[ Income under the Head

Salaries
and
Deductions under Chapter VIA ]
 Contents
1 Heads of Income and Calculation of Total Income

2 Salary

2a Basis Of Charge

2b Profit in lieu of Salary

2c Allowances and Exemptions

2d Deductions under the head Salaries

2e Perquisites (ESOP’s Discussed)

3 Deductions under Chapter VIA – List and imp deductions in brief

 1. Computation of Total Income

Deductions, Rebates and Relief Salaries

Computation
Other Sources of Total House Property
Income

Capital Gains Business and Profession

 2. Income under the head
“Salaries”
Salaries

5. Perquisites
1. Basis of
Charge

4. Deductions
Sec 15 to 17

2. Profit
in lieu of
3.Allow Salary
ances
and
Exemp
tions
 2a. Basis of Charge – Sec 15 and 17

Salary is chargeable to tax on "due" or "receipt" basis whichever is earlier

and
Includes

• wages,
• annuity or pension,
• gratuity,
• fees,
• commission,
• perquisites or
• profits in lieu of salary,
• advance salary,
• leave encashment, etc.
2b. Profits in lieu of Salary – Sec 17 (3)

any any receipt from any sum

employer/former
Any sum
compensation received under a received before
employer or from
from employer key man his joining any
provident/other
or former Fund to extent not insurance policy employment or
employer on consisting of including the after cessation
termination or contributions by sum of his
modification of assessee / interest allocated by way employment.
the terms of on of bonus on
such contributions.
employment such policy.
 2c. Allowances

House Rent Leave Travel Special and

Allowance Allowance Other
(Concession) Allowances
 2c. Allowances – cont’d

Sec and Exemption Conditions 2009-

Sr.No Rule Nature of Allowance 10 Exemption Conditions 2010-11

House Rent 1.An amount 50% of salary if residence

Sec 10A rule in Del/Mum/Cal/Mad & 40% of salary
1 2A Allowance if at any other place.

2.HRA recd for the period Same

accommodation is occupied in the
Previous year

3.The excess of rent paid over 10% of

salary

Salary = Basic + DA + Commission

 2c. Allowances – cont’d

Exemption Conditions
Sr.No Sec and Rule Nature of Allowance Exemption Conditions 2009-10 2010-11

Sec 10(5) and Leave Travel Concession or

Rule 2B Assistance
3 Based on Actual Expenditure

Available only in respect of fare Same

Available for shortest route

Not for more than 2 children

Salary = Basic + DA + Commission

Sr.N Sec and Exemption Conditions 2009- Exemption Conditions 2010-
o Rule Nature of Allowance 10 11

Sec 10(14) The amount of exemption is the amount of allowance or the amount utilised for
4 rule 2BB
Special Allowances the specific purpose.

Nature of Allowance Exemption Specified

Special Compensatory Allowance (hilly Exemption varies from Rs.300 to

a areas) Rs.7000 pm Same

Exemption varies from Rs.200 to

b Border Area allowance Rs.1300 pm Same

c Tribal Area Allowance Rs.200 pm Same

d Allowance for Transport Employees 70% or Rs.6000 whichever is lower. Same

e Children Education allowance Rs.100 pm /per child max of 2 children Same

f Hostel Expenditure allowance Rs.300 pm /per child max of 2 children Same

g Compensatory field area allowance Exemption limited to Rs.2600/-pm Same

Exempt up to Rs.800 pm and Rs.1600

h Transport Allowance in case of blind employee Same

i Underground Allowance Exemption limited up to Rs.800 pm Same

Exemption up to Rs.1060pm up to
15000 feet altitude and Rs.1600 for
j High Altitude Allowance altitude above 15000 feet Same

k Island Duty Allowance Exempt up to Rs.3250/-pm Same

Sr. Sec and Exemption Conditions 2009- Exemption Conditions 2010-
No Rule Nature of Allowance 10 11

