INCOME FROM SALARY

The meaning of the term ‘salary’ for purposes of income tax is much wider than what is normally
understood. The term ‘salary’ for the purposes of Income-tax Act, 1961 will include both monetary
payments (e.g. basic salary, bonus, commission, allowances etc.) as well as non-monetary facilities (e.g.
housing accommodation, medical facility, interest free loans etc). It is an inclusive definition and includes
monetary as well as non-monetary items.
As per Section 15, the income chargeable to income tax under the head salaries would include:
(i) Wages or Salary: ‘Salary’ is generally used in respect of payment for services of a higher class,
whereas ‘Wages’ is confined to the earnings of labourers. However, for income-tax purposes there is
no difference between salary and wages.
(ii) Annuity is annual grant made by the employer to the employee.
(iii) Pension is a periodical payment for past services.
(iv) Gratuity is a lump sum payment for past services.
(v) Fees and Commission: It is a remuneration to encourage employees.
(vi) Perquisites: all benefits and amenities provided by the employer either in cash or kind.
(vii) Profit in lieu of or in addition to salary or wages.
(viii) Advance of Salary.
(ix) Leave encasements

Profit In Lieu Of Salary:

1. Any compensation due to or received by an employee from his employer or former employer at
or in connection with the termination of his employment or modification of the terms and
conditions relating thereto.
2. Any Payment due to or received by employee from his employer or former employer or from a
provident fund or other fund to the extent it does not consist of contributions by the assessee or
interest on such contributions or any sum/bonus received under a Keyman Insurance Policy.
3. Any amount whether in lump-sum or otherwise, due to or received by an assessee from his
employer, either before his joining or after leaving the employment.

Employer-employee relationship: Every payment made by an employer to his employee for service
rendered would be chargeable to tax as income from salaries. Before an income can become chargeable
under the head salaries’, it is vital that there should exist between the payer and the payee, the relationship
of an employer and an employee. 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.
Tax free salary: the income from salaries in the hands of the employee will consist of his salary income
and also the tax on this salary paid by the employer.

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 Proforma for computation of income under the head “Salaries”

i. Basic Salary X
ii. Fees/Commission X
iii. Bonus X
iv. Allowances:
a. House Rent Allowance
Less: Least of the following is exempt;
i) 50%/40% of salary x
ii) HRA actually received x
iii) Rent paid (-)10% of salary x X
b. Dearness Allowance X
C. Children Education Allowance XXX X
Less: 100 per month per child upto maximum of two children
(d) Children Hostel Allowance xxx X
Less: 300 per month per child upto maximum of two children
e) Transport allowance XXX X
Less: 1,600 per month (3,200 in case of disabled
(f) Entertainment Allowance X
(g) Other Allowances / CCA/OT/ X
v Taxable Perquisites
A. Rent free accommodation
If accommodation owned by the employer
(i) Cities having population > 25 lakh
15% of salary (–) rent recovered from employee
(ii) Cities having population > 10 lakh < 25 lakh
10% of salary (–) rent recovered from employee X
(iii) In other cities
7.5% of salary (-) rent recovered from employee
If accommodation taken on lease by the employer
Lower of the following: Rent paid by the employer or 15% of salary X X
Less: rent recovered from the employee X
B. Valuation of use of motor car X
C. Any other perquisite like Professional Tax paid by employer X
vi Pension X
vii Gratuity X
Gross Salary XXX
LESS: 16 (i) Standard Deduction Rs. 40,000 x
Deduction (ii) Entertainment Allowance (Govt. Employees only) x
u/s 16 (iii) Professional taxes paid by employee x
Income from Salary XXX

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An Allowance is defined as a fixed amount of money given periodically in addition to the salary for the
purpose of meeting some specific requirements connected with the service rendered by the employee or
by way of compensation for some unusual conditions of employment.

FULLY TAXABLE ALLOWANCES

(1) Dearness Allowance and Dearness Pay
(2) Fixed Medical Allowance
(3) Tiffin Allowance: It is given for lunch and refreshments to the employees.
(4) Servant Allowance: it is taxable for all categories of employees.
(5) Non-practising Allowance
(6) Hill Area Allowance is fully taxable, if the place is located at less than 1,000 metres height
from sea level.
(7) Ot h e r f u l l y t a x a b l e a l l o w a n c e s a r e ; Warden Allowance and Proctor Allowance,
Deputation Allowance, Overtime Allowance, Family allowance, Project allowance, Marriage
allowance, City Compensatory allowance, Dinner allowance, Telephone allowance etc.

