INCOME TAX

COURSE
BY CA POOJA GUPTA

DAY-2 & 3
INCOME FROM SALARY
 Leave Travel Concession(LTC)

 Sometimes employer may permit the employee or his family member to go to any place in India and
travelling expenditure are incurred by the employer, such facility is called leave travel concession
 LTC exemption is Available for Travel of Employee, his spouse, children and dependent relative (M, F, B, S)
 The exemption is available twice in block of four Calendar Years (current block is 2018-21).
 Exemption of LTC is available only for 2 Children born on or after 1-10-1998
 First Time One Child & Second Time Twins
 Total 3 Children = Exemption allowed for all 3 Children
 First Time Twins & Second Time one Child
 Total 3 Children = Exemption allowed to only 2 Children
 Leave Travel Concession(LTC) – Sec10 (5)
Mode Maximum Exemption
Journey is by Air  Amount of Economy Class Fare (Air India)
 Actual Expense, whichever is lower
Journey is by Rail  Amount of 1st Class AC ticket
 Actual Expense, whichever is lower

Other mode of Transport  First Class or Deluxe Class Bus Fare

(Places not connected by Rail)  Actual Expense, Whichever is lower

SECTION 115BAC: An employee who opts for the provisions of section 115BAC would not be entitled for LTC
Retirement Benefits
 Gratuity (Sec.10(10)
Sr. Particulars (Gratuity) Exemption
1 Gratuity Received by Govt & Fully Exempt
Local Authority employees.
2 Gratuity in case of employees (covered under Payment of Lower of following:
Gratuity Act,1972) a. Actual Gratuity
b. ₹ 20,00,000/-
(Here, Salary means, c. Salary last drawn x [15/26] x completed
= Basic + DA entire ) years of service or part thereof in excess
of 6 months.

3 Gratuity in respect of other employees. Lower of following:

a. Actual Gratuity
b. ₹ 20,00,000/-
(Here, Salary means,
c. Average Salary (last 10 months) x [15/30] x
= Basic + DA, if terms of employment so provide +
completed years of service.
Commission, if based on fixed % of turnover.
{ignore fraction. Only completed years to be
taken, even more than 6 months not to be
considered.}
 Gratuity (Sec.10(10)

Points to Remember:
Gratuity Received during the period of Service → Fully Taxable.
Gratuity received by Members of Defence Service → Fully Exempt.
Retirement Gratuity received by Employees of CG/Members of Civil Services/LA → Fully Exempt.
Gratuity is received by Widow, Children or Dependents of Deceased Employee → Fully Exempt.
Exemption Limit of Rs.20 Lacs is the maximum amount of gratuity exempt. If gratuity is received in any earlier
year from former employer (if any) & again received from another employer in later year, limit of Rs.20 Lacs will
be reduced by the amount of gratuity exempt earlier.

Q: Mr. Ram not being covered by the Payment of Gratuity Act, 1972 retires during PY 2020-21 from XYZ Private Ltd &
receives Rs.45,000 as gratuity after a service of 40 years 11 months. His average monthly salary during the last 10
months of services was Rs.2,200. Determine the taxable gratuity for AY 2021-22.
 Gratuity (Sec.10(10)

1 Amount of Gratuity Received Rs.45,000

2 Amount of Gratuity Exempt u/s 10(10) [Least of the following] : Rs.44,000
(1)Amount of Gratuity actually received = Rs.45,000
(2) Specified Amount = Rs.20 Lacs
(3) Rs.2,200 x ½ x 40 = Rs.44,000
Taxable gratuity [ 1 – 2] Rs.1,000
 Pension
Pension is a periodically payment to the Employee at the time of
Retirement or to the family member in case of Death of an employee Exempt u/s
10(10A)

