Paper 7 New Book 83 152 Salary

INCOME UNDER HEAD SALARIES
STUDY NOTE : 5
“Salary is the recompense or consideration given to a person for the pains he has bestowed upon another’s
business” – Stroud’s Judicial Dictionary
This Study Note includes:
5.1 Basic Elements of Salary

5.2 Definition of Salary [Sec. 17(1)]
5.3 General Notes
5.4 Basis of charge [Sec.15]
5.5 Computation of Salary, at a glance
5.6 Gratuity
5.7 Leave Salary Encashment
5.8 Pension [Sec. 17(1)(ii)]
5.9 Retrenchment Compensation
5.10 Compensation received at the time of voluntary retirement [Sec. 10(10C)]
5.11 Annuity [Sec. 17(1)(ii)]
5.12 Salary received in lieu of notice period
5.13 Profits in lieu of salary [Sec. 17(3)]
5.14 Allowances
5.15 Perquisite [Sec. 17(2)]
5.16 Insurance premium payable by employer ??
5.17 Valuation of sweat equity shares allotted or transferred to the assessee ??
5.18 Valuation of perquisites in respect of Motor Car [Rule 3(2)]
5.19 Valuation of Perquisite in respect of Vehicle other than Motor Car
5.20 Valuation of perquisite in respect of Free Domestic Servants [Rule 3(3)]
5.21 Gas, electricity or water facility [Rule 3(4)]
5.22 Valuation of perquisite in respect of free education [Rule 3(5)]
5.23 Valuation of perquisite in respect of Free Transport [Rule 3(6)]
5.24 Valuation of perquisite in respect of interest free loan or concessional rate of interest [Rule 3(7)(i)]
5.25 Travelling/Touring/Holiday Home expenditure on Holiday [Rule 3(7)(ii)]
5.26 Valuation of perquisite in respect of free meals [Rule 3(7)(iii)]
5.27 Gift, voucher or token given by employer [Rule 3(7)(iv)]
5.28 Credit Card [Rule 3(7)(v)]
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 67

DIRECT TAXATION
5.29 Club Expenditure [Rule 3(7)(vi)]

5.30 Valuation of perquisite in respect of use of movable assets [Rule 3(7)(vii)]
5.31 Valuation of the perquisite in respect of movable assets sold by an employer [Rule 3(7)(viii)]
5.32 Medical Facility [Provisa to Sec. 17(2)]
5.33 Leave Travel Concession [Sec. 10(5)]
5.34 Other Perquisites
5.35 Provident Fund
5.36 Standard Deduction [Sec. 16 (ia)]
5.37 Entertainment Allowance [Sec. 16 (ii)]
5.38 Tax on employment or professional tax [Sec. 16(iii)]
5.1 BASIC ELEMENTS OF SALARY
● Payer and payee must have employer and employee (or Master & Servant) relationship; and
● Payment must have been made by the employer in such capacity.
Employer-employee relationship
A payment can be construed as salary only if the payer is the employer and payee is the employee of the payer.
● Criteria for employer-employee relationship: The key criteria to hold this relationship is that, employee is always
bound to work as per direction and supervision of the employer.
● Payment in employer’s capacity: To treat any payment as salary it is necessary that payer, being the employer,
must have made the payment in such (employer’s) capacity.
● Contract of service vs contract for service: In “contract of service”, the employer can direct and control the duties
and the manner of performance of employee hence employer-employee relationship exists in such contract.
However, in case of “contract for service” the contractee can simply decide and quote the object or target to
be achieved but cannot decide or direct the manner of performance.
● Agent and Principal: If a person is acting as an agent for his principal, any commission or remuneration earned by
the agent is not taxable under the head “Salaries”. This is because, an agent is not the employee of his principal.
● Salary received by a partner from its firm shall not be taxable as salary, because there is no employer-employee
relationship between the firm and the partner. Such salary shall be taxable under the head “Profits & gains of
business or profession”.
● Salary received by proprietor from his proprietorship firm is not an income. As proprietor and proprietorship firm are
the same person and no one can earn from himself.
● Remuneration to director from his company can be treated as salary only if the director is employee of the
company, otherwise the same shall be taxable under the head “Income from other sources”.
Note: Directors’ sitting fee is taxable under the head “Income from other sources”.
68 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA

● Pension received by the widow or legal heir of deceased employee is not taxable as salary as no employer-
employee relationship exists between the payer and the payee. However such amount shall be taxable under the
head “Income from other sources”.
● Remuneration received by Judges is taxable under the head “Salaries” even though they are not having any
employer.
Concluding the above discussions, a payment received for services rendered, from a person other than employer,
is not taxable under the head “Salaries” but may be taxed under the head “Profits & gains of business or profession”
or “Income from other sources”.
ILLUSTRATION 1
State whether the following receipts should be treated as salary or not?
● A teacher receives emoluments in kind from school in which he teaches.
Yes, it is immaterial whether salary has been received in cash or in kind.
● A teacher of a college receives fees from a University for checking answer sheets.
No, as employer – employee relationship does not exist between payer and payee. (College-teacher is not the
employee of the University). Such receipt shall be taxable under the head ‘Income from other sources’.
● A payment made to the Member of the Parliament or the State legislature.
No, as employer-employee relationship does not exist.
A member of the Parliament or the State legislature is not treated as employee of the Government. Payment
received by them shall be taxable under the head “Income from other sources”.
5.2 DEFINITION OF SALARY [SEC. 17(1)]
As per sec. 17(1) of the Income-tax Act, 1961, salary includes the following:
a) Wages;
b) Any annuity or pension;
c) Any gratuity;
d) Any fees, commission, perquisite or profits in lieu of or in addition to any salary or wages;
e) Any advance of salary;
f) Any payment received in respect of any period of leave not availed of by the assessee;
g) The portion of the annual accretion in any previous year to the balance at the credit of an employee, participating
in recognised provident fund, to the extent it is taxable;
h) Transferred balance in a Recognised Provident Fund to the extent it is taxable.
i) Contribution made by the employer in the previous year, to the account of an employee under a pension scheme
referred to in sec. 80CCD [National Pension Scheme and Atal Pension Yojana].

DIRECT TAXATION
5.3 GENERAL NOTES
● Salary & Wages are identical in the Income-tax Act

● Voluntary Payments: The Act does not make any difference between voluntary and contractual payment. Both
are taxable as salary.
● Remuneration for Extra Work: Where an employee gets extra payment from his employer (in such capacity) for
work performed outside the duties of his office and thus, such payment shall be taxable as salary.
● Salary from more than one source: If an individual receives salary from more than one employer during the same
previous year, salary from each employer shall be accumulated and taxable under the head “Salaries”.
● Salary from former, present or prospective employer is chargeable to tax under the head “Salaries”. E.g. Pension
from a former employer and advance salary from prospective employer shall be taxable under the head “Salaries”.
● Foregoing of salary: Once salary has been earned by an employee, its subsequent waiver does not make it
exempt from tax liability. Such waiver shall be treated as application of the income.
Note: However, where an employee opts to surrender his salary to the Central Government u/s 2 of Voluntary
Surrender of Salaries (Exemption from Taxation) Act, 1961, the salary so surrendered shall not be taxable.
5.4 BASIS OF CHARGE [SEC. 15]
Salary is chargeable to tax either on ‘due’ basis or on ‘receipt’ basis, whichever is earlier. Hence, taxable salary
includes:
a) Advance salary (on ‘receipt’ basis): Salary paid in advance is taxable under the head ‘Salaries’ in the year of
receipt.
Note: Such advance salary shall not be included again in the total income when the salary becomes due.
b) Outstanding salary (on ‘due’ basis): Salary falling due is taxable under the head ‘Salaries’ in the year in which it
falls due.
Note: Such due salary shall not be included again in the total income when it is received.
c) Arrear salary: Any increment in salary with retrospective effect which have not been taxed in the past, such
arrears will be taxed in the year in which it is allowed. Arrear salary are taxable on receipt basis
PROVISION ILLUSTRATED
Mr. X joined A Ltd. for a salary of ` 5,000 p.m. on 1/4/2016. In the year 2017-18 his increment decision was pending.
On 1/4/2018, his increment was finalized as for 2017-18: ` 1,000 p.m. and for 2018-19 ` 1,500 p.m. Such arrear salary
received on 5/4/2018. Find Gross taxable salary. Further, salary of April 2019 has also been received in advance on
15/03/2019.
Solution
Gross taxable salary for the previous year 2018-19 shall be calculated as under:
Particulars Workings Amount

Salary for 2018-19 (5,000 + 1,000 + 1,500) × 12 90,000

Arrear salary for 2017-18 (1,000) × 12 12,000

Advance salary for April 2019 7,500
Gross total salary 1,09,500
Taxpoint : Method of accounting followed by the employee is irrelevant
Salary due vs Salary accrued

Salary due is different from salary accrued.
Example: Mr. X joined an organisation for ` 10,000 p.m. on 1st Dec. 2018, in which salary falls due on 1st day of every
next month. In such case taxable salary for the previous year 2018-19 shall be ` 30,000 calculated as under:
Month Amount of Salary Due date of salary Taxable in the P.Y.

December 2018 10,000 1/1/2019 2018-19
January 2019 10,000 1/2/12019 2018-19
February 2019 10,000 1/3/2019 2018-19
March 2019 10,000 1/4/2019 2019-20
Advance salary vs Advance against salary

‘Advance salary’ is taxable u/s 17(1)(e) whereas ‘Advance against salary’ is treated as loan hence, not taxable under
the head “Salaries”.
Place of accrual of salary

Salary which is received in India or earned in India shall be taxable in hands of all assessee whether resident or non
resident in India. Salary is deemed to be earned in India provided -
(a) The service is rendered in India;
(b) The rest period or leave period, which is preceded and succeeded by the service rendered in India and forms part
of the service contract of employment.
Exceptions:
■ Salary paid to a Government employee, being a citizen of India, is deemed to accrue in India, irrespective of
place of work [Sec. 9(1)(iii)].
■ Pensions payable outside India to certain categories of Government employees and Judges who permanently
reside outside India, shall not be deemed to arise or accrue in India. [Sec. 9(2)]
Taxpoint: Salary is earned at the place where service is rendered.
Employee Employer Place of service Salary received Taxable

Any Any India Any where Yes
Any Any Any where In India Yes
Ordinarily resident in India Any Any where Any where Yes
Indian citizen Government Outside India Any where Yes
Not ordinarily resident/Non resident Any Outside India Outside India No

DIRECT TAXATION
5.5 COMPUTATION OF SALARY, AT A GLANCE
Computation of income under the head “Salaries” of ….. for the A.Y. 2019-20
Particulars Details Amount

Basic Salary *****
Fees *****
Commission *****
Bonus *****
Gratuity *****
Leave Encashment *****
Pension *****
Retrenchment Compensation *****
Compensation received under Voluntary Retirement Scheme *****
Allowances:
Dearness Allowance (DA) /Dearness Pay (DP) *****
House Rent Allowance *****
Children Education Allowance *****
Children Hostel Allowance *****
Entertainment Allowance *****
Medical Allowance *****
Conveyance Allowance *****
City Compensatory Allowance *****
Uniform Allowance *****
Professional Development Allowance *****
Transport Allowance *****
Other Allowances ***** *****
Perquisites u/s 17(2)
Any Obligation of Employee paid by Employer *****
Accommodation *****
Shares and securities issued under ESOP *****
Employer’s Contribution to Superannuation Fund *****
Gas, Electricity & Water *****
Medical Facility *****
Other fringe benefits ***** *****
Leave Travel Concession *****
Contribution of Employer to Provident Fund *****

Interest on Recognised Provident Fund *****

Any other item *****
Gross Salary *****
Less: Deduction u/s 16
(ia) Standard Deduction
(ii) Entertainment Allowance ****
(iii) Tax on employment/Professional tax **** ****
Taxable Salary *****
■ Basic Salary: It is the sum paid by employer to employee as salary and shall be fully taxable.
■ Pay-Scale (Grade system): It is a system of payment where increment scale is pre-known to employee. E.g. Basic
salary is given as 5,000 – 1,000 – 8,000 – 2,000 – 12,000. The above data indicates the increment schedule. As per
this schedule initial payment is ` 5,000 p.m. which will increased by ` 1,000 every year until salary reaches to `
8,000 p.m. Once salary reaches to ` 8,000 then increment will be ` 2,000 every year till salary reaches the scale of
` 12,000. Accordingly, basic salary is calculated.
■ Dearness Allowance (DA) or Dearness Pay (DP): It is an extra amount given to an employee to meet the burden
of inflation or increased cost of living. This is fully taxable.
Note: Sometimes, , it is given that DA/DP is not forming a part of retirement benefit (Leave encashment,
Pension, Provident Fund, etc.). In such case, DA/DP itself shall be fully taxable. However, for calculating
taxable Leave encashment, Pension, HRA, etc., DA/DP will be included in ‘salary’ only if it forms a part of
retirement benefit.
■ Fees: An employee may be given apart from basic salary, extra remuneration for doing specific
job under the terms of employment. Such extra remuneration is termed as fee and shall be fully
taxable.
■ Commission: It may be as a percentage of turnover or as a percentage of profit. In either case, it
is taxable.
■ Bonus: Bonus may be contractual or voluntary. In either case, it is fully taxable.
(i) Contractual bonus is taxable as bonus whereas voluntary bonus is taxable as perquisite.
(ii) It is taxable in the year of receipt.
(iii) If arrear bonus is received, assessee can claim relief u/s 89(1).
Retirement Benefits
5.6 GRATUITY
Gratuity is a retirement benefit given by the employer to the employee in consideration of past services. Sec. 10(10)
deals with the exemptions from gratuity income. Such exemption can be claimed by a salaried assessee. Gratuity
received by an assessee other than employee shall not be eligible for exemption u/s 10(10). E.g. Gratuity received by
an agent of LIC of India is not eligible for exemption u/s 10(10) as agents are not employees of LIC of India.

DIRECT TAXATION
Treatment :
During
continuation
of service
(Case A) By Govt.
Employee
(Case B) Covered by
On
the Payment
Gratuity termination of
of Gratuity Act
service
(Case C)
By Other
Employee Not Covered
Received
after death by the
of employee Payment of
(Case E) Gratuity Act
(Case D)
Case A: Gratuity received during continuation of service

Gratuity received during continuation of service is fully taxable in the hands of all employee (whether Government
or non-Government employee).
Case B: Gratuity received at the time of termination of service by Government employee

Gratuity received at the time of termination of service by Government employee is fully exempt from tax u/s 10(10)(i).
Taxpoint: Government employee, here, includes employee of the Central or the State Government or local authority
but does not include employee of statutory corporation.
Case C: Gratuity received at the time of termination of service by non–government (including foreign gov-
ernment) employee, covered by the Payment of Gratuity Act
In such case, minimum of the following shall be exempted from tax u/s 10(10)(ii):
1. Actual Gratuity received;
2. ` 20,00,000; or
3. 15 working days salary for every completed year of service
[Arithmetically, 15/26 × Completed year of service × Salary p.m.]
Notes
a) Completed year of service includes any fraction in excess of 6 months. (e.g. 7 years 9 months will be treated as 8
years; 7 years 5 months will be treated as 7 years and 7 years 6 months will be treated as 7 years).
b) Salary here means Basic + DA, last drawn
In case of an employee of a seasonal establishment: 15 days shall be replaced by 7 days. (i.e., 7/26 × Completed
year of service × Salary p.m.)
In case of a piece-rated employee: 15 days salary would be computed on the basis of average of total wages
(excluding wages paid for over time) received for a period of 3 months immediately preceding the termination of
his employment.