Other Allowances

Allowance to Govt Employees o/s

5 Sec 10(7) India Wholly exempt from Tax

Sec 10(14)
6 rule 2BB Tiffin Allowance Wholly taxable

7 Fixed Medical allowance Wholly taxable

8 Servant allowance Wholly taxable

Allowance to High Court & Supreme Not taxable u/s 22A(2) & 22C of High
9 Court Judges Court Act

Not Taxable by virtue of Sec 2 of UN

10 Allowance recd from UNO Act
 2c. Exemptions

Exemption Conditions
Sr.No Sec and Rule Nature of Allowance Exemption Conditions 2009-10 2010-11

Sec 10(5) and Leave Travel Concession or

Rule 2B Assistance
3 Based on Actual Expenditure

Available only in respect of fare Same

Available for shortest route

Not for more than 2 children

Salary = Basic + DA + Commission

 2d. Deductions – Sec 16

A. Standard Deduction (S. 16(i))

No standard deduction is allowed from A.Y.

2006-07 onwards

B. Entertainment Allowance (S. 16(ii))

For government employees, the least of —

1. Rs. 5,000; or
2. 20% of salary; or
3. actual amount of entertainment allowance.

C. Tax on employment on paid basis (S. 16(iii)).

 2e. Perquisites

Dictionary Meaning :

“A Gain or Profit incidentally made from

employment in addition to regular salary or
wages, especially one of a kind expected or
promised”
 2e. Perquisites – cont’d
As defined in I.T Act :

A. Perquisites taxable in hands of all employees:

i. value of rent-free accommodation.
ii. value of concession in rent.
iii. amount paid by employer in respect of any obligation which otherwise would
have been payable by employee.
iv. value of any fringe benefit or amenity (excluding the fringe benefits chargeable
to tax under Chapter XII-H) as prescribed.

W.e.f. 1-4-2010, following clauses are

substituted/added.

(a) value of any security or sweat equity shares allotted or transferred by

employer/former employer as free or concessional cost.
(b) an amount of contribution to an approved superannuation fund by the
employer, to an extent it excess Rs. 1,00,000/-.

v. any sum payable either directly or through a fund by employer (other than
recognised PF, approved superannuation fund etc.) to effect an assurance on
the life of the employee or to effect a contract for an annuity.
 2e. Perquisites – cont’d
Determination of the value of prescribed fringe benefit or amenity

• Interest free or concessional loan

Value of perquisite w.e.f. 1-4-2000, of the loan given to the employee or any
member of his household shall be at the rates charged by State Bank of India
in respect of the loans for the same purpose advanced by the employer, on the
maximum outstanding monthly balance as reduced by interest actually paid by
employee – However, perquisite value for loans (net of amount reimbursed
under medical insurance scheme) given for medical treatment of specified
disease or petty loans up to Rs. 20,000 is not taxable.
 2e. Perquisites – cont’d

Employees Stock Option Plan

ESOP
 ESOP - Introduction

Employee Stock Option is:
– A right but not an obligation.
– Granted to an employee.
– To apply for the specified security of a company.
– At a predetermined price.

ESOP Objective
– Attract, encourage and retain talented employees.
– Compensation in terms of ownership and profit share.
– A risk-based compensation – need for lower taxation.
– Nurtures entrepreneurship.
 ESOP – Flow of Events
Grant of Options Tax Trigger

Valuation of Shares
Vesting of Options on date of Vesting

Exercise of Options

Allotment of Shares Fringe Benefit Tax

Sale of shares Capital Gains

 ESOP – Latest Status
• Taxation of ESOP/ESPS/Sweat Equity

With abolition of Fringe Benefit Tax from 2009-

2010, FBT on ESOPs has been abolished and
once again ESOPs have been included in the
purview of Perquisites under Section 17 (2). The
value of the ESOPs determined on the date of
exercise, as the difference between the fair
market value of the shares as on the date of
exercise and the exercise price, would be
taxable as a perquisite in the hands of the
employees.
 Taxation of ESOPs - Pre Finance Act 2007