ALLOWANCES NOT FULLY TAXABLE (Partly Exempt Partly Taxable)

The following allowances are exempt upto a specified limit only
1) Conveyance Allowance – Rs.1600/= per month.
2) Transport allowance Rs. Rs. 1600 per month granted to an employee, for the purpose of
commuting between the place of his residence and the place of duty. In case of blind or
orthopaedically handicapped with disability @ Rs.3200/= per month
3) Children Education Allowance Rs.100/= per month maximum for 2 children.
4) Any allowance to meet the expenditure on hostel on his child Rs. 300/= per month, maximum for
2 children.
5) Tribal area allowance Rs.200 per month
6) House Rent Allowance (HRA) exemption (u/s10) is entitled least of the following :-
1. Actual HRA received, or
2. Rent paid in excess of 10% of salary or
3. 50% of salary if the accommodation is situated at Delhi, Mumbai, Kolkata, or Chennai or
40% of salary if the accommodation is situated at any other place.
Note: HRA will not be exempt if the residential accommodation is occupied by the assessee, is
owned by him or the assessee has not actually spent any expenses on account of rent.
Salary = Basic Pay + D.A. (If form part of retirement benefit) + Commission (If it is based on
specific % of turnover)
7. Entertainment Allowance
In case of Entertainment allowance an assessee will not get any exemption but would be eligible for
deduction under section 16(ii) from gross salary. The deduction is allowed to government employees only;
Non- Government employees will not be eligible for this deduction. The entire amount of entertainment
allowance will be added to gross salary.
The minimum of the following shall be available as deduction in case of Government employees:
(i) Actual amount of entertainment allowance received during the year
(ii) 20% of his salary exclusive of any allowance, benefit or other perquisites.
(iii) Rs.5,000.

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Difference Between Allowances and Perquisites::
From the point of view of employer, both are the expenses, incurred by employer for employees.
But in case of allowances, these are received by the employee in cash to meet some specific
expenses on regular basis whether these expenses are incurred or no by the employee. In case of
perquisites, the expenses are incurred by the employer on behalf of employee.

PERQUISITES: The term “perquisites” includes all benefits and amenities provided by the employer
to the employee in addition to regular salary. Perquisites are a gain or profit incidentally made from
employment in addition to regular salary.

PERQUISITES NOT TAXABLE (Or Tax-free perquisites):

Following are such perquisites which are exempt from income tax:-
1. Medical Facilities: Value of medical treatment provided to an employee or his family member in
a hospital maintained by his employer.
Reimbursement of expenditure incurred on medical treatment of an employee or his family
member in a Government approved hospital (like CHS or CGHS)
Reimbursement of expenditure incurred by the employee in a hospital approved by the Chief
Commissioner in connection with the medical treatment of the employee or any member of his
family. This concession will be admissible for treatment of prescribed diseases or ailments. The
employee is required to attach with his return of income:-
Medical insurance premium paid by the employer for the health of the employee or his family
member under a scheme approved by the Central Government.
Reimbursement of expenditure incurred in a private hospital on medical treatment of an employee
or his family member shall be exempt up to maximum of Rs.15000/=.
2. Free meal of value up to Rs.50/= per meal provided by the employer during office hours at
business premises. However, free meals during working hours provided in a remote area or a
offshore installation shall be fully exempt.
3. Gift or Gift Voucher up to a certain specified limit (Rs.5000) in a year. If the value of Gift
Voucher is more than that specified limit then whole amount shall be taxable.
4. Tea or snacks provided during office hours.
5. Expenditure incurred by employer on provision of food or beverages to employees either inside
or outside the place of work during working hours upto Rs. 35 per day per employee will not be
treated as income of the employee provided the amount is paid by the employer directly to the
caterer, restaurant, eating place, canteen, etc.
6. The value of recreational facilities provided is exempt.
7. Telephone facility provided at the residence of the employee is exempt
8. The value of transport provided by the employer to the employees as a group
9. Personal accident insurance: Payment of annual premium Refresher Course fees by the
employer is exempt.
10. Free educational facility to the children of the employee in an educational institute
owned/maintained by the employer if cost of such education or value of such benefit does
not exceed Rs. 1,000/- per month per child.
11. Interest free loan to an employee if the amount of loan does not exceed Rs. 20,000/- or if
loan is provided for specified diseases.
12. Computer/laptops (provided only for use, ownership is retained by the employer)
.

