Salary

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INCOME FROM SALARY
The provisions of "Income from Salary" are discussed under section 15,16,17
Some Basic Concepts :

1) Employer - Employee Relationship:
For charging any receipt in the hands of the recipient as Salary income, there
must be relationship of employer-employee. Unless there is relationship of
employer - employee. Unless there is relationship of employer and employee, any
receipt shall not be treated as Salary in the hands of recipient.
Once the relationship is formed of employer and employee, then all the receipts by
whatever may call from the employer to the employee shall be chargeable as
salary in the hands of employee.
1) When a professor receives remuneration from college for teaching, such
receipts are treated as "Income from Salary" since the professor is the employee
of the college.
On the other hand if he receives remuneration from the University for setting
the papers, such receipts shall not be treated as Salary, since he is not
employee of the University.
2) Sitting fee received by director from Company is not Salary in his hand since
he is not the employee of the company.
However, remuneration received by managing director is treated as salary since
he is the employee of the company.
3) Any remuneration received by partner of firm is chargeable as "Business
Income" in his hand and not the salary income. Since he is not the employee of
the firm.
4) MP's and MLA's are not the employee's of the Government, therefore
remuneration received shall not be treated as salary. However, the
remuneration received by a Minister is chargeable as Salary since, it is a post of
employment.
dd
2) Contract Of Service Or Contract For Service
CA - FINAL, DIRECT TAX BY CA PRASAD S. BHANDARI 71

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There is contract of Service in case of every employment. Therefore, the receipts

on contract of service are chargeable as salary income.
When professional provides service to his client, then there is "Contract for
Service" and therefore the receipts are chargeable as income from Business or
Profession.
3) Surrender Of Salary :
When employee surrenders his salary to Central Government under "Voluntary
Surrender of Salaries (Exemption from Taxation) Act, 1961", then it is not
chargeable in the hands of employee.
4) Waiver of Salary :
Waiver is treated as Application of Salary. Therefore, though employee waives the
salary, it will be chargeable in his hands.
For eg. Mr. X informed to his employer that salary for every month shall not be
paid to him but it shall be donated to a Charitable Trust. In this case, though the
salary of whole year is donated directly to the Trust, it is treated as application of
Salary by Mr. X and shall be chargeable to tax in his hands accordingly.
5) Tax Free Salary :

When employer makes the payment of tax due on the salary of the employee then
employee receives the Tax-free salary and he need not to pay tax on it. However,
tax paid by the employer is the BENEFIT to the employee from the employer.
Therefore, amount of tax paid by the employer shall be chargeable as salary in the
hands of the employee.
However, as per section 10(10CC), the income-tax paid by the employer on
nonmonetary perquisites on behalf of the employee would be exempt in the hands
of the employee
6) Place Of Accrual Of Salary :

There is simple rule in relation to place of accrual i.e. where the employee
provides the services, that will be treated as the place of accrual of Salary. If a

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person provides the services in India and receives the salary outside India, his
place of accrual of salary shall be treated as in India.
There is an exception that on Indian Citizen who is an employee of Government
and provides services outside India, then the Salary is deemed to be accrued in
India as per section 9(1)(iii).
However, all the allowances and perquisites received outside India shall be
exempted in his hands.
7) Full-time or part-time employment:

Once the relationship of employer and employee exists, the income is to be
charged under the head “salaries”. It does not matter whether the employee is a
full-time employee or a part-time one.
For eg. If an employee works with more than one employer, salaries received
from all the employers should be clubbed and brought to charge for the relevant
previous years.
8) Salary Received In Foreign Currency :

If a person received the salary in foreign currency, then while computing the
salary income in rupee, conversion shall be made at TT Buying rate (Telegraphic
Transfer) of the last day of the month immediately preceding the month in which
the salary is received.
9) Salary Received By Foreign Government / Enterprises :

If an employee receives the salary from the foreign Government/Enterprise for the
services provided in India, then it shall be deemed to be accrued in India.
10) Salary Under Grade System :

For eg.
1. A person joins the service on 01-05-2011 on the following grade
` 10,500 - 500 - 12,000 - 700 - 14,100
Then his starting salary will be ` 10,500 p.m. with the yearly increment of ` 500
till the salary reaches to ` 12,000. Thereafter, his yearly increment will be ` 700

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till the salary becomes ` 14,100. On the basis of the above grade the salary for
the P.Y. 2017-18 can be computed as follows :
Year wise Salary Per month Salary
01.05.2011 - 30.08.2012 ` 10,500
01.05.2012 - 30.04.2013 ` 11,000
01.05.2013 - 30.04.2014 ` 11,500
01.05.2014 - 30.04.2015 ` 12,000
01.05.2015 - 30.04.2016 ` 12,700
01.05.2016 - 30.04.2017 ` 13,400
01.05.2017 - 30.04.2018 ` 14,100
Salary for P.Y. 2017-18 (from 01.04.2017 – 31.03.2018)

From 01.04.2017 – 30.04.2017 = ` 13,400 X 1 =` 13,400
From 01.05.2017 - 31.03.2018 = ` 14,100 X 11 = ` 1,55,100
----------------
Total Salary = ` 1,68,500
2. Grade System : ` 15,000 - 750 - 18,000 - 1,000 - 21,000

(Date of Joining the Service : 01.08.2010)
Year-wise Salary Per month Salary
01.08.2010 - 31.07.2011 ` 15,000
01.08.2011 - 31.07.2012 ` 15,750
01.08.2012 - 31.07.2013 ` 16,500
01.08.2013 - 31.07.2014 ` 17,250
01.08.2014 - 31.07.2015 ` 18,000
01.08.2015 - 31.07.2016 ` 19,000
01.08.2016 - 31.07.2017 ` 20,000
01.08.2017 - 31.07.2018 ` 21,000
Salary for P.Y. 2017-18 (from 01.04.2017 - 31.03.2018)
From 01.04.2017 - 31.07.2017 = ` 20,000 X 4 = ` 80,000
From 01.08.2017 - 31.03.2018 = ` 21,000 X 8 = ` 1,68,000
-------------
Total Salary = ` 2,48,000
3. Grade System : ` 2,550 - 150 - 3,000 - 250 - 4,000

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(Date of Joining the Service : 01.02.2012)

Year wise Salary Per month Salary
01.02.2012 - 31.01.2013 ` 2,550
01.02.2013 - 31.01.2014 ` 2,700
01.02.2004 - 31.01.2015 ` 2,850
01.02.2015 - 31.01.2016 ` 3,000
01.02.2016 - 31.01.2017 ` 3,250
01.02.2017 - 31.01.2018 ` 3,500
01.02.2018 - 31.01.2019 ` 3,750
01.02.2019 - 31.01.2020 ` 4,000
Salary for P.Y. 2017-18 (from 01.04.2017 - 31.03.2018)

From 01.04.2017 - 31.01.2018 = ` 3,250 X 10 = ` 32,500
From 01.02.2018 - 31.03.2018 = ` 3,500 X 2 = ` 7,000
-----------
Total Salary = ` 39,500
Section 15: BASIS OF CHARGE
As per sec 15 following is chargeable to tax in the hands of the employee under
the head "Income from Salary"
1. Any salary "due" to him during the previous from the employer or the former
employer whether paid or not.
2. Any salary "Paid" or "Allowed" to him during the previous year on behalf of
the employer or former employer, whether due or not.
3. Any arrears of salary "Paid" or "allowed" to him during the previous year on
behalf of employer or the former employer if not charged earlier.
For eg.
1. If the salary of March received in April then it is due in March so chargeable in
March.
2. If advance of April is received in March, then as it is received in March, the
salary is chargeable in March.
As per the rules of employment, if salary is paid on 1st day of the next month
in which it is due then it is chargeable to tax in the month in which it is due.

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For eg. Salary of March 2018 is paid on 1st April 2018, then it is chargeable to
tax in March 2018.
If salary of April 2018 is received in advance in March 2018, then it is
chargeable in the year 2017-18 even if it is not due in this year.
If employee receives the arrears of salary of the earlier year, then it is

chargeable to tax in the year of receipt provided it was not charged earlier.
However, employee can claim relief under section 89 for such arrears of salary.
Section 17(1) : Definition of SALARY
Salary includes :
1. Wages
2. Annuity or pension
3. Gratuity
4. Any fees, commission, perquisites or Profits in lieu or in addition to Salary or
wages.
5. Any advance salary
6. Any amount received by employee during the P.Y. in respect of leave not
availed by him.
7. Annual Accretion to the account of an employee participating in Recognised
Provident Fund to the extent it is chargeable to tax.
(Employer's contribution in excess of 12% of Salary and Interest credited to the
fund in excess of 9% p.a.)
8. Aggregate of all sums comprised in the transferred balance of the account of
employee participating to Recognised Provident Fund i.e. transferred balance of
unrecognised Provident Fund to the extent chargeable to tax.
9. Any contribution made by government employer or any of the employer to the
Pension Scheme of the employee specified under section 80CCD.
All the elements of above definition of salary are being discussed as follows:-
1) Wages :- Wages are also chargeable as salary income in the hands of the
worker.