Uncommuted Commuted
(Monthly pension) (Lump sum) Other Govt.
Employees Employees

Fully Taxable for

all employees
If Gratuity If Gratuity
 Pension received by individual who are winners of Fully Exempt
Received not Received
awards like Parm vir chakra is exempt u/s 10 (18)
 Pension received by family member for Armed forces Exempt Amt. = Exempt Amt. = Total Pension =
after the death of employee is exempt u/s 10 (19) 1/3 of pension if so ½ of pension if Commuted
 Pension to family member of employee in case of death commuted so commuted pension/commu
is taxable under IFOS (Deduction u/s 57 = Lower of (Total Pension) (Total Pension) tation%
Rs.15000 OR 1/3rd of Pension)
 Leave Encashment/Leave Salary
Sec. 10(10AA)

It means en-cashment of un-utilised leave.

(1) Leave salary during employment-Fully taxable for all employees.
(2) Leave salary at the time of retirement: (i) Leave credit * Avg salary pm
(ii) Last 10 months avg salary
Exempt u/s 10(10AA) Other Employee (iii)Actual amt rec.
(iv) Rs.300000
(whichever is lower )

Govt.
Employee/Legal Fully Exempt
Heirs
 Earned Leave Encashment/Leave Salary
Sec. 10(10AA)

Average salary p.m

 Avg basic salary of last 10 months xxx
 Avg. DA(in terms) of last 10 months xxx
 Avg turnover commission of last 10 months xxx

Leave Credit
 Leave Credit=Leave allowed (-) Leave taken/encashed
(Max. 30 days for every completed year)

To convert leave credit in month divide total days with 30

 VRS- Exempt u/s 10(10C)
(i)Salary p.m. x 3 months x no. of years of completion of Service.
(ii) Salary p.m. x No. of remaining months of service,
Whichever is higher and then
(iii) Actual amount received.
(iv) Maximum 5,00,000.
(whichever is lower)

Salary p.m.= Basic + DA(T)+T/O Commission.

 Retrenchment Compensation
Sec.10(10B)

Sr Particulars Exemption
1 Compensation received at time of retrenchment is Lower of following is Exempt :
exempt from tax to the extent
a. Actual Amount Received.

b. Maximum Amount ₹ 5,00,000/-

(Here, Salary means,
Basic + DA, if terms of employment so provide + c. 15 days average pay (15/26) * Length
Commission, if based on fixed of service (for every completed
% of turnover.) years of continuous service or any
part in excess of six months)
 Retrenchment Compensation
Sec.10(10B)

Mr. Garg received retrenchment compensation of Rs.10 Lacs after 30 years 4

months of service. He was drawing basic salary Rs.20,000 p.m.; DA - Rs.6,000 p.m.
Compute his taxable retrenchment compensation.
Solution: Taxable Retrenchment compensation = Rs.10 lacs – Rs.4,50,000
(Refer WN below) = Rs.5,50,000
WN - Calculation of Exempt Retrenchment compensation = Lower of
(a) Actual Amount Received = Rs.10 lacs
(b) Rs.5,00,000.
(c) 15 days Average Pay × LOS (More than half is treated as full) = Rs.26000 × 15/26 × 30
years = Rs.4,50,000.
RETIREMENT BENEFITS IN ITR
Exempt Allowances
Particulars Statutory P.F. Recognised P.F. Unrecognised P.F. Public P.F.

Employee’s Contribution Available Available Not Available Available

(Deduction u/s 80C)
Employer’s Totally Exempt Exempt upto 12% Not exempt and not taxable Not Applicable
Contribution of Salary, excess is every year.
taxable Taxable on retirement

Interest Credited to Totally Exempt Exempt upto 9.5% Taxable on retirement Totally Exempt
Fund p.a., excess is
taxable
Amount withdrawn Totally Exempt Totally Exempt  Accumulated employee’s Totally Exempt
from Fund (Sec. (Sec. contribution – Exempt (Sec. 10(11))
(at time of 10(11)) 10(12))  Interest on employees (Report in ITR in
retirement) (Report in ITR in (Report in ITR in contribution (till date) is exempt Income)
exempt Income) exempt Income) taxable as IFOS
 Accumulated employer’s
contribution & interest on
Condition: employer’s contribution (till
completion of 5 years date) is taxable as profit in
of service lieu of salary (Sec.17(3))
(Report in ITR in exempt Income)
 Approved Superannuation Provident Fund