ILLUSTRATION 2
Ashok, an employee of ABC Ltd., receives ` 2,05,000 as gratuity under the Payment of Gratuity Act, 1972. He retires on
10th September, 2018 after rendering service for 35 years and 7 months. The last drawn salary was ` 2,700 per month.
Calculate the amount of gratuity chargeable to tax.
Solution
Computation of taxable gratuity of Mr. Ashok for the A.Y.2019-20
Particulars Details (`) Amount (`)

Gratuity received 2,05,000
Less: Minimum of the following is exempted as per Sec 10(10)(ii):
(a) Actual gratuity received 2,05,000
(b) Statutory Amount 20,00,000
(c) 15/26 × completed year of service × salary p.m. [15/26 × 36 × ` 2,700] 56,077 56,077
Taxable Gratuity 1,48,923
Case D: Gratuity received at the time of termination of service by non-government employee (including
foreign government employee) not covered under the Payment of Gratuity Act
Gratuity received at the time of termination of service by non-government employee being not covered under the
Payment of Gratuity Act shall be exempted from tax u/s 10(10)(iii) to the extent of lower of the following:
1. Actual Gratuity received;
2. ` 10,00,000; and
3. 1/2 × Completed year of service × Average Salary p.m.
Notes
a) While calculating completed year of service ignore any fraction of the year. (e.g. 7 years 9 months will be treated
as 7 years only)
b) Average Salary here means, Basic + DA# + Commission (being a fixed percentage on turnover) being last 10
months average salary, immediately preceding the month of retirement. (E.g. If an employee retires on 18/11/2018
then 10 months average salary shall be a period starting from Jan’ 2018 and ending on Oct’ 2018).
#
If DA is not forming a part of retirement benefit then the same shall not be included in salary for above purpose.
However, DA itself shall be fully taxable.
ILLUSTRATION 3
Mr. Oldman retired from his job after 29 years 6 months and 15 days of service on 17/12/2018 and received gratuity
amounting ` 4,00,000. His salary at the time of retirement was basic ` 6,000 p.m., dearness allowance ` 1,200 p.m.,
House rent allowance ` 2,000, Commission on turnover 1%, Commission on profit ` 5,000. He got an increment on
1/4/2018 of ` 1,000 p.m. in Basic. Turnover achieved by assessee ` 1,00,000 p.m. Calculate his taxable gratuity if he
is a —
a) Government employee

DIRECT TAXATION
b) Non-Government employee, covered by the Payment of Gratuity Act;
c) Non-Government employee not covered by the Payment of Gratuity Act
Solution
a) Government employee: Taxable amount: Nil as per section 10(10)(i).
b) Other cases:
Computation of taxable gratuity of Mr. Oldman for the A.Y. 2019-20
Case (b) Case (c)

Particulars
Details (`) Amount (`) Details (`) Amount (`)
Gratuity received 4,00,000 4,00,000
Less: Min. of the following is exempted u/s 10(10)
─ Actual gratuity received 4,00,000 4,00,000
─ Statutory Amount 20,00,000 10,00,000
─ 15/
26 × completed year of service × salary p.m. 1,24,615 1,24,615
[15/ 26 × 30 × 7,200]
─ 1/ × completed year of service × salary p.m. 1,16,000 1,16,000
2
[1/2 × 29 × 8,000]
Taxable Gratuity 2,75,385 2,84,000
Workings for case (b):
1. Completed year of service is 30 years.
2. Salary here means (Basic + Dearness Allowance) last drawn. i.e. (` 6,000 + ` 1,200) = ` 7,200
Workings for case (c):
1. Completed year of service is 29 years.
2. Salary here means Basic + Dearness Allowance + Commission on turnover, being last 10 months average just
preceding the month of retirement, as shown below:
1 (`) 2 (`) 3 (`) 4 (`) 5 (`) 6 (`) 7 (`) 8 (`) 9 (`) 10 (`) Total
Particulars
Feb’18 Mar Apr May June July Aug Sept Oct Nov (`)
Basic 5,000 5,000 6,000 6,000 6,000 6,000 6,000 6,000 6,000 6,000 58,000
D.A. 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 12,000
Commission 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 10,000
Total 80,000
Average salary = ` 80,000 / 10 months 8,000
Note: Applicable in Case D and not in Case C
While claiming the statutory amount (i.e. ` 10,00,000) any amount earlier claimed as deduction u/s 10(10) shall be
reduced from ` 10,00,000.

Example: An assessee left a job in the year 1995-96 and claimed a deduction of ` 40,000 for gratuity in that year.
He joined another organisation, left the same in the year 2018-19, and received a gratuity of ` 9,80,000. While
calculating exemption for gratuity for the assessment year 2019-20, statutory amount of ` 10,00,000 shall be reduced
by earlier deduction claimed i.e. ` 40,000. Hence, statutory deduction limit for the assessee in the A.Y. 2019-20 will
be ` 9,60,000 only.
Note: Applicable in Case C and Case D
Where gratuity is received from more than one employer: Where gratuity is received from more than one employer
in the same previous year, the aggregate amount exempt from tax shall not exceed statutory deduction.
Case E: Gratuity received after death of employee

The Act is silent on treatment of gratuity received after death of employee. However, on following grounds, it can be
concluded that gratuity received by a legal heir shall not be taxable in the hands of the recipient -
● A lump sum payment made gratuitously to widow or legal heir of employee, who dies while in service, by way of
compensation or otherwise is not taxable under the head “Salaries”. [Circular No.573, Dated 21.08.1990]
● Unutilised deposit under the capital gains deposit account scheme shall not be taxable in the hands of legal heir.
[Circular No.743 dated 6/5/1996]
● Legal representative is not liable for payment of tax on income that has not accrued to the deceased till his
death.
● Leave salary paid to the legal heir of deceased employee is not taxable as salary. [Circulars Letter No. F.35/1/65-
IT(B), dated 5/11/1965]. Further, leave salary by a legal heir of the Government employee who died in harness is
not taxable in the hands of the recipient [Circulars No.309, dated 3/7/1981].
Taxpoint: If gratuity becomes due before the death of the assessee (no matter when and by whom received), it shall
be taxable in the hands of employee. Whereas if gratuity becomes due after the death of assessee, it shall not be
taxable (even in the hands of legal heir of the assessee).
ILLUSTRATION 4
Mrs. X is working with ABC Ltd. since last 30 years 9 months. Her salary structure is as under:
Basic ` 5,000 p.m. Dearness allowance ` 3,000 p.m.
On 15/12/2018, she died. State the treatment of gratuity in following cases:
Case 1: Mrs. X retired on 10/12/2018 & gratuity ` 4,00,000 received by her husband (legal heir) as on 18/12/2018.
Case 2: Husband of Mrs. X received gratuity on 18/12/2018 falling due after death of Mrs. X.
Mrs. X is covered by the Payment of Gratuity Act.
Solution
In Case 1, Computation of taxable gratuity in hands of Mrs. X for the A.Y. 2019-20
Total Gratuity received 4,00,000
Less: Minimum of the following is exempted as per Sec 10(10)(ii):
a) Actual gratuity received 4,00,000

DIRECT TAXATION
b) Statutory Amount 20,00,000

c) 15/ × completed year of service × salary p.m. [15/ × 31 × ` 8,000] 1,43,077 1,43,077
26 26
Taxable Gratuity 2,56,923
In Case 2, Since gratuity falls due after the death of Mrs. X hence the same is not taxable in hands of Mrs. X. The said
gratuity is not taxable even in hands of husband of Mrs. X.
5.7 LEAVE SALARY ENCASHMENT
As per service contract and discipline, normally, every employee is allowed certain period of leave (with pay) every
year. Such leave may be availed during the year or accumulated by the employee. The accumulated leave lying
to the credit of an employee may be availed subsequently or encashed. When an employee receives an amount
for waiving leave lying to his credit, such amount is known as leave salary encashment.
Treatment :
During continuation
of service (Case A)
Govt. Employee
(Case B)
Leave Salary On termination of

Encashment service
Other Employee
(Case C)
Paid to legal heir

(Case D)
Case A: Leave salary received during continuation of service

Leave salary during continuation of service is fully taxable in the case of the Government employee as well as other
employees [Sec. 17(1)(va)].
Case B: Leave salary received by Government employee on termination of service

At the time of termination of service, leave salary received by the Central or State Government employee is fully
exempted u/s 10(10AA)(i).
Taxpoint: Government employee here does not include employee of local authority or public sector undertaking or
foreign Government employee.
Case C: Leave salary received by non-Government employee on termination of service

At the time of termination of service, leave salary received by a non-Government employee (including employee
of foreign Government, local authority, public sector undertaking) is exempted to the minimum of the following u/s

10(10AA)(ii):
a) Actual amount received as leave salary
b) ` 3,00,000/-
c) 10 × Average salary p.m.
d) To the maximum of 30 days (normally taken as 1 month) average salary1 for every completed year of service2,
subject to deduction for actual leave availed during the tenure of service.
Academically: [{(1 × completed year of service) – leave actually taken in terms of month} × average salary p.m.]
1.
Average salary means Basic + DA# + Commission (as a fixed percentage on turnover) being last 10 months
average salary ending on the date of retirement or superannuation. (e.g. if an employee retires on 18/11/2018
then 10 months average salary shall be a period starting from 19th Jan’ 2018 and ending on 18th Nov’ 2018).
#
If DA is not forming a part of retirement benefit then the same shall not be included in salary for the above
purpose. However, DA itself shall be fully taxable.
2.
While calculating completed year of service, ignore any fraction of the year. E.g. 10 years 9 months shall be
taken as 10 years.
Notes
a) Leave encashment received from more than one employer: Where leave encashment is received from more than
one employer in the same previous year, the aggregate amount exempt from tax shall not exceed the statutory
deduction i.e. ` 3,00,000.
b) Earlier deduction claimed for leave encashment: While claiming the statutory amount (i.e. ` 3,00,000) any
deduction claimed earlier as leave encashment shall be reduced from ` 3,00,000.
ILLUSTRATION 5
a) Mr. Bhanu is working in Zebra Ltd. since last 25 years 9 months. Company allows 2 months leave for every completed
year of service to its employees. During the job, he had availed 20 months leave. At the time of retirement on
10/8/2018, he got ` 1,50,000 as leave encashment. As on that date, his basic salary was ` 5,000 p.m., D.A. was `
2,000 p.m., Commission was 5% on turnover + ` 2,000 p.m. (Fixed p.m.). Turnover effected by the assessee during
last 12 months (evenly) ` 5,00,000. Bhanu got an increment of ` 1,000 p.m. from 1/1/2018 in basic and ` 500 p.m. in
D.A. Compute his taxable leave encashment salary.
b) How shall your answer differ if the assessee had taken 2 months leave instead of 20 months, during his continuation
of job.
Solution
Working
1. Completed year of service: 25 years 9 months = 25 years
2. As per sec. 3(35) of the General Clauses Act, 1897, month shall mean a month reckoned according to the British
calendar e.g. the period commencing from 7th September & end on 6th October shall be a month.
3. Salary here means Basic + Dearness Allowance + Commission on turnover (last 10 months average from the date
of retirement)

DIRECT TAXATION
Oct’ 17 Nov Dec Jan’ Feb Mar April May June July Aug 10 Total
Particulars
21 days (`) (`) (`) 18 (`) (`) (`) (`) (`) (`) (`) Days (`) (`)
Basic 2,710 4,000 4,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 1,613 47,323
D.A. 1,016 1,500 1,500 2,000 2,000 2,000 2,000 2,000 2,000 2,000 645 18,661
Commission 500000 × 5% × 10/12 20,833
Total 86,817
Average salary i.e. ` 86,817 / 10 months 8,682
Monthly fixed commission is irrelevant. Commission as fixed percentage of turnover is to be considered.
Computation of taxable leave encashment salary of Mr. Bhanu for the A.Y.2019-20
Case (a) Case (b)

Particulars
Leave encashment received 1,50,000 1,50,000
Less: Min. of the following is exempted u/s 10(10AA)(ii):
a) Actual amount received 1,50.000 1,50,000
b) Statutory Amount 3,00,000 3,00,000
c) 10 months × Av. Salary p.m. (10 × 8,682) 86,820 86,820
d) [{1× completed year of service - Leave taken} × salary

p.m.]
^[{1 × 25 – 20} × 8,682]# [{1 × 25 – 2} × ` 8,682] 43,410^ 43,410 1,99,686# 86,820
Taxable Leave Encashment 1,06,590 63,180
ILLUSTRATION 6
Mr. Das retired on 31/3/2019. At the time of retirement, 18 months leave was lying to the credit of his account. He
received leave encashment equivalent to 18 months Basic salary ` 1,26,000. His employer allows him 1½ months leave
for every completed year of service. During his tenure, he availed of 12 months leave. At the time of retirement, he
also gets D.A. ` 3,000. His last increment of ` 1,000 in basic was on 1/4/2018. Find taxable leave encashment.
Solution
Working
1. Calculation of completed year of service: Employee has received 18 months leave encashment on termination of
service as well he had enjoyed leave of 12 months during his tenure. That means he had received a leave benefit
of 30 months. Since leave allowed by employer is 1½ months for every completed year of service, this signifies that
Mr. Das had completed 20 years (being 30/1½) of service.
2. Salary here means, Basic + DA + Commission, being last 10 months average from the date of retirement. There is
no increment in last 10 months (last increment was on 1/4/2018) and there is no commission, hence Av. Salary = `
7,000 (i.e. ` 1,26,000/18) + ` 3,000 = ` 10,000 p.m.

Computation of taxable leave encashment of Mr. Das for the A.Y. 2019-20

Leave Encashment received 1,26,000
Less: Minimum of the following is exempt u/s 10(10AA)(ii):
(a) Actual amount received 1,26,000
(b) Statutory Amount 3,00,000
(c) 10 months × Av. Salary p.m. (10 × 10,000) 1,00,000
(d) {1× completed year of service - Leave taken} × Avg. salary p.m. 80,000 80,000
[{1 × 20 – 12}× ` 10,000]
Taxable Leave Encashment 46,000
Case D: Leave salary paid to the legal heir

Leave salary paid to the legal heir of deceased employee is not taxable. [Circulars Letter No. F.35/1/65-IT(B), dated
5/11/1965]. Further, leave salary received by a legal heir of the Government employee who died in harness is not
taxable in the hands of the recipient [Circulars No.309, dated 3/7/1981].
5.8 PENSION [SEC. 17(1)(ii)]
Pension means a periodical payment received by an employee after his retirement. On certain occasions, employer
allows to withdraw a lump sum amount as the present value of periodical pension. When pension is received
periodically by employee, it is known as Uncommuted pension. On the other hand, pension received in lump sum is
known as Commuted pension. Such lump sum amount is determined considering factors like the age and health of
the recipient, rate of interest, etc.
Treatment
Uncommuted
Pension
(Case A)
Govt.
Pension Employee
(Case B) Assessee
Commuted receives
Pension Gratuity
(Case C)
Other
Employee
Assessee does
not receive
Gratuity
(Case D)
Case A: Uncommuted pension

Uncommuted pension is fully taxable in the hands of all employees whether Government or Non –Government
employee.

DIRECT TAXATION
Case B: Commuted pension received by a Government employee

Commuted pension received by a Government employee is fully exempt from tax u/s 10(10A)(i).
Note: Government employee here includes employee of the Central or State Government, Local authority as well
as employee of Statutory corporation. Judges of the High Court and the Supreme Court are also entitled to the
exemption [Circular No.623 dated 6/1/1992]
Case C: Commuted pension received by an employee who also received gratuity [Sec. 10(10A)(ii)]
One third of total pension (which assessee is normally entitled for) commuted is exempt.
Taxpoint: It is immaterial whether the employee is covered by the Payment of Gratuity Act or not.
Case D: Commuted pension received by an employee who does not receive gratuity [Sec. 10(10A)(ii)]
One half of total pension (which assessee is normally entitled for) commuted is exempt.
Notes
a) Pension received by a widow or legal heir of a deceased employee shall not be taxable as salary but taxable
u/s 56 as income from other sources (further refer chapter “Income from other sources”.)
b) Where commuted pension is taxable, relief u/s 89 is available.
c) Pension received from United Nations Organisation is not taxable. Further, pension received by a widow of the
United Nations ex-officials from UN Joint Staff Pension Fund is also exempt
ILLUSTRATION 7
Mr. Amit has retired from his job on 31/3/2018. From 1/4/2018, he was entitled to a pension of ` 3,000 p.m. On 1/8/2018,
he got 80% of his pension commuted and received ` 1,20,000. Compute taxable pension if he is:
Case a) Government employee;
Case b) Non-Government employee & not receiving gratuity
Case c) Non-Government employee (receiving gratuity, but not covered by the Payment of Gratuity Act)
Solution
Computation of taxable pension of Mr. Amit for the A.Y.2019-20
Case a Case b Case c

Particulars
Details (`) Amount (`) Details (`) Amount (`) Details (`) Amount (`)
Uncommuted Pension
- 1/4/2018 to 31/7/2018 (` 3,000×4) 12,000 12,000 12,000
- 1/8/2018 to 31/3/2019 (` 600 × 8) 4,800 16,800 4,800 16,800 4,800 16,800
Commuted Pension 1,20,000 1,20,000 1,20,000
Fully exempted u/s 10(10A)(i) 1,20,000 Nil
Exempted u/s 10(10A)(ii)
75,000 45,000
(½ of ` 1,50,000#)

Exempted u/s 10(10A)(ii) 50,000 70,000

(1/3 of ` 1,50,000#)
Taxable Pension 16,800 61,800 86,800
#
Commuted Amount for 80% of pension = ` 1,20,000. Commuted amount for 100% of pension = ` 1,50,000
5.9 RETRENCHMENT COMPENSATION
Retrenchment means cancellation of contract of service by employer.
Tax Treatment [Sec. 10(10B)]: Any compensation received by a worker at the time of retrenchment is exempted to
the extent of minimum of the following:
a) Actual amount received;
b) ` 5,00,000; or
c) An amount calculated in accordance with the provisions of sec. 25F(b) of Industrial Dispute Act, 1947 (Under the
said Act a workman is entitled to retrenchment compensation equivalent to 15 days’ average pay, for every
completed year of service or any part thereof in excess of 6 months).
Notes
a) In case, where the compensation is paid under any scheme approved by the Central Government nothing shall
be taxable.
b) Compensation received by a workman at the time of closing down of the undertaking in which he is employed is
treated as compensation received at the time of his retrenchment.
5.10 COMPENSATION RECEIVED AT THE TIME OF VOLUNTARY RETIREMENT [SEC. 10(10C)]
If an employee accepts retirement willingly in lieu of compensation then such retirement is known as Voluntary
Retirement. Voluntary retirement compensation received or receivable by an employee is eligible for exemption
subject to the following conditions -
Conditions for exemption

1. Compensation is received from specified employer#
2. Compensation is received as per Voluntary Retirement Scheme (VRS) framed in accordance with prescribed
guidelines*
Amount of exemption
Exemption shall be minimum of the following -
a) Actual amount received as per guidelines; or
b) ` 5,00,000.