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2) Annuity :- Annuity is a special grant provided by the employer to the employee

after the termination of employment. Such annuity is chargeable as "Salary
Income" in the hands of the employee.
3) Advance Salary : As per the chargeability of sec 15, advance salary is
chargeable to tax in the year of receipt though not due.
 Fees / Commission : Any fees of commission received by the employee
whether during or after employment is chargeable to tax in the hands of
employee. If employee receives any profit in lieu of or in addition to salary, then
it is also chargeable as salary.
 Overtime Payment : Any amount received by employee for overtime work is
chargeable as salary only.
All other elements are chargeable in the following ways :
- Retirement benefits
- Perquisites
- Allowances
 Bonus : Bonus is chargeable to tax in the year of receipt. Before, we discuss on
the above elements of salary, the computation of total salary can be made as
follows.
Computation of Total Salary
Particulars Amount Amount

Basic Salary XXX
Dearness Allowance XXX
Commission XXX
Bonus XXX
Advance Salary XXX
Retirement Benefits XXX
Perquisites XXX
Allowances XXX
Contribution of employer to Recognised XXX
Provident Fund in excess of 12% of the Salary
Interest on Recognised Provident Fund in XXX
excess of 9.50 % pa.
Transferred balance of URP to RPF to the extent XXX
chargeable to tax

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Employer’s Contribution to Pension Scheme of XXX

the employee specified under section 80CCD
Gross Salary XXXX
Less : Deduction under section 16
(ii) Entertainment Allowance XXX
(iii) Tax on Employment (Professional Tax) XXX XXX
Income From Salary (i.e. Taxable Salary) XXXX
Now we will discuss the major contents of the salary in details as follows :
A. Retirement Benefits :-
Following are retirement benefits :-
1. Gratuity - Exempt under section 10(10)
2. Pension - Exempt under section 10 (10A)
3. Leave Salary - Exempt under section 10
(10AA)
4. Retrenchment Compensation - Exempt under section 10 (10B)
5. Compensation on Voluntary Retirement - Exempt under section 10 (10C)
Section 10(10) Gratuity
Gratuity is a voluntary payment made by an employer in appreciation of services

rendered by the employee. Now-a-days gratuity has become a normal payment
applicable to all employees. In fact, Payment of Gratuity Act, 1972 is a statutory
recognition of the concept of gratuity. Almost all employers enter into an
agreement with employees to pay gratuity.
Such gratuity received by the employee shall be chargeable as "Income from

Salary" However, if the gratuity is received by legal heir of the employee on his
death, then such gratuity is chargeable as "Income from Other Sources" in the
hands of hands of legal heir.
Employee is eligible for gratuity on completion of continuous service of 5 years to

the employer on his -
a. Superannuation

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b. Retirement or termination
c. On death
However, in case of death of the employee condition of continuous service of 5
years is not applicable.
For the purpose of exemption, the employees are divided in following categories :-
1. 10(10)(i) GOVT EMPLOYEES INCLUDING EMPLOYEES OF LOCAL
AUTHORITY
In case of these employees, whole of the Gratuity received at the retirement is
exempted.
2. 10(10)(ii) EMPLOYEES COVERED UNDER GRATUITY ACT, 1972 :

Exemption is least of the following :-
a. Gratuity actually received
b. 15 days salary* for every completed year of service or part thereof in excess
of 6 months.
[Salary : includes Basic Salary + Dearness Allowance]
c. Amount specified under the Act. ` 10,00,000
For this purpose,

i) Salary : Includes Basic Salary + Dearness Allowance
(since, only DA is mentioned above, it means it shall be added to the salary
for this purpose whether or not provided in terms of employment)
ii) 15 Days Salary
= [ X 15] X No. of completed year of service and part thereof
in excess of 6 months
For eg. A retired on 01.07.2017 serving 25 years and 7 months. His current
salary was ` 27,500 p.m. at the time of retirement. He received gratuity of `
4,50,000.
Compute exemption assuming he is covered Gratuity Act.
Particulars Amount
Exemption will be least of the following :
i) Gratuity actual received ` 4,50,000
ii) 15 days salary for every completed year of service or Part ` 4,12,000
thereof in excess of 6 months (Note:1)

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iii) Amount specified under the Act. ` 10,00,000

Exemption being least of the above ` 4,12,500
Note 1:- 15 days salary = [ X 15 ] X No. of years of service

and part thereof
= [ X 15 ] X 26
= ` 4,12,500
* 25 years of completed Service 25 years
7 moths are in excess of 6 months 1 year
----------
26 years
 In case of Seasonal employees, instead of 15 days 7 days salary for every

completed season during his service period shall be considered.
 In case of piece rated employee, 15 days salary can be computed on the
basis of daily salary / wages computed by taking average of salary / wages of
last 3 months from his retirement.
3. 10(10)(iii) OTHER EMPLOYEES :

Exemption is least of the following :
i. Gratuity actually received
ii. Half month salary for every completed year of service computed on the basis
of 10 month salary.
iii. ` 10,00,000
For this purpose,
iii) Salary : Includes Basic Salary
+ Dearness Allowance (to the extent provided in terms of employment)
+ commission received as a fixed percentage on Turnover achieved by the
employee during the year.
iv) Half month Salary for every completed year of Service
= X No. of completed year of Service
v) 10 month Salary for this purpose = Salary for 10 month immediately
preceding the month of retirement.
Unless otherwise given, DA shall not form the part of retirement
benefits.

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For eg. A retired on 01.07.2017 services 25 years and 7 months. His Avg. salary
for 10 months was ` 27,500 at the time of retirement. He received gratuity `
4,50,000.
Compute exemption assuming he is covered Gratuity Act.
Particulars Amount
i) Gratuity Actually received ` 4,50,000
ii) Half month Salary for every completed year of service ` 3,43,750
computed on the basis of 10 month
iii) ` 10,00,000
Exemption ` 3,43,750
10 month Average Salary = X 25
SOME IMPORTANT POINTS

1) If employee receives the gratuity from more than one employer in the previous
year, then the exemption for gratuity received from all the employers shall not
exceed the aggregate of ` 10,00,000
2) If employee receives the gratuity in past from the former employer and claim
the exemption earlier, then while computing the exemption for gratuity
received from the later employer, the limit of ` 10,00,000 shall be reduced by
the amount of exemption claimed earlier.
3) In case employee provides the service for 10 years to the former employer and
not received the gratuity at the time of termination. He joins another service
and retires after 15 years receiving the gratuity. While computing the
exemption for such gratuity, no. of completed years shall be taken as 25
and not 15.
4) Gratuity received during the period of service is fully taxable.
Section 10(10A) PENSION
Treatment of pension is given in under section 17(i)(ii) :

Pension is one of the retirement benefits which is received by the employee
periodically after the retirement. Pension is of 2 types :-
1. Uncommuted Pension
2. Commuted Pension

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1) Uncommuted Pension :
Uncommuted Pension is the person which employee receives periodically after
retirement say per month.
2) Commuted Pension :-
Employee has an option to commute some part of his total pension which is
called as commuted pension. It means receiving the lump sum pension
instead of periodical pension.
 Some important points
a. Judges of the Supreme Court and High Court will be entitled to exemption
of the commuted portion not exceeding ½ of the pension.
b. 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.
TAXABILITY OF PENSION:
For this purpose employees are divided as follows :-
Type of Pension Uncommuted Commuted
Categories of Employee
i) Government employees of Taxable Fully Exempt under section
local authority and 10(10A)(i)
employees of statutory
corporation.
ii) Employees receiving Taxable Exempt to the extent limit
Gratuity specified under section
10(10A)(ii)
iii) Other Employees Taxable Exempt to the extent limit
specified under section
10(10A)(iii)
1. 10(10A)(ii) EXEMPTION FOR COMMUTED PENSION RECEIVED BY
EMPLOYEE RECEIVING GRATUITY
(Whether covered under Gratuity Act or not)
Exemption is least of following :-
1. Pension actually received
2. of commuted value of Total Pension.

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2. 10(10A)(iii) EXEMPTION FOR COMMUTED PENSION RECEIVED BY OTHER

EMPLOYEES (i.e. who is non-government employee and not receiving gratuity)
Exemption is least of the following :-

1. Pension Actually received
2. of commuted value of Total Pension.
For eg. X retired from his service on 15.10.2017 and eligible for pension at the
rate ` 12,000 p.m. He received pension upto 31.01.2017 and thereafter
commuted 70% of total pension for ` 4,20,000. On the basis of this compute
total taxable pension for the year 2017-2018 assuming he is receiving gratuity.
Ans :-
Mr. X
AY : 2018-19
PY : 2017-18
Computation of Taxable Pension
Uncommuted Pension :
From 15.10.2017 to 31.10.2017 - 12,000 X 3.5 42,000
From 01.02.2018 to 31.03.2018 - 3600 X 2 (Note:1) 7,200 49,200
Commuted Pension :
Received 4,20,000
Less : Exemption under section 10(10A)(ii) (Note:2) 2,00,000 2,20,000
Total Taxable Pension 2,69,200
Note 1:- Pension from 01.02.2018 - 31.03.2018

12,000 X = 3,600
Note 2 :- Computation of exemption under section 10(10A)(ii)
Exemption is least of the following
a. Pension actually received 4,20,000
b. of commuted value of total pension
Commuted Value of total pension = = 6,00,000
x 6,00,000 2,00,000
Exemption = 2,00,000 being least of above two.

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3. computation of Taxable Pension if in the above case it is assumed that the

employee is not receiving the gratuity.
Computation of Taxable Pension
Uncommuted Pension :
from 15.10.2017 to 31.10.2017 12,000 X 3.5 42,000
from 01.02.2018 to 31.03.2018 - 3600 X 2 (Note:1) 7,200 49,200
Commuted Pension :
Received 4,20,000
Less : Exemption 10(10A)(iii) (Note:2) 3,00,000 1,20,000
Total Taxable Pension 1,69,200
Note 1 :- Exemption under Section 10(10A)(iii)

Exemption is least of the following :
a. Pension actually received 4,20,000
b. of commuted value of total pension
Commuted Value of total pension = = 6,00,000
x 6,00,000 3,00,000
Therefore Exemption will be ` 3,00,000 being least of the above.
Section 10(10AA) TREATMENT OF LEAVE SALARY
Every employer provides certain leaves to be availed by the employee during the
previous year. Employee may or may not avail all the leaves allowable during the
year. If he avails part of the leaves, he is entitled for the Salary for unavailed
leaves. Such cash equivalent of unavailed leave is called as "Leave Salary."
For eg. As per the terms of employment, leave allowable during the year is 50
days of which employee availed 35 leaves. Thus, he is entitled to the salary for 15
days unavailed leaves.
He may get the unavailed leave encashed during the tenure of the service or at the
time of retirement etc.
Leave Salary received during the tenure of service is fully chargeable to tax in
the hands of the employee.