TAXABLE PERQUISTES

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Following are few perquisites which are taxable under the head salary income.
1. Income Tax treatment of Rent Free or Concessional: Accommodation given to an employee
is divided in the following categories and tax treatment of each category is separate:

I. Accommodation given by Govt.

1. Unfurnished Accommodation
2. Furnished Accommodation
II. Accommodation given by Non Govt.
1. Unfurnished Accommodation
2. Furnished Accommodation

INCOME TAX ON ACCOMMODATION GIVEN BY THE GOVT.

Treatment in case of Unfurnished Accommodation

License Fee determined by Central or State Govt. XX
Less - Rent paid by the Employee X
Taxable value of perquisite for Unfurnished Accommodation XXX

Treatment in case of Furnished Accommodation

License Fee determined by Central or State Govt. XX
ADD + Lease Charges of Furniture in case of Leased Furniture or 10% X
Depreciation on Furniture in case it is owned by Employer
LESS- Rent paid by the Employee X
Taxable value of perquisite of Furnished Accommodation XXX
INCOME TAX ON ACCOMMODATION GIVEN BY NON GOVT (Private Employees)
In case of Unfurnished Accommodation, it should first be ascertained whether the accommodation is
owned by the employer or the employer has taken the accommodation on lease.

In case Unfurnished Owned Accommodation is provided by the Employer

Population exceeds 25 Population exceeds 10 Population is less than 10
Lakhs Lakh but less than 25 Lakh Lakh
15% of Salary 10% of Salary 7.5% of Salary
Less - Rent paid by Employee Rent paid by Employee Rent paid by Employee

In case Unfurnished Leased Accommodation is provided by the Employer,

Actual Rent paid by Employer or 15% of Salary (whichever is lower) XX
Rent paid by Employee X
Taxable value of Perquisite XXX

In case of Furnished Owned Accommodation provided by the Employer

Value of Unfurnished Owned Accommodation as computed above XX
ADD + Lease Charges of Furniture in case of Rented Furniture or 10% X
Depreciation on Furniture in case it is owned by Employer
LESS - Rent received X
Taxable Value of Perquisite XXX

In case of Furnished Leased Accommodation, i.e. Accommodation is leased by Employer

Value of Unfurnished Leased Accommodation as computed above XX
ADD + Lease Charges of Furniture in case of Leased Furniture or 10% X

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 Depreciation on Furniture in case it is owned by Employer
LESS - Rent received X
Taxable Value of Perquisite XXX

INCOME TAX ON ACCOMMODATION PROVIDED BY EMPLOYER IN A HOTEL

Lease Charges payable to the Hotel or 24% of Salary (whichever is XX

lower)
LESS - Rent paid by the Employee X
Taxable Value of Perquisite XXX
However, in case such accommodation is provided for a period not exceeding 15 days on his transfer from one
place to another, it won’t be considered as a Perquisite and therefore tax won’t be levied in such a case.
SALARY includes pay, allowance, bonus, commission or any other monetary payments except
contribution to Provident fund

2. Sum paid by the employer in respect of any obligation of the assessee, which would otherwise
have been payable by the assessee. Some of the examples of such expenses are as follows :
(a) Income-tax paid by the employer due from the employee.
(b) Payment of club bills, club subscription or hotel bills of the employee.
(c) Fees paid by the employer directly to the school or reimbursement of tuition fees of the children
of the employee.
(d) Payment of any loan due to the employee.

3. Valuation of Perquisite in Respect of Motor Car Provided to the Employee

(If the car is used wholly for official purposes Only, no value of perquisite shall be added)

Circumstances Value of perquisites

CASE 1: WHERE CAR IS OWNED BY THE EMPLOYEE
a. When car expenses are met by the a. it is not a perquisite, hence not taxable
employee
b. When running and maintenance expenses are met or reimbursed by the employer
If the car is used wholly for private purpose Value of perquisite shall be actual expenditure
incurred by the employer (less -) amount recovered
from the employee.
If the car is partly used for official purposes Value of perquisite shall be actual expenditure
and partly for private purposes. incurred by the employer (less -) amount used for
official purposes
i.e where the cubic capacity of the engine does not
exceed 1.6 litres @ Rs. 1800 per month
if such capacity exceeds 1.6 litres, @ Rs. 2400
and Rs.900 p.m if chauffeur is provided or higher amount as per records of the employer (less -) amount
recovered from the employee
CASE 2: WHEN CAR IS OWNED OR HIRED BY EMPLOYER
2.1 When car running and maintenance expenses are met by the employee
If the car is used wholly for private purpose Value of perquisite shall be: 10% of the actual cost
of car or hire charges if car is taken on hire plus (+)
salary of chauffeur if any paid or payable by the
employer.