DIRECT TAXATION
*Guidelines [Rule 2BA]

1. Scheme (VRS) must be applicable to all employees (other than director) who have either completed age of 40
years or has completed 10 years of service. (This condition is, however, not applicable in the case of an employee
of a public sector company)
2. Such scheme must be framed to reduce the number of employees.
3. The vacancy caused by VRS is not to be filled up.
4. The retiring employee is not to be employed in another company or concern belonging to the same management.
5. The amount of compensation does not exceed
● the amount equivalent to 3 months salary for each completed year of service; or
● salary at the time of retirement multiplied by the balance month of service left.
Note: Salary here means [Basic + DA (if forms a part of retirement benefit) + fixed percentage of commission on
turnover], last drawn.
# Specified Employer
Any company; or An authority established under Central, State or Provincial Act; or A local authority; or A Co-
operative society; or A specified University; or An Indian Institute of Technology (IIT); or Any State Government; or The
Central Government; or Notified Institution of Management (IIM Ahmedabad, IIM Banglore, IIM Calcutta, IIM Lucknow,
and the Indian Institute of Foreign Trade New Delhi); or Notified Institution.
Taxpoint: Voluntary retirement compensation received from the employer being an individual, firm, HUF, AOP, etc. is
fully taxable in the hands of employee.
Note:
■ Where exemption is allowed to an assessee under this section in any assessment year then no deduction is allowed
in any subsequent assessment years. It means deduction under this section is allowed once in life of an assessee.
■ Where any relief has been allowed to an assessee u/s 89 in respect of voluntary retirement, no exemption shall be
allowed under this section.
5.11 ANNUITY [SEC. 17(1)(ii)]
Annuity means a yearly allowance, income, grant of an annual sum, etc. for life or in perpetuity.
Treatment
Case Treatment
Annuity payable by a present employer, whether Fully taxable as salary
voluntarily or contractual.
Annuity received from an ex-employer Fully taxable as ‘profit in lieu of salary’ u/s 17(3)(ii).
Annuity received from a person other than employer e.g. Taxable as per provision of Sec. 56 as ‘Income from other
from insurer, etc. sources’.

5.12 SALARY RECEIVED IN LIEU OF NOTICE PERIOD
When an employer retrenches an employee then he has to give a proper notice. If an employer fails to do so then he
will have to pay salary equivalent to notice period, apart from retrenchment compensation. Such amount is known
as salary received in lieu of notice period and it is fully taxable.
5.13 PROFITS IN LIEU OF SALARY [SEC. 17(3)]
Following receipts are taxable as profits in lieu of salary:
1. The amount of any compensation due to or received by an assessee from his employer or former employer at
or in connection with the (a) termination of his employment, (b) modification of the terms and conditions of
employment.
2. Any payment due to or received by an assessee from his employer or former employer except the following:
● Gratuity exempted u/s 10(10);
● House rent allowance exempted u/s 10(13A);
● Commuted pension exempted u/s 10(10A);
● Retrenchment compensation exempted u/s 10(10B);
● Payment from an approved Superannuation Fund u/s 10(13);
● Payment from statutory provident fund or public provident fund;
● Payment from recognised provident fund to the extent it is exempt u/s 10(12).
3. Any payment from unrecognised provident fund or such other fund to the extent to which it does not consist of
contributions by the assessee or interest on such contributions.
4. Any sum received by the employee under the Keyman Insurance Policy including the sum allocated by way of
bonus on such policy.
5. Any amount due to or received by the employee (in lump sum or otherwise) prior to employment or after cessation
of employment.
5.14 ALLOWANCES
Allowance means fixed quantum of money given regularly in addition to salary to meet particular requirement. The
name of particular allowance may reveal the nature of requirement, e.g. House Rent Allowance, Tiffin Allowance,
Medical Allowance etc.
Allowances at a glance
General Allowance House Rent Allowance, City Compensatory Allowance,

Tiffin Allowance, Medical Allowance, Servant Allowance,
Entertainment Allowance

DIRECT TAXATION
Allowance u/s 10(14)(i), deductions from which depends Travel or Transfer allowance, Daily Allowance,
upon actual expenditure [Rule 2BB(1)] Conveyance Allowance, Assistant Allowance, Professional
Development Allowance, Uniform Allowance
Allowance u/s 10(14)(ii), deductions from which do not Few of these allowances are: Children Education
depend upon actual expenditure [Rule 2BB(2)] Allowance, Children Hostel Allowance, Truck Drivers’
Allowance, Transport Allowance, Tribal Areas Allowance,
Special Compensatory Allowance, Border Area
Allowance, etc.
Allowances to a Government employee being an Indian citizen working outside India [Sec. 10(7)]
Allowances received from UNO
Compensatory allowance under Article 222(2) of the Constitution
Allowance to judges of the High Court and the Supreme Court
Allowances to teacher / professor from SAARC Member States
Allowance or Perquisite to member of Union Public Service Commission [Sec. 10(45)]
Any other Allowance
Tax treatment of various allowances are as follows

Following allowances are fully taxable:
Allowances Meaning
City Compensatory Allowance An allowance to meet personal expenses, which arise due to special circumstances,
or to compensate extra expenditure by reason of posting at a particular place.
Tiffin Allowance An allowance to meet the expenditure on tiffin, refreshment etc.
Medical Allowance An allowance to meet the expenditure on medical treatment etc.
Servant Allowance An allowance to meet the expenditure of servant for personal purpose.
Non-practicing Allowance Allowance given to professionals to compensate them for restriction on private
practice.
Warden or Proctor Allowance Allowances given to employees of educational institutions for working as warden
of the hostel or working as proctor in the institutions.
Deputation Allowance Allowances given to an employee, when he is sent on deputation for a temporary
period from his permanent place of service.
Entertainment Allowance It is an allowance to meet expenditure on entertainment, by whatever name
called. Government employee can claim deduction u/s 16(ii) discussed later in
this chapter.
House rent allowance (HRA) [Sec. 10(13A) and rule 2A]

An allowance to meet the expenses in connection with the rent of the house, by whatever name called.
Tax Treatment: Minimum of the following is exempted from tax:
a. Actual HRA received.
b. An amount equal to 50% of salary1 (when house is situated in a metro city) or 40% of salary1 (when house is situated
in any other place) for the relevant period

c. The excess of rent paid over 10% of salary1. [Arithmetically, (Rent Paid – 10% of Salary)]
1.
Salary here means: Basic + D.A. (if it forms a part of retirement benefit) + Commission as a fixed % on turnover.
Notes
a) Salary shall be determined on due basis for the period for which the employee occupies rented accommodation
in the previous year and gets HRA.
b) Exemption is not available if employee lives in his own house, or in a house for which he does not pay any rent.
c) For criteria of 50% or 40% of salary as deduction, place of employment is not significant but place where the house
is situated is important.
d) Deduction from HRA depends on Salary of the employee, Amount of HRA, place of residence (not place of
employment), rent paid by the employee.
ILLUSTRATION 8
X, a resident of Ajmer, receives ` 48,000 as basic salary during the previous year 2018-19. In addition, he gets ` 4,800
as dearness allowance forming part of basic salary, 7% commission on sales made by him (sale made by X during
the relevant previous year is ` 86,000) and ` 6,000 as house rent allowance. He, however, pays ` 5,800 as house rent.
Determine the quantum of exempted house rent allowance.
Solution
Computation of taxable house rent allowance of X for the A.Y. 2019-20

House Rent Allowance Received 6,000
Less: Minimum of the following being exempted u/s 10(13A)
a) Actual Amount Received 6,000
b) 40% of Salary (Note) 23,528
c) Rent paid – 10% of salary [` 5,800 – ` 5,882] Nil Nil
Taxable House Rent Allowance 6,000
Note: Salary for the purpose of HRA

Basic sBasic salary ` 48,000
Dearness Allowance ` 4,800
Commission (7% of ` 86,000) ` 6,020
Total ` 58,820
Hence, exemption u/s 10(13A) is Nil.
ILLUSTRATION 9
Compute the taxable house rent allowance of Mr. Abhijeet from the following data:
● Basic Salary ` 5,000 p.m., D.A. ` 2,000 p.m., HRA ` 4,000 p.m., Rent paid ` 4,000 p.m. in Pune.
● On 1/07/2018, there is an increment in Basic salary by ` 1,000.

DIRECT TAXATION
● On 1/10/2018, employee hired a new flat in Kolkata at the same rent as he was posted to Kolkata.
● On 1/01/2019, employee purchased his own flat and resides there.
Solution
Computation of taxable house rent allowance of Mr. Abhijeet for the A.Y. 2019-20
Particulars Details (`) Amount (`) Amount (`)
House Rent Allowance Received (from 1.4.2018 to 30.6.2018) 12,000
(a) Actual Amount Received 12,000
(b) 40% of Salary [(` 5,000 + ` 2,000) × 3] 8,400
(c) Rent paid – 10% of salary (` 12,000 – ` 2,100) 9,900 8,400 3,600
(b) 40% of Salary [(` 6,000 + ` 2,000) × 3] 9,600
(b) 50% of Salary [(` 6,000 + ` 2,000) × 3] 12,000
House Rent Allowance Received (from 1.1.2019 to 31.3.2019)
(Fully taxable as assessee resides in his own house) 12,000
Taxable House Rent Allowance 20,400
Special allowance exempt u/s 10(14)

Allowances, deduction from which depends on actual expenditure [Sec. 10(14)(i)]
Allowance Meaning
Travel or transfer An allowance, by whatever name called, to meet the cost of travel on tour. Cost of
Allowance travel includes any sum paid in connection with transfer, packing and transportation
of personal effects on such transfer.
Daily Allowance An allowance, by whatever name called, granted on tour (or for the period of journey
in connection with transfer) to meet the ordinary daily charges incurred by employee
on account of absence from his normal place of duty.

Conveyance Allowance Any allowance granted to meet the expenditure on conveyance in performance
of duties of the office, provided free conveyance is not provided by the employer.
Taxpoint: Expenditure for covering the journey between office and residence is not
treated as expenditure in performance of duties of office and consequently not
covered under this allowance. (Refer Transport allowance)
Helper / Assistant Any allowance (by whatever name called) to meet the expenditure of assistant or
Allowance helper, provided such helper is appointed for the performance of duties of an office.
Taxpoint: Servant allowance is fully taxable.
Research Allowance Any allowance, by whatever name called, granted to encourage academic,
research and other professional pursuits. This allowance may also be termed as
Professional Development / Academic allowance
Uniform Allowance Any allowance, by whatever name called, to meet the expenditure on purchase or
maintenance of uniform wear, during the performance of duties of an office.
Taxpoint: Uniform allowance is different from Dress allowance. Dress allowance is fully
taxable.
Tax Treatment of aforesaid allowances:

Minimum of the following shall be exempted:
a) Actual amount received; or
b) Actual expenditure incurred for such purpose.
Allowances, deduction from which do not depend on actual expenditure [Sec. 10(14)(ii)]
Children Education Allowance
An allowance to meet the expenses in connection with education of children, by whatever name called.
Treatment: Minimum of the following is exempted from tax -
a) ` 100 per month per child (to the maximum of two children)
b) Actual amount received for each child (to the maximum of two children)
Children Hostel Allowance

An allowance to meet the hostel expenses of children, by whatever name called.
Treatment: Minimum of the following is exempted from tax -
a) ` 300 per month per child (to the maximum of two children)
b) Actual amount received for each child (to the maximum of two children)
Notes for Children Education Allowance and Hostel Allowance:

a) Child includes adopted child, step-child but does not include illegitimate child and grandchild.
b) Child may be major or minor child.
c) Deduction is available irrespective of actual expenditure incurred on education of child.

DIRECT TAXATION
ILLUSTRATION 10
Mr. Laloo Singh, received education allowance of ` 80 p.m. for his 1st child, ` 90 p.m. for his 2nd child and ` 120 p.m.
for his 3rd child. He also received hostel allowance of ` 1,000 p.m. None of his children are studying. Find taxable
Children Education Allowance and Hostel allowance.
Solution
Computation of taxable children education allowance for Mr. Laloo Singh for the A.Y. 2019-20

Hostel allowance 12,000
Less: Exempted (` 300 × 2 × 12) 7,200 4,800
Children Education allowance [(` 80 × 12) + (` 90 × 12) + (` 120 × 12)] 3,480
Less: Exempted {(` 100 + ` 90) × 12} 2,280 1,200
Taxable Allowance 6,000
Note: Education allowance is allowed for any two children of assessee therefore education allowance of first child
(which is the lowest one i.e. ` 80 only) is not considered, to avail higher deduction.
ILLUSTRATION 11
Mr. & Mrs. X have three children and two of them are not studying. Both Mr. & Mrs. X are working in A Ltd. and getting
children education allowance ` 500 per month and hostel allowance ` 1,000 per month. Compute taxable children
education allowance and hostel allowance.
Solution
Computation of taxable allowance of Mr. & Mrs. X for the A.Y. 2019-20
Mr. X Mrs. X
Particulars
Education allowance (` 500 × 12) 6,000 6,000
Less: Exemption (` 100 × 12 × 2) 2,400 3,600 2,400 3,600
Hostel Allowance (` 1,000 × 12) 12,000 12,000
Less: Exemption (` 300 × 12 × 2) 7,200 4,800 7,200 4,800
Taxable Allowance 8,400 8,400
Truck Driver’s Allowance

Any allowance (by whatever name called) granted to an employee working in any transport system to meet his
personal expenditure during his duty performed in the course of running of such transport (from one place to another
place), provided such employee is not in receipt of daily allowance.
Treatment: Minimum of the following shall be exempted:
a) 70% of allowance.
b) ` 10,000 p.m.

Taxpoint: If assessee is in receipt of Daily allowance then above allowance shall be fully taxable.
Transport Allowance
An allowance, by whatever name called, to meet the expenditure for the purpose of travelling between the place
of residence and the place of duty.
Available to: Assessee is blind / deaf and dumb / orthopaedically handicapped.
Treatment: Minimum of the following shall be exempted:
a. Actual amount received; or
b. ` 3,200 p.m.
Taxpoint: No exemption is available to the assessee other than specified above.
Allowance to Government employees outside India

As per sec. 10(7), any allowance or perquisite allowed outside India by the Government to an Indian citizen for
rendering services outside India is wholly exempt from tax.
Taxpoint:
1. Assessee must be -
a) Government employee
b) Citizen of India; and
c) Working outside India
2. Any allowance or perquisite to such employee shall be exempted u/s 10(7)
Allowance received from UNO (United Nations Organisation)

Basic salary or Allowance paid by the UNO to its employees are not taxable.
Compensatory allowance under Article 222(2) of the Constitution

It is fully exempt from tax.
Allowance to judges of the High Court or the Supreme Court

Any allowance paid to Judges of the High Court u/s 22A(2) and sumptuary allowance u/s 22C of the “High Court
Judges (Conditions of Service) Act, 1954” is not taxable. Allowance to the Supreme Court Judges u/s 23B of the
“Supreme Court Judges (Conditions of Service) Act, 1958” is also exempt.
Salary to teacher or professor from SAARC Member States [DTAA]

Salary including allowances and perquisites of a teacher or professor or research scholars from SAARC Member States
shall not be taxable if following conditions are satisfied:
1. Such professor, teacher or research scholar is a resident of other SAARC member State (i.e., Bangladesh, Bhutan,
India, Maldives, Nepal, Pakistan & Sri Lanka) prior to visiting another member State.
Taxpoint: An individual is deemed to be a resident of a member State if he/she is resident in that member State in
the fiscal year in which he visits the other member State or in the immediately preceding fiscal year.