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However, leave salary at the time of retirement etc is exempt to the extent limit
specified under section 10(10AA)
For this purpose, the employees are categorised as follows :

1. Government employees (only Central and State Government) (Fully exempt)
2. Other employees
1. Section 10 (10AA)(i) : Exemption in the hands of Government employees :

Whole of the leave Salary received by Central or State Government employee is
fully exempt.
2. Section 10(10AA)(ii) : Other employees

Leave salary received is exempt to the extent least of the following
1. Leave Salary actually received
2. 10 months Salary
3. Cash equivalent of unavailed leave standing to the credit of employee based on
maximum 30 days leave for every completed year of service. However, such
cash equivalent shall be computed on the basis of 10 months average salary.
4. Amount specified under the Act. ` 3,00,000
For this purpose :-

1. Salary = includes Basic Salary + Dearness allowance (to the extent provided in
the terms of employment) + Commission received as a fixed percentage on
Turnover achieved by the employee during the year.
2. 10 month Salary = It is the salary of the employee for 10 months immediately
preceding the DATE retirement.
For eg. If employee retires on 15.10.2017, then 10 months shall be counted
from 15.12.2016 - 14.10.2017
3. 10 months Salary = (as computed above)
 Cash equivalent of unavailed leave:
For eg. X provided service for 20 years and 8 months and retired on 10-11-
2017. Allowable leave as per Company’s rule 45 days per year (1.5 months).
10 months Average Salary was ` 15,000. He availed the Leave of 17 months

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during his tenure and he received the Leave Salary of ` 3,40,000 at the time of
retirement.
Computation of exemption under section 10(10AA)(ii) in case of Mr. X
Exemption is least of the following Amount
i) Leave Salary actually received 3,40,000
ii) 10 months’ Salary (15,000 X 10months) 1,50,000
iii) Cash equivalent of unvailed leave (Note:1) 45,000
iv) Amount specified under the Act 3,00,000
Exemption under section 10 (10AA)(ii) is ` 45,000 being least of the
following
Note 1 - Computation of cash equivalent of unavailed leave.

leave allowable as per Company’s rule (20 X 1.5 month) 30 months
leave allowable as per Act (20 X 1 month) 20 months
Cash equivalent shall be computed as per Act. being it is less
Leave allowable as per Act 20 months
Less :- Leave availed 17 months
Therefore, unavailed leave standing to the credit of employee 3 months
10 months Average Salary 15,000
Cash equivalent of the leave standing to the credit (15,000 X 3) 45,000
For eg. Compute the exemption for Leave salary received from the following
information :
Y provided Service for 20 years 8 months and retired on 10.11.2017.
Allowable leave as per Company’s rule was 45 days/year (1.5 months)
10 months Average = ` 12,000
Leave Standing to the credit 12 months
Leave Salary received ` 3,00,000
 Computation of exemption under section 10(10AA)(ii) in case of Mr. Y
Exemption is least of the following Amount
i) Leave Salary actually received 3,00,000
ii) 10 months’ Salary ` 12,000 X 10 1,20,000
iii) Cash equivalent of unavailed leave 24,000
iv) Amount specified under the Act 3,00,000
Exemption under section 10(10AA)(ii) is ` 24,000 being least of the
following.
Note 1 :- Computation of cash equivalent of unavailed leave.

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Leave availed = Leave allowed - Leave standing to the credit

= (20 X 1.5 months) - (12 months)
= 30 months - 12 months
= 18 months
leave allowable as per Company’s rule (20 X 1.5 month) 30 months
leave allowable as per Act (20 X 1 month) 20 months
Cash equivalent shall be computed as per Act. being it is less
Leave allowable as per Act 20 months
Less :- Leave availed (As computed above) 18 months
Therefore, unavailed leave standing to the credit of employee 2 months
10 months Average Salary 12,000
Cash equivalent of the leave standing to the credit (15,000 X 3) 24,000
Section 10 (10B) RETRENCHMENT COMPENSATION

On being retrenched, employee is entitled for compensation. This section provides
the exemption for the compensation received by the employee on his retrenchment
under Industrial Dispute Act, 1947 or
a. Under any other Act, rule, notification thereunder.
b. By standing order of court.
c. By contract of service or otherwise
As per Section 10(10B), the exemption is least of the following :
1) Compensation Actually received
2) 15 days Salary for every completed year of service and part thereof in
excess of 6 months.
3) Amount specified under the Act, i.e. ` 5,00,000
For this purpose -
Salary (Common Salary) = Basic Salary + Dearness Allowance (to the extent
provided in the terms of employment) + Commission received as a fixed % on
turnover achieved by the employee during the year.
Section10(10C) COMPENSATION RECEIVED ON VOLUNTARY

RETIREMENT/SEPARATION SCHEME

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Employee is eligible for the exemption under section 10(10C) for compensation
received on voluntary retirement / separation scheme from the following employer
:
1. Any public sector company
2. Any other company
3. Any authority established under central, state or provincial Act.
4. Local authority
5. Co-operative society
6. Any university established or incorporated under section 3 of the University
Grant Commission Act, 1956
7. Indian Institute of Technology under section 3(g) of the Institute of
Technology Act, 1961
8. Any institute of management which is notified by the government specifically
9. Central Government
10. State Government
11. Any other institute which is of special importance in a state or country.
Condition for exemption :

Employee is eligible for exemption under section 10(10C) only if the scheme is as
per the guidelines issued by the Government If any of the guidelines is not
fulfilled, employee will not be eligible for exemption.
Guidelines under Rule 2BA
1) The employee must complete 10 years of service or attain at least 40 years of
age.
2) The scheme shall be applicable to all the employees including the executives of
company, or authority or co-operative society but excluding the directors of the
company or co-operative society.
3) There must be reduction in the total strength of employees due to the scheme.
4) Vacancy caused by the scheme shall not be filled up again.
5) The retired employee shall not be re-employed in another company under the
same management.
6) The compensation given shall not exceed the following :-
a. 3 months salary for every completed years of service.

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or
b. Current Salary X Remaining months of service till retirement.
 AMOUNT OF EXEMPTION :
Amount of exemption is least of the following :
1) Compensation actually received
2) ` 5,00,000
SOME IMPORTANT POINTS

a. The aggregate exemptions of the employee shall not in any case exceed `
5,00,000
b. Exemption for compensation received on VRS (Voluntary Retirement Scheme)
is available to the employee for only once in his lifetime.
c. In a guideline given in rule 2BA, Clause No. 1 is not applicable when employee
retires from Public Sector Co. under Voluntary Separation Scheme.
Section17(2) PERQUISITES
Perquisite means any benefit, amenity, profit, attached to the employment

position in addition to the regular salary and wages. The employee is eligible for
perquisites by his right. This is not a voluntary payment made by the employer to
the employee.
Section 17(2) gives the inclusive definition of perquisites as follows :

i) Value of Rent-free accommodation provided by the employee to the assessee.
Section 17(2)(i)
ii) Value of concession in the matter of rent respecting the accommodating
provided by the employer to the Assessee. Section 17(2)(ii)
iii) Value of any benefit or amenity granted or provided by the employer to the
specified Employees only. Section 17(2)(iii)
iv) Any amount paid by the employer which is the obligation of employee to pay.
Section 17(2)(iv)

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v) Any amount payable by employer directly or through any fund, other than
Recognised Provident Fund, Approved Superannuation fund or Deposit
Linked Insurance Fund, to effect insurance of the life of the employee or to
effect a contract of annuity. Section 17(2)(v)
vi) The value of any specified security or Sweat equity shares allowed or
transferred at free of cost or at a concessional rate by employer to the
assessee. Section 17(2)(vi)
vii) Amount of any contribution made by employer to the approved
superannuation fund of the employer to the extent it exceeds ` 1,50,000.
Section 17(2)(vii)
viii) Any other fringe benefit or amenity provided by the employer to the assessee.
Section 17(2)(iii)
RELEVANCE OF UNDERLINED WORDS
1) Provided :
The word 'provided' in caluse (i)(ii)(iii) and (viii). It means when the benefit is
provided by the employer to the employee, it becomes perquisites in the hands of
the employee. When the benefit is provided, it shall be treated as perquisite
irrespective of the fact that such benefit is used by the employee or not.
2) Paid :
The word is used in clause No. (iv) which means the perquisite is chargeable in
the hands of the employee when obligation of employee is actually paid by the
employer. In short, the chargeability is on payment basis.
For eg. If any obligation becomes due in the year 2017-18 and it is actually paid
by the employer in 2018-19, then perquisite is chargeable in 2018-19.
Following are some of the examples of obligation of employee.
i) Payment to gardener, sweeper, cook etc employed by employee.
ii) School fees of the children of employee.
iii) Gas, electricity, water facility.
iv) Expenses of car of the employee.
v) Income tax payable by the employee, etc.
3) Payable :

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This is in relation to clause no. (v) It means the perquisite is chargeable on due
basis. It means, when it becomes due irrespective of the payment, it becomes due
irrespective of the payment, it becomes perquisite in the year in which it becomes
due.
For eg. The insurance premium becomes due in March 2018 but paid by the
employer in April 2017. Then, the perquisite is chargeable in March 2018 i.e.
2017-18 in the hands of the employee.
The perquisite under clause no. (vi) and (vii) are chargeable if the condition there
under are fulfilled.
Meaning of Specified Employees
It means the following :-

1) Employee of a company who is a director in that company.
2) Employee of a company who holds substantial interest in the company.
Substantial interest for this purpose means beneficial holding at least 20%
voting power of the company. A person may or may not be the registered owner
of the share, but he shall be beneficial holder of the voting power either directly
or indirectly (along with the relatives)
3) Any other employee who is not covered in 1 and 2 above and his salary income
(whether due or paid, form all the employees) including non-monetary
perquisites exceeds ` 50,000 during the previous year. However, while
computing such salary income following deduction under section 16 are
allowed to be deducted.
CLASSIFICATION OF PERQUISITES :
All the above perquisites of definition can be categorised as follows :
a. Perquisites chargeable in the hands of all the employee.
b. Perquisites chargeable in the hand of specified employee.
c. The value of any specified security or sweat equity shares allowed or
transferred at free of cost or at a concessional rate by employer to the
assessee.

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d. Amount of any contribution made by the employer to the approved

superannuation fund of the employee to the extent it exceeds ` 1,50,000
employee to the extent it exceeds ` 1,50,000.
e. Tax-free perquisites.
Important difference between category 1 and 2 above

Category 1 includes the perquisites which is chargeable in the hands of all the
employer whereas in category 2, perquisites are chargeable in the hands of
specified employees only. Thus, perquisite under clause no. i, ii, iv ,v ,vi, vii and
viii are chargeable in the hands of all the employees and all perquisites under
clauses i, to viii are chargeable in the hands of specified employee.
Difference between 17(2)(iii) and 17(2)(iv)

i) When obligation of the employee is paid by the employer, it is the perquisite
under section 17(2)(iv)
ii) Benefit as such is provided by the employer to the employee, then its value
shall be chargeable under section 17(2)(iii) in the hands of specified
employees only.
For eg.
1) If any servant is employed by employee and his salary is paid and reimbursed
by the employer then it is chargeable under section 17(2)(iv)
2) When servant is employed by the employer at the residence of employee, then
it is the perquisite under section 17(2)(iii)
3) It electricity bill paid by the employee is paid or re-imbursed by the employer
chargeable under section 17(2)(iv). If electricity as such is provided by the
employer to the employee, then such value is chargeable under section 17(2)
(iii).
4) If school fees of children of the employee is paid or re-imbursed by the
employer, then it is chargeable under section 17(2)(iv).
5) If the education facility is provided by the employer to the children of the
employee, then it is chargeable v/s 17(2)(iii)

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A. VALUE OF PERQUISITES CHARGEABLE IN THE HANDS OF ALL THE

EMPLOYEES
1. Section 17(2)(i) Value of rent free accommodation provided by the
employer to the assessee and
2. Section 17(2)(ii) Value of concession in the matter of rent respecting the
accommodation provided by the employer to the Assessee.
For the purpose of these perquisites, the Accommodation can be divided as

follows :
1) Rent free Unfurnished
2) Rent free Furnished
3) Concessional Rent Unfurnished
4) Concessional Rent Furnished
For the chargeability of these perquisites, the employees are categorised as

1) Government employees
2) Other employees
1. Value of perquisites in the hands of Government employees (Employees

of union or State Government)
1 Rent free Unfurnished License fee as determined by Union or
State Government for this purpose.
2 Rent free Furnished License fee as determined in 1 above +
value of furniture. (Value of furniture =
10% cost of furniture if it is owned by
the employer or rent paid or payable
by the employer if taken on hire)
3 Concessional Value computed in 1 above - Rent
Unfurnished collected from the employee
4 Concessional Furnished i) Value computed in 3 above + Value of
furniture or
ii) Value computed in 2 above + Rent
collected from employee.

