Computation of Income:

Step 1: Determine Residential Status

Step 2: Compute Gross Total Income from 5 heads of Income
Particulars Amount
Income under the head Salary (A)
Income under the head House Property (B)
Income under the head Profits and Gains from Business or
Profession (C )
Income under the head Capital gains (D)
Income under Other Sources (E )
Gross Total Income A+B+C+D+E

Step 3.: Calculate Deductions from Gross Total Income

Step 4:Net Income=Gross total Income-Dedcutions
Step 5: Apply tax rate to Net total income

Income Under the head 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
Basis of Charge [Section 15]
(i) Salary is chargeable to tax either on ‘due’ basis or on ‘receipt’ basis, whichever is earlier.

(ii) However, where any salary, paid in advance, is assessed in the year of payment, it cannot be
subsequently brought to tax in the year in which it becomes due.
(iii) If the salary paid in arrears has already been assessed on due basis, the same cannot be taxed again
when it is paid.
Employer includes –

o Former
o Present
 o Multiple employers

As per sec. 17(1) of the Income-tax Act, 1961, salary includes the following (Charging Section):

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 recognized provident fund, to the extent it is taxable;

h) Transferred balance in a Recognized 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].

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Taxability of certain components

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.
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).

Gratuity

Received during Received at the time of

service retirement/Death

Fully Taxable
Government Non-Government
Employees Employees

Fully Exempt
Covered under Not covered
Payment of underpayment of
Gratuity Act, 1972 Gratuity Act, 1972

Least of the
following would be
exempt: Least of the following would
be exempt:
- Rs 20 lakh
- Rs. 20 lakhs
- Gratuity received
- Gratuity received
- 15/26 * Last drawn
Salary pm * Number
- ½ * Salary * completed
of years of service
number years of service (ignore
(where > 6 moths =
fraction of years
1 year.

SALARY=BASIC + DEARNESS ALLOWANCE

Example 1: Ashok, an employee of ABC Ltd., receives Rs.2,05,000 as gratuity under the
Payment of Gratuity Act, 1972. He retires on 10th September, 2019 after rendering service for 35
years and 7 months. The last drawn salary was Rs.2,700 per month. Calculate the amount of
gratuity chargeable to tax.
Example 2: Mr. Oldman retired from his job after 29 years 6 months and 15 days of service on
31/12/2019 and received gratuity amounting Rs.4,00,000. His salary at the time of retirement
was basic Rs. 6,000 p.m., dearness allowance Rs.1,200 p.m., House rent allowance Rs.2,000,
Commission on turnover 1%(Turnover-Rs.150000), Commission on profit Rs.5,000. Calculate
his taxable gratuity if he is a —
a) Government employee
b) Non-Government employee, covered by the Payment of Gratuity Act;
Also Calculate his Income under head Salary if he is Non-Government Employee(PY 2019-
2020)
Example 3:

Commission:1 % of turnover (turnover Rs.12,00,000)

Bonus: Rs.12,000 pa
Compute Taxable gratuity assuming:
1.He is Government employee
2.He is non-government employee covered by POGA
 Pension

Commuted Uncommuted
Lumpsum)d (Monthly)

Employees of the Non-Government Fully taxable

Central Employees
Government/local
authorities/Statutory
Corporation/Members
of the Defence Services If the If the employee
employee is does not
in receipt of receive any
gratuity gratuity

1/3  Full Value ½  Full Value of

of pension would pension would
EXEMPT be exempt be exempt

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.
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”.)
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
Mr. Amit has retired from his job on 31/3/2019. From 1/4/2019, he was entitled to a pension of
Rs. 3,000 p.m. On 1/8/2019, he got 80% of his pension commuted and received Rs.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)
ALLOWANCES

Transport allowance to an employee who is blind/deaf & Dumb/orthopedically

handicapped is exempt to extent of Rs.3200 per month
PARTLY TAXABLE ALLOWANCES

Exemption Exemption
based on based on
Expenditure Amount:
House Rent made by 1.Children
Allowance(HRA) employee Education
1.Travelling (T) Allowance-
Rs.100 per
2.Daily (D) month per child
3.Conveyance( 2.Children
C) Hostel
allowance-
4.Helper (H)
Rs.300 per
5.Research (R ) month per child