DIRECT TAXATION
2. Such visit is for the purposes of teaching or engaging in research or both at a university or college or similar
approved institution in that other Member State.
3. The remuneration from aforesaid activities in other Member State is exempt for a period of 2 years from the date
of arrival in the other member State.
Allowance or Perquisite to member of Union Public Service Commission [Sec. 10(45)]

Any allowance or perquisite, as may be notified by the Central Government in the Official Gazette in this behalf,
paid to the Chairman or a retired Chairman or any other member or retired member of the Union Public Service
Commission is exempt
ILLUSTRATION 12
Mr. Mugal joined Star Ltd. on 1/4/2018. Details regarding his salary are as follows:
Particulars Amount (`)
Basic 5,000 p.m.
Dearness Allowance 2,000 p.m. (50% considered for retirement benefit)
Education Allowance 1,000 p.m. (he has 1 son and 3 daughters)
Hostel Allowance 2,000 p.m. (none of the children is sent to hostel)
Medical Allowance 1,000 p.m. (total medical expenditure incurred ` 3,000)
Transport Allowance 1,800 p.m. (being used for office to residence & vice versa)
Servant Allowance 1,000 p.m.
City compensatory Allowance 2,000 p.m.
Entertainment Allowance 1,000 p.m.
Assistants Allowance 3,000 p.m. (paid to assistant ` 2,000 p.m.)
Professional Development Allowance 2,000 p.m. (actual expenses for the purpose ` 8,000 p.m.)
Bonus 24,000 p.a.
Commission 9,000 p.a.
Fees 5,000 p.a.
Compute his gross taxable salary for the assessment year 2019-20.
Solution
Computation of gross taxable salary of Mr. Mugal for the A.Y.2019-20
Basic Salary 60,000
Bonus 24,000
Commission 9,000
Fees 5,000

Allowances
Dearness Allowance 24,000
Education Allowance 12,000
Less: Exemption (` 100 × 2 × 12) 2,400 9,600
Hostel Allowance 24,000
Less: Exemption (` 300 × 2 × 12) 7,200 16,800
Medical Allowance 12,000
Transport Allowance 21,600
Less: Exemption Nil 21,600
Servant Allowance 12,000
City Compensatory allowance 24,000
Entertainment Allowance 12,000
Assistance Allowance 36,000
Less: Exemption (Being actual expenditure) 24,000 12,000
Professional development allowance 24,000
Less: Exemption (Actual expenditure max. of amount received) 24,000 Nil 1,44,000
Gross Taxable Salary 2,42,000
ILLUSTRATION 13
Miss Sonal, being a citizen of India and Government employee has following salary details: (in `)
Basic Salary 2,000 p.m.
Dearness Allowance 3,000 p.m.
Dearness Pay 1,000 p.m.
Fees 50,000 p.a.
House Rent Allowance 5,000 p.m. (Rent paid for Kolkata house ` 4,000 p.m.)
Children Education allowance 3,000 p.m. (She is having one adopted child)
Children allowance 1,000 p.m.
Hostel allowance 2,000 p.m.
Dress Allowance 5,000 p.m.(Actual expenditure ` 10,000 p.m.)
Uniform Allowance 2,000 p.m. (Actual expenditure ` 1,000 p.m.)
Tiffin Allowance 1,000 p.m.
Education Allowance for her own education 2,000 p.m. (Actual expenditure ` 1,500 p.m.)
Compute her gross salary for the assessment year 2019-20.

DIRECT TAXATION
Solution
Computation of gross taxable salary of Miss Sonal for the A.Y.2019-20

Basic Salary 24,000
Fees 50,000
Allowances
Dearness Pay 12,000
House Rent Allowance 60,000
Less: Minimum of the following u/s 10(13A)
a) Actual Amount Received ` 60,000
b) 50% of Salary i.e. 50% of (24,000 + 36,000 + 12,000) ` 36,000
c) Rent Paid – 10% of Salary (48,000 – 7,200) ` 40,800 36,000 24,000
Children Education Allowance 36,000
Less: Exemption (` 100 × 1 × 12) 1,200 34,800
Children Allowance 12,000
Less: Exemption (` 300 × 1 × 12) 3,600 20,400
Dress Allowance (fully taxable) 60,000
Uniform Allowance 24,000
Less: Exemption (` 1,000 × 12) 12,000 12,000
Tiffin Allowance 12,000
Education allowance for own study 24,000
Less: Exemption (` 1,500 × 12) 18,000 6,000 2,29,200
ILLUSTRATION 14
In the above illustration, how shall your answer differ if Miss Sonal is working outside India and rent paid for the house
in Japan.
Solution
Computation of gross taxable salary of Miss Sonal for A.Y.2019-20

Basic Salary 24,000
Fees 50,000
Gross Taxable Salary 74,000
Note: Since, Miss Sonal, being Government-employee and citizen of India, is working outside India. Hence, all
allowances paid to her by the Government are exempted u/s 10(7).

5.15 PERQUISITE [SEC. 17(2)]
Meaning and Chargeability
In common parlance, perquisite means, any casual emoluments or benefits attached to an office or position, in
addition to salary or wages, which is availed by an employee. In other words, perquisites are the benefits in addition
to normal salary.
As per sec. 17(2) of the Income tax Act, Perquisite includes -
i. Value of rent-free accommodation provided by the employer.
ii. Value of concession in rent in respect of accommodation provided to the assessee by his employer.
iii. The value of any benefit or amenity granted or provided free of cost or at concessional rate to ‘specified
employees’.
iv. Amount paid by an employer in respect of any obligation which otherwise would have been payable by the
employee.
Taxpoint: Any obligation of the employee met by employer shall be taxable on cash basis i.e. in the year in which
amount is paid by the employer.
Example: Employer paid employees’ professional tax liability pertaining to period 2017-18 in April 2018, such
perquisite shall be taxable in the previous year 2018-19.
v. Sum payable by an employer, whether directly or through a fund other than recognised provident fund or
approved superannuation fund or deposit-linked insurance fund, to effect an assurance on the life of the assessee
or to effect a contract for an annuity.
Taxpoint: Such sum shall be taxable on accrual basis.
vi. The value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the
employer, or former employer, free of cost or at concessional rate to the assessee.
vii. Any contribution in excess of ` 1,50,000 to an approved superannuation fund by the employer in respect of the
assessee.
viii. the value of any other fringe benefit or amenity as may be prescribed.
Notes:
a) Perquisites are taxable under the head “Salaries” only if, they are:
● Allowed by an employer to his employee or any member of his household.
● Resulting in the nature of personal advantage to the employee.
● Derived by virtue of employee’s authority.
b) Perquisite may be contractual or voluntary. In other words, it is not necessary that the benefit must have been
received under an enforceable right.
c) Perquisite may be received from the former, present or prospective employer
d) Member of household includes:

● Spouse (whether dependent or not)
● Parents (whether dependent or not);

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● Servants; and
● Children and their spouse (whether dependent or not);
● Dependents.
$ Specified employees [Sec. 17(2)(iii)]

Specified employee means:
1. A director employee.
Note: It is immaterial -
a) whether he is a nominee of the workers, financial institutions, etc. on the board;
b) whether the employee is full time director or a part time; and
c) whether he was a director throughout the previous year or not.
Taxpoint:
■ A director-employee shall be treated as specified employee of that company only.
Example: If Manu is working with X Ltd. as director-employee and with Y Ltd. as employee only, she will be
treated as specified employee only for X Ltd. and not for Y Ltd.
■ Director even for a day is construed as specified employee of such company.
2. An employee who has substantial interest in the employer company.
Substantial interest means the employee who beneficially holds 20% or more voting power in the employer
company.
Taxpoint:
■ Such employee shall be treated as specified employee of that company only.
■ The main criteria is beneficial ownership and not the legal ownership.
■ Substantial interest must be held by the assessee individually, and not together with relative.
Example: Mr. Mohan holds 18% equity share of X Ltd. and his wife holds 7% equity share of the same company.
In such case Mr. Mohan will not be treated as specified employee.
3. An employee whose aggregate salary from all employers together exceeds ` 50,000 p.a.
For computing the sum of ` 50,000, following are to be excluded/deducted:
a) All non-monetary benefits;
b) Non-taxable monetary benefits;
c) *Deduction u/s 16(ia), 16(ii) and 16(iii) [Discussed later in this chapter]; and
d) Employer’s contribution to Provident Fund.
Taxpoint:
■ Where salary is received from two or more employers, the aggregate salary from all employers shall be
considered for calculation of above ceiling. And if aggregate salary exceeds ` 50,000 p.a. the employee
shall be treated as specified employee of all employers.
Example: Mr. Rohan is working with X & Co. and Y Ltd. His taxable monetary salary from X & Co. is ` 36,000 p.a.

and from Y Ltd. is ` 45,000 p.a. Since the aggregate salary is more than ` 50,000 p.a. Mr. Rohan will be treated
as specified employee for both the employer i.e. X & Co. and Y Ltd.
■ Even ‘DA not forming a part of salary for retirement benefit’ shall be included in salary, while determining the
above limit of ` 50,000 p.a.
Exempted Perquisites
Following perquisites are exempted in hands of employee:
1. Tea or snacks: Tea, similar non-alcoholic beverages and snacks provided during working hours.
2. Food: Food provided by employer in working place.
3. Recreational facilities: Recreational facilities extended to a group of employees.
4. Goods sold to employee at concessional rate: Goods manufactured by employer and sold by him to his employees
at concessional (not free) rates.
5. Conveyance facility: Conveyance facility provided -
● to employees for journey between office and residence and vice versa.
● to the judges of High Court and Supreme Court
6. Training: Amount spent on training of employees including boarding & lodging expenses for such training.
7. Services rendered outside India: Any perquisite allowed outside India by the Government to a citizen of India for
rendering services outside India.
8. Contribution in some specified schemes
● Employer’s contribution to a pension or deferred annuity scheme.
● Employer’s contribution to staff group insurance scheme.
● Annual premium paid by the employer on personal accident policy affected by him in respect of his
employee.
9. *Loans
● Loan given at nil or at concessional rate of interest by the employer provided the aggregate amount of loan
does not exceed ` 20,000.
● Interest free loan for medical treatment of the diseases specified in Rule 3A.
10. *Medical facility: A provision of medical facility at office is exempt.
Note: However, medical allowance is fully taxable.
11. Periodicals and journals: Periodicals and journals required for discharge of work.
12. Telephone, mobile phones: Expenses for telephone, mobile phones actually incurred on behalf of employee by
the employer whether by way of direct payment or reimbursement.
13. *Free education facility: Free education facility to the children of employee in an institution owned or maintained
by the employer provided cost of such facility does not exceed ` 1,000 p.m. per child.
Note: Such facility is not restricted to two children as in case of Children Education allowance.
14. Computer or Laptop: Computer or Laptop provided whether to use at office or at home (provided ownership is
not transferred to the employee).

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15. *Movable assets: Sale or gift of any movable asset (other than car and electronic items) to employee after being
used by the employer for 10 or more years.
16. *Leave Travel Concession: Leave Travel Concession (LTC) subject to few conditions.
17. Rent-free accommodation
● Rent-free official residence provided to a Judge of a High Court or the Supreme Court.
● Rent-free furnished residence (including maintenance thereof) to Official of Parliament, a Union Minister or a
Leader of opposition in Parliament.
18. *Accommodation: Accommodation provided -
● on transfer of an employee in a hotel for a period not exceeding 15 days in aggregate.
● in a remote area to an employee working at a mining site or an onshore exploration site or a project execution
site or a dam site or a power generation site or an offshore site.
19. Tax on non-monetary perquisite paid by employer on behalf of employee. With effect from A.Y. 2003-04 a new
sec. 10(10CC) has been inserted which provides that income tax paid by employer on behalf of employee on
income, being non-monetary perquisite, is not a taxable perquisite.
20. Health club, Sports club facility
* Discussed later in this chapter
Valuation of Perquisites
Valuation of Rent-free unfurnished accommodation (RFA) [Rule 3(1)]

Rent-free accommodation is taxable in the hands of all employees (except the Judges of High Court or Supreme
Court and Official of the Parliament or Union Minister and a leader of Opposition).
Accommodation here includes fixed as well as floating structure.
Fixed Structure A house, flat, farm house (or a part there of), accommodation in hotel, motel, service apartment,
a guest house, etc.
Floating Structure A caravan, mobile home, ship etc.
For the purpose of valuation, employees are divided into three categories:
a. Employees of the Central or State Government or of any undertaking under the control of the Government;
b. Accommodation provided by Government to an employee serving on deputation
c. Other employees
I) Central and State Government Employee (including military person)
Where the accommodation is provided by the Central Government or any State Government to the employees
either holding office or post in connection with the affairs of the Union or of such State, the value of perquisite in
respect of such accommodation is equal to the licence fee, which would have been determined by the Central
or State Government in accordance with the rules framed by the Government.

{Academically, the taxable value of the perquisite will be mentioned in the problem}
Taxpoint: Employees of a local authority or a foreign government are not covered under this category.
II) Accommodation provided by Government to an employee serving on deputation
Where the accommodation is provided by the Central Government or any State Government to an employee
who is serving on deputation with any body or undertaking under the control of such Government, then the value
of perquisite of such an accommodation shall be:
City in which accommodation is provided Value of perquisite

Having population exceeding 25 lacs as per 2001 census 15% of salary for the period during which the employee
occupied the said accommodation.
Having population exceeding 10 lacs but not exceeding 10% of salary for the period during which the employee
25 lacs as per 2001 census occupied the said accommodation.
Any other city 7.5% of salary for the period during which the employee
occupied the said accommodation.
Note:
a) Salary for the purpose of Rent free accommodation: Salary here means:
Basic + Dearness allowance/pay (if it forms a part of retirement benefit) + Bonus + Commission + Fees + All other
taxable allowances (only taxable amount) + Any other monetary payment by whatever name called (excluding
perquisites and lump-sum payments received at the time of termination of service or superannuation or voluntary
retirement, like gratuity, severance pay leave encashment, voluntary retrenchment benefits, commutation of
pension and similar payments)
Taxpoint
■ Salary shall be determined on due basis.
■ Where an assessee is receiving salary from two or more employers, the aggregate salary for the period during
which accommodation has been provided (by any of the employer) shall be taken into account.
■ Monetary payments, which are not in the nature of perquisite, shall be taken into account. E.g. Leave
encashment received during the continuation of service shall be included in salary for this purpose. However,
if such pay leave is received at the time of retirement, then such receipt shall not be considered.
■ Here salary does not include employer’s contribution to Provident Fund of the employee.
b) The employer of such an employee shall be deemed to be that body or undertaking where the employee is
serving on deputation.
III) Other Employees (residual category)
The value of perquisite is determined as per the following table:
City in which accommodation is Accommodation is owned by the Accommodation is not owned by

provided employer the employer
Having population exceeding 25 lacs 15% of salary for the period during
as per 2001 census which the employee occupied the
said accommodation. Rent paid or payable by the employer

DIRECT TAXATION
Having population exceeding 10 lacs 10% of salary for the period during or 15% of salary, whichever is lower.
but not exceeding 25 lacs as per 2001 which the employee occupied the
census said accommodation.
Any other city 7.5% of salary for the period during
which the employee occupied the
said accommodation.
Notes
a) Salary for the purpose of Rent free accommodation: Salary here means:
Basic + Dearness allowance/pay (if it forms a part of retirement benefit) + Bonus + Commission + Fees + All other
taxable allowances (only taxable amount) + Any other monetary payment by whatever name called (excluding
perquisites and lump-sum payments received at the time of termination of service or superannuation or voluntary
retirement, like gratuity, severance pay leave encashment, voluntary retrenchment benefits, commutation of
pension and similar payments)
Taxpoint
■ Salary shall be determined on due basis.
■ Where an assessee is receiving salary from two or more employers, the aggregate salary for the period during
which accommodation has been provided (by any of the employer) shall be taken into account.
■ Monetary payments, which are not in the nature of perquisite, shall be taken into account. E.g. Leave
encashment received during the continuation of service shall be included in salary for this purpose. However,
if such pay leave is received at the time of retirement, then such receipt shall not be considered.
■ Here salary does not include employer’s contribution to Provident Fund of the employee.
b) Exemption of 90 days in case of two house allotment: Where an employee is transferred from one place to another
and he is provided with an accommodation at new place also, the value of perquisite shall be taken for only one
such house having lower value for a period not exceeding 90 days. Thereafter, the values of both such houses are
taxable.
c) Any accommodation provided to an employee working at a mining site; or an on-shore oil exploration site; or a
project execution site; or a dam site; or a power generation site; or an off-shore site, which
a. being of a temporary nature and having plinth area not exceeding 800 sq.ft. is located not less than 8 kms
away from the local limits of any municipality or a cantonment board; or
b. is located in a remote area.
d) Remote area here means an area located at least 40 K.M. away from a town having population not exceeding
20,000 as per latest published census.
ILLUSTRATION 15
Mr. Chauhan has the following salary structure::
a) Basic Salary ` 5,000 p.m. b) Entertainment Allowance ` 1,000 p.m.