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If the car is partly used for official purposes value of perquisite shall be: if the cubic capacity of
and partly for private purposes the engine does not exceed ≤ 1.6 litres Rs.600 p.m
if such capacity exceeds >1.6 litres, Rs.900 p.m
And Rs.900 p.m if chauffeur is provided.
2.2 When running and maintenance expenses are met or reimbursed by the employer
If the car is used wholly for private purpose Value of perquisite shall be the actual expenditure
incurred by the employer plus normal wear and tear
@10% or hire charges if car is taken on hire less (-)
amount recovered from the employee.
If the car is partly used for official purposes and value of perquisite shall be: if the cubic capacity of
partly for private purposes the engine does not exceed ≤ 1.6 litres Rs.1,800
p.m
if such capacity exceeds >1.6 litres, Rs.2,400 p.m
And Rs.900 p.m if chauffeur is provided.

4. Sweeper, Gardener, Watchman or Personal Attendant: As per the new rule 3, the
value of benefit to the employee resulting from the provision of services such as sweeper,
gardener, watchman or personal attendant, shall be fully taxable as follows: Actual cost to
the employer LESS - any amount paid by the employee for such services.
5. Supplying of Gas, Electric energy or Water taxable as given below: the amount paid on
that account by the employer to the supplying agency LESS - any amount paid by the
employee for such services
6. Use Of Any Movable Asset by the employee of the assets belonging to the employer or
hired by him shall be taxable and determined @ 10% p.a. of the actual cost of such asset
or the amount of rent or charge paid or payable by the employer, as the case may be, as
reduced by the amount, if any, paid or recovered from the employee for such use.
7. Employer’s Contribution to Provident Funds: In case of Statutory Provident Fund, the
entire amount of employer’s contribution without any limit or restriction whatsoever shall be
exempt from tax. In the case of a Recognised Provident Fund or Public Provident Fund, the
employer’s contribution to the Provident Fund is exempt from tax does not exceed 12% of the
salary. But if the contribution of the employer exceeds 12% of the employee’s salary, the excess
of the contribution over 12% of the salary of the employee is to be treated as part of the taxable
income. In the case of an Unrecognised Provident Fund, the employee’s own contribution to the
Fund would not be allowed as a deduction. The employer’s contribution and the interest thereon
would, however, be exempt from tax as and when the contributions are being made. But when the
money in lump sum is received back by the employee, that part of the amount attributable to the
employer’s contribution would be taxable as income from salaries
8. Perquisites TAXABLE ONLY in the cases of Specified Employees (an employee who
is director, who has a substantial interest in the company concern, i.e., employee is the beneficial
owner of at least 20 per cent of the equity shares of that company or salary is Rs.50,000 p.a. or
more)
Some of the examples of such perquisite which are included in the salary income of a specified
employee as defined above are:
 Free boarding facility provided by employer.
 Free conveyance for private use.
 Free education facility to the family members of employee.
 Holiday trips at employer’s cost.
 Gas, electricity or water supplied free for household consumption.

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  Wages of domestic servants paid by employer.
 Free lunches or dinners.

TAXABILITY OF GRATUITY
Gratuity’ is a retirement benefit. Gratuity Act, 1972 act envisages in providing retirement benefit to the
workman who have rendered long and unblemished service to the employer. Gratuity is a reward for long
and meritorious service.
Tax treatment of gratuity: For the purpose of exemption of gratuity under sec.10 (10) the employees are
divided under three categories:
I. Any death cum retirement gratuity received by Central and State Govt. employees, Defense
employees and employees in Local authority shall be exempt.
II. Any gratuity received by persons covered under the Payment of Gratuity Act, 1972 shall be
exempt subject to following limits:-
The least of the following three is exempt from tax
1. Fifteen days wages for every completed year of service or part thereof, based on the rate of
wages last drawn. (Last drawn salary X 15/26 X No. of years of service)
2. Rs. 20,00,000/-
3. Gratuity actually received
III. In case of any other employee, gratuity received shall be exempt, subject to the following
exemptions
The least of the following three is exempt from tax
1. Half month salary (based on last 10 months average) for each completed year of service
(Last drawn salary X ½ X No. of years of service)
2. Rs. 10,00,000/-
3. Gratuity actually received
Note:
 Where the gratuity was received in any one or more earlier previous years also and any
exemption was allowed for the same, then the exemption to be allowed during the year gets
reduced to the extent of exemption already allowed, the overall limit being Rs. 10 Lakhs.
 Salary will comprise your basic + DA

