COMPUTATION OF TOTAL INCOME (FOR THE ASSESSMENT YEAR 2022-23) . Income from Salaries . Income from House Property . Profits and Gains of Business or Profession-I . Profits and Gains-I ; Depreciation . Capital Gains . Income from other Sources . Aggregation of Income . Set-off and Carry Forward of Losses . Deductions out of Gross Total IncomeWOON! TWLOL -_ > Zs sin ar sin Ze 01 08 S/N ye sin gsm suononpog suoyonpeg ‘suononped suoyonpag suoganpsg 62 01 04 suond9s yepun sesso} 08 jo yo uo108s yg pue gapun PABA} br Ol Be sishonport ‘ue suonoas 6g 91 95 §g 91 Sr WoIssajeg LBB su}}998 ‘suoDas JO Ssaut Su se9in0g sueD Apedoig 400. qeydeg PUB SIYOId asnoy << 2ti y $890 {88 088) Aa SWOONI IVLOL 40 LdaONO9 Mls.Income from Salaries (Sections 15-17) 1.1, DEFINITION OF HEAD SALARIES 7 1.2, CHARACTERISTICS OF SALARY 1.3. PROVIDENT FUNDS 1.4 ALLOWANCES 1.5. PERQUISITES 1.6. PROFITS IN LIEU OF SALARY 1.7, DEDUCTIONS OUT OF GROSS SALARY U/s 16 1.8, DEDUCTIONS U/S 80C (OUT OF GROSS TOTAL INCOME) 1.9. SUMMARY CHART 1.1. DEFINITION OF HEAD SALARIES Under section 15, the followin (a) comes are chargeable to Income-tax under the head "Salaries": any salary due from an employer or a former employer to an assessee in the previous year whether paid or not; (b) any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer though not duc or before it becomes due to him: any arrears of salary prid or allowed to him in the previous year by or on behalf of an employer or a former employer if not charged to income-tax for any earlier previous year. Under the provisions of this section the amount of salary due in the year, amount of advance salary received and the amount of arrears of salary received during the year from the present or past employer are to be included in this head. In the expla () dt section 15, it has been clearly mentioned that for the removal of doubts, it is hereby declared that where any salary paid in advance is included in the total incor of amy person for any previous year it shall not be included again in the total income of the person when the salary becomes duc.INCOME TAX LAW AND PRAGToR 24 re ence soseia Fhe inypottant rule is that income once taxed cannot be taxed ain, 0 any salary pug ig ; vious seat when the advance salary was received) wil not be inched apa cs ea pain dance (if taxed in ap ved) wi 8 vee of the petsot when the stary becomes de. Advance salary does not include loans, sse a car of a scooter of for building house te . commission or remuneration, by whatever name called due 10 0F received py shall not be regarded as salary for the purpases of this section, n firm Definition of word ‘Salary’ [Section 17(1)] o Scction 17/1) salary includes the following amounts received by an employee from According employer. dunng the previous year W) Wages: a) wv annuity or pension; (Family pension received by heirs of an employee is taxable under ne from other sources): (iii) any gratuity ) any fees. commission, perquisites or profits in licw of or in addition to am salary or wages; any advance of salary syment received by an employee in respect of any period of leave not availed of by (Leave encashment or salary in liew of leave); annual aceretion 10 the balance at the credit of an employee participating in a recognised prowident fund, 10 the extent to which itis chargeable to tax under Rule 6 of part A of the Fourth Schedule: and che aggregate of all sums that are comprised in the transferred balance as referred to in sub-rule (2) of Rule [1 of Part A of the Fourth Schedule, of an employee participating in enised provident fund, to the extent to which it is chargeable to tax, under sub-rule taxable portion of transferred balance from unrecognised provident fund to (iit) are (4) there, i recognised provident fund. (22) the contribution made by the Central Government or any other employer in the previous » the account of an emplovee under a pension scheme referred to in Section 80CCD. The above definition of word “salary” ws 17(1) includes the above mentioned items. These can be explained in following manner wages—uny amount received by a person for work done or job rendered is called wages. ived under the name of ‘Pay’, ‘Basic Pay’, ‘Salary’. “Basic salary” or It may be for actual work or leave salary or actually received or due “Remuneration ning the age of retirement or superannuation is fully taxable. It may be received direct perannuation fund created by employer: in both cases it is taxable ved by employee from his past employer as a token of ed gratuity. ‘This amount is exempted upto Hc as pension or out of a (ii) any gratuity—Any sum rece gratitude for rendered in past is ¢ certain limite given wl 1010) and it is dealt with in this very chapter at a tater st cived from employer under the name of fee is alse fully taxable. (b) any commmission—any vinnsmissions given by employer to employee is fully taxable. Any com by a director for standing guarantee for repayment of loan, and if he ble under “Income from other wres In cave conpmminsion js given to an emplayee and iis paid as a fixed percentage of turnaver achieved by such employee, such commission shall also be Sreated ws art of the salary for all practical purposes. [Gestener Duplicators (7) Wh 2. I WY SL fix) (2) any fee—any son recede nployee of the company, shall be ta (ii) any annuity or pension—Any amount received by employee from past employer after seenaisinlee:10 nOM SALARIES (c) any Bonus—Honus is fully taxable under the head “Salaries on receipt basis, In case arrears of bonus are received in a previous these are fully taxable. Honus can be of two types : . vee tees Statutory Bonus—I is received under some leg: taxable. . al or contractual obligation and is fully Gratuitous Bonus—W is a casual benefit and is taxable as a receipt from employer and having no other implication (d) any Perquisite~-Any benefit or amenity allowed by employer to employee. These are explained in detail later in this chapter w/s. 1712). (e) any Profit in lieu of or in addition to salary—any cash payment received by employee from employer is called profit in lieu of salary and these are explained later in this chapter ws. 17(3), (v) any salary in lieu of leave received during service is fully taxable. (vi) any advance salary—In case an assessce receives some salary in ad) and which was actually not due in that year shall be taxable in the y not include any loan or advance taken from employer. 1.2, CHARACTERISTICS OF SALARY For any payment to be made taxable under the head ‘Salaries’ it must fulfil the following characteristics, In case any receipt is not covered under any of these features it will not come under this head : 1. Relationship of Employer and Employee For a payment to fall under the head ‘Salaries’ the relationship of employer and employee must exist between payee and the receiver of the salary. The employer may be a Government. a Local authority. a company or any other public body or an Association or H.U.P. or even an individual, Every kind of payment to every kind of servant, public of private, however bigh or low placed he may he. 1s covered under the provisions of this Act, Even the remuneration payable to an employee of a foreign Govt, falls within this section, Even servant is an employee, but an agent may of may not be employee. A detailing agent of a selling concer is its employee whereas the person holding an agency to sell the goods of such a concer will not be employe. The relationship of master and servant 1s the only test to establish the relationship of employer and employee. A disector of a company, though holding office, is not an employee unless it is so provided in the independent contract, or the Amtcles Association of the company provide for such a relationship. [Ram Prashad v. 2. No distinction between Salary and Wages For income tax purposes, both salary and wages are alike are taxable as ‘salary income’ 3. Nature