c) Education Allowance ` 500 p.m. (he has three children) d) DA ` 3,000 p.m.
e) Fees ` 5,000 p.a. f) Bonus ` 10,000 p.a.
g) Professional tax of employee paid by employer ` 2,000 for the year

h) He has been provided a rent-free accommodation in Mumbai.
i) 60% of DA only forms part of retirement benefits
Compute taxable value of accommodation in the hands of Mr. Chauhan in the following cases:
i) The employer owns such accommodation.
ii) The employer hires such accommodation at a monthly rent of ` 900.
Solution
Taxable value of rent-free accommodation for the A.Y. 2019-20
Particulars Basis of determination Taxable Perquisite

(i) Owned by employer 15% of Salary (Working) ` 16,830
(ii) Hired by employer 15% of Salary or Actual rent paid by ` 10,800
employer, whichever is lower
Working: Salary for the purpose of Rent-free accommodation:
Particulars Details Amount (`) Amount (`)

Basic Salary 60,000
Bonus 10,000
Fees 5,000
Allowances
Dearness allowance ` 36,000 × 60% 21,600
Entertainment Allowance 12,000
Education Allowance ` 6,000 – ` 2,400 3,600 37,200
Note : Professional tax paid on behalf of employee is a perquisite; hence the same shall not be included in salary for
the aforesaid purpose.
ILLUSTRATION 16
In above illustration, how shall answer differ if the property is situated in a city where population is only 14,60,000.
Solution
Taxable value of rent free accommodation for the A.Y.2019-20
Particulars Basis of determination Taxable value of Perquisite

Owned by employer 10% of Salary (as per the above ` 11,220
working)
Hired by employer 15% of Salary or Actual rent paid by ` 10,800
employer, whichever is lower

DIRECT TAXATION
ILLUSTRATION 17
Miss Stuti has the following salary structure: `
a) Basic salary 15,000 p.m.
b) Dearness Allowance 5,000 p.m. (not forming part of retirement benefit)
c) Hostel Allowance 1,000 p.m. (does not have any child)
d) Tiffin Allowance 500 p.m.
e) Transport Allowance 200 p.m.
f) Bonus 20,000 p.a.
g) Commission 15,000 p.a.
h) Free refreshment in office worth 5,000 p.a.
i) Mobile phone facility by employer 900 p.m.
j) Computer facility worth 10,000 p.a.
She has been provided a Rent-free Accommodation (owned by employer) in Kolkata. The house was allotted to her
with effect from 1/5/2018 but she could occupy the same only from 1/6/2018. Find her gross taxable salary.
Solution
Computation of gross taxable salary of Miss Stuti for the A.Y. 2019-20
Particulars Details Amount (`) Amount (`)

Basic Salary 1,80,000
Bonus 20,000
Commission 15,000
Allowances:
Hostel Allowance (Fully taxable as she has no child) 12,000
Transport Allowance 2,400 80,400
Perquisite u/s 17(2):
Free Refreshment (not taxable) Nil
Mobile or telephone facility Nil
Computer facility Nil
Rent Free Accommodation Working 29,425 29,425
Gross Salary 3,24,825
Working : Salary for the purpose of rent-free accommodation: (in `)
Bonus 20,000

Commission 15,000
Allowances
Dearness allowance Nil
Transport Allowance 2,400
Total 2,35,400
Value of Rent-Free Accommodation (being 15% × ` 2,35,400 × 10/12) 29,425
ILLUSTRATION 18
Miss Khushi has the following salary details:
i) Basic salary ` 6,000 p.m.
ii) DA ` 3,000 p.m.
iii) Academic development allowance ` 1,000 p.m., expenditure incurred ` 700 p.m.
iv) Entertainment allowance ` 500 p.m.
She has been provided with a rent-free accommodation in Purulia. On 1/7/2018, she was posted to Kolkata. A new
house further allotted to her on same date. But she surrendered her Purulia house only on 31/12/2018. Rent paid by
employer for Purulia House ` 500 p.m. while Kolkata house is owned by the employer. Find her gross taxable salary.
Solution
Computation of gross taxable salary of Miss Khushi for the A.Y. 2019-20
Basic Salary 72,000
Allowances:
Academic Development Allowance 12,000
Less: Exempted to the extent of actual expenditure 8,400 3,600
Entertainment Allowance 6,000 45,600
Perquisite u/s 17(2):
Rent Free Accommodation Working 13,320
Working : Since Miss Khushi has been transferred from Purulia to Kolkata and she is provided with an accommodation
at Kolkata also, the value of perquisite shall be taken for only one such house having lower value for a period not
exceeding 90 days. Thereafter, the value of both such houses is taxable.

DIRECT TAXATION
Valuation of rent-free accommodation:
Period Particulars Purulia house Kolkata house Taxable Amount (`)

1/4/2018 - 30/6/2018 She is having only 15% of (` 1,17,600 × Not applicable 1,500
Purulia house 3/12) or Rent paid by
employer (` 500 × 3)
whichever is lower
1/7/2018 - 30/9/2018 She has both house ` 1,500 (as calculated 15% of Salary1 i.e. 1,500
but the house having above) ` 4,410
lower value shall be
taxable
1/10/2018 - She has both house ` 1,500 (as calculated ` 4,410 (as above) 5,910
31/12/2018 and both shall be above)
taxable
1/1/2019 - 31/3/2019 She has only Kolkata Not applicable ` 4,410 (as above) 4,410
house
Taxable perquisite 13,320
Note:
a. For the sake of conveyance, 3 months have been taken as equivalent to 90 days.
b. After 90 days, value of both the house shall be considered.

1.
Salary for valuation of rent- free accommodation: : (in `)
Basic Salary 72,000

Allowances
Dearness allowance 36,000
Entertainment allowance 6,000
Academic development Allowance 3,600
Total 1,17,600
Valuation of Rent-free furnished accommodation

Furnished accommodation means Accommodation + Furniture.
Value of Furnished accommodation = Value of accommodation + Value of furniture
Valuation of Accommodation: As discussed above.
Valuation of Furniture: As per the following table
Case Taxable value

Furniture owned by the employer 10% of original cost of furniture
Furniture hired by the employer Actual hire charges paid/payable by the employer
Notes :
1. “Furniture” here, includes refrigerator, television, radio, air-conditioner and other household appliances, etc.

2. The above rule is applicable to Government as well as Non-Government Employees.
ILLUSTRATION 19
Sri Ashutosh has been provided with a furnished accommodation in a city having population of 14,00,000 as per last
census. Municipal Value of the house (owned by employer) is ` 80,000 whereas Fair rent of the house is ` 1,00,000.
His salary details are as under:
Basic 25,000 p.m.

Allowance for increased cost of living 5,000 p.m.
Children Education allowance 3,000 p.m. [He has one son and two married daughters]
Furniture details as under :
Furniture Hired by the employer (Hire charge) (`) Owned by the employer (Original Cost) (`)
T.V. 2,000 p.a. -
Refrigerator - 10,000
Washing Machine - 5,000
Other furniture 1,000 p.m. 20,000
Calculate gross taxable salary of Sri Ashutosh for the A.Y. 2019-20.
Solution
Computation of gross taxable salary of Sri Ashutosh for the A.Y. 2019-20
Particulars Amount (`) Amount (`)

Dearness allowance (Allowance for increased cost of living) 60,000
Children Education Allowance 36,000
Less: Exemption (` 100 × 2 × 12) 2,400 33,600
Rent Free Furnished Accommodation
Value of Accommodation (10% of Salary1) 39,360
Value of furniture 2
17,500 56,860
1.
Salary for valuation of rent- free accommodation: (in `)

Education Allowance 33,600
Total 3,93,600
2.
Valuation of taxable perquisite for furniture :
Furniture Perquisite for hired furniture Perquisite for owned furniture Total Taxable value of furniture
T.V. 2,000 - 2,000

DIRECT TAXATION
Refrigerator - 10% of 10,000 1,000

Washing Machine - 10% of 5,000 500
Other furniture 12,000 10% of 20,000 14,000
Total 17,500
Municipal value and Fair rent are irrelevant.
Valuation of accommodation provided at concessional rent

Valuation will be made as if the rent-free accommodation is provided and the amount so computed will be reduced
by the rent payable by the employee.
Value of Rent free accommodation as usual *****

Less: Rent payable by employee to employer for the above facility ****
Taxable value of perquisite ****
Taxpoint: The above rule of valuation shall be applicable in case of the Government employee also.
Accommodation provided in a hotel

In this case, value of perquisite shall be minimum of the following:
a) 24% of salary for the period such accommodation is provided; or
b) Actual charges paid or payable to such hotel.
However, if the following conditions are satisfied then nothing is taxable -
● Such accommodation is provided for a period not exceeding in aggregate 15 days; and
● Such accommodation is provided on transfer of employee from one place to another place.
Note: If the employee pays any rent, the value so determined shall be reduced by the rent actually paid or payable
by the employee
Taxpoint:
■ Salary here has the same meaning as in the case of rent-free accommodation.
■ Above rule shall be applicable whether the assessee is a Government or a Non-Government employee.
■ If the facility is provided for more than 15 days, then the perquisite is exempt for first 15 days and thereafter
taxable. E.g. if facility has been provided for 45 days then taxable perquisite shall be only for last 30 days.
■ Hotel includes licensed accommodation in the nature of motel, service apartment or guest house.
5.16 INSURANCE PREMIUM PAYABLE BY EMPLOYER
As per sec. 17(2)(v), following sums payable by an employer shall be taxable perquisite in the hands of all employees,
whether it is paid directly or through a fund (other than recognised provident fund or approved superannuation fund
or deposit-linked insurance fund),
● to effect an assurance on the life of the assessee; or
● to effect a contract for an annuity
Note: Employee can claim deduction u/s 80C for LIC premium paid by employer

5.17 VALUATION OF SWEAT EQUITY SHARES ALLOTTED OR TRANSFERRED TO THE ASSESSEE
Meaning
♦ Specified security means the securities as defined in sec.2(h) of the Securities Contracts (Regulation) Act, 1956 and,
where employees’ stock option has been granted under any plan or scheme therefore, includes the securities
offered under such plan or scheme.
As per sec.2(h) of the Securities Contracts (Regulation) Act, 1956, securities includes:
a. shares, scripts, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or
of any incorporated company or other body corporate;
b. derivative;
c. units or any other instrument issued by any collective investment scheme to the investors in such schemes;
d. security receipt as defined in sec. 2(zg) of the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002.
e. units or any other such instrument issued to the inves¬tors under any mutual fund scheme;
f. any certificate or instrument (by whatever name called), issue to an investor by any issuer being a special
purpose distinct entity which possesses any debt or receivable, including mortgage debt, assigned to such
entity, and acknowledging beneficial interest of such investor in such debt or receivable, including mortgage
debt, as the case may be;
g. Government securities;
h. such other instruments as may be declared by the Central Government to be securities; and
i. rights or interest in securities.
♦ Sweat equity shares means equity shares issued by a company to its employees or directors at a discount or for
consideration other than cash for providing know-how or making available rights in the nature of intellectual
property rights or value additions, by whatever name called.
Taxpoint: If such shares are allotted or transferred not for above reasons (i.e, for providing know-how, etc.), then
it is not taxable as perquisite. E.g., if such option is granted to the employee against acquisition of immovable
property by the company, then such benefit shall not be considered as perquisite. However, employee is liable to
pay tax, if any, under the head ‘Capital Gain’
Perquisites
Value of any specified security or sweat equity shares shall be considered as perquisites in hands of employee if the
following conditions are satisfied:
a. Such security or sweat equity shares are allotted or transferred on or after 01-04-2009
b. Such security or sweat equity shares are allotted or transferred by the employer (former or present) directly or
indirectly.
c. Such security or sweat equity shares are allotted or transferred free of cost or at concessional rate to the assessee

DIRECT TAXATION
Valuation
Value of such perquisite shall be computed as under:
Particulars Amount
The fair market value of the specified security or sweat equity shares, as the case may be, on the date ***
on which the option is exercised by the assessee
Less: The amount actually paid by, or recovered from the assessee in respect of such security or shares ***
Value of perquisite ***
Notes : Option means a right but not an obligation granted to an employee to apply for the specified security or
sweat equity shares at a predetermined price.
ILLUSTRATION 20
A company ‘X’ grants option to its employee ‘R’ on 1st April, 2013 to apply for 100 shares of the company for making
available right in the intellectual property to the employer-company at a pre-determined price of ` 50 per share
with date of vesting of the option being 1st April, 2014 and exercise period being 1st April, 2014 to 31st March, 2019.
Employee ‘R’ exercises his option on 31st March, 2018 and shares are allotted/transferred to him on 3rd April, 2018.
Fair market value of such share on different dates are as under:
01-04-2013 01-04-2014 31-03-2018 03-04-2018

` 100 ` 180 ` 440 ` 470
Compute taxable perquisite, if any, in hands of Mr. R for A.Y. 2019-20.
Solution
Since shares are allotted by the company after 31-03-2018 (even though it is exercised by the employee on 31-03-
2018), hence, it is taxable in A.Y. 2019-20. Value of the perquisite is as under:

The FMV of shares on the date on which the option is exercised [` 440 × 100 shares] 44,000
Less: The amount actually paid by assessee in respect of such shares [` 50 × 100 shares] 5,000
Value of perquisite 39,000
Note: For the purpose of computing capital gain on transfer of these shares by Mr. R, ` 44,000 (i.e. ` 440 per shares)
shall be considered as cost of acquisition of such shares.
5.18 VALUATION OF PERQUISITES IN RESPECT OF MOTOR CAR [RULE 3(2)]
Motor-car facility provided by an employer is taxable in the hands of employee on the following basis:
Car is owned by Car is Maintained by Used by employee for Taxable value Who is Chargeable
Office purpose Not a perquisite Not applicable

Employer Personal purpose M +D
1 2
Specified
Both purpose ` 1800 or ` 2400 p.m. 3 Employee


Employer Employee Personal purpose D Specified
Both purpose ` 600 / ` 900 p.m. 4 employee
Personal purpose M
Actual expenditure
incurred by the employer
as reduced by ` 1800
Employee Employer
/ ` 2400 p.m.3 (further All employee
Both purpose
deduction of ` 900 p.m.
for driver) or a higher
deduction if prescribed
conditions are satisfied5
Employee Any purpose Not a perquisite Not applicable
1.
M =Maintenance cost
2.
D = Depreciation @ 10% of actual cost of the car. However, if the car is not owned by employer then actual hire
charge incurred by employer shall be considered.
3.
` 2400 p.m. in case of higher capacity car# and ` 1800 p.m. for lower capacity car.
4.
` 900 p.m. in case of higher capacity car# and ` 600 p.m. for lower capacity car.
#
Higher capacity car means a car whose cubic capacity of engine exceeds 1.6 litres.
5.
Conditions to be fulfilled for claiming higher deductions:
● The employer has maintained complete details of journey undertaken for official purpose, which may include
date of journey, destination, mileage, and the amount of expenditure incurred thereon; and
● The employer gives the certificate to the effect that the expenditure was incurred wholly and exclusively for
the performance of official duties.
Chauffeur / Driver
If chauffeur is also provided, then salary of chauffeur is further to be added to the value of perquisite (as computed
above). However, if car is used for both i.e. official and personal purpose then ` 900 p.m. (irrespective of higher or
lower capacity of car) is to be taken as value of chauffeur perquisite.
Notes
a) If motor car is provided at a concessional rate then charges paid by employee for such car, shall be reduced from
the value of perquisite.
b) The word “month” denotes completed month. Any part of the month shall be ignored.
c) When more than one car is provided to the employee, otherwise than wholly and exclusively for office purpose,
the value of perquisite for -
● One car shall be taken as car is provided partly for office and partly for private purpose i.e. ` 1,800 or ` 2,400
p.m. (plus ` 900 p.m. for chauffeur, if provided); and
● For other car(s), value shall be calculated as car(s) are provided exclusively for private purpose.