Illustrations
1. Calculation of taxable house rent allowance:
Mr. Ram is employed at Bombay. His basic Salary is Rs. 5,000 per month. He receives Rs. 5,000 p.a.
as house rent allowance. Rent paid by him is Rs. 12,000 p.a. Find out the amount of taxable house
rent allowance.
(Solution: Rs. 5,000, being the least, the entire amount of HRA would be exempt from tax)

2. Valuation of rent free unfurnished accommodation:

Mr. Shyam, employed at Mumbai, receives the following from his employer during the previous year:
Basic Salary 60,000 Bonus 1,800 Entertainment allowance (taxable) 6,000
Electricity expenses 2,000 Professional tax paid by the employer 2,000
Salary of gardener 2,400 Garden Maintenance 1,200 Salary of watchman 1,800
Rent free house (owned by Employer): Fair rent 48,000
Determine the value of taxable perquisites in respect of rent free house assuming
(a) Shyam is a Government Officer and the fair rent as arrived at by the Government is Rs. 6,000 p.a
(b) Shyam is a semi-Government employee, and
(c) Shyam is employed by a private company.

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Solution:
(a) If Mr. Shyam is a Government Officer: As per Rule 3(1) of Income-tax Rules, Rs. 6,000 p.a being the
rent of the house as per Government rules, will be the taxable value of the perquisite.
(b) If Mr. Shyam is a semi-Government employee : As per Rule 3(1) of the Income-tax Rules, the value of
the perquisite in respect of rent free accommodation is taken at 15% of salary of the employee
(as the house is owned by the Employer and provided in Mumbai).
Salary = Rs. 67,800 (Rs. 60,000 + 1,800 + 6,000)
15% of salary = Rs. 10,170 and Therefore, Rs. 10,170 is taxable value of the perquisite.
Further, the value of Electricity expenses and Professional Tax paid by the employer, being perquisites,
are not included in the salary for valuation of Rent Free House Accommodation.
(c) If Mr. Shyam is employed in Private Company: The value of perquisite in this case shall also be Rs.
10,170. Under the new rules there is no difference between the semi-Govt. and other employees.

3. Mr. Ramamoorthy, an employee of M/s. Gopalkrishnan & Co. of Chennai receives during the
previous year ended March 31, ----- the following payments (Rs.):
Basic Salary 40,000 Dearness allowance 3,000
Leave Salary 5,400 Professional tax paid by employer 1,000
Fair rent of the flat provided by employer 6,000 Rent paid for furniture 1,000
Rent recovered by employer 3,000 Contribution to Statutory Provident Fund 4,000
Employer’s contribution to Statutory Provident Fund 4,000
Compute his taxable income for the Assessment Year --------.

Solution: Computation of taxable income of Mr. Ramamoorty for the Assessment Year ---------

Basic Pay + DA+LA 48,400

Professional tax paid by employer 1,000
Perquisite for House:
15% of salary (Rs. 40,000 + 3,000 + 5,400) 7,260
Add: Furniture rent 1,000
Less: Rent recovered (–) 3,000 5,260

54,660

Less: Professional tax u/s 16 1,000

Gross Total Income 53,660
Less: deduction U/S 80C SPF 4,000
Tax on total income 49,660
Total tax payable NIL

4. Mr. X was the employee of M/s XYZ during financial year ---------. He received the following
amounts from his employer:-
1. Basic Salary Rs.700000; 2. Conveyance Allowance Rs.60000; 3.HRA Rs.240000
Mr. X spent the following amounts against salary income: Rent paid Rs.300000/=
Medical Insurance Premium for self Rs.8000/=; Expenses incurred in respect of preventive
health check up of his wife Rs.4000/=; Deposit in Public Provident Fund Account Rs.100000/=
Other Information of Mr. X who lives in Delhi and he is 46 years old.
Mr. X does not own any residential accommodation. His Employer had deducted Employee
Contribution for Provident fund Rs.60000/=
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Compute his income from salary for financial year --------.
Solution:
INCOME FROM SALARY