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Rent free official residence provided to a Judge of a High Court or to a

Judge of the Supreme Court is not taxable. Similarly, rent-free furnished
house provided to an officer of parliament is not taxable.
2. Value of perquisites in the hands of other employees

1 Rent free Unfurnished Value as determined below.
2 Rent free Furnished License fee as determined in 1 above +
value of furniture. (Value of furniture =
10% cost of furniture if it is owned by
the employer or rent paid or payable
by the employer if taken on hire)
3 Concessional Value computed in 1 above - Rent
Unfurnished collected from the employee
4 Concessional Furnished i) Value computed in 3 above + Value of
furniture or
ii) Value computed in 2 above + Rent
collected from employee.
Value of Rent Free Unfurnished Accommodation :
Accommodation Population of City where accommodation is provided

Exceeding 25 Exceeding 10 Not exceeding 10
Lakhs as per 2001 Lakhs but not Lakhs
census; exceeding 25
Lakhs as per 2001
census;
Where the 15% of salary in 10% of salary in 7.5% of salary in
accommodation respect of the respect of the respect of the
is owned by the period during period during period during
employer which the said which the said which the said
accommodation accommodation accommodation
was occupied by was occupied by was occupied by
the employee the employee the employee
during the during the during the

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previous year previous year previous year

where the  Actual amount of lease rental paid or payable by the
accommodation employer
is taken on or
lease or rent by • 15% of salary
employer. whichever is lower
* Furniture for this purpose includes

1) TV
2) Refrigator
3) AC
4) Home appliances.
Meaning of Salary :
Salary is inclusive of all allowances, bonus, commission, but excluding the
following :
1) Dearness allowance to the extent not forming the part of retirement benefits.
2) Employer's contribution to provided fund account of the employee
3) Allowance to the extent exempted.
4) Perquisites as specified under section 17(2)
5) Any payment or expenditure as specified under sub clause (iii) to clause (2)
[ in relation to employee's stock option plan (ESOP) or scheme] or as
specified in proviso to clause (2) of Section 17 (in relation to expenditure or
re-imbursement of medical expenditure)
 ACCOMMODATION PROVIDED IN HOTEL
It employer provides the accommodation to the employee, then value of perquisite
in the hands of employee shall be least of the following :
1. 24% of the salary during the previous year or
2. Actual hotel charges paid or payable by the employer.
While computing the Salary in clause i, 24% of the total Salary for the relevant
previous year shall be computed 1st and then proportionate salary for the
period for which the accommodation is provided in a hotel shall be computed.
3. If employer collects any amount from the employee then the above value of
perquisite shall be reduced by such amount collected.

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Exception :
Where value of accommodation provided in hotel is not taxable. If following 2
conditions are fulfilled, value of perquisites for accommodation provided in a hotel
shall be taken as NIL.
1) The accommodation shall not be provided exceeding 15 days.
AND
2) It is provided when employee is on transfer.
Above rule of accommodation are not applicable in following 2 cases :
1) Proviso 1 to Rule 3(1) :
Accommodation provided at certain sites or at a remote area.
b. If accommodation is provided to the employees at mining site, oil exploration
site, dam site, power generation site, then value of perquisite shall be taken as
NIL.
Provided, accommodation is of a temporary nature at a place not exceeding
800 sq. feet plinth area and beyond 8 kms from the local limits of the local
authority.
c. Similarly, value shall be taken as NIL if accommodation is provided at "remote

site / area"
Remote area for this purpose means the area located 40 km away from the
town having population less than 20000 (as per latest census)
2) Proviso 2 to Rule 3(1) :

Accommodation provided at the place of work keeping another
accommodation at the other place. (In short, provision of 2 accommodations
at a time)
If employee is provided with 2 accommodation, one at the place of work and
another at other place, then in this case, value of any one accommodation
shall be chargeable to tax in the hands of employee for the 1 st 90 days but
thereafter if he keeps both the accommodations then after 90 days value of
both the accommodation shall be chargeable to tax in his hands.

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3. 17(2)(iv) Any amount paid by the employer which is the obligation of

employee to pay :
If employer makes any payment which is the obligation of employee, then
such amount paid shall be chargeable as perquisite in the hands of employee.
The value of perquisite is computed on payment basis i.e. if expenditure is due
in 2017-18 and paid in 2018-19, then the perquisite shall be chargeable in
the year 2018-19.
Examples are some of obligation of employee
1) Payment to gardener, sweeper, cook etc employed by employee.
2) School fees of children of employee.
3) Gas, electricity, water facility
4) Expenses of car of employee
5) Income tax payable by employee.
4. Section 17(2)(v) : Any amount payable by employer directly or through

any fund other than RPF, Approved Superannuation fund or deposit
linked. Insurance fund to effect insurance of life of employee or to effect
a contract of annuity.
It means the perquisite is chargeable on Due Basis. It means when it becomes
due irrespective of payment, it becomes perquisite in the year in which it
becomes due.
For eg. The insurance premium becomes due in March 2018, but paid by
employer in April 2018. Then the perquisite is chargeable in 2017-18 in the
hands of the employee.
If employer makes the contribution to employee's State Insurance Scheme or
fidelity Guarantee Scheme, then such Premium paid shall not be treated as
perquisite in the hands of employee since these policies are generally for the
benefit of the employer.
5. 17(2)(viii) Any other fringe benefit or amenity provided by the employer
to the Assessee :

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As per amendment in Finance Act 2009, following are the rules in respect of
valuation of any other fringe benefit or amenity provided by employer to the
employee
1) Rule 3(7)(i) : Providing loan facility interest free or at a concessional rate.
When employer provides any loan to the employee or any member of his
household, then value of perquisite shall be computed by computing the
interest at the rates specified by State Bank of India as on the 1st day of the
relevant previous year
When employer collects any interest from the employee, then the above value
shall be reduced by the amount so collected.
Interest shall be computed on the maximum outstanding balance of every
month.
(Maximum outstanding balance means aggregate outstanding balance of all the
loans at the end of every month.)
Exceptions
In the following 2 cases, value of perquisites is not chargeable to tax in the
hands of employee.
1) If aggregate of the loans provided during the year does not exceed `
20,000.
2) When loan is provided (irrespective of amount) for medical treatment of
diseases specified in rule 3 A
For eg. A Ltd. gives loan to his employee of ` 1,00,000 on 01.04.2017

repayable in equal installments, in 10 months
a) At the end of every month
b) On the 1st day of next month
Compute the value of perquisite assuming the SBI rates for such loans as on
01.04.2017 was 9.75%
Ans :- At the end of every month
Months Maximum outstanding On the 1st day of
at end of every month next month
April 90,000 1,00,000
May 80,000 90,000
June 70,000 80,000

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July 60,000 70,000

August 50,000 60,000
September 40,000 50,000
October 30,000 40,000
November 20,000 30,000
December 10,000 20,000
January --- 10,000
--------------- ---------------
4,50,000 5,50,000
========= =========
Amount of interest :
At the end of every month = 4,50,000 X X = 3656.25
On the 1st day of next month = 5,50,000 X X = 4468.75
MEANING OF MEMBER OF HOUSEHOLD :

For this purpose, members of household include the following :
1) Spouse (s)
2) Children and their spouse
3) Parents
4) Servants and dependents
2) Rule 3(7)(ii) Value of Travelling, touring, accommodation and other

expenditure incurred by employer while employee is on holiday.
CIRCUMSTANCES VALUE OF PERQUISITES
1 When facility is maintained by the Amount charged by the similar
employer and it is not uniformly agency to the public
allowed to all the employees
2 Employee is on official tour and Actual expenditure incurred on
expenditure is incurred by the such person accompanying the
employer on the person employee
accompanying the employee
3 Official tour is extended as vacation Expenditure incurred on such
extended tour.
4 In any other case Actual expenditure incurred by
the employer.
Above value of perquisite shall be reduced by the amount of money collected

from the employee.

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3) Rule 3(7)(iii) Value of free food and non-alcoholic beverages

CIRCUMSTANCES VALUE OF PERQUISITES
1 Tea and snacks provided at working place NIL
2 Free food and non-alcoholic beverages NIL

provided
a) at remote place
b) at offshore installations
3 Free food and non-alcoholic beverages NIL if value of each meal
provided is not exceeding ` 50.
a) during working hours at business
premises
b) through paid vouchers which are non-
transferable and used at eating sites
The above value of perquisite shall be reduced by the amount collected from
the employee.
Value of each meal is more than ` 50 than the amount exceeding ` 50 shall be
treated as taxable perquisites.
As per the CBDT circular No. 15/2001 dated 12.11.2001, tea and snacks also
includes any non-alcoholic beverages and snacks in the form of light
refreshment.
4) Rule 3(7)(iv) Value of any gift, voucher, or token.
When employer gives any gift, voucher or token to the employee or any
member of his household, then value of such girt, voucher or token is treated
as perquisite in the hands of the employee. If aggregate value of such gift,
voucher or token received during the year does not exceed ` 5,000 then whole
of the amount is exempt and not treated or perquisite in the hands of the
employee.
If aggregate value of perquisite exceeds ` 5,000 then the taxable value shall be
the amount in excess of ` 5,000.