• Prior to April 1, 1999 - No specific provision on taxability of ESOPs

• April 1, 1999 to March 31, 2000 - Specific provision - Section
17(2)(iiia) inserted in the Income Tax Act, 1961 (“Act”) to tax benefit
on exercise/allotment of shares issued free of cost or at
concessional price.
• April 1, 2000 upto March 31, 2007 –Section 17(2)(iiia) was
withdrawn and following proviso to Section 17(2)(iii) inserted

“Provided that nothing contained in this sub-clause shall apply to the value of
any benefit provided by a company free of cost or at concessional rate to its
employees by way of allotment of shares, debentures, or warrants directly
or indirectly under any Employees’ Stock Option Plan or Scheme of the
company offered to such employees in accordance with the guidelines
issued in this behalf by the Central Government.”
 Taxation of ESOPs - Pre Finance Act 2007 –
Cont’d
The new proviso sought to introduce the following:
• Single point taxation at the time of sale of shares in case of ESOP
compliant with Central Government guidelines
• Character of income – Capital Gains in the hands of the employee
• No responsibility on the employer to report and/or withhold tax

However, if the Plan did not satisfy the Central Government Guidelines, the
income continued to be taxed as a perquisite in the hands of the employee
at the time of exercise.
Tax implication on ESOP when allotment or transfer of
shares is made on or after April 1, 2009.
• Case – Mr. Vijay , an employee was allotted 10
shares.
• Market value of shares on allotment date 15-Apr-09- @ 1,000 - Rs. 10,000
• Less: Purchase Price of Mr. Vijay - @ 500 Rs. 5,000
• Taxable Perquisite for Mr. Vijay Rs. 5,000
• Assuming Mr. Vijay is in highest tax bracket Tax @ 30.90 % Rs. 1,545

• Mr. Vijay sold shares in July 09 - @ 1,300 13,000

• Less : Market value on allotment date @ 1000 10,000
• Short Term capital Gain 3,000
• Short Term capital Gain Tax @ 15 % 450

If allotment is made prior to April 1, the same continues to attract FBT.

 3. Deductions under VI-A
Sr.N
o Sec Description Deduction for 2009-10 Deduction for 2010-11

1 Sec 80 C LIP

PF/SAF/PPF/RPF

Deposits in PO/Savings Bank

ULIP

NSC

Housing Loan Repayment(principal)

Deposits National Housing Bank 100% of the amount invested /paid or Rs.100000/-
Same
whichever is less.
Annuity/Pension Schemes

Mutual Fund

Tution Fees for education of 2

childn only

Invst in shares or debentures of

public co exclusively in
Infrastrucure of power sector

Term Deposits with scheduled Bank

Insurance premium on the health

2 Sec 80 D of self, spouse ,children or parents Upto Rs.15000

Insurance premium on the health

of dependent parent(senior citizen) Upto Rs.20000
 3. Deductions under VI-A – Cont’d
Sr.N
o Sec Description Deduction for 2009-10 Deduction for 2010-11

Rs.50,000 for ordinary

disability, Rs. 1,00,000 for
Medical treatement & Rs.50,000 for ordinary disability, Rs.75,000 for severe severe disability w.e.f
3 Sec 80DD rehabilitation of dependent. disability 01.04.2010

Amount actually paid for such

4 Sec 80DDB disease or ailments as specified Rs.40000/- (Rs.60000/- for senior citizen) Same

Repayment on loan for higher

5 Sec 80E education Entire amount of Interest paid on this loan Same

50 % Generally and 100 % in case of PM relief funds and

6 Sec 80G Donations for charitable purposes Gujrat earthquake relief fund. Same

7 Sec 80GGA Donations for Scientific Research 100.0% Same

Any sum contributed to any

8 Sec 80GGC political party 100.0% Same

9 Sec 80U Income of a person with disability Rs.75000/- Same

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