of Employer ‘An employer may be an individual, ie., Sole proprietor, partnership firm, limited lability partnership firm, H.U-F., company, local authority, AOP/BOL or any other artificial judicial person: 4. Salary from more than one Employer ‘Any amount of salary received or due from one or more than one employer/sarce shall be taxable under this head, Such situation may arise when an employee is working. with Iwo employers simultancously or has worked with one employer and later on serves with another employer alter leaving service with first employer, salary from both the employers shall be taxable under this head 5, Salary from Present, Past or Prospective Employer Salary received or due from present, past or future employer is also taxable under this head. 6, Tax Froe Salary Sometimes, the employer allows an employee to draw txefree salary, &.g. the employer pays full salary to the employee and also pays tix on this ditcetly to the department, ‘The employee's ¢ in 2 previous year of receipt. It does an T. (86 LTR. 122, 127 (S.C3]26 INCOME TAX LAW AND PRACTICE nount of salary he is drawing but on gross amount j assessment is to be made not on the drawn plus the tax paid by the employer. 7. Salary Received as Member of Parliament or Member of State Legislature A member of Parliament or of State Legislature js not treated as an employee of the governmen ary received by such persons (MPs & MLAs) is not taxable under the heal “Satan ome from other sources". However, certain allowances received by them ate full e Salary and hence, sa It is taxable as exempted from tax ws 10(17). ny remuneration (pay or allowance) received by a be taxable under the head “Income from Salaries However. abinet Minister or Chief Minister of a state sha 8. Receipts from Persons other than Employer Perquisites or benefits or any other remuneration received from persons other than the employer, would be taxable not under the head “Salaries’ but under the head “income from othe, sources’ even if they acerue to the employee by reason of his employment or while he was eived by a professor of a college for acting as an discharging his normal duties, e.g., amount r examiner in a university For example, Dr. Dhir is an employee of a leading physician of Delhi. In one case, the patient's life was saved because of the hard work and intelligence of Dr. Dhir. The patient, therefore, gives %5,000 to Dr. Dhir in appreciation of his services. The amount in this case is not chargeable as “salary but constitutes income from other sources. 9, Place of Accrual of Salary Income Salary accrues at that place where the services are rendered. If the sei the salary accrues in India and if the services ure rendered outside Indi India. Thus. if @ person employed in India goes on leave to England and gets his leave salary there, the salary is said to acerue in India and not in England, because it is paid for services rendered in India Pension paid in a foreign country for services rendered in India, will be Indian income, as it is paid for the services rendered in India although in the past. On the other hand, if any person is employed in India and transferred to its branch in England, the salary received by him in England is not Indian income, but it is income arising in England as the service is rendered in England. Followings are th are rendered in India, |. the salary accrues outside two exceptions to this rule (i) A pension payable outside India to a person who has gone to forcign country for permanent settlement is not deemed to arise in India, if pension is payable to a person appointed by the Secretary of State or to a person who was appointed before 15th August 1947, as a judge of the Federal Cour or of a High Court and who continued 10 serve on or after the commencement of the Constitution ats a judge in India. This is a special concession granted to certain officials of Government, who were employees before independence but continued to serve afier this (i) The Govt. of India employs Indian citizens for services to be rendered in foreign countries and salary paid outside India is deemed to accrue or arise in India. ‘This provision helps in taxing the salaries received by Government servants posted abroad. But under Section 10(7) the allowances and perquisites paid or allowed by the Government outside India are to be excluded from total income 10. Deductions made by the Employer If, an employer makes certain deductions out of the deducted is deemed to be received by the employee and the amount so deducted is also ti plicatio of income by the employee. Some important types of deductions made by the employer are as follows amount $0 Wy payable to an employe cen as application 1. Deductions made to recover the loan advanced by the employer 2. Employce’s contribution towards the provident fund, income-tax and profession |X. 3. Deduction made to pay the premium on life insurance policy of the employeeINCOME FROM SALARIES 27 4. Any other deduction for which the employee has authorised the employer. In case an employee receives his salary after certain deductions made by employer on account of profession tax, contribution to provident fund, tax deducted at source, the ‘salary’ will not be the net amount received, rather it will be the gross salary due to the employee. Gross Salary/Salary = Net Salary received + Deductions made by employer ILLUSTRATION 1 Mr. A receives € 4,20,000 p.a. as net salary. Employer had deducted % 4,000 p.m. as contribution (0 R.P.F., & 5,000 p.a. as tax deducted at source and & 2,000 p.a. as professi During the year employer had deducted % 2,500 p.m. towards the recovery of house building advance taken by Mr. A, SOLUTION In the above-mentioned case employee's salary is not % 4,20,000 rather z Net salary received 4,20,000 Add : (i) Employee's own contribution to P.F. @ & 4,000 p.m 48,000 (ii) Tax deducted at source 5,000 (iti) Professional tax deducted at source 2,000 (iv) Recovery of House Building Advance @ 2,500 p.m 30,000 Salary Q. No.1 Find out salary of Mr. O.P. Gupta from particulars given below : z Net salary received 72,000 Income-tax deducted by employer 4,000 Professional tax deducted by employer 1,200 Group Insurance Scheme Contribution of employee deducted by employer 1,200 Rent of house provided by employer (Deducted out of salary) 3.600 Lite Insurance premium paid by employee 9,000 (Hints : Salary % 82,000 ; Life Insurance premium paid by employee is not to be added back) cular rate and tax deducted at source, own contribution ¢ these deductions are not to be added back s rather it is given before deduction of these But sometimes sakiry is given at a pa nd recovery of loan ele, are given, In such ac wo PA as the silary given is not alter deduction of these amour items, 11. Salary or Pension received by UNO Employees It is fully exempted as per circular No. 293 Dt. 10-2-81. 12, Salary received by a teacher/researcher from a SAARC member State Exempted upto 2 13. Salary as Partner Any salary, commission or remuneration received by a working partner from a firm/LLP shall not be taxable under the head “Salaries’, It is taxable under the head Profits & Gains in the hands of partner to the extent deduction is allowed to firm, 14, Salary received by a sole proprietor from his proprietory concern A sole-proprietor is the owner and not the employee of his own sole-proprietory concer. Hence, any salary or remuneration received by such owner from his proprictory business cannot beINCOME TAX LAW AND PRacn ICE mreated es his salary income. Also. such remuneration to proprietor is not allowed as deducti mir the bead business and profession of sole proprietorship buss Stile soch remuneration received by the owner from his proprietory cones 7 1S not taxable im the bands of owne 45. Payments received by Legal Heirs of a Deceased Employee Ange “ment or compensation given to widow ot legal heirs of an employee wh during service is not taxable as salary income but family pension received is taxable under vac ther sources 46. Payment made after Cessation of Employment Payment made by an employer to his employee after the cessation of his employment j “Salaries”. It is taxable under this head because it represents remuneration fe ior taxable under the services rendered in the past. 47. Voluntary foregoing : Application of Salary Voluntary foregoing of salary by an employee is simply an application of income by him and therefore. any voluntary foregoing of salary is taxable when itis due, whether paid or not (Section 13) The salary which is voluntarily foregone must be actually due in the name of the employee. Voluntary foregoing is different from voluntary surrender of salaries which is exempted from tax ° 18. Previous year for Salaries “The previous year for the income under the head ‘Salaries’ shall always be financial year of the Government of India (i.e., April to March). 