Basic Salary 700000

Conveyance Allowance 60000

Less: Allowed as deduction @ Rs.1600/= p.m. 19200 40800

House Rent Allowance 240000

Less: Exempted u/s 10 230000 10000

Gross Total Income 750800

Less: Deductions under Chapter VI-A

Contribution to P.F. (u/s 80-C) 60000

Deposit in PPF (u/s 80-C) 100000

Total 160000

Gross deduction allowed u/s 80-C 150000

Preventive health check Expenses of his wife (u/s 80-D) 4000

Medical Insurance premium (u/c 80-D) 8000 12000 162000

Net Taxable Salary Income 588800

Notes: Maximum Deduction Allowed u/s 80-C is Rs.150000 & Maximum deduction allowed u/s 80-D
Rs.25000/=

5. Mr. B is working in XYZ Ltd. and has given the details of his income for the P.Y.
You are required to compute his gross salary from the details given below:
Basic salary Rs. 10,000 p.m., D.A. (50% is for retirement benefits) Rs. 8,000 p.m. Commission as a
percentage of turnover 0.1%, Turnover during the year Rs. 50,00,000; Bonus Rs.40,000 Gratuity Rs.
25,000 His own contribution in the RPF Rs. 20,000; Employer’s contribution to RPF 20% of his basic
salary ; Interest accrued in the RPF @ 13% p.a. Rs. 13,000
SOLUTION
Computation of Gross Salary of Mr. B for the A.Y. 2018-19
Particulars
Basic Salary [ 10,000 × 12] 1,20,000
Dearness Allowance [ 8,000 × 12] 96,000
Commission on turnover [0.1% × 50,00,000] 5,000
Bonus 40,000
Gratuity [Note 1] 25,000
Employee’s contribution to RPF [Note 2] ---
Employers contribution to RPF [20% of 1,20,000] = 24,000
Less : Exempt [Note 3] = 20,760 3,240
Interest accrued in the RPF @ 13% p.a. = 13,000

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Less : Exempt @ 9.5% p.a. = 9,500 3,500
Gross Salary 2,92,740

Note 1: Gratuity received during service is fully taxable.

Note 2: Employee’s contribution to RPF is not taxable. It is eligible for deduction under section 80C.
Note 3: Employers contribution in the RPF is exempt up to 12% of the salary. i.e., 12% of [Basic Salary + Dearness
Allowance forming part of retirement benefits + Commission based on turnover] = 12% of [` 1,20,000 + (50% × `
96,000) + ` 5,000] =12% of ` 1,73,000 = ` 20,760

Illustration 6
‘A’ furnishes the following details of his salary income for the financial year:
(1) Salary 4,000 p.m.
(2) Dearness Allowance 500 p.m.
(3) Entertainment Allowance 200 p.m.
(4) Employer’s and his own contribution to unrecognised Provident Fund 2,600 each
(5) Interest on the accumulated balance of provident fund @ 12% p.a. 2,600
(6) City Compensatory Allowance 60 p.m.
(7) Medical Allowance 1,500 p.a.
(8) Project Allowance 600 p.m.
(9) He is also provided with an unfurnished accommodation for which his employer charges Rs. 200 p.m.
The fair rent of house is Rs. 12,000 per annum. The house is owned by the employer.
Compute his taxable income from salary for the assessment year.

Solution:
Computation of taxable income of Mr. A from salary for the assessment year
Salary (Rs. 4,000 x 12) 48,000
Dearness allowance (Rs. 500 x 12) 6,000
Entertainment allowance (Rs. 200 x 12) 2,400
City Compensatory allowance (Rs. 60 x 12) 720
Medical allowance 1,500
Project Allowance 7,200
Perquisite value of accommodation provided at concessional rent 6,573
Gross Salary 72,393
Net Income from Salary 72,393
Notes:
 Due to absence of any specific information about Mr. A’s residence, he has been treated as a
resident of any place having population exceeding 25 lakhs.
 Salary for the purpose of calculation of perquisite value of accommodation provided at
concessional rent is Rs. (48,000 + 2,400 + 720 + 1,500 + 7,200) = Rs. 59,820. It is assumed that
the house is owned by the employer. The value of house perquisite shall be: 15% of Salary 8,973
Less: Rent actually paid by B 2,400; then taxable Perquisite value 6,573
 If RPF employer’s contribution in excess of 12% of salary is taxable and interest credited in
excess of 9.5% p.a is taxable.