Employee Contribution Deduction u/s 80 C Allowed

Employer contribution Exempt upto Rs.150000 per Employee
per year

Interest Fully Exempt

Refund/Withdrawal Fully Exempt (Sec.10(13))

(Report in ITR in exempt Income)

 Amended by FA 2020
Contribution by employer to fund and scheme taxable u/s
17(2)(vii)
The amount or aggregate of any contribution made:
• In a recognised provident fund +
• In NPS referred to in section 80CCD(1)+
• In an approved super annuation fund
By the employer to the account of assessee, to the extent it exceeds Rs.750000 shall be
considered as perquisites (Section 17(2)(vii)

Annual accretion by way of interest, dividend etc. to the balance at the credit of fund and
scheme referred to in section 17(2)(vii) and taxable under section 17(2)(viia) - Interest
amount on these accretions also taxable
 Amendment by Finance Act-2021
Interest on Excess Contribution in SPF/RPF

 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 Rs.250000 in any PY in that
fund on or after 01/04/2021
 If in that fund employer not made any contribution, then a higher limit of Rs.500000 would be
applicable
 It may be noted that interest accrued on contribution to such fund upto 31/03/2021 would be
exempt without any limit, even in accrual of income is after that date.
 Interest will be taxable in Income from Other sources.
 Read section 10(11) & 10(12) with Rule 9D (NN 95/2021 dated 31.08.2021)
 Relief u/s 89 for Arrears of salary
(only for individual)

If any individual receives any portion of his salary in arrears or receives profits
in lieu of salary (Gratuity, commuted pension etc.) &
as a result of such receipt,
his income is assessed at a higher rate
Than the rate at which it would have been assessed
he can claim relief u/s 89
To claim relief form 10E is mandatory to be furnished
 Steps to calculate Relief u/s 89

Step1: Calculate tax due in the current year by including arrears in total income.
Step 2:Calculate tax due in the current year by excluding the arrears from total income.
Step 3: Calculate the difference between Step 1 and Step 2.
Step 4: Calculate tax payable on the total income of the year to which the arrears relate,
excluding arrears.
Step 5: Calculate tax payable on the total income of the year to which the arrears relate,
including arrears.
Step 6: Calculate the difference between Step 4 and Step 5.
Step 7: Excess of amount at Step 3 over Step 6 is the tax relief that shall be allowed.
If the amount in Step 6 is more than the amount in Step 3 no relief shall be allowed.
 Example

Mr. Ram furnishes the following particulars for the year ending 31 March 2021:
1) Salary for the year (including arrear) 800000/-
2) Arrears of Salary for PY 2018-19 received during the year 200000/-
3) Salary for the PY 2018-19 600000/-
Compute relief u/s 89

Tax Rate in year 2018-19: Tax Rate in year 2020-21:

On first Rs.250000 Nil On first Rs.250000 Nil
250000 to 500000 5% 250000 to 500000 5%
500000 to 1000000 20% 500000 to 1000000 20%
1000000 above 30% 1000000 above 30%
HEC @4% HEC @4%
Standard deduction Rs.40000 Standard deduction Rs.50000
Step-1 (With Arrear) 2020-21 Step-2 (without Arrear) 2020-21
Salary 600000 Salary 600000
Add: Arrear Salary 200000
Gross Salary 800000
Less: Standard Deduction 50000 Less: Standard Deduction 50000
Income under the head Salary 750000 Income under the head Salary 550000
Tax 62500 Tax 22500
HEC @4% 2500 HEC @4% 900
Total Tax 65000 Total Tax 23400
Step: 3 (Step1 – Step 2) = 65000-23400 = 41600
Step-4 (With Arrear) 2018-19 Step-5 (without Arrear) 2018-19
Salary 600000 Salary 600000
Add: Arrear Salary 200000
Gross Salary 800000
Less: Standard Deduction 40000 Less: Standard Deduction 40000
Income under the head Salary 760000 Income under the head Salary 560000
Tax 64500 Tax 24500
HEC @4% 2580 HEC @4% 980
Total Tax 67080 Total Tax 25480
Step: 6 (Step 4 – Step 5) = 67080-25480 = 41600