49. Taxability of salary on due or receipt, whichever is earlier basis Uss 15(a) salary is taxable on due basis whether received or not. Salary becomes due after doing work and in India it is due on monthly basis. Every employee gets salary on completion of a month. ‘As per our financial system the year starts on Ist April and ends on 31st March. As such first salary for the month of April becomes due on Ist day of next month, But in some cases salary becomes due on the last day of the month and salary for the month of April shall be due on 30th April. This results into following two situations (a) If salary is due on Ist day of the month, during the financial year 202 be due on Ist April 2021 and it shall be for the month of March 2021 and last sala be due on Ist March 2022 for the month of February 2022 (b) If salary is due on the last day of the month, during the financial year 202 shall be due on 30th April 202] and it shall be for the month of April 2021. and last salary shall be due on 31st March 2022 for the month of March 2022 2 first sa ILLUSTRATION 2 sed his M.B.A. on 15th June 2021 and joined his first job on 15th July @e Find out his salary for the assessment year 2022- x x 3ist ment year 2022-23 ée., previous year in this case shall be from 15th July 2021 © 3ist Ass March 2022. Salary is taxable either on due or on receipt basis whichever comes first. If salary for the month of March falls due on 31st March : z Salary for the month of July 2021 falling due on 31st July 2021 20,000 (half month oaly) 590,000 Salary from August 2021 to March 2022 for $ months @ & 40.000 = Total Salary 3008 —INCOME FROM SALARIES 29 If salary for the month of March falls due on Ist April : It means salary of the month of March neither falls due in the month of March nor it is received in the month of March. z Salary for the month of July 2021 falling due on Ist August 2021 (half month) 20,000 Salary from the month of ist to the month of February falling due on March first 2022 for 7 months @ 40,000 p.m 2.80,000 Salary for the month of March falls due on Ist April and also received in April will be taxable in the previous year 2022-23 Total Salary 20. Salary grade/Pay scale In some organisations like Government offices. Banks, Post Offices. Colleges etc. salary to employces is paid as per pay scales or salary grades. The pay scales fixes the starting salary of an employee and also the annual increment in future years of employment. ‘The annual increment is granted to employee after completion of one full year of service e.g. if an employee joins his scrvice/job on Ist September 2020, he will be granted Ist annual increment ptember 2021 ailways, Universities. wef. Ist S Example of grade/pay scale 8,000-300- 11,000, 12,000-500-20.000 The amount mentioned in between two big amounts is known as annual increment i.e. the salary of employee will increase by this amount on the completion of every 12 month of his job Example. Mr. A joined his job on Ist September 2017 in the grade of 12,000-500-20,000. Find out his salary for the previous year 2021-22 Date of increment is Ist September every year Amount of increment % 500 1-9-2017—31-8-2018 12,000 p.m. 1-9-2018—31-8-2019 12,500 p.m. 1-9-2019 —31-8-2021 =. 13,000 p.m. 1-9-2020—31-8-2021 13,500 p.m. 1-9-2021 —31-8-2022 14,000 p.m. 1-4-2021—31-8-2021 @ @ 13,500 x 5 1-9-2021—31-3-2022 @ % 14,000 x 7 Salary for the previous year 2021-22 ILLUSTRATION 3 Mr. Patil was appointed as a manager on Ist July 2017 in the grade of 20,000-500-22,000-1,000- 25,000 with two advance increments. Find out his salary for the previous year 2021-22 if (a) salary is due on first day of the month : and (b) salary is due on last day of the month. SOLUTION ‘Computation of salary of Sh. Patil for the Previous Year 2021-22 (Assessment Year 2022-23) Pay fixation : Pay on 1-7-2017 : € 20,000 + two increments of % 500 each = 221,500 21,000 Pay Pay Pay Pay240 INCOME TAX LAW AND PRACTICE (i) Due on first day of the month : On 1-4-2021 to 1-7-2021 % 23,000 pm. x 4 209 On 1-8-2021 t0 22 % 24,000 p.m. x 8 = se Salary for the year iam ow (ii) Due om the last day of the month : On 30-4-2021 to 30-6-2021 % 23,000 pm. x 3 = 6s.0e9 On 31-7-2021 to 31-3 24,000 pm. x 9 mies Salary for the year Dasan == Salary may be received or due from present, past of future employer, it shall be taxable unde the head salary. By adding sub cause (c) in section 17(3), any payment received from future im has also been made taxable under this head. Any payment received from p ployment has come to an end is also taxable as salary income. employer employer after the Q. No. 2 Mr. Sen was appointed as Reader in Calcutta University in the scale of 37,400-1200-62,400 on 1.9.2018 at © 42,000 p.m. Gompute his salary income for the previous year 2021-22 il (a) salary is due on tt of every months; (b) salary is duo on last date of every month. [Hints : (a) Salary © 4,84,800 (b) € 4,86,000] 21, Advance salary received vs. Advance against salary In case an assessee receives some salary in advance in a previous year which was actually not due in that year, it shall be taxable in the year of receipt. In case, any loan or advance is not treated as advance salary and henee is not taxable in the hands of an employee Ken it is 22. Arrears of salary received Any amount of salary received from present or past employer during relevant previous year | which relates to some earlier previous years, is treated as arrears of salary. 11 is taxable in the yea i which received and not the year to which it belongs. (CLT. v. Gajapathy Naidu (1964) 58 1.7... 114 'S.C.)J. In case assessee has to pay tax at a rate higher than that at which he would have paid, had apply to Income-tax Officer these arrears been received in the year to which they belong, assessee for relief ws 89(1) (Refer to Chapter 2 of part IIT of this book). ILLUSTRATION 4 (a) During the previous year 2021-22, Mr. X receives % 20,000 as arrears of D.A, which the employer did not pay him in the year 2020-21. (b) As per salary contract between employer and employee the salary of the employee was 10 be increased by & 2,000 p.m. from the financial year 2019-20 but the employer did not do so and ultimately employer agreed to enhance his salary as per the agreement and paid all the arrears in October 2021 (6) Due to a dispute between the employer and employee, the employee was suspended in the year 2018-19 und he was ge only half of his salary during the whole period of his suspension. The dispute was utlimately settled by the court in the previous year 2021-22 and the employee was paid all his dues of arrears in Febraury, 2022. iINCOME FROM SALARIES 21 SOLUTION ‘Treatment of Arrears In case arrears are allowed to be taxed at a higher rate then the employee is punished twice. Firstly, he is not paid his dues (Salary etc.) at the time these were supposed to be paid and thus employee is mentally tortured and now while these