DIRECT TAXATION
d) Conveyance facility to the judges of High Court or Supreme Court is not taxable.
e) Use of any vehicle provided to an employee for journey from residence to work place or vice versa is not a taxable
perquisite.
ILLUSTRATION 21
Sonam, has been provided a car (1.7 ltr.) by his employer Vikash Ltd. The cost of car to the employer was ` 3,50,000
and maintenance cost incurred by the employer ` 30,000 p.a. Chauffeur salary paid by the employer ` 3,000 p.m.
Find value of perquisite for Sonam for the A.Y.2019-20, if the car is used for:
a) Office purpose.
b) Personal purpose.
c) Both purpose.
In case (b) and (c), employee is being charged ` 15,000 p.a. for such facility.
Solution
a) Nil, as car is used for office purpose.
b) Taxable value of car facility:
Particulars Details Amount (`)

Depreciation of Car 10% of ` 3,50,000 35,000
Maintenance cost Actual 30,000
Driver’s salary Actual 36,000
Total 1,01,000
Less: Amount charged from employee 15,000
Taxable Perquisite 86,000
c) ` 2,400 p.m. for car facility + ` 900 p.m. for driver facility = ` 3,300 p.m.
Taxable value of perquisite ` 3,300 × 12 = ` 39,600.
Note: Whenever statutory value (` 1,800 or ` 2,400 and ` 600 or ` 900) is taken as taxable value of perquisite then
amount charged from employee shall not be subtracted.
ILLUSTRATION 22
Mr. Piyush has been provided a car (1.5 ltr.) on 15/7/2018. The cost of car to the employer was ` 6,00,000 and
maintenance cost incurred by employer ` 20,000 p.a. Chauffeur salary paid by employer (Mr. Ratan) ` 4,000 p.m.
The car is 40% used for office and 60% for personal purpose. Charges paid by employee for such facility ` 5,000 p.a.
Find taxable value of perquisite.
Solution
Taxable value of perquisite
Particulars Details Amount (`)

Car ` 1,800 × 8 14,400
Driver ` 900 × 8 7,200

1. A part of month shall not be considered for this purpose.
2. Whenever statutory value is taken as taxable value of perquisite then amount charged from employee shall not
be subtracted.
ILLUSTRATION 23
Mr. Vikram being a Government employee has a car (1.7 ltr.) used for office as well as for personal purpose. During the
year, he incurred ` 40,000 on maintenance and ` 20,000 on driver’s salary. The entire cost is reimbursed by employer.
Find taxable perquisite.
Solution
Taxable perquisite in the hands of Mr. Vikram
As the car is owned by the assessee & maintained by the employer, taxable value of perquisite shall be -
Actual expenditure incurred by the employer as reduced by ` 2,400 p.m. (in case of 1.7 ltr.) and ` 900 p.m. for driver’s
salary. Hence, taxable amount shall be -
Amount reimbursed by employer (` 40,000 + ` 20,000) ` 60,000
Less: Deduction for the amount used for office purpose (` 2,400 + ` 900) × 12 ` 39,600
Taxable amount ` 20,400
ILLUSTRATION 24
Wasim has a car (1.5 ltr.) used for office as well as for personal purpose. During the year car is used 80% for business
purpose being certified by the employer. During the year, he incurred ` 50,000 on maintenance and running of such
car. The entire cost is reimbursed by the employer. Find taxable perquisite if assessee wish to claim higher deduction,
when – (a) A proper log book is maintained; (b) A proper log book is not maintained
Solution
a) When log book is maintained
Taxable perquisite in the hands of Wasim
Actual expenditure incurred by the employer is reduced to the extent it is used for office purpose, as a proper record
is kept and duly certified by employer
Amount reimbursed by the employer ` 50,000

Less: Deduction (80% of ` 50,000) ` 40,000
b) When log book is not maintained
Taxable perquisite in the hands of Wasim
Actual expenditure incurred by the employer is reduced to the extent of ` 1,800 p.m. even though it is used for office
purpose but a proper record is not kept
Amount reimbursed by the employer ` 50,000
Less: Deduction (` 1,800 × 12) ` 21,600

DIRECT TAXATION
ILLUSTRATION 25
Amit is provided with two cars, to be used official & personal work, by his employer Raj. The following information is
available from the employer records for computing taxable value of perk (assuming car 1, is exclusively used by Amit).
Particulars Car 1 (`) Car 2 (`)

Cost of the car 6,00,000 4,00,000
Running and maintenance (borne by the company) 40,800 28,000
Salary of driver (borne by the company) 24,000 24,000
Solution
Valuation of perquisite for Mr. Amit
Particulars Workings Details (`) Amount (`)

Valuation of perquisite in respect of Car 1
- Depreciation of car 10% of ` 6,00,000 60,000
- Maintenance 40,800
- Driver salary 24,000 1,24,800
Valuation of perquisite in respect of Car 2 (` 1,800 + ` 900) × 12 32,400
(assumed capacity of engine does not exceed 1.6 cc)
Value of car perquisite 1,57,200
ILLUSTRATION 26
Mr. Vijay, manager, has been provided the following car facilities by Kishan Ltd. (his employer) -
Particulars Car A Car B Car C

Owned by Employer Employer Employer
Used for Office as well as personal purpose Personal purpose
Cost of car 3,00,000 5,00,000 2,00,000
Maintenance expenditure incurred by employer 50,000 60,000 -
Maintenance expenditure incurred by employee 40,000
Capacity of car 1.8 ltr. 1.4 ltr. 1.6 ltr.
Find taxable value of car facility.
Case a) Mr. Vijay holds 17% of equity share capital and 30% of preference share capital of Kishan Ltd. and his wife
holds 13% equity share capital of the same company. Assume his total salary during the year other than perquisite
is ` 40,000;
Case b) Mr. Vijay holds 25% equity share capital of the employer company.
Solution
Case a) Since Mr. Vijay is not a specified employee & employer owns all cars therefore car facility shall not be taxable.

Case b) Since Mr. Vijay holds substantial interest in employer-company hence he is a specified employee.
As employee has been provided 2 cars, used for office as well as for personal purpose, therefore he will have to opt
one car as for ‘office as well as personal purpose’ & the other car for personal purpose. In the given case, assessee
has two options -
Option 1) Car A is used for office as well as personal purpose and car B is used for personal purpose.
Option 2) Car A is used for personal purpose and car B is used for office as well as personal purpose.
In any case, Car C is used for Personal purpose
Option 1 Option 2
Particulars Workings
Car A Car B Car C Car A Car B Car C
Car used for Both Personal Personal Personal Both Personal
` 2,400 × 12 28,800
10% of ` 5,00,000 + ` 60,000 1,10,000
Valuation 10% of ` 2,00,000 20,000 20,000
10% of ` 3,00,000 + ` 50,000 80,000
` 1,800 × 12 21,600
Total 1,58,800 1,21,600
As option 2 has lesser taxable value, hence assessee will opt for option 2 & taxable value shall be ` 1,21,600.
5.19 VALUATION OF PERQUISITE IN RESPECT OF VEHICLE OTHER THAN MOTOR CAR
The facility provided by employer is taxable in the hands of employee on the following basis:
Maintained Who is
Owned by Used for Taxable Value of perquisite
by Chargeable
Office Not
Nil
purpose Applicable
Personal Actual Maintenance + Depreciation @ 10% of Original
Employer
purpose cost Specified
Both Reasonable proportion of (Maintenance + Depreciation employee
purpose @ 10% of Original cost)
Office Not
Nil
purpose Applicable
Personal
Actual Maintenance
purpose
Employee Employer
Actual expenditure incurred by the employer as reduced
All employee
Both by ` 900 p.m. or as reduced by higher sum if prescribed
purpose conditions (as discussed in case of Car facility) are
satisfied.

DIRECT TAXATION
5.20 VALUATION OF PERQUISITE IN RESPECT OF FREE DOMESTIC SERVANTS [RULE 3(3)]
Value of perquisite is determined as under:
Servant appointed by Taxable value of perquisite Taxable in hands of
Employer Actual cost to the employer is Specified employee

taxable as perquisite
Employee All employee
Notes:
a) If rent-free accommodation (owned by the employer) is provided with gardener then gardener’s salary and
maintenance cost of garden shall not be taxable. [Circular No.122 dated 19/10/1973]
b) Any amount charged from the employee for such facility shall be reduced from above value.
c) Domestic servant allowance given to employee is fully taxable.
d) Reimbursement of servant-salary by the employer shall be taxable in hands of all employee.
ILLUSTRATION 27
Sri Bhagawan, has been provided with the following servants by his employer::
Servant Appointed by Salary of Servant

Watchman Employer 2,000 p.m.
Cook Employee’s wife 3,000 p.m.
Maid servant Employer 1,000 p.m.
Sweeper Employee 500 p.m.
Gardener Employer 1,000 p.m.
Sri Bhagawan has also been provided a rent-free accommodation, which is owned by the employer. Find taxable
value of servant facility if - Case a) He is a specified employee. Case b) He is a non-specified employee.
Solution
Computation of taxable value of perquisite for A.Y. 2019-20
Taxable Amount
Servant
Case a (`) Case b (`)
Watchman 24,000 Nil
Cook 36,000 36,000
Maid servant 12,000 Nil
Sweeper 6,000 6,000
Gardener (since Rent free accommodation, owned by employer, is provided) Nil Nil
Taxable Perquisite 78,000 42,000

5.21 GAS, ELECTRICITY OR WATER FACILITY [RULE 3(4)]
It is taxable on the following basis:
Taxable value of perquisite

Case Facility is provided from Facility is provided from Taxable in the hands of
own sources other agency
Facility is in name of employee Manufacturing cost to the All employees
Prices paid to such agency
Facility is in name of employer employer Specified employees
Note : Where the employee is paying any amount for such facility, the amount so paid by employee shall be reduced
from the value determined above.
5.22 VALUATION OF PERQUISITE IN RESPECT OF FREE EDUCATION [RULE 3(5)]
Taxable value of perquisite is as follows:
Case Taxable Value

Facility provided to employee Not taxable
Facility provided to family member
Facility provided in an institution owned by the employer Child of the assessee: Cost of such education in similar
institution subject to an exemption of ` 1,000 p.m. per
child shall be taxable*.
Facility provided in any institution (not owned by the
employer) by reason of his being in employment. Other family member: Cost of such education in similar
institution shall be taxable.
Actual reimbursement shall be taxable. Such
reimbursement of tuition fee shall also be taxable in the
Reimbursement of education expenditure to employee.
hands of Central Government employee. (Circular letter
No 35/7/65–IT(B) dt 12/2/1965)
Who is chargeable
Case Taxability in the hands of

In case of reimbursement; or
School fee of family member of the employee paid by All employee

the employer directly to school
In any other case Specified employee
Notes:
a) ` 1,000 per month per child shall be exempted without any restriction on number of children.
* However, Hon’ble Punjab & Hayana High Court in the case of CIT -vs.- Director, Delhi Public School (2011) 202 Taxman 318 has held that
if value of perquisite exceeds 1,000/-, then entire amount shall be taxable.

DIRECT TAXATION
b) Child includes adopted child, stepchild of the assessee, but does not include grandchild or illegitimate child.
c) Any amount charged from the employee for such facility shall be reduced from the above value.
d) Contribution made under an Educational Trust, created for the children of particular group of employees, is not
taxable.
5.23 VALUATION OF PERQUISITE IN RESPECT OF FREE TRANSPORT [RULE 3(6)]
Case Treatment
If employer is engaged in transportation business. Amount charged from public for such facility is taxable
in the hands of specified employee.
In any other case Actual cost of employer for such facility is taxable in the
hands of all employees.
Notes
a) In case above facility is provided to employees of Railways & Airlines, nothing shall be chargeable to tax.
b) Any amount charged from the employee for such facility shall be reduced from the above value.
c) Conveyance facility provided to the employee for journey between office and residence is not taxable.
5.24 VALUATION OF PERQUISITE IN RESPECT OF INTEREST FREE LOAN OR CONCESSIONAL RATE OF

INTEREST [RULE 3(7)(i)]
Perquisite in respect of interest free loan or loan at concessional rate of interest to the employee or any member of
his household by the employer or any person on his behalf, is not taxable if aggregate amount of loan given by the
employer (or any other person on his behalf) does not exceed ` 20,000. The taxable value of such perquisite shall
be determined as per the rate as on the 1st day of the relevant previous year charged by the State Bank of India in
respect of loans for the same purpose advanced by it.
Notes
a) Maximum outstanding monthly balance: Interest is calculated on the maximum outstanding monthly balance.
Maximum outstanding monthly balance means the aggregate outstanding balance for each loan as on the last
day of each month.
b) Loan for medical treatment: Nothing is taxable if loan is given for medical treatment of the employee or any
member of his household in respect of diseases specified in rule 3A. However, such exempted loan will not include
the amount that has been reimbursed by an insurance company under any medical insurance scheme.
c) Concessional interest: Any interest paid by the employee to the employer for such loan shall be reduced from
the above computed value. If rate of interest charged by the employer is higher than the above rate, nothing is
taxable as perquisite.
d) Amount on which interest shall be calculated: If loan amount is more than ` 20000, interest shall be levied on total
loan amount, rather than the excess amount.

e) Treatment of outstanding loan taken earlier: Interest on loan, taken before insertion of this provision, shall also be
treated as taxable perquisite. [Circular No.15/2001dated 12/12/2001]
5.25 TRAVELLING / TOURING / HOLIDAY HOME EXPENDITURE ON HOLIDAY [RULE 3(7)(ii)]
Valuation of perquisite in respect of travelling, touring, holiday home or any other expenses paid for or borne or
reimbursed by the employer for any holiday availed of by the employee or any member of his household is taxable
in the hands of all employees as per the following table :
Case Taxable value of perquisite
Where such facility is maintained by employer and is not Notional cost of such facility. In other words, value at
available uniformly to all employee which such facilities are offered by other agencies to
the public.
Where the employee is on official tour and the expenses The amount of expenditure so incurred for the
are incurred in respect of any member of his household accompanying member of his household.
accompanying him
Where any official tour is extended as a vacation The value will be limited to the expenses incurred in
relation to such extended period of stay or vacation.
In any other case Amount incurred by the employer.
Notes:
a) Any amount charged from employee shall be reduced from the above determined value.
b) The above provisions are not applicable in case of Leave Travel Concession (discussed earlier)
5.26 VALUATION OF PERQUISITE IN RESPECT OF FREE MEALS [RULE 3(7)(iii)]
Case Tax Treatment

Tea, snacks or other non-alcoholic beverages in the Nil
form of light refreshment provided during office hours
(including over-time)
Free meals provided during office hours in: Nil
● Remote area ; or
1
● An offshore installation
Free meals provided by the employer during office hours: Expenditure on free meals in excess of ` 50 per meal shall
● At office or business premises; or be taxable perquisite to the extent of excess amount in
● Through paid vouchers which are not transferable hands of all employees.
and usable only at eating joints. E.g. Free meal given to employee worth ` 70 per meal
through non-transferable coupon for 300 times in a year.
Taxable perquisite in such case shall be ` 6,000 {being
` (70 – 50) × 300}.

DIRECT TAXATION
In any other case The actual expenditure incurred by employer as reduced

by amount charged from employee for such lunch or
meal shall be taxable in the hands of all employees. i.e.
[Actual expenditure to employer – Amount charged
from employee]
1.
Remote area means an area located at least 40 k.m. away from a town having a population not exceeding 20,000
based on latest published census.
5.27 GIFT, VOUCHER OR TOKEN GIVEN BY EMPLOYER [RULE 3(7)(iv)]
The value of any gift, voucher, or token (in lieu of which any gift may be received) given to the employee (or any
member of his household) on ceremonial occasion or otherwise by the employer shall be taxable in the hands of all
employees. However, gift, voucher or token upto ` 5,000, in aggregate, during the previous year, shall be exempted.
Notes
a) Where worth of gift is in excess of ` 5,000 then amount in excess of ` 5,000 shall be taxable.
b) No such exemption (` 5,000) is available on gift made in cash or convertible into money.
ILLUSTRATION 28
Determine taxable perquisite in the following cases:
1. Miss Shradha received a wrist-watch of ` 3,000 on 17/7/2018 and a golden chain worth ` 12,000 on 18/8/2018 from
her employer, Mr. Raju.
2. Miss Rakhi received ` 11,000 cash–gift from her employer, Dipu Ltd.
3. Mr. Anirudha is working with X & Co. a partnership firm. During the year, the employer firm gifted a diamond ring
worth ` 80,000 to wife of Mr. Anirudha.
Solution
1. Taxable perquisite in the hands of Shradha shall be ` 10,000 (being ` 3,000 + ` 12,000 – ` 5,000)
2. Taxable perquisite in the hands of Rakhi shall be ` 11,000.
3. Taxable perquisite in the hands of Mr. Anirudha shall be ` 75,000.
5.28 CREDIT CARD [RULE 3(7)(v)]
Expenditure incurred by an employer in respect of credit card facility to employee shall be treated as under:
Case Tax Treatment
Where such credit card is used wholly and exclusively Nil

for office purpose and specified conditions# are
satisfied.