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If employee receives any cash or cheque as gift then whole of such gift shall
be treated as perquisite even if it is less than ` 5,000 because rule 3(7)(iv)

includes in kind only.
5) Rule 3(7)(v) Value of Credit Card provided to the employee
Circumstances Value of perquisites
1 Any fees paid including the annual fees by Actual amount of
the employer for the credit card provided to expenditure incurred by
the employee or any members of his the employer
household for the purpose other than
mentioned (2) below
2 Credit Card is provided wholly and NIL
exclusively for official purpose
The above value of perquisite shall be reduced by the amount collected from the
employee.
The value of perquisite in (2) above shall be taken as NIL provided following record
is maintained by the employer :
i) All the details of expenditure incurred shall be maintained which includes
date of expenditure, nature of expenditure etc.
ii) Employer shall give the certificate to the effect that the expenditure is
incurred wholly and exclusively for official purpose.
6) Rule 3(7)(vi) Value of Club Membership :
In case of corporate club membership, entrance fees shall not be included in
the value of perquisites
Circumstances Value of perquisites
1 Any fees paid including the entrance fees Actual amount of
by the employer for the club membership expenditure incurred by the
provided to the employee or any employer.
members of his household for the
purpose other than mentioned (2) below
2 Club membership is provided wholly and NIL
exclusively for official purpose
employee.

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The value of perquisite in (2) above shall be taken as Nil provided following record
is maintained by the employer
iii) All the details of expenditure incurred shall be maintained which
includes date of expenditure, nature of expenditure etc.
iv) Employer shall give the certificate to the effect that the expenditure is
incurred wholly and exclusively for official purpose.
7) Role 3(7)(vii) Perquisite for use of movable asset.
Asset Value of perquisite
i Computer and laptoos NIL
ii Any other movable asset other a)10% of cost of asset if it is owned by
than the employer or b)Actual rent paid /
a) Computer and laptops payable by the employer if it is taken on
b) Assets already specified hire
employees.
8) Rule 3(7)(viii) : Sale of movable Asset.
Asset Value of perquisite
Actual Cost of Asset to the employer as
reduced by ____% rate of depreciation for
every completed year of service. on the
basis-------------
1 Computer and other* 50%, Reducing Balance Method
electronic assets
2 Motor Car 20%, Reducing Balance Method
3 Any other Asset 10%, Straight Line Method
employee.
For eg. Employer purchased an asset on 01.05.2015 for ` 5,00,000 and the same
is sold to one of his employees for ` 56,000 on 01.06.2017. Compute the value of
perquisite in the hands of employee if that asset is
a) Computer b) Motor Car c) A.C.
Computer Motor Car A.C.
Rate of Depreciation 50% 20% 10%
Method of Depreciation W.D.V. W.D.V. SLM
No of Completed Years 2 Years 2 Years 2 Years
Cost to the employer 5,00,000 5,00,000 5,00,000
Less : Depreciation for 1st Year 2,50,000 1,00,000 50,000

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W.D.V. at the end of 1st Year 2,50,000 4,00,000 4,50,000

Less : Depreciation for 2nd Year 1,25,000 80,000 50,000
W.D.V. at the end of second Year 1,25,000 3,20,000 4,00,000
Amount collected from employee 56,000 56,000 56,000
Value of perquisite 69,000 2,64,000 3,44,000
9) Rule 3(7)(ix) : Other benefit or amenity [Sub-rule 7(ix) of Rule 3]

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.
However, there will be no taxable perquisite in respect of expenses on
telephones including mobile phone actually incurred on behalf of the
employee by the employer i.e., if an employer pays or reimburses telephone
bills or mobile phone charges of employee, there will be no taxable perquisite.
B. PERQUISITES CHARGEABLE IN THE HANDS OF SPECIFIED EMPLOYEES

In case of specified employees, all the perquisites i.e. provided under section 17(2)
(i), (ii), (iii), (iv), (v) and (viii) are chargeable to tax.
The perquisites under section 17(2) (i), (ii), (iv), (v) and (viii) have already discussed
earlier. Now we will discuss the perquisites chargeable under section 17(2)(iii)
which are specifically chargeable in the hands of specified employees only.
1) Rule 3(2) : Perquisite in respect of Motor Car/any other vehicle provided

Circumstances Value of perquisite
1 Motor Car owned or taken on hire
by the employer and expenses are
incurred or reimbursed by employer
a Car is used wholly and exclusively NIL, provided the record specified
for performing official duties below is maintained.
b Car is used wholly and exclusively All amount of expenses incurred by
for person purpose of employee or employer including the remuneration
any member of his household given to 'Chauffeur' as added by the
value of normal wear & tear (i.e.

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depreciation) computed @ 10% of

Cost of Motor Car.
c. Car is partly used for official Capacity of Car Capacity of Car
purpose and partly for person upto 1.6CC exceeding 1.6CC
purpose of employee or any
member of his household
i) If all the expenses are incurred or ` 1,800 p.m. ` 2,400 p.m.
reimbursed by the employer (+900 p.m. if (+900 p.m. if
chauffeur is chauffeur is
provided) provided)
ii) If all expenditure on personal ` 600 p.m. (+900 ` 900 p.m.
purposes are fully met by employee p.m. if chauffeur (+900 p.m. if
is provided) chauffeur is
provided)
2. Motor Car is owned by the

employee and expenses are
incurred or reimbursed by the
employer
a Car is used wholly and exclusively NIL, provide the record specified
for performing official duties below is maintained.
Capacity of Car Capacity of Car
upto 1.6CC exceeding 1.6CC
b Car is used partly for official Actual amount of Actual amount of
purpose and partly for personal expenses incurred expenses incurred
purposes of employee or any as reduced by as reduced by
member of household amount specified amount specified
in 1(c)(i) above i.e. in 1(c)(i) above i.e. `
` 1,800/2,700 2,400/3,300 p.m.
p.m. as the case as the case may be
may be.
If car is owned by the employee and used wholly for personal purpose and the
expenses are incurred by the employer, then such perquisite shall be covered
under section 17(2)(iv). Hence not included in the following table.
3. Any vehicle other than motor car

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(For eg. truck, tempo) is owned by

employee and expenses are
incurred or reimbursed by the
employer
a Vehicle is used wholly and NIL, provided the record specified
exclusively for performing official below is maintained.
duties
b Vehicle is used partly for official Actual amount of expenses incurred
purpose and partly for personal as reduced by ` 900 p.m. (+900 p.m. if
purposes of employee or any chauffeur is provided)
member of household
The capacity of the vehicle is not applicable for vehicle other than Motor Car
Record to be maintained if car is used wholly and exclusively for official

purpose
1) Particulars in respect of every journey i.e. date, destination, distance,
mileage, amount of expenditure etc.
2) Employer shall give the certificate to the effect that the car is used wholly
and exclusively for official purpose.
If more than one car is provided to the employee :

If employer provides one car to the employee (otherwise than, for wholly and
exclusively for official purpose) for wholly or partly personal purpose of employee
or any member of his household, then any one car shall be valued as per rule /
point No. 1(c)(i) and rest of the cars are valued as per point No. 1(b) (i.e. as if the
car is used wholly and exclusively for personal purposes by the employee)
If vehicle is provided for commuting the distance between residence and

office.
When employer provides any vehicle to the employee for commuting the distance
between residence and office or any other place of work, then NO VALUE of
perquisites will be chargeable in the hands of employee.

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2) Rule 3(3) : Value of perquisite in respect of provision of Domestic

Servants.
When employer provides any Domestic Servant at the residence of employee
i.e. sweeper, gardener, cook, personal attendant, etc. the value of perquisite is
actual amount of expenditure incurred by the employer on providing such
servants. However, the value of perquisite shall be reduced by the amount of
money collected from the employee.
If the servant is employed by the employee and his payment is made or
reimbursed by the employer, then such value of perquisite will be chargeable in
the hands of all the employees under section 17(2)(iv)
3) Rule 3(4) : Perquisite in respect of provision of gas, electricity by the

employer to the employee.
The valuation rules in respect of this is given in the following table
1 If gas, electric energy or water Actual unit cost to the employer
facility is provided from the
source owned by employer
2 If such facilities are provided Actual amount of expenditure incurred
through the outside agencies by the employer (i.e. amount paid/
by the employer payable to outside agency by the
employer)
employee.
4) Rule 3(5): Value of perquisite in respect of education facility provided to

the children of employee or children of any member of his household.
1 Education facility is provided Fees charged by the similar locality for
through the institute owned by the similar course.
employer

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2 Education facility is provided to If facility is provided to the children of

the children of his household due employee (Children of household are
to the reason of his being in not covered here) and value is less
employment of the employer than ` 1,000 p.m. per child then the
value of perquisite will be taken as
NIL
3 In any other case Actual amount of expenses incurred
by the employer for providing such
facility.
employee.
5) Rule 3(6) Value of travelling provided to the transport employees.

Travelling is provided to the
employees or any member of his
household by the employer engaged
in business of transportation (either
passenger or goods)
1 If facility is provided by the Railway NIL
or Airline
2 If facility is provided by the
employer a) Value charged by the employer
a) If provided free of cost to the outside public
b) The above value as reduced by
b) If at a concessional rate the amount collected from
employee.
C. THE VALUE OF ANY SPECIFIED SECURITY OR SWEAT EQUITY SHARES

ALLOWED OR TRANSFERRED AT FREE OF COST OR AT A
CONCESSIONAL RATE BY THE EMPLOYER TO THE ASSESSEE.