arrears are finally paid (may have been paid after lot of harassment, dispute, ete.), employee will again be punished if the arrears are taxed at a higher rate than the rate at which these would have been taxed had these been received in the year to which these arrears belong. (a) Arrears of & 20,000 belonging to the previous 2021-22, ie., in the year of receipt of arrears. In case employee is taxed at higher rate than the rate at which these arrears would have been taxed had these been received in the year to which these arrears do belong, then the employee would be entitled for a relief w/s $9(1) (b) Increase in salary required to be paid as per agreement : “or previous year 2019-20 @ & 2,000 p.m. = & 24,000 For previous year 2020-21 @ & 2,000 p.m. = 24.000 For previous year @ & 2,000 pm. From 1-4-21 to 30-9-21 = 6 months = 12.000 year 2020-21 are taxable in the previous year ‘These arrears of € 60,000 received in October, 2021 are taxable in the previous year 2021- 2, Arrears from 1-4-2] to 30-9-21 belong to the same year and are taxable in the previous year 2021-22 but arrears belonging to the previous year 2019-20 and 2020-21 are taxable in the year of their receipt but the employee is entitled for a relief w/s 89(1). (©) Due to suspension, the employee could not receive half of his salary and the arrears of half of his salary belonging to the previous year 2018-19, 2019-20, 2020-21 are taxable in the year of their receipt, i.e., in the previous year 2021-22. However, employee is entitled to a relief w/s 89(1), 23, Salary in Lieu of notice te the services of an employee it is essential to serve a notice as per service ¢ it is desired to relieve the employee immediately, he is given salary in lieu of such notice period, Such amount is fully taxable under the head ‘salaries’ on receipt bi 24. No Relevance of Method of Accounting Salary income is to be computed on due or receipt, whichever is earlier, basis as provided u/s Section 15. A salaried individual is not required to adopt any method of accounting for computation of his salary income. The method of accounting is relevant for computing business or profession income or while computing income under the head ‘Other Sources’ (in certain cases). 25. Salary in Foreign Currency Salary received or receivable in foreign currency applying specified Telegraphic Transfer Buying Rate. COMPUTATION OF SALARY INCOME Salary income of an employee is 10 be computed in accordance with the provisions lai in seetions 15, 16 and 17, Section 15, shall be converted into Indian currency by down 1s discussed earlier gives the scope of this head and tells us that which incomes shall form pa ion 16 gives deductions to be allowed out of income taxable under this head, Section 171) defines the word *salary* as mentioned in section 15. Section 17(2) and 17(3) further define the terms *Perquisites’ and “profits in lieu of can be depicted in the form of chart given below : head. $ ary”, The:2.12 SALARY [Sections 15, 16 & 17] y INCOME TAX LAW AND, PRACTICE Salar ‘Allowances Perquisites Profits in th iM + + + | ofsatary uz) 117(3)(19) 072) U7) Less t ‘Standard Entertainment Tax on Deduction + Allowance + Employment wis 16(ta) [16ti9) [18(u9) ¥ Income under the Head Salary 1.3. PROVIDENT FUNDS ‘To encourage savings for the social security of employees, the Government h: mployee contributes a fixed percentage of his s: contribution along with interest is kinds of provident funds. The funds and in many cases employer also contributes. The whole credited to employee's account. He will get payment out of this fund at the some other important occasions. If the employee dies, his hei Provident Funds are of four kinds (® Statutory Provident Fund or the Fund to which the Act of 1925 Gi) Recognised Provident Fund (R.P-F.). (it) Unrecognised Provident Fund (U.R.P.F.). (iv) Public Provident Fund (P.P.F.) aS Set up various ary towards these time of retirement and at will get the full payment, applies (S.P.F) TREATMENT OF PROVIDENT FUNDS Particulars Fund governed by Recognised Provident Fund Unrecognised (RPE) (For Private Sector) (U.R.P.E.) (For Private PF. Act 1925 (SPE) (For Govt. or Semi Govt. Employees) Fully qualifies for Fully qualifies for deduction imployee’s own contribution, deduction ws 80C u/s 80C 2. Employer's Fully exempted It is deemed to be received by contribution employee. Excess of Employer's contribution to RPE. over 12% of salary is taxable. 3. Interest credited Fully exempted Exempted upto rate prescribed by to Accumulated the Government. Excess over this Balance, amount is taxable (ie. 9.5%) 4. Refund/Transferred Fully exempted Exempted in all cases except Balance of U.R.PF. when employee leaves service to RPP. of his own accord before completion of 5 years’ continuous service, In such case the amount which has not been charged to lax is added in salary 1. Taxable Portion = Employer taxable under the head Income from Other Sources. Sector) Does not qualify for deduction ws 80C Ignore for the time being, Ignore for the time being. In case of refund taxable portion is added in s income of the year IE to relief wis $9(1)) In case transferred balance amount which would have been taxable had the fund been RPP is added in salary 5 n nis 8 contribution + Interest on this part. Interest on employec’s own contributionINCOME FROM SALARIES 2.43 (a) Statutory Provident Fund, Statutory provident fund is the oldest type of fund. It was started in the year 1925 through a Provident Fund Act of 1925. This fund was started with a view of promoting savings amongst government employees. Generally, this fund is maintained by Government or Semi-Government Departments like Railways, Reserve Bank of India, Colleges, Universities, local bodies, insurance companies, ete. The employer's contribution towards the employee's statutory provident fund and the amount of interest earned on the accumulated balance to the employee's credit balance are not to be included in the income of employee and so it is ignored. When the employee retires or Icaves the service and receives any amount from the accumulated balance to his credit in the statutory provident fund, the amount so received will not be included in employee's total income [Section 10(11)] being exempted income. ‘The employee's own contribution will qualify for deduction w/s 80C. (6) Recognised Provident Fund. As the name suggests, it is a fund to which the Commissioner of Income-tax has given the recognition as required under the Income-tax Act. Generally this fund is maintained by industrial undertakings, business houses, banks, etc. The employer's contribution over and above 12% of employee's salary, will be included in employee's salary income for tax purposes. ‘The employee's contribution towards this fund will fully qualify for deduction u/s 80C Interest on Provident Fund credit balance upto prescribed rate (9.5%) is exempted, but interest credited over and above such rate is deemed to be employee's salary income and is included in salary income of that previous year. (c) Unrecognised Provident Fund. I is the provident fund which is not recognised by the Commissioner of Income-tax. The employee and the employer both contribute towards this fund, ‘The employee's contribution is added in this salary (if ‘net salary’ or ‘salary after deduction of is given) and he will not be allowed any deduction ws 80C regarding this contribution while computing the total income of the employee. ‘The employer's contribution and interest on the accumulated credit balance of the fund are not neluded in employee's salary income from year to year. A payment received out of this fund is taxable so far it represents the employer's contribution and interest thereon. The employee is entitled to relief under section 89(1). [The employee's contribution is ignored because it was taxed when it was contributed]. Interest on the employee's own contribution