Illustration 7
Compute taxable salary income of Mr. Z of Kanpur for the assessment year based on the
following information:
Salary @ Rs. 4,000 p.m. (serving since 1.4.1998) 48,000
– Entertainment Allowance 5,000
– Bonus 10,000

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– Dearness Allowance (not recognised for computing retirement benefit) 2,000
– Employer’s contribution to provident fund (recognised) 4,000
– Education Allowance for one child 2,700
– Lunch Allowance 7,200
– Rent-free unfurnished quarters (valued) 6,000
– Medical expenses met by employer 600
– Reimbursement of hotel bills (necessary for duty) 100
– Employee’s contribution to Provident Fund 2,000
– Premium of Mrs. Z’s life policy of Rs. 50,000 6,000
– Purchase of books necessary for duty 1,000
– Share of HUF 50,000

Solution:
Computation of Salary Income of Mr. Z for the assessment year
Salary (i.e. Rs. 4,000 x 12) 48,000
– Entertainment Allowance 5,000
– Bonus 10,000
– Dearness Allowance 2,000
– Employer’s contribution to recognised provident fund
(Since it is not exceeding 12% of salary) Exempt
– Education allowance for one child 2,700
Less: Exempt under Section 10(14) (1 x 100 x 12) (1,200) 1,500
– Lunch Allowance 7,200
– Valuation of rent free unfurnished quarters
(value as given, because it being less than 20% of salary) 6,000
– Medical expenses met by employer Exempt
– Reimbursement of hotel bills (necessary for duty) Exempt
Gross Salary 79,700
Net Salary 79,700
Qualifying Amount for deduction under Section 80C of the Act Rs. 8,000
(i) Mr. Z’s contribution to recognised provident fund 2,000
(ii) Premium of Mrs. Z’s life policy 6,000

Value of rent free unfurnished quarters shall be 15% of salary, assuming that the house is not
owned by the employer. Salary for this purpose is Rs. 71,700 (i.e. Rs. 48,000 + 5,000 + 10,000 +
7,200 +1500)
– 15% of Salary Rs. 10,755
– Value of quarters Rs. 6,000
Value of perquisite shall be least of above two (i.e. Rs. 6,000)
.

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 DIFFERENT MEANINGS OF ‘SALARY’ FOR DIFFERENT PURPOSES
For Rent-free House Rent Qualifying Entertain Gratuity Determination Compensation
computation House or Amount of - ment of ` 50,000 u/s 10(10B)
of taxable Concession Allowance Contributio Allowanc regarding
income in rent n to R.P.F. e taxability of
under the perquisites
head
u/s 17(2)(iii)(c)
salaries

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Prepared by Dr.Sebastian A Baskaran
 1. Basic 1. Basic 1. Basic Same as for Basic Basic Salary, Basic Salary, Salary,
salary or Salary house Rent Salary D.A. (if given Dearness allowance,
wages. (excluding Salary. Allowance exclusive under the Allowance, value of rent-
advance or 2. Dearness as per of any terms of free or
2. Advance arrear of preceding allowanc employment) All other concessional
salary. salary Allowance taxable
column. e, benefit and accommo-
3. Arrears of received). Commission allowances, dation light,
if the terms or other based on benefits
salary. water or any
2. Taxable of perquisit
fixed received in other amenity
4. Annuity or Allowances. employment e. percentage cash, Bonus, and travel
so provide,
pension. concession;
3. Bonus. i.e. it is of turnover. It Commission, but does not
5. Gratuity. does not etc. and all
include Bonus,
4. Commis- taken into include monetary
6. Fees, account for payments Gratuity
sion or, bonus, other
Commission, retirement included in employer’s
Bonus. 5. Any benefits, commission, gross salary contribution
H.R.A. over- after allowing to any fund
7. monetary or Dearness for retirement
time wages deductions u/s
Allowances payment Pay. benefits.
and any other 16. For this
including (Excluding (Excluding all
purpose salary
Dearness dearness other allowance will not include
Allowance. allowance allowances, and
perquisites not
not bonus or perquisites. received in
8. Profits in entering perquisites
lieu of salary. into If the cash.
and all
9. retirement extras). employee is
Perquisites. benefits of covered by
the 3.
the Gratuity
10. Excess employee, Commission Act, D.A.
contribution employer’s based on
to R.P.F. by contributio fixed will always be
employer n to R.P.F. percentage included in
over 12% of allowances of turnover salary.
salary. exempt achieved
Exercise
11. Excess from tax, by the
1.interest deductible
Mr. M is an area manageremployee
of M/s N. Steels Co. Ltd. During the financial year --------, he gets the
following
received emoluments
amount of and employer:
from his
Basic Salary Up
from R.P.F. value to 31.8.2018 andgiven
Rs. 20,000 p.m. From 1.9.2018 Rs. 25,000 p.m.
of under
Transport allowance Rs.2,000 p.m.terms
over
Contribution toperquisites)
recognised provident
of fund 15% of basic salary
. employment.
9.5% rate of Page 14
Prepared by Dr.Sebastian A Baskaran
interest will
be taxable.