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When company allots specified securities or sweat equity shares to its employees,
the value of perquisite is the fair market value of security or shares on the date at
which the option is exercised.
1) For this purpose specified securities means the securities defined under
section 2(h) of Securities Control and Regulation Act (SCRA), 1956
2) Sweat Equity Shares : Means the shares allotted to the directors or
employees for contribution know-how, any rights in intellectual property or
any value addition to the company.
D. Amount of any contribution made by the employer to the approved

superannuation fund of the employee to the extend it exceeds ` 1,50,000
E. Tax Free perquisites :
Nature of Perquisite Exemption

Telephone Telephone provided by an employer to an
employee at his residence
Transport Facility Transport facility provided by an employer
engaged in the business of carrying of
passengers or goods to his employees either
free of charge or at concessional rate;
Privilege passes and Privilege passes and privilege ticket orders
privilege ticket granted by Indian Railways to its employees
Perquisites allowed Perquisites allowed outside India by the
outside India by the Government to a citizen of India for rendering
Government services outside India;
Employer’s contribution Employer’s contribution to staff group
to staff group insurance insurance scheme;
scheme;
Annual premium by Payment of annual premium by employer on
employer on personal personal accident policy effected by him on the
accident policy life of the employee;
Refreshment Refreshment provided to all employees during

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working hours in office premises;

Subsidized lunch Subsidized lunch or dinner provided to an
employee;
Recreational facilities Recreational facilities, including club facilities,
extended to employees in general i.e., not
restricted to a few select employees;
Amount spent on Amount spent by the employer on training of
training of employees employees or amount paid for refresher
management course including expenses on
boarding and lodging;
Sum payable by Sum payable by an employer to a RPF or an
employer to a RPF or an approved superannuation fund or deposit-
approved superannuation linked insurance fund established under the
fund Coal Mines Provident Fund or the Employees’
Provident Fund Act;
Leave travel concession Leave travel concession, subject to the
conditions specified under section 10(5)
Medical facilities Medical facilities subject to certain prescribed
limits;
Rent-free official Rent-free official residence provided to a Judge
residence of a High Court or the Supreme Court;
Rent-free furnished Rent-free furnished residence including
residence maintenance provided to an Officer of
Parliament, Union Minister and a Leader of
Opposition in Parliament;
Conveyance facility Conveyance facility provided to High Court
Judges under section 22B of the High Court
Judges (Conditions of Service) Act, 1954 and
Supreme Court Judges under section 23A of
the Supreme Court Judges (Conditions of
Service) Act, 1958.
PERQUISITE IN RESPECT OF MEDICAL TREATMENT : Proviso to sec 17(2)
A) Medical Treatment in India.
B) Medical Treatment outside India.
A) Medical Treatment in India :

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Following amount incurred or reimbursed by the employer to the employee in

respect of medical treatment shall be tax free.
1) Any amount incurred by the employee on the medical treatment of
himself or any of his family members in a hospital maintained by the
employer.
2) Any amount incurred by the employee on the medical treatment of
himself or any member of family in any hospital, clinic, nursing home of
otherwise to the extent ` 15,000
However, the following expenditure incurred by the employee and
reimbursed by employer is fully tax free :
a) If the medical treatment is availed in any hospital which is
maintained by Government or any local authority or any hospital
specified by the Government for the medical treatment of his
employee.
b) If medical treatment is availed in respect of any disease or ailment
specified under rule 3A, in a hospital approved by Chief
Commissioner of Income Tax (CCIT)
3) Any amount of premium paid by the employer on the health of the
employee under the scheme approved by Government or IRDA
(Insurance Regulatory Development Authority)
4) Any amount of premium paid by the employee on himself or his health
of any of his family members under the Scheme as approved by
Government or IRDA and reimbursed by the employer.
B) Medical Treatment Outside India :

Any medical allowance received by employee from the employer
(whether spent of not) is fully taxable.
6) In case of medical treatment outside India the assessee incurs the expenses
on medical treatment of the patient, stay and travel of patient as well as
attendent. When employer makes the re-imbursement of the same, then its
taxability is follows : (Medical treatment of family members or himself)
Expenses Amount of Exemption
reimbursed

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1 Medical treatment The amount of exemption is to the extent limit

of patient specified by RBI.
2 Stay of patient The amount of exemption is to the extent limit
and any 1 specified by RBI
attendant
3 Travelling of If Gross total Income of the Assessee (before including
patient and any 1 the taxable amount of travelling but after including
attendent the taxable amount of medical treatment and stay)
does not exceed ` 2,00,000 Then whole of the amount
re-imbursed is exempt, otherwise it is fully taxable.
For this purpose, family means, family members include :
a) Spouse, children whether dependent or not, whether married or not
b) Parents, brothers, sister who are dependent on the assessee.
For eg. X an employee of the company gets the following re-imbursement in
respect of his medical treatment in America Medical treatment ` 2,50,000
His Stay as well as his wife's stay ` 1,87,500 and for travelling of both ` 1,95,000
In respect of medical treatment and stay, RBI specified the limit of ` 2,25,000 and `
1,50,000 respectively. Compute the taxable amount of perquisite in respect of above
medical treatment assuming the gross total income of X for the year 2017-18 is
a) ` 1,00,000
b) ` 1,37,500
c) ` 1,60,000
Expenses reimbursed Reimbursement Limit by RBI Taxable
Medical treatment 2,50,000 2,25,000 25,000
Stay 1,87,500 1,50,000 37,500
Travelling :
a. Income ` 1,00,000 (1) 1,95,000 N. A. ---
b. Income ` 1,37,500 (2) 1,95,000 N.A. ---
c. Income ` 1,60,000 (3) 1,95,000 N.A. 1,95,000
Note 1 :- Income ` 1,00,000

Gross Total Income = 1,00,000 + 25,000 + 37,500 = 1,62,500
Exemption limit = 2,00,000
Therefore is fully exempt
Note 2 :- Income ` 1,37,500

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Exemption limit 2,00,000
Therefore is fully exempt
Note 3 :- Income ` 1,60,000
Exemption limit 2,00,000
It is Taxable fully.
Therefore Computation of taxable perquisite
Income 1,00,000 1,37,500 1,60,000
1) Medical Treatment 25,000 25,000 25,000
2) Stay 37,500 37,500 37,500
3) Travelling --- --- 1,95,000
Total Taxable Perquisite 62,500 62,500 2,57,500
Section 10(5) LEAVE TRAVEL CONCESSION (LTC)

1) The terms of employment may provide the leave travel concession to the
employee to the employee.
c) either during the term of employment or
d) after the retirement.
2) The exemption is available to the employee for the fare charges incurred or re-
imbursed by the employer during such leave travel.
3) The exemption is available depending upon mode of travel which employee
opts for as following -
i) If journey is availed by air - extend of air fare of national airline of economy
class for the shortest route to the place of destination.
ii) If source and place of destination is connected by rail and the journey is
availed by any mode other than air - the exemption is maximum to the
extent of first class air condition fare of rail for the shortest route.
iii) If source and place of destination is not connected by rail and
a) Recognised public transport system is available to the place of
destination :- the exemption is maximum to the extent of 1st class or
executive class fare of such transport system for the shortest route to
the place of destination.
b) No public transport system is available to the place of destination :-

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iv) The exemption is maximum to the extent of 1st class air condition fare of
railway for same distance (It means in the above clauses a and b, journey
is performed by the mode other than railway and airways)
1) Limit of exemption :
1) Employee can avail the exemption under this section for any 2 journey
availed during the block of 4 years.
Block :- The Act itself has defined a block of 4 years and the 1st block has
started from 1986-1989 (Calendar years). The current block in 2018-2021.
2) If employee could not avail two journey in our block then he can carry
forward one journey to the next block and can claim the exemption
provided the journey shall be availed within 1st year of the next block.
It means an employee can avail the exemption for maximum of 3 journies.
3) The employee can avail the exemption for the journey availed along with
his family .
Family for this purpose means -
a) Spouse and children
b) Brother, sister, parents who are dependent on the employee.
It is not necessary that the members of the family shall accompany the
employee during the journey.
4) The said exemption is allowed to the extent 2 children only. However, the
exemption was available to any member to any no. of children before 01-
101998. If after 01-10-1998 if an employee has 1 child and he get
multiple birth thereafter say twins then that multiple birth shall be
deemed as 1 child for the purpose of LTC it means 3 children will be
treated as 2 children in this case.
ALLOWANCES :
Meaning :
Allowance is the extra amount paid by the employer to the employee for meeting
certain expenditure. It may be personal or official. The allowance under income
tax Act are classified as follows :

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Section 10 (13A) : HOUSE RENT ALLOWANCE

House rent allowance is given by the employer to the employee for meeting the
expenditure of rent for an accommodation which he may take on rent. The
exemption for house rent allowance is least of the following.
a) HRA actually received
b) Rent paid in excess of 10% of the Salary for the specified period
c) 50% of the total salary if accommodation is in Mumbai / Delhi / Calcutta /
Chennai or 40% in any other city.
Salary for this purpose means basic salary + DA (to the extent provided in terms
of employment) + Commission as a fixed percentage of turnover achieved by the
employee during the PY)
For eg. X is an employee of XYZ Ltd and receiving HRA of ` 5,000 p.m. during
2017-18 (P.Y). He is occupying the accommodation for which he is paying rent of `
4,500 p.m. His basic salary for the year is ` 2,00,000 + DA 50% of basic salary (of
which 50% is provided in the terms of employment) and commission of ` 50,000.
He paid the rent throughout the year in Pune. Compute the taxable HRA or
compute the taxable Salary for X for AY 2018-19
Ans : Mr. X
P.Y. : 2017-18
A.Y : 2018-19
Computation of taxable Salary.

Basic Salary 2,00,000
DA (50% of 2,00,000) 1,00,000
Commission 50,000
HRA received (50000 X 12) 60,000
(-) exemption under section 10 (13A) (N:1) 24,000
Total Taxable Salary 3,86,000
N:1 Exemption under section 10(13A) House rent allowance is least of the
following
a) HRA actually received (5000 X 12) 60,000
b) Rent paid in excess of 10% of the Salary for
specified period.
Salary Basic 2,00,000

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(+) DA 50% (50% X 2,00,000) 50,000

(+)Commission 50,000
-----------
Total Salary 3,00,000
10% of total Salary 30,000
Rent paid (4,500 X 12) 54,000
----------- 24,000
c) 40% of total salary (40% of 3 lac) 1,20,000
Since accommodation is in Pune.
Therefore amount of exemption is ` 24,000 least of above.
The above computation for HRA depends upon the following factors :
1) HRA
2) Rent paid
3) Salary
4) Place of accommodation.
If any of the above factors change, there will be change in exemption.
For eg. In the above case, there are following changes
1) If he was living in Pune from 01.04.2017 - 31.08.2017 and from
01.09.2017 in Mumbai.
2) Salary was ` 15,000 p.m. from 01.04.2017 - 31.01.2018
3) Salary was ` 20,000 p.m. from 01.02.2018 to 31.03.2018
Ans :- Mr. X
P.Y. 2017-18 A.Y. 2018-19
Computation of total taxable salary
Basic Salary
01.04.2017 - 31.01.2018 (15,000 X 8) 1,20,000
01.02.2018 - 31.03.2018 (20,000 X 4) 80,000 2,00,000
DA (50% of 2 lac) 1,00,000
Commission (5,000 X 12) 60,000
HRA received (5,000 X 12) 60,000
(-) Exemption under section 10(13A) (N:1) 23,000