will be taxable as ‘Income from Other Sources’ and not as salary income, Transferred balance. When the unrecognised provident fund is recognised for the first time, the credit balance in the employee's unrecognised provident fund is transferred to the recognised Provident fund account. This balance is known as transferred balance. In such case fund will be treated as RPF from the day of its inception and exemption will be allowed in same manner. Only excess of amount transferred to RPF over exempted amount shall form taxable portion of transferred balance. (d) Public Provident Fund. So far all these funds were for the salaried people. On July 1, 1968 3 new fund known as public provident fund was started so that self-employed people may also enjoy the benefit of deduction u/s 80C. Self-employed people are doctors, lawyers, accountants, actors, ts ders, pensioners, This fund can suit all types of pockets and its working is also very simple. The interested people can open their account in State Bunk of India and its subsidiaries. The subscription can be between & 500 and % 1,50,000 in one year. At one time one can deposit in multiples of 50 and in one month only one deposit is possible and in the year minimum subscription should be % 500 and the maximum ® 1,50,000. Full withdrawal is possible after 13 years but in case of death of the subscriber full repayment Will be made to the legal heir of nominee. Partial withdrawal and loans are also possible, ‘The subscription towards this type of fund is eligible for deduction in the similar manner, as in the case of statutory provident fund. Interest credited in this account is fully exempted, to be' INCOME TAX LAW AND PRACTICE Balances in the public provident fund are not liable to attachment by any coun. pin Tasable Portion of annual accretion to RPE [Section 17(1\ vii]. The Rule 6 of Part « Fourth Schedule defines taxable annual accretion as: of “That portion of the annual accretion in any previous year to the balance at the credit of , employee participating in a recognised provident fund as consists of + an oy Contribution made by the employer in excess of 12% of the salary of the employe oennna credited on the balance to the credit of the employee in so far as sere allowed at 0 rate exceeding such rate as may be fixed by the Central jin this behalf by notification in Official Gazette, shall be deemed to have been the employee in that previous year and shall be included in the total incor previous year and shall be liable to income-tax. ‘The abo tioned rule makes it clear that any contribution by employer to R.P.F, of 12% of employee's salary is to be added in salary ‘About interest the taxable portion will be excess of Interest credited to the balance of R.P.E, ov ‘a rate of interest to be announced by the Government from time to time. ove aver To simplify the above discussion it can be put in the following manner + Taxable annual accretion will consist of: ‘of employer's contribution to Recognised Provident Fund over 12% of employee's lary, and ccess of interest credited to R.P.F. over interest calculated at prescribed rate (i.e., 9.5%) of the balance standing to the credit of employee | Vide Notification No. $.0. 120 (E) dated 27.3.86). ILLUSTRATION 5 jculate the taxable amount of annual accretion to R.P-F. if following information is provided by assessee : (i) Pay @ & 40,000 p.m. Gi) Commission received by him on the basis of turnover achieved by him : % 1,36,000; (iii) Employer's contribution to R.P.F. @ 13% of salary: (iv) Interest credited during the year to R.P-F. Balance @ 12% is % 64,000. SOLUTION and exceeds the Government received by me for that in excess ) Calculation of Taxable Portion of Annual Accretion (i) Employer's contribution to RP.F. @ 13% of z z salary [13% of (4.80,000 + 1.36,000)] 80,080 Less : 12% of salary being exempted 73,920 Taxable Portion 6,160 (ii) Interest credited to R.P.F. Balance @ 12% 64,000 Less : Exempted upto @ 9.5% (64,000 x 9.5%/12) 50,667 Taxable portion 13,333 Taxable portion of annual accretion la [Note = Salary for the above purposes is pay + commission on the basis of turnover achieved by him. Q.No.3 Compute taxable part of annual accretion from information given below : ()) Salary @ 8 48,000 p.m (i) Commission @ 1% of tumover of € 80,00,000 achieved by him during the previous year (ii). Employer's contribution to P.P.F. @ 7,000 p.m (iv) Interest crediied to R.P.F. balance @ 12% p.a. is 7 72,000 {Hints : 7 5,280 + 15,000 = © 20,280)INCOME FROM SALARIES 245 Transferred Balance [Section 17(1)(vi)] When an organisation (a business unit) is new or it is not maintaining proper and regular books of accounts, the provident fund it is maintaining for employees is likely to be unrecognised by the Commissioner of Provident Fund. Later on (may be after few years), when the Commissioner gets satisfied with the working and maintenance of books of accounts, its Provident Fund gets duc on and then recog shall be known as Recognised Provident Fund from the date of the institution of this fund. During the years, when it was unrecognised employer and employee both must have contributed in URPF and interest also must have been credited on the credit balance of such a fund. Now. when unrecognised provident fund is recognised, the credit balance of employee in the URPF is transferred to the Recognised Provident Fund and it will be treated as RPF in future and balance transfered will be called as How much portion of credit balance of URPF is taxable when transferred to RPF. ‘Transferred balance consists of four (4) components. (i) Employer's contribution in URPF (ii) Interest credited on employer's contribution Gii) Employee's own contribution in his URPF (iv) Interest credited on employee’s own contribution. Out of transferred balance, employer's contribution in excess of 12% of his own contribution and interest credited in excess of 9.5% of credit balance shall be taxable in the year in which recognition takes place. Since it is treated as recognised from the very start of this fund, so employer's contribution in excess of 12% and interest credited in excess of 9.5% in all its years when it remains unrecognised, shall be chargeable to tax in the year of its recognition. So, if employer's contribution is less than 12% of employee's salary and interest credited is less than 9.5% of credit balance then nothing is taxable when it is recognised. ILLUSTRATION 6 Mr. A joined a company as an assistant on Ist June 2018 on a consolidated salary of % 40,000 p.m. Since the company was incorporated in the year 2017, so its provident fund is still unrecognised ‘As per terms of the employment contract, both employee as well as employer started contributing in unrecognised provident fund @ 14% of employee’s salary. Interest is credited @ 10% of credit balance. Ultimately, the unrecognised provident fund is recognised on 30th Nov., 2021. Interest credited in provident fund @ 10% upto 30th Nov., 2021 is © 23,500. Find out transferred balance and taxable portion of transferred balance. SOLUTION Year of Salary of employee | Contribution] Contribution| Employer’s| Interest contribution in URPF by | in URPF by|contribution| credit in URPF. employee | employer | in excess @14% @14%. of 12% 1. 1-6-2018 to 40,000 p.m. 56,000 56,000 8,000 313-2019 | 40,000 x 10 = 4,00,000 2. 1-4-2019 to | 40,000 x 12 = 4,80,000] 67,200 67,200 9.600 Interest | credited 3 40,000 x 12 = 4,80,000] 67.200 67.200 9,600 from 1-6-2018 to 4. 