Where expenses (including membership and annual If directly paid by the employer
fees) are incurred by the employee or any member Any amount incurred by the employer as reduced by amount
of his household, which is charged to a credit card charged from the employee shall be taxable in the hands
(including any add-on card) provided by the of all employees
employer or otherwise, are paid or reimbursed by
the employer. If amount reimbursed by the employer
Any amount reimbursed by the employer shall be taxable in
the hands of all employees.
#
Specified conditions to be fulfilled to claim that expenses have been incurred wholly and exclusively for office
purpose:
a. Complete details in respect of such expenditure are maintained by the employer which may, interalia,
include the date of expenditure and the nature of expenditure; and
b. The employer gives a certificate for such expenditure to the effect that the same was incurred wholly and
exclusively for the performance of official duty.
5.29 CLUB EXPENDITURE [RULE 3(7)(vi)]
Expenditure incurred by employer in respect of club facility to employee shall be treated as under:
Case Tax Treatment
Where such expenses are incurred wholly and exclusively

Nil
for office purpose and specified conditions# are satisfied.
Where health club, sports and similar facilities are

Nil
provided uniformly to all employees by the employer.
Where the employer has obtained corporate membership Amount incurred by employer for such facility shall
of the club and the facility is enjoyed by the employee be taxable perquisite in the hands of all employees.
or any member of his household However, initial fees paid for obtaining corporate
membership shall not be a taxable perquisite.
Any payment or reimbursement by the employer of any If directly paid by the employer
expenditure incurred (including the amount of annual or Any amount incurred by the employer as reduced by
periodical fee) in a club by employee or any member amount charged from the employee shall be taxable in
of his household the hands of all employees.
If amount reimbursed by the employer

Any amount reimbursed by the employer shall be
taxable in the hands of all employees.
#
Specified conditions to be fulfilled to claim that expenses have been incurred wholly and exclusively for office
purpose:
a. Complete details in respect of such expenditure is maintained by the employer which may, interalia, include the
date of expenditure, the nature of expenditure and its business expediency; and
b. The employer gives a certificate for such expenditure to the effect that the same was incurred wholly and
exclusively for the performance of official duty;

DIRECT TAXATION
5.30 VALUATION OF PERQUISITE IN RESPECT OF USE OF MOVABLE ASSETS [RULE 3(7)(vii)]
If employee (or any member of his household) uses any movable asset (other than the assets for which provisions
have been made) belonging to employer, then such facility is taxable in the hands of all employees. The value of
such benefit is determined as per the following table:
If the asset is owned by the employer 10% of the original cost of such asset.
If the asset is hired by the employer Charges paid or payable by the employer
Notes:
a) Any sum charged from the employee shall be reduced from the value determined as above.
b) Use of computer, laptop, etc. (as discussed earlier) is exempted perquisite.
c) Here movable asset does not include car.
5.31 VALUATION OF THE PERQUISITE IN RESPECT OF MOVABLE ASSETS SOLD BY AN EMPLOYER

[RULE 3(7)(viii)]
If the sale price is less than the written down value (calculated as per method and rate mentioned below) then the
difference would be treated as perquisite and taxable in the hands of all employees.
Rates and methods of depreciation for different types of assets are as follow :
Types of asset Rate of depreciation Method of depreciation
Electronic items#/Computer 50% Reducing balance
Motor car 20% Reducing balance
Any other 10% Straight line
#
Electronic items here means data storage and handling devices like computer, digital diaries and printers. They do
not include household appliances like washing machines, microwave ovens, mixers, etc.
Mathematically, taxable perquisite is as under:
Original cost to the employer *****
Less: Accumulated depreciation for each completed year during which such asset is used by the employer ****
Written down value ****
Less: Amount charged from employee ***
Value of Perquisite (if positive) *****
Taxpoint :
No depreciation shall be charged for a part of the year.

ILLUSTRATION 29
X Ltd. has sold the following assets to its employee, Mr. Amit. Compute taxable perquisite.
Assets Date of purchase Purchase value (`) Date of sale Sale price (`)
Computer 1/7/2015 2,00,000 18/8/2018 20,000
Car 1/4/2016 3,00,000 1/3/2019 50,000
Television 1/4/2013 50,000 1/4/2018 2,000
Sofa set 1/4/2003 80,000 1/7/2018 5,000
Solution
Computation of taxable value of perquisite in hands of Mr. Amit for the A.Y.2019-20
Assets Written down value (`) Sale value (`) Taxable perquisite (`)
Computer 25,0001 20,000 5,000
Car 1,92,0002 50,000 1,42,000
Television 25,0003 2,000 23,000
Sofa set Nil4 5,000 Nil
Taxable Perquisite 1,70,000
1. Calculation of WDV of Computer
Purchase value 2,00,000
Less: Depreciation from 1/7/2015 to 30/6/2016 @ 50% 1,00,000
WDV as on 1/7/2016 1,00,000
Less: Depreciation from 1/7/2016 to 30/6/2017 @ 50% 50,000
WDV as on 1/7/2017 50,000
WDV as on 1/7/2018 25,000
Less: Depreciation from 1/7/2018 to 18/8/2018 (as not being a complete year) Nil
WDV as on the date of sale 25,000
2. Calculation of WDV of Car

Purchase value 3,00,000
WDV as on 1/4/2017 2,40,000

DIRECT TAXATION
WDV as on 1/4/2018 1,92,000

Less: Depreciation from 1/4/2018 to 1/3/2019 (as not being a complete year) Nil
WDV as on date of sale 1,92,000
3. Calculation of WDV of television

Purchase value 50,000
WDV as on the date of sale 25,000
4. Depreciation on sofa set is charged @ 10% as per straight-line method. Since the asset is used for more than 10
years, hence its WDV will be Nil.
5.32 MEDICAL FACILITY [PROVISO TO SEC. 17(2)]
Medical facility is taxable as under:

a) Medical facility provided in India
Case Treatment
1. Medical facility provided to the employee or his family in a hospital, clinic, dispensary
Fully Exempted
or nursing home maintained by the employer.
2. Reimbursement of medical bill of the employee or his family of -
● Any hospital maintained by Government or Local Authority; or Fully exempted
● Any hospital approved by the Government for its employee.
3. Payment/reimbursement by employer of medical expenses incurred by an
employee on himself/his family in a hospital, which is approved by the CCIT, for
the prescribed diseases (like Cancer, TB, AIDS, etc.)
Employee must attach with the return of income - Fully exempted

● a certificate from the approved hospital specifying the prescribed disease or
ailment for which hospitalisation was required; and
● a receipt for the amount paid to the hospita
4. Group medical insurance (i.e. Mediclaim) obtained by the employer for his
Fully Exempted
employees.
5. Any reimbursement by employer of any insurance premium paid by the employee,

Fully Exempted
for insurance of his health or the health of any member of his family.
b) Medical facility provided outside India
Case Treatment
Medical Expenditure Exempted to the extent permitted by RBI.

Cost of stay abroad (Patient + One Attendant/Care Exempted to the extent permitted by RBI.
taker)
Cost of travel (Patient + One Attendant/Care taker) Exempted only when gross total Income of the employee
excluding this (cost of travel) perquisite, does not exceed
` 2,00,000 p.a.
Taxpoint: In calculation of gross total income ceiling,

taxable value of medical treatment perquisite and cost
of stay perquisite shall be included.
Notes:
a) Hospital includes a dispensary, a clinic or a nursing home.
b) For this purpose ‘family’ means:
● Spouse, children of the individual; and
● Parents, brothers, sisters of the individual, wholly or mainly dependent on him.
c) Fixed Medical Allowance is fully taxable.
d) The expenditure on medical treatment by the employer may be by way of payment or reimbursement.
e) The perquisite is taxable in the hands of specified employee, however if the bills are issued in the name of
employee and reimbursed by the employer, then it shall be taxable in the hands of all employees.
ILLUSTRATION 30
Find taxable amount of perquisite in the following cases:
1. Y has been allowed a fixed medical allowance of ` 2,000 p.m.
2. Apart from reimbursement of petty medical bill of ` 25,000, Z and his family get medical treatment in a dispensary
maintained by the employer. Value of facility provided to Z and his family members during the previous year are
as follows:

a. Z 2,000
b. Mrs. Z 5,000
c. Major son of Z (independent) 8,000
d. Minor daughter of Z 25,000
e. Dependent younger brother of Z 8,000
f. Independent younger sister of Z 10,000
g. Dependent sister in law 5,000
Solution
1. Medical allowance is fully taxable, hence the taxable amount is ` 24,000

DIRECT TAXATION
2. Taxable perquisite in hands of Mr. Z is as under:

a. Z Nil
b. Mrs. Z Nil
c. Major son of Z (independent) Nil
d. Minor daughter of Z Nil
e. Dependent younger brother of Z Nil
f. Independent younger sister of Z 10,000
g. Dependent sister in law 5,000
h. Reimbursement of medical bill 25,000
ILLUSTRATION 31
Himalaya Ltd. reimburses the following expenditure on medical treatment of the son of an employee Karan. The
treatment was done at UK:
1. Travelling expenses ` 1,15,000.
2. Stay expenses at UK permitted by RBI ` 45,000 (Actual expenses ` 70,000).
3. Medical expenses permitted by RBI ` 50,000 (Actual expenses ` 70,000).
Compute the taxable perquisites for the assessment year 2019-20 in the hands of Karan, if his annual income from
salary before considering medical facility perquisite was (i) ` 1,50,000; (ii) ` 2,00,000.
Solution
Taxable value of perquisite in hands of Mr. Karan is as under:
Particulars Workings Details Case 1 Case 2

Medical Amount paid in excess of RBI permission and actual ` 70,000 – ` 50,000 ` 20,000 ` 20,000
expenditure expenditure shall not qualify for exemption.
Stay cost Stay cost in excess of RBI permission and actual ` 70,000 – ` 45,000 ` 25,000 ` 25,000
expenditure shall not qualify for exemption.
Travel cost Travel cost (Note) Nil ` 1,15,000
Total taxable perquisite ` 45,000 ` 1,60,000
Note : Travel cost shall be eligible for exemption only if gross total income of the assessee does not exceed ` 2,00,000,
which can be evaluated as under:
Particulars Case 1 (`) Case 2 (`)
Salaries
Annual income from salary other than foreign medical perquisites 1,50,000 2,00,000

Add: Medical facility
Medical expenditure perquisite 20,000 20,000
Stay cost perquisite 25,000 25,000
Gross Total Income for the purpose of foreign travel medical facility 1,95,000 2,45,000
5.33 LEAVE TRAVEL CONCESSION [SEC. 10(5)]
If an employee goes on travel (on leave) with his family and traveling cost is reimbursed by the employer, then such
reimbursement is fully exempted.
Notes
1) Journey may be performed during service or after retirement.
2) Employer may be present or former.
3) Journey must be performed to any place within India.
4) In case, journey was performed to various places together, then exemption is limited to the extent of cost of
journey from the place of origin to the farthest point reached, by the shortest route.
5) Employee may or may not be a citizen of India.
6) Stay cost is not exempt.
Exemption: Exemption is limited to the amount actually incurred on the travel to the extent as under:
Journey performed Maximum exempted fare

By Air Air economic class fare of shortest route
By Rail Air conditioned 1st class fare of shortest route
When the place of origin and destination is connected Same as above
by rail but journey is performed by any other mode of
transport
When the place of origin and destination is not connected by rail:
Where a recognised public transport system exists First class or deluxe class fare, as the case may be, on
such transport.
Where no recognised public transport system exists Amount equivalent to air-conditioned 1st class rail fare,
for the distance of the journey by the shortest route, as if
journey had been performed by rail.
Notes
a) No exemption can be claimed without performing journey and incurring expenses thereon.
b) Block-period: Exemption is available in respect of 2 journeys performed in a block of 4 calendar years commencing
from 1st January 1986.
Academically, for the A.Y. 2019-20, the relevant block is Jan 2018 to Dec. 2021.

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c) Carry-forward facility: Where concession is not availed during the preceding block (whether on one occasion
or both), then any one journey performed in the first calendar year of the immediately succeeding block will be
additionally exempted (i.e. not counted in two journey limit)
d) Family: Family here means -
● Spouse and children of the individual; and
● Parents, brothers and sisters of the individual, who are wholly or mainly dependent on him.
e) Restriction on number of children: Exemption can be claimed for any number of children born on or before
30/9/1998. In addition, exemption is available only for 2 surviving children born on or after 1/10/1998.
However, children born out of multiple birth, after the first child, will be treated as one child only.
f) Fixed Leave travel allowance: Fixed amount paid to employees by way of leave travel allowance shall not be
exempt.
g) The exemption u/s 10(5) is for travel cost and does not include stay cost or other cost.
5.34 OTHER PERQUISITES
The value of any other facilities, benefits, amenities, services, rights or privileges (which is not discussed earlier) 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.
Taxability of perquisites at a glance
Whether it is taxable in the

hands of
Rule / Section Perquisites
Specified Non-specified
employee employee
Rent-free residential accommodation
- Unfurnished
Rule 3(1) - Furnished Yes
- Concessional
- Hotel accommodation
Motor car
Rule 3(2) - If car is owned by employer Yes No
- If car is owned by employee Yes Yes
Free domestic servant
Rule 3(3) - Appointed by employer Yes No
- Appointed by employee Yes Yes
Gas, electricity or water facility
Rule 3(4) - If facility is in the name of employer Yes No
- If facility is in the name of employee Yes Yes

Free education
Rule 3(5) - In case of reimbursement Yes Yes
- In any other case Yes No
Free transport
Rule 3(6) - If employer is engaged in transport business Yes No
- In any other case Yes Yes
Rule 3(7) Other fringe benefits or amenities
- (i) - Interest free loan or concessional rate of interest
- (ii) - Traveling / Touring / Holiday Home expenditure
- (iii) - Meals / Refreshments
- (iv) - Gift, voucher or token Yes
- (v) - Credit card
- (vi) - Club membership
- (vii) - Use of movable assets
- (viii) - Movable assets sold by employer to its employee
Fair market value of the specified security or sweat equity shares

Rule 3(8) & (9) Yes
allotted to the employee
Sec. 10(5) Leave travel concession No No
Income tax paid by employer on -
Sec.10(10CC) - Non-monetary perquisite No No
- In any other case Yes Yes
Medical facility
Proviso to
- In case of reimbursement Yes Yes
Sec. 17(2)
- In any other case Yes No
Any obligation of employee paid by employer (unless otherwise

Sec. 17(2)(iv) Yes Yes
specifically exempted)
Sec.17(2)(vi) Allotment/transfer of specified securities or sweat equity shares Yes Yes
Sec.17(2)(vii) Contribution in excess of ` 1,50,000 to superannuation fund Yes Yes
5.35 PROVIDENT FUND
Provident fund scheme is a saving device in the hands of salaried class. It is a retirement benefit scheme. Under
this scheme, a stipulated sum is regularly deducted from the salary of the employee as his contribution towards the
fund. The employer also, generally, contributes a similar amount out of his pocket to the fund. The employer’s and
employee’s contribution are together invested in such fund. Interest earned thereon is also credited to the fund

DIRECT TAXATION
of the employee. Thus, provident fund scheme is a great media to initiate and mobilise small savings to a large
scale. On termination of service or retirement, employee receives the whole accumulated fund, subject to certain
conditions. Hence, provident fund has four components i.e. Employer’s contribution; Employee’s contribution; Interest
on employer’s contribution; and Interest on employee’s contribution
Provident fund is of four types, viz:
a) Statutory Provident Fund (SPF): Statutory provident fund is set up under the provisions of the Provident Funds Act,
1925. Government and Semi-Government organisations, local authorities, railways, Universities and recognised
educational institutions maintain Statutory Provident Fund.
b) Recognised Provident Fund (RPF): The provident fund scheme is framed under the Employee’s Provident Fund and
Miscellaneous Provisions Act, 1952 (hereinafter referred as PF Act). The PF Act covers any establishment employing
20 or more persons. However, any establishment employing less than 20 persons can also join the scheme provided
employer and employee both agree to do so. Further, if an employer creates his own scheme for provident fund
then he can do so subject to recognition from the Commissioner of Income tax.
c) Unrecognised Provident Fund (URPF): If a provident fund scheme is created by an employer, which is not recognised
by the Commissioner of Income tax, then such fund is known as Unrecognised provident fund.
d) Public Provident Fund (PPF): The Central Government has established a fund for the benefit of public to mobilise
personal savings. Any member of the public, whether salaried or self-employed, can contribute to the fund by
opening a provident fund account at any branch of the State Bank of India or its subsidiaries or other nationalised
bank. Even a salaried employee can simultaneously become a member of employee’s provident fund (whether
statutory, recognised or unrecognized) and public provident fund. Any amount in multiple of ` 5 (subject to
minimum of ` 500 and maximum of ` 1,50,000 p.a.) may be deposited in this account. Interest is credited every
year but payable only at the time of maturity. Interest earned on this fund is exempt from tax u/s 10(11).
Tax Treatment
Particulars SPF RPF URPF PPF

Exempted up to 12% of Salary (here, salary
Employer’s Not
Not taxable means Basic + DA# + Commission as a fixed Not taxable
Contribution Applicable
percentage on turnover
Eligible for Not eligible Eligible for
Employee’s
deduction u/s Eligible for deduction u/s 80C for deduction deduction u/s
Contribution
80C u/s 80C 80C
Exempted @ 9.5% p.a. (Interest rate), any excess
Interest Not Taxable Not Taxable Not taxable
interest will be taxable as salary.
Lump Sum Not taxable
Not Taxable Note 1 Not taxable
withdrawal (Subject to Note 2)
#
D.A., forming part of retirement benefit, only to be considered.
Notes:
1. Lump sum amount withdrawn from URPF
Particulars Tax treatment