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A. Note 1 :- Exemption under section 10(13A) house rent allowance will be

least of following (5 mon)
a. HRA actually recd. (5,000 x 5) 25,000
b. Rent paid in axcess of 10% of Salary
Basic Salary 15,000 x 5 75,000
(+) DA (50%) (50% of 75,000) 18,750
(+) Commission (5,000 x 5) 25,000
10% of Total Salary 11,875
Rent Paid (4,500 x 5) 22,500 10,625
c. 40% of Salary (40% of 1,18,750) 47,500
Exemption is 10,625 being least of above.
B. 3 months
Salary for specified period
Salary 15,000 x 3 45,000
(+) DA (50%) (50% of 45,000) 11,250
(+) Commission (5,000 x 3) 15,000
Total Salary 71,250
10% of TS 7,125
Rent Paid (4,500 x 3) 13,500 6,375
c. 50% of Salary (50% of 71,250) 35,625
Exemption is 6,375 being least of above.
C. 4 months
Salary 20,000 x 4 80,000
(+) DA (50%) (50% of 80,000) 20,000
(+) Commission (5,000 x 4) 20,000
10% of TS 12,000
Rent Paid (4,500 x 4) 18,000 6,000
c. 50% of Salary (Live in Bombay) 60,000
Total Exemption = A+B+C
= 10,625 + 6,375 + 6,000
= 23,000
For eg. Mr. Y is working with Z Ltd. and receiving salary of ` 25,000 p.m. till
31.12.2017. Thereafter he received ` 30,000 p.m. He received HRA ` 10,000 p.m.
throughout the year. He was paying the rent to the Accommodation house ` 8,500

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till 30.09.2017 and thereafter ` 10,000 p.m.. Compute taxable salary income of
Mr. Y assuming he was staying in Baroda.
Ans. Mr. Y
A.Y. 2018-19
P.Y 2017-18
Computation of Taxable Salary

Basic Salary
(25,000 x 9) 2,25,000
(30,000 x 3) 90,000 3,15,000
HRA Received (10,000 x 12) 1,20,000
(-) Exemption under section 10(13A) (N:1) 79,500 40,500
Note 1 :- Computation of Exemption :-

a. From 01.04.2017 to 30.09.2017
HRA Actually received (10,000 x 6) 60,000
Rent Paid in excess of 10% of Salary of the 75,000
Specified period
Basic Salary (25,000 x 6) 1,50,000
10% of Salary 15,000
Rent Paid (8,500 x 6) 51,000 36,000
40% of Basic Salary (40% of 1,50,000) 60,000
Exemption is least of the following 36,000

b. From 01.10.2017 to 31.12.2017
Rent Paid in excess of 10% of Salary of the
Specified period
Basic Salary (25,000 x 3) 75,000
10% of Salary 7,500
Rent Paid (10,000 x 3) 30,000 22,500
40% of Basic Salary (40% of 75,000) 30,000

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c. From 01.01.2018 to 31.03.2018

Rent Paid in excess of 10% of Salary of the
Specified period
Basic Salary (30,000 x 3) 90,000
10% of Salary 9,000
Rent Paid (10,000 x 3) 30,000 21,000
40% of Basic Salary (40% of 90,000) 36,000
Total Exemption = 36,000 + 22,500 + 21,000 = 79,500
Section 10(14) : SPECIFIED / NOTIFIED ALLOWANCES
These allowances are divided into following 2.
Section 10(14)(i) : Allowances exempt to the extent spent by the employee.
These allowances are given generally for meeting the official obligations. These are
exempt to the extent least of the following.
d) Allowance actually received
e) Allowance actually spent
Following is the list of allowance specified under this section and the list is
exhaustive.
1. Traveling Allowance :-
This allowance is given for meeting the expenses on traveling while on official
tour or from transfer from 1 place to another.
2. Conveyance Allowance :-
This allowance is given for meeting the expenses on conveyance while
providing the official duty or in the course of transfer from one place to
another (For eg. traveling in taxi, auto etc.)
3. Daily Allowance :- This is granted to the employee for meeting the daily
needs for performing the official duties while on tour.
4. Helper Allowance :-
Employee may employ helpers to assist him for the purpose of performing the
official duties. For meeting such expenses on helper, employer gives the
allowance which is called as the helper allowance.
5. Academic Allowance :-
This allowance is provided for encouragement of education and training
among the employees

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For eg. A B & Co. employee is granted allowance for pursuing CA Course.
6. Uniform Allowance :-
This is given for purchasing and / or maintaining the uniform to wear while
performing the official duties.
Section 10(14)(ii) : Notified allowance provided for meeting the personal

expenses and which are exempt least of the following
a) Allowance actually received
b) Limit specified under the Act.
The list is as follows :
1) Children education allowance :
This is exempt to the extent ` 100 p.m. per child to the extent 2 children.
2) Hostel expenditure allowance :
This is exempt to the extent ` 300 p.m. per child to the extent 2 children
3) Tribal area allowance :
Exempt to the extent ` 200 p.m.
4) Special Compensatory hilly area allowance :
Exempt to the extent ` 300 - ` 7,000 p.m.
5) Border area allowance :
Exempt to the extent ` 200 - ` 1,300 p.m.
6) Compensatory field area allowance :
Exempt to the extent ` 2,600 p.m.
7) Compensatory modified field area allowance :
Exempt to the extent ` 1,000 p.m.
8) Counter insurgency :
Allowance given to the member of armed forces exempt to the extent of `
3,900 p.m.
9) Transport Allowance :
This allowance is given for commuting the expenditure from house or place
of work or office. This is exempt to the extent ` 800 p.m.
10) Underground Allowance :
This allowance is given to the employees who are working underground i.e.
mines under unnatural condition. This is exempt to the extent ` 800 p.m.

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11) High altitude Allowance :

This allowance is given to the members of armed forces for working at high
altitude (above the sea level) This is exempt to the extent ` 1,060 if the
working is at altitude 9000 ft. - 1500 ft and ` 1,600 p.m. above 15000 feet.
12) Special Compensatory :
Highly remote area allowance allowed to the member of armed forces -
exempt to the extent of ` 4,200 p.m.
13) Island Allowance :
This is exempt to the extent ` 3,250 p.m. allowed to members of armed
forces working at Andaman Nicobar or at a group of island at
Lakshadweep.
Exemption to the extent percentage specified in the Act
Allowance given to transport employee (not in receipt of daily allowance as
specified in 10(14)(i))
This allowance is given to the employee who is working with the employer who is
carrying business of transport. This allowance is given for meeting the daily needs
of the employee while on the duty of transportation. Exemption is least of the
following :
a) 70% of allowance received or
b) ` 10,000 per month
This exemption is available provided he shall not claim the exemption for daily
allowance under section 10(14)(i)
Exempt Allowances :
Following are the allowances which are fully exempt in the hands of employee.
1) Allowances received by an India citizen who is a Government employee and
providing services outside India.
2) Allowances received by the Judges of High Court and Supreme Court.
3) Allowances received by the employee of UNO.
Fully Taxable Allowances :
Following are fully taxable in hands of employee :
1) Dearness Allowances
2) City compensatory allowances

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3) Medical allowances
4) Telephone allowance
5) Overtime allowances
6) Lunch / tiffin allowances
7) Servant allowances
8) Warden allowances
9) Non-practicing allowances
10) Special allowances
TREATMENT OF PROVIDEND FUND :
Types of Providend Fund
1) Statutory Provident Fund : (SPF) :

This provident fund is applicable to the Government employee may be
semi-Government, university or an educational institution affiliated to any
university. The employer and employee make contribution to such PF as
per the rules defined there under by the Government
2) Recognised Provident Fund (RPF) :
It is applicable to the employees other than covered in SPF, who employs
20 or more employee at any time during the P.Y. when it becomes
compulsory to make the contribution to PF, the employer has 2 options :
1) To become the part of scheme of Government defined under Provident
Fund and Miscellaneous Provisions Act, 1952.
OR
2) To open the separate account in a designated bank and get the
recognition of the Provident Fund Commissioner.
In this option, employer has to create trust through which contri of
employer and employee is deposited and account is maintained, for
this account he has to take the approval of commissioner of Income-
Tax.
3) Unrecognised Provident Fund (URPF) :
In case employer employ's less than 20 employee's, he may open PF A/c
but which is not recognised by PF Commissioner. However, such fund
requires the approval of Commissioner of Income-Tax.

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In the above three types of funds, we have to discuss the treatment of the
following
1) Employee's Contribution to fund
2) Employer's Contribution to fund
3) Interest on balance of fund.
4) Public PF (PPF) :
This is the fund created under the Providend Fund Act 1972 to which any
part of the public being an individual or HUF can contribute. The minimum
contribution to this fund is ` 500 p.a. and maximum contribution `
1,50,000 p.a. The terms of the fund is 15 years unless extended and on the
balance assessee gets interest about @ 8% p.a. compounded.
In case of PPF we have to discuss the treatment of following
1) Assessee's contribution to PPF
2) Interest on the balance of fund
 Treatment of PF :
Particulars Statutory PF Recognised PF Unrecognised PF Public PF
Employee's Eligible for Eligible for No deduction is Eligible for
contribution deduction deduction available under deduction
under under section section 80C under
section 80C 80C section 80C
Employer's Fully Exempt to the Not exempt, not N.A.
contribution exempt in extent 12% of taxable at the time
hands of salary of of contribution
employee employee
Interest on Exempt Exempt to the Not exempt, not Exempt
the Account under extent 9.5%p.a. taxable under
balance section10(1 section
1) 10(11)
Withdrawal Fully Fully exempt  Own Fully
from fund exempt contribution - exempt
Not taxable
 Employer’s
contribution -
taxable as

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salary
 Interest on own
contribution -
Taxable as
other source
Income.
 Interest on
employer’s
contribution -
Taxable as
Salary
SOME IMPRORTANT POINTS

1) In case of RPF amount withdrawn at the time of cessation of the
employment is exempt provided -
Employee shall have served a continued service of 5 years with the
employer or
If he has not completed continuous service of 5 years but the cessation is
due to
a. ill health of the employee
or
b. Discontinuous of business by the employer
or
c. Due to any other reason beyond the control of the employee.
2) After termination, employee gets the employment with any other employer
and the balance of employee in RPR is transferred to the RPF maintained
by such other employer.
3) If employee withdraws amount from the RPF within a period of 3 years and
without fulfilling any of the above conditions, then his exemption claimed
earlier stands withdrawn. In this case, the tax liability for earlier stands
withdrawn. In this case, the tax liability for earlier years shall be computed
as if no concession had been granted (12% for contribution and 9.5% pa for
interest) and the additional tax liability he has to pay in the year of

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termination. Interest on his own contribution will be chargeable as 'Other

Source Income'
4) Salary for this purpose means basic salary + DA (to extent provided in the
terms of employment) + Commission (as fixed % of turnover achieved by
employee during the P.Y.)
TREATMENT OF TRANSFERRED BALANCE OF URPF TO RRF
When the employee creates the RPF after maintaining the URPF for earlier years,
then there are 2 options with the employee.
a) to withdraw whole or part of the balance from URPF
or
b) let the employer transfer the balance of URPF to RPF.
a) To withdraw whole or part of the balance from URPF.