40,000 x 8 = 3,20,000 | 44,800 44,800 6,400 16,80,000 2,35,200 | 2,35,200 | 35.600INCOME TAX Law 2.46 AND PRACTIgg ‘Transferred Balance as on 30-11-2021 Employee's contribution in URPF from 1-6-2018 to 30-11-2021 zg Employer's contribution in URPF from 1-6-2018 to 30-11-2021 235.09 Interest credited upto 30-11-2021 “5.9 Transferred balance — ‘Taxable portion of transferred balance == Employer's contribution in URPF over 12% of employee's salary z Interest credited in URPF over 9.5% = 33,600 x (0.5/10) 3.60 ‘Taxable Transferred balance ) 35,289 ‘The balance of unrecognised provident fund, which i transferred to PLP. is called “Pignsz, Balance’ mfered ‘According to Schedule IV, rule 11(4), the amount of taxable portion will be calculated (i) The fund will be treated as R.P.F. from the date fund was instituted, (ii) The employer's contribution of URPF shall qualify for exemption upto 12% of excess shall be taxable. of salary ang (iti) The interest credited to the accumulated balance shall be exempted if rate of i upto 9.54%. Excess if any, is taxable interest was (iv) The taxable amount under point (i) and (ili) above shall be deemed to be the income of previous yearn which fund gets recognition The remainder of the transferred balance sing be ignored ILLUSTRATION 7 Mr. A joined a new job on 1-4-2020 at & 15,000 p.m. due on last day of the month. He stared contributing to URPF @ @ 2,500 p.m. His employer was also contributing same amount, The Fund was recognised from 1-8-2021. Interest credited during 2020-21 at the rate of 11% was % 4,400 and for the period 1-4-2021 to 31-7-2021 was % 3,300. Compute the amount of transferred balance of URPF to RPF as on 1-8-2021 and its taxable portion. aS under: SOLUTION ‘Computation of Transferred Balance and Taxable Portion thereof Previous year 2020-21 % Previous year 2020-21 as Employee's contribution (2,500 x 12] 30,000 Employer's contribution [2,500 x 12] 30,000 Employer's contribution [2.500 x 12} 30,000 Less exempted @ 12% of salary Interest on balance 4,400 [1,80,000] 21,600 8,400 Interest credited @ 11% 4,400 Less exempted @ 95% (4400 x 9.5/1] 3,800 600 Previous year 2021-22 up to Previous year 2021-22 : 31-7-2021 [4 months} : [4 months} Employee's contribution (2,500 x 4] 10,000 Employer's contribution [2,500 x 4] 10,000 Employer's contribution (2,500 x 4] 10,000 Less exempted @ 12% of salary {60,000} 7,200 2.800 Interest on balance 3,300 Interest credited @ 11% 3,300 Less exempled @ 9.5% [3300 x 95/11] 2,850 450 Transferred balance to RPF —— Taxable portion of transferred =§ ————— on 1-8-2021 87,700 balance igINCOME FROM SALARIES 247 ‘Mc. X joined a new job on 1-4-2020 at a salary of & 18,000 p.m. due on last day of the month. He started contibuting to URPF @ % 3,000 p.m. His employer was also contributing same amount. The fund was recognised from 1-10-2021. Interest credited during 2021-22 at the rate of 12% was % 4,800 and for the period 1-4-2021 to 30-9-2021 was % 3,600. Compute the amount of transferred balance of URPF to APF as ‘on 1-10-2021 and its taxable portion. [Hints : Taxable portion of transferred balance % 16,870] Refund from Provident Fund [Section 17(3)(i)] (a) if S.P.F.—Fully exempted u/s 10(11). (b) Amount withdrawn or refunded from Credit balance of Recognised Provident Fund : Any lump sum amount received or refund taken from accumulated credit balance of recognized provident fund shall be fully exempted subject to some conditions as mentioned in rule 8 of part A of the fourth schedule : As per rule 8, exemption is allowed in the following cases : . (i) In case employee is taking the refund after putting up continuous service for a period of 5 years or more. i) In case employee has not completed 5 years service but he is taking the refund as his service has been terminated due to ill-health, discontinuance of employer's business, the contract of service was for less than 5 years or any other case beyond the control of the employee. It simply means that the employee is leaving not of his own sweet will, (iii) In case employee has got job with another employer and his provident fund account was transferred to such new employer and total service with both the employers is 5 years or more. (©) if U.R.P.F—Taxable portion is added in salary income. Taxable portion is equal to employer’s contribution i.e.interest on this part. Interest on own contribution to U.R.P.F. is taxable under the head “Income from other sources.” ILLUSTRATION 8 Mr. Sen left service after 3 years and received a refund of % 60,000 from provident fund on 4-6-2021. It consists of his own contribution plus an equal contribution by his employer plus interest @ 12% p.a. How will it be treated for income-tax purposes, if he was contributing to (@ SPF. (6) REF or (c) URPF. SOLUTION (a) In case he was contributing to S.P-F. it is fully exempted. No part of refund is taxable ufs 10(11).. (O) As he has left service of his own accord before expiry of 5 years, the amount which was exempted earlier shall become taxable. It means the amount of employer's contribution upto 12% of salary and interest on balance of R.P-F. upto prescribed rate (ie. 9.5% p.a.) shall be taxable, (©) In case of U.RPF.—taxable portion ie., employer's contribution plus interest on this part is taxable under the head “salaries” and interest on own contribution is taxable under “Other Sources.” @.No.5 Mr. R was working with a company at a salary of € 18,000 p.m. He was contributing to unrecognised Provident fund. On 31-12-2021 he lett the job and received % 2,60,000 as refund from URPF. It consisted of € 1,12,000 as his own contribution, & 1,12,000 as employer's contribution and % 36,000 as interest (on accumulated balance. What will be the Keatment of the aforesaid amount during the previous year 2021-22 {Hints ; Taxable under the head salary € 1,90,000 (ie. employer's contribution and interest thereon) and taxable under the head income from other sources % 18,000 (i.., interest on Mr. R's own conttibution)]218 INCOME TAX LAW AND PrAcTicg New Pension System for Central Government and other Employees joining 1 jobs on or after 1-1-2004 [NPS] iw Cental Government of India introduced a New Pension System for its employees who y after [-1-2004 and now this scheme is also applicable in case of ether emp eo in, the employee is required to contribute 10% of his monthly satay oye also mandatory forthe employer to contebute 10% af empin ees join the service on or Under this 5} notified pension acc salary towards this Tax treatment of employee and employer's contribution 1. Employer's contribution in N.P.S. is simply an additional salary to the employee and so fy of all it is included in the salary income of the employee under the head “Salaries”. aL 2, Contribution made by employee is eligible for deduction out of employce’s gross 4 income ie., u/s 89CCD(1) to the extent of 10% of employee's salary. total 43. Contribution made by employer is also eligible for deduction upto 10% of employee's sal (upto 14% of salary in case of Central Government Employees), This deduction is to be allowed oo, of employee's G.T.I. u/s 80CCD(2). out 4. From assessment year 2016-17, an employee contributing in NPS is allowed to contribute a additional amount upto % 50,000 p.a. and the same shall be allowed as deduction w/s 80CCD(IB) ant this deduction of % 50,000 shall be allowed in addition to above mentioned deduction of & 1.50,009 ufs 80C, 80CCC, 80CCD(1) put together. 4 Basic Salary + Dearness Allowance (If under terms of employmenty + Commission if paid at a fixed percentage of turnover achieved by employee. [Meaning of Salary IMPORTANT POINTS (9 The total amount of deductions u/s 80C, 80CCC and 80CCD(1) (other than deduction in respect of employer's prescribed contribution) shall not exceed % 1,50,000 plus upto & 50,000 additional deduction in case employee contributes additional amount ‘upto Z 50,000 in NPS. (i) The deduction u/s 80CCD(2) in respect of employer's prescribed contribution shall be in addition to the above combined ceiling of 1,50,000. 