Accumulated employer’s contribution Fully taxable under the head Salaries
Accumulated employee’s contribution Not taxable

Accumulated interest on employer’s contribution Fully taxable under the head Salaries
Accumulated interest on employee’s contribution Fully taxable as income from other sources
2. Lump sum amount withdrawn from RPF
a) Amount withdrawn from RPF is not taxable, if
i. Employee retires or terminates job after 5 years of continuous service; or
ii. Employee has resigned before completion of 5 years and joins another organization (who also maintains
recognized provident fund and his fund balance with current employer is transferred to the new
employer).
iii. The entire balance standing to the credit of the employee is transferred to his account under New
Pension Scheme as referred u/s 80CC
iv. Employee retires or terminates job before 5 years of continuous service -

● by reason of ill health; or
● by reason of contraction or discontinuance of employer’s business; or
● any other reason beyond the control of employee.
b) In any other case, amount withdrawn shall be taxable as in the case of URPF. [Refer Note 1]..
Employer’s Contribution to the New pension System (as specified u/s 80CCD) is fully taxable under the head
‘Salaries’. However, deduction is available u/s 80CCD.
ILLUSTRATION 32
Mr. X has the following salary structure –
Basic pay ` 10,000 p.m. Commission (fixed) ` 2,000
DA ` 1,000 p.m. Entertainment allowance ` 2,000 p.m.
X contributes ` 20,000 to provident fund. Employer also makes a matching contribution. Compute gross salary of if –
a) Mr. X is a Government employee and such provident fund is a statutory provident fund.
b) Mr. X is an employee of Y Ltd. and such fund is a recognized fund.
c) Mr. X is an employee of Z Ltd. and such fund is an unrecognized fund.
Solution
Computation of taxable salary of Mr. X for the A.Y. 2019-20
Case A Case B Case C

Particulars
Details (`) Amount (`) Details (`) Amount (`) Details (`) Amount (`)
Basic 1,20,000 1,20,000 1,20,000
Commission 2,000 2,000 2,000
Allowances
Dearness allowance 12,000 12,000 12,000
Entertainment allowance 24,000 36,000 24,000 36,000 24,000 36,000

DIRECT TAXATION
Employer’s contribution to PF 20,000 20,000 20,000

Less: Exempted 20,000 1
Nil 15,840 2
4,160 20,0001 Nil
Gross Salary 1,58,000 1,62,160 1,58,000
Notes
1. Contribution to statutory and unrecognised provident fund is fully exempted.
2. Contribution to recognised provident fund is exempt upto 12% of salary. Salary for such purpose –

Basic 1,20,000
Commission (as fixed) Nil
Total 1,32,000
Transferred Balance (Conversion of URPF to RPF) [Rule 11(4) of Part A of the Fourth schedule]
An organisation maintaining URPF, may later get recognition from Commissioner of Income tax. In such case, the
accumulated balance under URPF shall be converted to RPF. Tax treatment of such transferred balance will be as
under:
Calculation is made of all sums comprised in the transferred balance that would have been liable to income tax if
the recognition of the fund had been in force from the date of institution of the fund. However, in case of serious
accounting difficulty, the Commissioner may make a summary calculation of such aggregate.
Such aggregate sum is deemed to be the income received by the employee in the previous year in which the
recognition of the fund takes effect.
Note: On taxability of such conversion, assessee cannot claim relief u/s 89(1).
ILLUSTRATION 33
Mr. Sharma has been appointed as an accountant of ABC Ltd as on 1/4/2016, since then he is working with the same
company. The salary structure and increment details are as under:
Basic ` 5000 - 1000 - 8000 -1500 - 14000
D.A. ` 3000 – 500 – 5000 – 1000 - 10000
He and his employer contribute to URPF 14% of basic and DA.
Every year 9% interest is credited to such fund. As on 1/4/2018, the fund gets recognition. Hence, the accumulated
balance in URPF was transferred to RPF. Comment on tax treatment of such transferred balance.
Solution
Statement showing treatment of transferred balance :
Exempted amount considering the

Year Employer’s contribution to fund Difference
fund as RPF
2016-2017 14% of (60,000 + 36,000) i.e. ` 13,440 12% of ` 96,000 i.e. ` 11,520 ` 1,920

2017-2018 14% of (72,000 + 42,000) i.e. ` 15,960 12% of ` 1,14,000 i.e. ` 13,680 ` 2,280
Total ` 4,200
Current year (i.e. 2018-19) contribution shall be treated as RPF and taxable amount will be ` 2,640 [being (14 -12)%
of (` 84,000 + ` 48,000) i.e. 2% of ` 1,32,000].
Since interest rate is less than the exempted limit (i.e. 9%), hence interest portion is not taxable.
Total taxable salary on account of provident fund for the A.Y. 2019-20 is ` 6,840 (being ` 4,200 + ` 2,640).
Deduction from Gross Salary [Sec. 16]
5.36 STANDARD DEDUCTION [SEC. 16(ia)]
Lower of the following shall be allowed as standard deduction to all employee:

a. ` 40,000
b. Amount of gross salary
5.37 ENTERTAINMENT ALLOWANCE [SEC. 16 (ii)]
Entertainment allowance is initially included in taxable allowances as fully taxable. Thereafter, a deduction is allowed
under this section from gross taxable salary. However, deduction u/s 16(ii) shall be available to the Government
employee only.
Deduction for Entertainment allowance being minimum of the following:
a. Actual Entertainment Allowance
b. ` 5,000/-
c. 20% of Basic Salary.
Taxpoint:
■ Deduction allowed shall be irrespective of actual expenditure incurred, whether for office or personal purpose.
■ No deduction is available under this section to a Non-government employee.
ILLUSTRATION 34
Compute taxable Entertainment allowance & net salary of Sri Hanuman Prasad from the following data:
Basic salary ` 8,000 p.m. D.A. ` 2,000 p.m. Taxable perquisite ` 35,000, Entertainment Allowance ` 4,000 p.m. Out of
such allowance ` 20,000 is expended and balance amount is saved. Assuming he is:
a. Government employee
b. Non-Government employee.

DIRECT TAXATION
Solution
Computation of taxable income of Sri Hanuman Prasad for the A.Y.2019-20
Government Employee Non-Government Employee

Particulars
Basic Salary 96,000 96,000
Dearness Allowance 24,000 24,000
Taxable perquisite 35,000 35,000
Gross Taxable Salary 2,03,000 2,03,000
Less: Deduction u/s
16(ia) Standard Deduction 40,000 40,000
16(ii) Entertainment allowance# 5,000 45,000 Nil 40,000
Net Taxable Salary 1,58,000 1,63,000
#
Entertainment Allowance is exempted to the extent of minimum of the following :
a. Actual Entertainment Allowance ` 48,000
b. 20% of Basic Salary ` 19,200
c. Statutory amount ` 5,000
5.38 TAX ON EMPLOYMENT OR PROFESSIONAL TAX [SEC. 16(iii)]
Tax on employment, profession, trade, etc. levied by a State under Article 276 of the Constitution will be allowed as
deduction on cash basis, whether paid by employee or by employer (on behalf of employee) from gross taxable
salary.
Note: If employer (on behalf of employee) pays Professional tax then:
a. Firstly, it is to be included as taxable perquisite; and
b. Further, it is allowed as deduction u/s 16(iii).
ILLUSTRATION 35
Mr. Rohit a non-Government employee has the following salary details :
a. Basic Salary ` 5,000 p.m. b. D.A. ` 2,000 p.m.
c. Entertainment Allowance ` 300 p.m. d. Professional tax paid by employee ` 600
e. LIC Premium paid by employer ` 3,600 f. Income tax paid by employee ` 2,000
g. Professional tax paid by employer on behalf of employee ` 1,600
Find his taxable salary.

Solution
Computation of taxable salary Mr. Rohit for the A.Y.2019-20

Basic Salary 60,000
Allowances
Taxable perquisite
Professional tax paid by employer 1,600
LIC Premium paid by employer 3,600 5,200
Gross Taxable Salary 92,800
Less: Deduction u/s
16(ia) Standard Deduction 40,000
16(ii) Entertainment allowance (Assessee is a Non-government employee) Nil
16(iii) Professional Tax (` 1,600 + ` 600) 2,200 42,200
Taxable Salary 50,600
Notes
A. Conversion of Net Salary into Gross Salary
Sometimes net basic salary is given after deduction of TDS, Loan repayment, PF deduction etc that needs to be
grossed up as under:
Net Salary = Gross Salary – Employee’s contribution to provident fund – TDS – loan repayment by employee – other
deduction from salary (if any).
Examples: Find basic salary of Mr. Singh having the following salary structure:
a. Net Basic Salary received ` 1,00,000
b. Deduction from salary 10% of basic salary as contribution to RPF
c. TDS ` 9,000
d. Repayment of earlier loan ` 35,000
In this case, Basic Salary shall be computed as under:
Net basic salary = Basic salary – TDS – Loan repayment – Contribution to RPF
Let the basic salary be X
1,00,000 = X – 9,000 – 35,000 – 0.1X
1,44,000 = 0.9X
X = 1,60,000. Hence, basic salary for the year is ` 1,60,000.

DIRECT TAXATION
B. Meaning of Salary for different purposes
For Retirement benefit
Gratuity (covered by the Payment of Gratuity Act) (Basic + DA) last drawn
Gratuity (not covered by the Payment of Gratuity Act) (Basic +DA1 + Commission2) being average of last 10
months preceding the month of retirement.
Leave encashment (Basic +DA1 + Commission2) being average of last 10

months immediately from the retirement.
Voluntarily retirement (Basic +DA1 + Commission2) last drawn
For regular benefit
Rent Free Accommodation (Basic + DA1 + Commission2 + Bonus + Fees + Any other
taxable allowance + Any other monetary benefits
excluding perquisite)
Specified employee (Basic + DA + Commission2 + Bonus + Fees + Any other

taxable allowance + Any other monetary benefits –
Deduction u/s 16)
Entertainment Allowance Basic only
Any other case (Basic +DA1 + Commission2)
1.
DA only if it forms a part of retirement benefit.
2.
Commission as a fixed percentage on turnover.
Special allowances as prescribed in rule 2BB

The following special allowances are notified by the Government as exempt u/s 10(14)(ii):
Name of allowance Place Exemption

1. Any allowance (by whatever name Any place To the extent
called) granted to meet the cost of of amount
travel on tour or on transfer incurred
2. Any allowance, whether granted on Any place To the extent
tour or for journey in connection with of amount
transfer, to meet the ordinary daily incurred
charges incurred by an employee on
account of absence from his normal
place of duty.
3. Any special compensatory allowance a. Specified area of Manipur, Arunachal Pradesh, ` 800 p.m.
in the nature of special compensatory Sikkim, Uttar Pradesh, Himachal Pradesh, Jammu &
(hilly area) allowance or high altitude Kashmir
allowance or uncongenial climate b. Siachen area of Jammu & Kashmir. ` 7,000 p.m.
allowance or snow bound area ` 300 p.m.
c. All places located at a height of 1,000 meters or more
allowance or avalanche allowance.
above the sea level, other than places specified
above.

4. Any special compensatory allowance in 1. Specified area of Little Andaman, Nicobar & ` 1,300 p.m.
the nature of Border Area Allowance or Narcondum Islands, North and Middle Andamans,
Remote Locality allowance or Difficult Throughout Lakshadweep Minicoy Islands, All places
Area Allowance or Disturbed Area or north of the demarcation line, Himachal Pradesh,
Allowance. [no exemption is available Mizoram, Jammu & Kashmir, UP, Sikkim
if exemption is claimed against any 2. Installations in the Continental Shelf of India & the ` 1,100 p.m.
allowance referred to in point 8, 9 and Exclusive Economic Zone.
10] 3. Specified area of: ` 1,050 p.m.
a. Throughout Arunachal Pradesh other than
areas covered by point (3) above.
b. Throughout Nagaland
c. South Andaman (including Port Blair)
d. Throughout Lunglei District (excluding areas

beyond 25 km, from Lunglei town) of Mizoram.
e. Dharmanagar, Kailasahar, Amarpur and

khowai in Tripura.
f. Jammu and Kashmir & Himachal Pradesh

4. Specified area of Throughout Aizawal district of ` 750 p.m.
Mizoram, Tripura, Manipur, Himachal Pradesh,
Jammu & Kashmir
5. Jog falls in Shimoga district in Karnataka. ` 300 p.m.
6. Specified area of Himachal Pradesh, Assam & ` 200 p.m.
Meghalaya.
5. Tribal area/Schedule Areas/Agency Specified area of (a) Madhya Pradesh; (b) Tamil Nadu; ` 200 p.m.
Areas allowance (c) Uttar Pradesh; (d) Karnataka; (e) Tripura; (f) Assam;
(g) West Bengal; (h) Bihar; (i) Orissa.
6. Any allowance in the nature of high (a) For altitude of 9000 to 15000 ft. ` 1,060 p.m.
altitude granted to the member of Arm (b) For altitude above 15000 ft. ` 1,600 p.m.
force operating in high altitude.
7. Under Ground Allowance to an Whole of India ` 800 p.m.
employee who is working in uncongenial,
unnatural climate in underground
mines.
8. Compensatory field Area Allowance Specified area of Arunachal Pradesh, Manipur & ` 2,600 p.m.
Nagaland, Sikkim, Himachal Pradesh, Uttar Pradesh,
Jammu & Kashmir
9. Compensatory Modified field area Specified area of Punjab, Rajasthan, Haryana, Himachal ` 1,000 p.m.
allowance Pradesh, Arunachal Pradesh, Assam, Mizoram, Tripura,
Uttar Pradesh, Jammu & Kashmir, Sikkim & West Bengal

DIRECT TAXATION
10. Any allowance in the nature of counter Whole of India ` 3,900 p.m.
insurgency allowance granted to the
members of armed forces operating
in areas away from their permanent
locations
11. Compensatory highly active field area Whole of India ` 4,200 p.m.
allowance granted to Armed forces.
12. Island (duty) allowance to armed force Andaman & Nicobar & Lakshadweep Islands ` 3,250 p.m.

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INCOME UNDER HEAD SALARIES

This Study Note includes:

5.1 Basic Elements of Salary

THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 67

5.29 Club Expenditure [Rule 3(7)(vi)]

5.1 BASIC ELEMENTS OF SALARY

● Payment must have been made by the employer in such capacity.

68 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA

State whether the following receipts should be treated as salary or not?

● A teacher receives emoluments in kind from school in which he teaches.

Yes, it is immaterial whether salary has been received in cash or in kind.

● A payment made to the Member of the Parliament or the State legislature.

No, as employer-employee relationship does not exist.

5.2 DEFINITION OF SALARY [SEC. 17(1)]

b) Any annuity or pension;

e) Any advance of salary;

h) Transferred balance in a Recognised Provident Fund to the extent it is taxable.

THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 69

5.3 GENERAL NOTES

● Salary & Wages are identical in the Income-tax Act

5.4 BASIS OF CHARGE [SEC. 15]

Particulars Workings Amount

70 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA

Arrear salary for 2017-18 (1,000) × 12 12,000

Taxpoint : Method of accounting followed by the employee is irrelevant

Salary due vs Salary accrued

Month Amount of Salary Due date of salary Taxable in the P.Y.

Advance salary vs Advance against salary

Place of accrual of salary

(a) The service is rendered in India;

Taxpoint: Salary is earned at the place where service is rendered.

Employee Employer Place of service Salary received Taxable

THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 71

5.5 COMPUTATION OF SALARY, AT A GLANCE

Particulars Details Amount

72 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA

Interest on Recognised Provident Fund *****

(ii) It is taxable in the year of receipt.

THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 73

Case A: Gratuity received during continuation of service

Case B: Gratuity received at the time of termination of service by Government employee

1. Actual Gratuity received;

3. 15 working days salary for every completed year of service

[Arithmetically, 15/26 × Completed year of service × Salary p.m.]

b) Salary here means Basic + DA, last drawn

74 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA

Computation of taxable gratuity of Mr. Ashok for the A.Y.2019-20

Particulars Details (`) Amount (`)

1. Actual Gratuity received;

3. 1/2 × Completed year of service × Average Salary p.m.

THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 75

b) Non-Government employee, covered by the Payment of Gratuity Act;

c) Non-Government employee not covered by the Payment of Gratuity Act

a) Government employee: Taxable amount: Nil as per section 10(10)(i).

Computation of taxable gratuity of Mr. Oldman for the A.Y. 2019-20

Case (b) Case (c)

Workings for case (b):

1. Completed year of service is 30 years.

Workings for case (c):