Step: 7 (Relief) (Step 3 – Step 6) = 41600-41600 = 41600

 Relief u/s 89A inserted after section 89 by
the Finance Act, 2021, w.e.f. 1-4-2022
Relief from taxation in income from retirement benefit account maintained
in a notified country:
Section 89A. Where a specified person has income accrued in a specified account, such income shall be
taxed in such manner and in such year as may be prescribed (Read Rule 21AAA) form 10EE to file and it
is optional for specified person to opt this relief

Explanation.—For the purposes of this section,—

(a) "notified country" means a country as may be notified by the Central Government in the Official Gazette
for the purposes of this section

(Canada, United Kingdom of Great Britain and Northern Ireland, United States of America)
 Relief u/s 89A inserted after section 89 by
the Finance Act, 2021, w.e.f. 1-4-2022

(b) "specified account" means an account maintained in a notified country by the specified person in
respect of his retirement benefits and the income from such account is not taxable on accrual basis but
is taxed by such country at the time of withdrawal or redemption;

(c) "specified person" means a person resident in India who opened a specified account in a notified
country while being non-resident in India and resident in that country.
 Relief u/s 89A inserted after section 89 by
the Finance Act, 2021, w.e.f. 1-4-2022
certain residents invest in foreign retirement benefit accounts. Some countries tax Income from such
accounts on a receipt basis. Income-tax Act however taxes Income from foreign retirement benefit accounts
on an accrual basis. This results in a mismatch in the year of taxability because of which the assessees face
problems to claim the foreign tax credit.

The Department has recognised this issue and has introduced section 89A by the Finance Act, 2021, w.e.f. 1-
4-2022. According to section 89A, if a specified person has income accrued in a specified account, such
income shall be taxed in such manner and in such year as may be prescribed.

How is Income from the Foreign Retirement Benefits Account taxed?

If a specified person has Income accrued in a specified account then the same shall be included in the total
income of the previous year in which such income is taxed in the country wherein such account is
maintained. For Ex. Mr X, a resident of India have a retirement benefits account in the USA and his income
from such account was taxed in the USA in FY 2021-22, then such income will also be included in total
income in India in FY 2021-22. However, Mr X can claim relief for taxes paid in the USA.
 Relief u/s 89A inserted after section 89 by
the Finance Act, 2021, w.e.f. 1-4-2022
What are the conditions to exercise the option under section 89A?
• The taxpayer is required to file Form 10-EE before filing of Income-tax Return.
• An option once exercised shall apply to all subsequent years and cannot be subsequently withdrawn.
• If a specified person becomes non-resident after exercising the option then the option exercised shall be
deemed to have been never exercised. Further, Income accrued in the specified accounts shall be taxed
from the previous years in which the option was exercised.
Salary in ITR
 Computation of Income from Salary
Particulars Details Amount
Basic Salary xxx xxx
Add: Misc. Benefits Like Bonus, commission etc. xxx
Add: Allowances xxx
Less: Exempt xxx xxx
Add: Perquisites xxx
Add: Retirement Benefits xxx
Less: Exempt xxx xxx
Gross Salary xxx
Less: Deduction u/s 16 xxx
(a) Standard Deduction xxx
(b) Entertainment Allowance xxx
( c) Professional Tax xxx xxx
Income From Salary xxx
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