5. Pension received out of this fund by employee or his nominee. After retirement, the employee will get pension every month out of this pension account and the pension so received will be taxable in the hands of the recipient of pension Any amount received out of this fund by employee or his nominee as pension shall be fully taxable in the year of receipt 6. Tax Treatment of amount received/receivable at the time of closure or opting out of NPS. (i) In case assessee makes a partial withdrawal out of credit balance in NPS—25% of such withdrawal shall be exempted and balance will be taxable in the year of withdrawal. Gi) In case assessee opts out or closes his account and withdrawals the amount—40% of such withdrawal shall be exempted and balance will be taxable (ii) In case the assessee dies and the nominee of the assessee withdrawals the amount then nothing is taxable. 7. Treatment of annuity purchased. For the purposes of this section, the assessee shall be deemed not to have received any amount in the previous year if such amount is used for purchasing an annuity plan in the same previous year. 8. Tax treatment of pension reccived out of annuity plan purchased. It shall be fully taxable as income of the previous year in which such sum is received. ILLUSTRATION 9 Mr. Advani joined central government job on Ist October 2019 in the grade of € 30,000-1,000- 50,000. He is entitled to get dearness allowance @ % 5,000 p.m. as per terms of employment. Mr. Advani contributes 16% of his salary towards National Pension Scheme (NPS) and a similarINCOME FROM SALARIES 2.19 contribution was made by employer also, Find out Mr, Advani year 2022-23. SOLUTION SOLUTION ; Salary of Mr. Advani for the Assessment year 2022-23 (Previous year 2021-22) 1-10-2019-30-9-2020 30,000 p.m. 1-10-2020-30-9-2021 31,000 p.m 1-10-2021-30-9-2022 32,000 p.m. 1-10-2022-30-9-2023 33,000 p.m. Salary from 1-4-2021 to 37-3-2022 salary income for the Assessment 1-4-2021-30-9-2021 31,000 x 6 86,000 1-10-2021-31-3-2022 32,000 x 6 = 1,92,000 3,78,000 Basic salary 3,78,000 D.A. (as per terms of employment) 60.000 Central Government contribution in pension fund Account @ 16% of salary plus D.A (3,78,000 + 60,000) 70,080 Gross Salary 5,08,080, Less : Deductions u/s 16 : Standard deduction u/s 16(ia) 50,000 Salary income 080 Amount eligible for deduction u/s 80CCD (1) Contribution made by employee towards pension fund (but subject to maximum of @10% of salary) 43,800 Deduction w/s 80CCDUB) Employee's own contribution in NPS over 10% of salary = 26,280 Amount eligible for deduetion u/s 80CCD(2) Employer's contribution towards pension fund % 70,080 but subject to. maximum of 14% of employee's salary of % 4,38,000 (Central Govt. Employee) 61,320 Notes: 1. D.A. received as per terms of employment shall be treated as part of basic salary for calculating central government or employee’s contribution in Pension fund. So D.A. forms part of basic salary for all other calculations based upon salary 2, Deduction w/s 80C. 80CCC and SOCCD(1) shall be restricted to & 1,50,000. 3. An additional deduction of upto % 50,000 is allowed wis SOCCD(1B). 4. Employer's contribution in NPS upto 10% of employee's salary (14% in case of Central Govt. Employees) is allowed as deduction ws 80CCD(2). ILLUSTRATION 10 Mr. Raja joined a new job in April 2016. His particulars of salary for the previous year 2021- 22 are as under : Basic Salary % 40,000 p.m. DA. % 20,000 p.m. (50% enters) Other taxable allowances % 12,000 p.m. Employer and employee both are requited to contribute @ 12% of employee"s salary towards employee's pension scheme. Mr. Raja’s other eligible savings like provident fund, L.LC. contribution ete, are & 96,000 p.a. During the year Mr. Raja contributed an additional amount of € 60,000 in NPS. Caleulate Mr. Raja's income and deduction u/s 80C, 80CCD(1), 80CCD(1B) and 80CCD(2),pesg ny Sagem COME TAX LAW Ati pay Toe SOLUTION . . Computation of Mr. Raja’s Income and deduction u/s 80C, 80CCD, 80CCDiB) & 80 IC | | ‘Chiay Basic salary @ % 40,000 p.m. DA. @ 2 20,000 p.m. (50% enters) 480.5 Other taxable allowances @ % 12,000 p.m. ane Employer's contribution in Pension Scheme @ 12% of salary, Taso Le, 12% of 4,80,000 + 1.20.000 7. Gross salary 2 Deductions u/s 16 : Standard deduction u/s 16(ia) 9.365005 Soy income being Gross Total Income = Less : Deductions ws 80 86,009 Uss 80C + Eligible savings 96,000 Us BUCCDIT) + Employee's contribution in Pension Scheme @ 12% of 6,00,000 60,000 (but restricted to 10% of employee's salary of % 6,00,000) 1,56,000 Deductions w/s 80C, 80CCC and 80CCD(1) are subject to an overall limit of @ 1.50,000 u/s 80CCE, so deduction allowed is restricted to 1,50,000 Uss 80CCD 1B) Additional amount contributed in NPS by the employee & 60,000 50,000 but deduct Us 80C Employer's contribution towards employee's pension scheme & 72,000 but subject to maximum of 14% of employee's salary, ie, 14% of 6,00,000 = 84,000 72,000 2,72,000 Total Income 6,14,000 { Note : Employers contribution in notified pension fund will be excluded while calculating monetary | | of & 1,50,000. 1.4, ALLOWANCES [SECTION 17(3)] ‘The term allowance has been derived from the word ‘to allow’. As per Oxford Dictionary the word “Allowance” means “any amount or sum allowed regularly”. As such allowances are given in cash along with salary by the employer. These allowances are given to an employee to meet some specific type of loss or expenditure of the employee or to help him to meet certain type of expenses which the employee might have incurred in the performance of duties assigned by his employer. For example, house rent allowance is given to help the employee to pay house rent or to get a house 0 rent. These are divided into three categories on the basis of their tax treatment. These are : (A) Fully Exempted Allowances (1) Foreign allowance given by Govt. to its employees posted abroad is fully exempled. (1) House rent allowance given to Judges of High Court and Supreme Court is exempted. (ai) Sumptuary allowance given to Judges of High Court and Supreme Cour exmpted, 1 is fullyINCOME FROM SALARIES: 221 (B) Fully Taxable Allowances 1, Dearness Allowance/Additional Dearness Allowance/High cost of living allowance/Interim Relief. Employces having fixed income suffer the most duc to rise in prices and to compensate their Joss, they are paid such allowances. So D.A. is nothing but an additional salary and it is fully taxable. Some times it is mentioned that (i) D.A. enters into pay for service benefits; or (ii) D.A. enters into pay for retirement benefits; or (iif) D.A. is given under the terms of employment; or (iv) Dearness pay, A B Cc Fully Exempted Fully Taxable Partially Taxable 1. Foreign Allowance 1. Deamess Allowance 1. House Rent Allowance only in case of Additional Deamess 2. Entertainment Allowance for Govt. Government employees allowance employees (sce details) posted outside High Cost of living 3, Allowances covered ws 10(14)(i) India allowance read with Rule 2BB(1) 2. House rent allowance 2. City Compensatory Allowance (@) Helper Allowance 2. House rent allowance 3. Capital Compensatory ‘) Uniform Allowance given to judges of High Allowance (iti Academic Allowance Court and Supreme 4. Lunch Allowance (iv) Conveyance Allowance Cour 5. Tiffin Allowance (v) Travelling Allowance 3, Sumptuary Allowance 6. Marriage Allowance (vi) Daily allowance given to judges of High 7. Family Allowance 4, Allowances covered w/s 10(14)(ii) Court and Supreme Court 8. Deputation Allowance read with Rule 2BB(2) 4, Allowances from U.N.O. 9. Wardenship Allowance (@ Any special allowance in the 5. Allowance to teacher or 10. Non practicing Allowance nature of Composite Hill professor from SAARC 11. Project Allowance compensatory Allowance or member States 12. Overtime Allowance: High Altitude Allowance or 6. Allowance to Chairman/ 13. Fixed Medical Allowance Uncongenial Climate member of Union Public 14, Entertainment Allowance for non- Allowance or Snow Bound Service Commission Govt. employees Area Allowance or Avlanche {fully exempted upto 15. Water and Electricity Allowance Allowance ALY. 2020-21) 16. Servant Allowance (ii) Any Special Compensatory 17. Holiday Trip