12. Taxable
Children education allowance (Total) Rs.500 p.m. for two children
City compensatory allowance Rs. 300 p.m.
Hostel expenses allowance (Total) Rs. 380 p.m. for two children
Tiffin allowance (actual expenses Rs. 3,700) Rs. 5,000 p.a.
Tax paid on employment Rs. 2,500
Compute taxable salary of Mr. M for the Assessment year --------.

2. MR. A gets salary of RS,12,000 p.m. and is provided with rent free unfurnished accommodation at
Ludhiana (Population 20 Lakhs as per latest census) whose fair rental value is Rs. 1,300 p.m. he gets
leave encashment for the current previous year of Rs. 6,000 during the year. House was provided to him
with effect from 1-7-2015. His salary is due on 1st day of every month. Calculate the value of rent free
accommodation and gross salary.
3. Mr. Z gets a salary of Rs. 13,000 p.m and he has been provided with rent-free furnished
accommodation at Karnal [Population 7.5 lakhs ]. The fair rental value of the unfurnished house is Rs.
20,000 p.a. He gets D.A. @ 40% of salary which is given as per terms of employment. He gets education
allowance of Rs 300 p.m for education of his son. The cost of furnishing of the house is 30,000. The
employee has been provided with hired air conditioner for five months and hire charges of 1,000 p.m are
paid by the employer.
4. Mr. M is a production manager of an industrial unit at Chennai. The particulars of his salary income
are as under :
Rs.
Basic Salary 15,000
Dearness allowance (given under the terms of employment) 5,000
Entertainment allowance 1,000
Medical allowance 500
House Rent allowance 4,000
Rent paid for the house 5,000
i. Car of 1.2 lit. Capacity provided by employer for private and official use. Employer meets
expenses of car.
ii. He and his employer (each) contribute 15% of salary to R.P.F.
iii. Mr. M had taken interest free loan of Rs. 15,000 to purchase refrigerator.
Compute income under the head salary for the assessment year ----------.

5. From the particulars given below compute the salary income of Mrs. Revathi for the year ending on
31-3-2017:
Rs
1. Net salary received after deduction of the following 1,50,000
Income tax deducted at source 6,000
Own contribution to RPF 20,000
Rent of residential house provided 4,000
2. Profit Bonus 24,000
3. Entertainment Allowance 12,000 p.a
4. She went on tour for official purposes and received travelling allowance 6,000

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Prepared by Dr.Sebastian A Baskaran
 5. She was ill and was treated in a notified hospital. Medical bills reimbursed 18,000
6. She was provided with rent free house owned by the company at Patna 500 p.m
[Population 20 lakhs] company also provided a gardener to maintain this
house. Salary of gardener paid by the company
7. The electricity and water bill of the above house paid by the company 1,200 p.m
8. She was provided with a car of 1.2 It. CC which was used partly for personal
and partly for employment purposes.
9. The company contributed Rs. 24,000 towards RPF.
10. She has interest free loan of Rs.12,000 against salary during the year
repayable in 6 equal monthly instalments starting from August, 2018.

6. From the following information, compute the taxable income under the head ‘salaries’ of Shri
Ramakant, who is working as a driver in a transport company.
I. Salary Rs 8,000
II. Arrears of salary Rs. 4,000
III. D.A Rs. 2,000 p.m
IV. Employer is playing insurance premium of Rs. 16,000 p.a on Ramakant’s Life.
V. Bonus received Rs. 15,000
VI. Education allowance for grandchild Rs. 400 p.m
VII. Cash gift Rs. 10,000
VIII. City compensatory allowance Rs. 1,000 p.m
IX. Medical expenses paid by employer Rs. 6,000
X. He contributes 15% of his salary to a recognized provident fund and his employer
contributes the same.
XI. He is given lunch allowance @ Rs. 100 per day for250 days during the previous year
2015-16.
XII. He is provided with a mobile, bill of which is paid by company Rs 6,000

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Prepared by Dr.Sebastian A Baskaran