from your total income.
6. After that, compute the difference of the two figures of Step 4 & 5 and 5. Let us term this as 'B'.
7. Subtract A (Step 3) from B (Step 6) and you will get the relief amount.

Rule 9D
Calculation of taxable interest relating to contribution in a SPF or RPF, exceeding specified limit
Separate accounts within the PF account shall be maintained during the PY 21-22 and all subsequent PY's for
taxable contribution and non-taxable contribution made by a person.
(a) Non-taxable contribution account shall be the aggregate of the following, namely
(i) closing balance in the account as on 31/03/21;
(ii) any contribution made by the person in the account during the PY 21-22 and subsequent PY's,
which is not included in the taxable contribution account;
(iii) interest accrued on (i) and (ii), as reduced by the withdrawal, if any, from such account;
(b) Taxable contribution account shall be the aggregate of the following, namely
(i) contribution made by the person in a PY in the account during the PY 21-22 and subsequent PY's,
which is in excess of 2,50,000/5,00,000; and
(ii) interest accrued on sub- clause (i)
Yearly threshold limit is ₹ 5,00,000, if the contribution by such person/employee is in a fund in which there is no
employer’s contribution and ₹ 2,50,000 in other cases.

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