6.Uniform ( U )

Exemption is to the extent of least of following(T,D,C,H,R,U):

1.Allowance amount or
2.Actual Expenditures

Mr.Z Rs.7000 per month Rs.6000

7000-6000=1000 Mr.P 7000 per month Rs.7500
7000-7000=0
Travel allowance -
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.
Important points with respect to HRA

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 1
X, a resident of Ajmer, receives Rs. 48,000 as basic salary (per month) during the previous
year 2019-20. In addition, he gets Rs. 6,800 (per month) as dearness allowance forming part
of basic salary, and Rs.6,000 (per month) as house rent allowance. He, however, pays Rs.
5,800(per month) as house rent. Determine the quantum of exempted house rent allowance.

Illustration 2 (HW)
Compute the taxable house rent allowance of Mr. Abhijeet from the following data:
• Basic Salary Rs. 5,000 p.m., D.A. Rs.2,000 p.m., HRA Rs. 4,000 p.m., Rent paid Rs. 4,000
p.m. in Pune.
• On 1/07/2019, there is an increment in Basic salary by Rs. 1,000.
• On 1/10/2019, employee hired a new flat in Kolkata at the same rent as he was posted to
Kolkata.
• On 1/01/2020, employee purchased his own flat and resides there.

Perquisites:
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.

1.Gift, Voucher or Token given by Employer:

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 up
to Rs.5,000, in aggregate, during the previous year, shall be exempted.

Notes
a) Where worth of gift is in excess of Rs. 5,000 then amount in excess of Rs. 5,000 shall be
taxable.
b) No such exemption (Rs.5,000) is available on gift made in cash or convertible into money
(gift cheque)
Mr. Y works XYZ ltd.2019-2020:

1.Watch- 15,000
2.Voucher -7000
3.Refrigerator-25,000

Taxable value of gift =15000+7000+25000-5000=42000

2.Use of Movable Assets:

Illustrations for practice.

Mr. Mugal joined Star Ltd. on 1/4/2019. Details regarding his salary are as follows:PY 2019-
2020

Particulars Amount (Rs.) (per month)

Basic 5,000
Dearness Allowance 2000
Education Allowance 1000 (he has one son & 3 daughters)
Hostel Allowance 2000
Medical Allowance 1000 (Medical expenditure -Rs.3000)
Transport Allowance 1800
Servant Allowance 1000
City Compensatory allowance 2000
Entertainment allowance 1000
Helper allowance 3000(Paid 2000 per month to him)
Research allowance 2000 (Actual expenses are Rs.4000 per
month)
Bonus 24000 per annum
Commission 9000 per annum
Fees 5000 per annum

Answer-Rs.242000

HW

Mr. Sham was working for Astar motors ltd for a period of 15 years and 5 months. He resigned from
Astar motors on 1st February 2020 and started his own consultancy. He joined Seven star ltd on 1st April
2020 for a monthly salary of Rs.1,50, 000.Following are details of his Income received from Astar Ltd.

Particulars Amount (Rs.) (per month)

Basic 75,000
Dearness Allowance 15,000
HRA 25,000 (Rent paid per month-Rs.28,000)-
Hyderabad
Commission 5,000 per month
Gratuity Rs.5,00,000 lumpsum (Covered by POGA)
Pension Rs.45,000 per month
Painting received at farewell Party from Employer Value Rs.20,000
Sculptor received from Colleagues Value Rs.70,000
 Conveyance Allowance Rs.5000 (Actual expenditure 4000)

He receives consultancy charges amounting to Rs.2,00,00 for Previous year 2019-2020.Compute Income
under the head Salary for Mr. Sham for A.Y.2020-2021 PY 2019-2020

Mr.

MMr

Lal

MrM.

TO
L
KEN GIVEN BY EMPLOYER [