Treatment is as follows :-
Employees own contribution Not Taxable
Employer's contribution Taxable as Salary
Interest on employee's contribution Other source income
Interest on employer's contribution Taxable as 'Salary'
b) Let the employer transfer the balance of URPF to RPF
In this case the URPF is treated as if it was recognised since beginning and
in each year employers contribution and interest on the total fund shall be
added in the total salary after availing the respective deduction for
employer's contribution and interest. (the deduction for employers
contribution upto AY 1997-98 was 15% of the salary and thereafter it is
12% of the salary and deduction for interest upto 31.03.2001 was 10% p.a.
and thereafter it is 9.5%p.a.)
The additional tax liability of each year, if any, shall be paid by the
employee during the year of conversion.
Superannuation Fund :
Employee's contribution Eligible for deduction under section
80C
Int. on employer's contribution exempt under the A/c
Employer's contribution Taxable to the extent the amount

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exceeding ` 1,00,000 during the

year.
Interest on employer's contribution exempt under the Act.
Section 16 Deduction From Gross Salary

Following are the 2 deductions allowed under section 16 from the gross salary.
Section 16(ii) : Deduction for entertainment allowance
1) This deduction is available to the government employees only. It

means it is fully chargeable to tax in the hands of employees other than
Government employee.
2) Entertainment allowance received shall be added 1st in the gross salary
and then allowed to be deducted under section 16(ii)
3) Amount of deduction : is least of the following
1) Allowance actually received
2) 20% of the basic salary only.
3) ` 5,000
Section 16(iii) : Tax on employment or Professional tax.
PF may be paid by employer or employee.

Paid by employer :
It shall be added as gross salary as perquisite under section 17(2)(iv) and then
allowed to be deducted under section 16(iii)
Paid by employee :
Allowed as deduction under section 16
Maximum deduction shall be allowed to ` 2,500 p.a.
RELIEF UNDER SECTION 89 : (read with rule 21A)
In some of the cases of employee, the benefit received from the employer gets
taxed in the year of receipt. though it pertains to earlier years. Due to this
chargeability, tax burden on the employee increases. To avoid this hardship sec

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89 has been inserted in the Act for granting the relief in a manner provided in rule
21A.
Relief under section 89(1) is granted for the following :
Rule 21A(2) Arrears / Advance of Salary received
1) Gratuity (Taxable after claiming exemption under section 10(10))
2) Compensation received on termination
3) Commuted pension (Taxable after claiming exemption under section
10(10A)
4) Any other receipt from the employer.
COMPUTATION OF RELIEF
1) Rule 21A(2) : Arrears / advance of Salary received
The relief is to be computed with the help of following steps :
Step 1 Compute Tax liability on the Total income including Arrears XXX
of Salary received in the year of receipt
Step 2 Compute Tax liability on the total income excluding Arrears XXX
of salary received in the year of receipt
Step 3 1-2 XXX
Step 4 Compute the tax liability of the year to which arrears XXX
pertains including the arrears
Step 5 Compute the tax liability of the year to which arrears XXX
pertains excluding the arrears.
Step 6 4-5 XXX
Therefore, Relief = 3 - 6
If 3 < 6, there is no relief.
2) Rule 21A(3) : Gratuity (Taxable after claiming exemption)

The relief is available to the gratuity which is taxable after claiming the
exemption under section 10(10). The relief is available only if employee has
served to the employer minimum of 5 years.
The computation of relief is given for following 2 categories.
1) Gratuity received after serving for more than 15 years.
2) Gratuity received after serving more than 5 years and less than 15
years.
3) Gratuity received after serving for more than 15 years :

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Step 1 : Compute the average tax rate in the year in which gratuity is
received on the income including the gratuity (taxable portion only)
Average = X 100
Step 2 : Average tax rate (as computed above) X Gratuity
Step 3 : Add of such gratuity received to the total income in each of 3
immediately preceeding PY and compute average tax for each of 3 years.
Step 4 : Compute average of above 3 overage tax rate.
Step 5 : Average rate (as computed above) X Gratuity
Step 6 : Relief = 2 - 5
For eg. P.Y. 2017-18
Income + Gratuity = Total income
4,40,000 + 60,000 = 5,00,000
Total tax : 5,00,000 - 1,60,000 = 3,40,000

Therefore, 10% of 3,40,000 34,000
(+) 3% 1,020
--------
Total Tax 35,020
Average Tax = X 100 = 7%
Step 2 : 60,000 X 7% 4,200
Year Income Tax Tax%
Step 3 : 2017-18 2,00,000 + 20,000 = 2,20,000 6,000 2.72%
2016-17 2,20,000 + 20,000 = 2,40,000 8,000 3.33%
2015-16 2,50,000 + 20,000 = 2,70,000 10,000 3.7%
Step 4: = 3.25%
Step 5 : 60,000 X 3.25% 1,950
Step 6 : Relief = 4,200 - 1,950 2,250
4) Gratuity received after serving more than 5 years and less than 15
years.

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Step 1: Compute the average tax in the year in which gratuity is

received on the income including the gratuity (taxable portion
only)
Step 2 : Average tax rate (as computed above) X Gratuity
Step 3 : Add of such gratuity received to the total income in each of 2
immediately preceeding previous years and compute average
tax for each of 2 years.
Step 4 : Compute average of above 2 average tax rate.
Step 5 : Average rate (as computed above) X Gratuity.
Step 6 : Relief = 2 - 5
Rule 21 A(4) : Compensation received on termination
Relief for compensation received on termination is available provided -
a) Employee shall serve the employer for at least 3 years.
And
b) The period of service left shall not be less than 3 years.
The relief in this case shall be computed in a manner provided when
gratuity is received after period of service of 15 years.
Rule 21A(5) : Commuted Pension
The relief is available for the commuted pension which is taxable after
claiming the exemption under section 10(10A). The relief in this case shall
be computed in a manner provided when gratuity is received after a period
of service of 15 years.
Rule 21A (6) : Any other receipt from the employer.
In this case, the relief shall be computed in a manner as specified by the
Board [CBDT].
--- Ω ---

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INCOME FROM SALARY

Some Basic Concepts :

CA - FINAL, DIRECT TAX BY CA PRASAD S. BHANDARI 71

There is contract of Service in case of every employment. Therefore, the receipts

5) Tax Free Salary :

6) Place Of Accrual Of Salary :

CA - FINAL, DIRECT TAX BY CA PRASAD S. BHANDARI 72

7) Full-time or part-time employment:

8) Salary Received In Foreign Currency :

9) Salary Received By Foreign Government / Enterprises :

10) Salary Under Grade System :

CA - FINAL, DIRECT TAX BY CA PRASAD S. BHANDARI 73

Salary for P.Y. 2017-18 (from 01.04.2017 – 31.03.2018)

2. Grade System : ` 15,000 - 750 - 18,000 - 1,000 - 21,000

3. Grade System : ` 2,550 - 150 - 3,000 - 250 - 4,000

CA - FINAL, DIRECT TAX BY CA PRASAD S. BHANDARI 74

(Date of Joining the Service : 01.02.2012)

Salary for P.Y. 2017-18 (from 01.04.2017 - 31.03.2018)

Section 15: BASIS OF CHARGE

CA - FINAL, DIRECT TAX BY CA PRASAD S. BHANDARI 75

If employee receives the arrears of salary of the earlier year, then it is

Section 17(1) : Definition of SALARY

CA - FINAL, DIRECT TAX BY CA PRASAD S. BHANDARI 76

2) Annuity :- Annuity is a special grant provided by the employer to the employee

Particulars Amount Amount

CA - FINAL, DIRECT TAX BY CA PRASAD S. BHANDARI 77

Employer’s Contribution to Pension Scheme of XXX

Section 10(10) Gratuity

Gratuity is a voluntary payment made by an employer in appreciation of services

Such gratuity received by the employee shall be chargeable as "Income from

Employee is eligible for gratuity on completion of continuous service of 5 years to

CA - FINAL, DIRECT TAX BY CA PRASAD S. BHANDARI 78

2. 10(10)(ii) EMPLOYEES COVERED UNDER GRATUITY ACT, 1972 :

For this purpose,

CA - FINAL, DIRECT TAX BY CA PRASAD S. BHANDARI 79

iii) Amount specified under the Act. ` 10,00,000

Note 1:- 15 days salary = [ X 15 ] X No. of years of service

 In case of Seasonal employees, instead of 15 days 7 days salary for every

3. 10(10)(iii) OTHER EMPLOYEES :

CA - FINAL, DIRECT TAX BY CA PRASAD S. BHANDARI 80

10 month Average Salary = X 25

SOME IMPORTANT POINTS

Treatment of pension is given in under section 17(i)(ii) :

CA - FINAL, DIRECT TAX BY CA PRASAD S. BHANDARI 81

CA - FINAL, DIRECT TAX BY CA PRASAD S. BHANDARI 82

2. 10(10A)(iii) EXEMPTION FOR COMMUTED PENSION RECEIVED BY OTHER

Exemption is least of the following :-

Note 1:- Pension from 01.02.2018 - 31.03.2018

Exemption = 2,00,000 being least of above two.

CA - FINAL, DIRECT TAX BY CA PRASAD S. BHANDARI 83

3. computation of Taxable Pension if in the above case it is assumed that the

Note 1 :- Exemption under Section 10(10A)(iii)

Therefore Exemption will be ` 3,00,000 being least of the above.

Section 10(10AA) TREATMENT OF LEAVE SALARY

CA - FINAL, DIRECT TAX BY CA PRASAD S. BHANDARI 84

For this purpose, the employees are categorised as follows :

1. Section 10 (10AA)(i) : Exemption in the hands of Government employees :

2. Section 10(10AA)(ii) : Other employees

For this purpose :-

CA - FINAL, DIRECT TAX BY CA PRASAD S. BHANDARI 85

Note 1 - Computation of cash equivalent of unavailed leave.

Note 1 :- Computation of cash equivalent of unavailed leave.