Allowance Allowance in the nature of 18. Transport Allowance for normal border area or remote area or employees [w.e.f. AY. 2019-20] difficult area or disturbed area 19. Any other allowance which is Allowance neither fully nor partially exempted (iif) Transport Allowance for specified 20. Allowance to Chairman/retired handicapped employees Chairman, member or retired (iv) Tribal Area Allowance member of UPSC [w.e.f. AY. Running Allowance given to 2021-22) (0) employees of transport sector, (vi) Children Education Allowance (vii) Hostel Expenditure Allowance (iif) Compensatory Field Area Allowance (x) Compensatory Modified Field Area Allowance (2) Special Allowance in the nature of counter insurgency allowance given to the members of armed forces operating in areas away from their permanent locations for a period of more than 30 days,: oy INCOME T/ TAX LAW AND FRACTION ir covered under category A (Fully exempted DOF ca tsa) shalt ily a aly ere, eo Cap is important to note that vie. A.Y. 2021-22, if an employce opts to be tax such an employee except the following allowances : loved (a) Any allowance granted to meet the cost of travel on tour or transfer; (©) Daily allowance granted to tour ot for the period of journey in connection with transfer the orinary al charges incur hy an employes on aecount of shee om ha 9 fy ai the expenditure incurred ape (o) Any allowance granted to meet the expen sumed on conveyance j ‘oa employment of profit (ie. conveyance allowance), °” Pe*rmance g¢ (2 ‘Transperatlowance yo € 3200 pm. granted to dvyang Chandicspped employ) his expenitre for commuting berwcen the pace of his residence andthe paces) RS In other words, only above mentioned allowances covered under point (a) 1 (4) shall eon be exempt as provided under section 10 for an employce who opts to HSBAC. be taxed under sectie It is treated as part of salary for calculation of all benefits such as rent free house, house rent allowance, bonus, gratui benefits. In case any part of D.A. enters salary for calculation of only some of the retire (not all) then that part of D.A. will not form part of salary for the calculation of any reti ILLUSTRATION 11 X receives salary of & 40,000 p.m. and D.A. @ & 10,000 p.m. His employer declares half of A, a pay (ce., enters into pay for service benefits). Compute his salary. Provident fund, y leave encashment and all other vera ment benefits irement benef, SOLUTION His salary shall be computed as under : z Salary @ F 40,000 p.m. 4,80,000 D.A. (which enters into pay for service benefits) 60,000 Rest of D.A. 60,000 For all practical purposes salary of Mr. X shall be % 5,40,000 and not & 4,80,000. Q. No. 6 Compute gross salary from information given below (Salary @ % 25,000 p.m. (i) DA. @ % 5,000 p.m. 2,500 p.m. enters into pay for service benefits] (ii), Advance salary for two months 55,000. (i) Employer's contribution to R.P.F. & 3,500 p.m. [Hints : Gross salary % 4,17,400] 2. City/Capital compensatory Allowance. These are given to compensate for the high cost of living in a particular big city of India or any other capital city. These are also fully taxable. 3. Lunch/Tiffin/Marriage/Family/Deputation/Wardenship/Non-practising/Project/Overtime! Fixed Medical Allowance. These allowances are fully taxable. 4. Entertainment Allowance to Non-government Employees. This allowance is fully taxable irrespective of any expenditure incurred on entertainment of guests or customers. A nom government employee is not entitled to any deduction u/s 16(ii) in respect of any such allowance received. But in case any amount is reimbursed against any expenditure incurred by employee © entertainment of guests or customers it shall be fully exempted.INCOME FROM SALARIES 204 5. Allowances to Chairman/Member of UPSC. W.e.f. A-Y. 2021-22, any allowance received by Chairman or retired Chairman, member or retired member shall be taxable. (C) Partially Taxable Allowances 1, House Rent Allowance Sometimes the employer docs not provide rent-free accommodation but instend makes a provision to pay some amount in cash, so that the employee may be compensated to some extent as far as rent is concerned. The amount of cash paid is known as House Rent Allowance. Out of the total HLR.A. received, an amount equal to the minimum of the following three items is exempted from tax ws 10(13A) read with Rule 2A and balance, if any, will be added in the salary of the employee for tax purpose. The three items are : (8) 50% of salary in case of Bombay, Calcutta, Delhi and Madras, and 40% of salary in case of all other cities, or (i) Actual House Rent Allowance received; or (ii) The amount by which the actual rent paid by the employee exceeds 10% of his salary. “ ‘Taxable HRA = Actual HRA received - Exempted amount. IMPORTANT NOTES ) Meaning of Salary Salary = Basic + DA (Enters) / DP + Commission on turnover. |n Gestener Duplicators (P) Ltd. vs. CIT (1979) (S.C.), it was held that in case a commission is given fo an employee and itis a fixed % of turnover achieved by such employee, such commission shall also be treated as part of the salary for House Rent Allowance. (if Salary to be taken. For HRA exemption, salary is to be taken on due basis in suspect of the period during which rented accomodation is occupied by the employee during the previous year. (i) Cases when HRA is fully taxable. HRA is fully taxable in any of the following cases : (2) If employee is living in his own house, or (0) It employee is living in a house for which he is not paying any rent, or (6) If rent paid does not exceed 10% of salary. (d) Ifthe employee opts to be taxed u's 115BAC i.e. under new concessional tax regime. [w.e.f, A.Y. 2021-22) (iv) H.R.A fully Exempted. In case HRA is rece ved by judges of High Court under High Court Judges Condition of service) Act 1954 and Supreme Court Jidges under Supreme Court Judges (conditions of Service) Act, 1958 shall he exempted. (v) The Exemption of HRA u/s 10 (13) read with rule 24. shall be available even if employee is living a rented houses at a place other than the place of his employment, ILLUSTRATION 12 Mr. Hari is employed at Amritsar on a salary of € 30,000 p.m, The employer is paying H.R.A. of € 8,000 p.m, but the actual rent paid by him (employee) is € 12,000 p.m. He is also getting 2% Commission on turnover achieved by him and turnover is & 50,00,000, Calculate his Gross Salary, SOLUTION Computation of Gross Salary of Mr. Hari z z Salary @ & 30,000 p.m. 3,60,000 Commission @ 2% of turnover 1,00,000INCOME TAX LAW any 2.24 Pere House Rent Allowance received 96,000 Less : Exempted w/s 10(13A) (See Note 1) 96,000 Taxable H.R.A. — Gross Salary Ta = Note 1. Exemption of H.RA. ws 10(13A) read with rule 2A upto least of the following + = (@ Actual H.R.A. received 96,000 easy (i) Excess of rent paid over 10% of salary (1,44,000 ~ 46,000) 98,000 (iii) 40% of salary (Amritsar) 1,84,000 Exempted H.R.A. = & 96,000 ILLUSTRATION 13 Mr. Ganesh is employed with a company at Delhi. During the previous year 2021-29, he yu” ¥ 60,000 pam. as basic salary and & 20,000 pam. as house rent allowance. He is also geting @ 965 Pam. as deamess allowance, but only 50% shall be taken into account to calculate value of ee retirement benefits. In Delhi he is having his own residential flat which he bought in 2016 On 28th June, he was transferred to his native place of Nagpur where he stayed with his parents upto 31st October and shifted to a rented house on Ist November and started paying rent of & 24,009 p.m. He did not pay any rent when he was staying with his parents, Find out the amount of HRA, chargeable to tax for the Assessment Year 2022-23. SOLUTION Calculation of Taxable Amount of H.R.A. for A.Y. 2022-23 For calculation of value of taxable amount of House Rent allowance, the year is to be divided in 3 parts, 1. April to June (In Delhi) During this period of 3 months, he stayed in his own house and did not pay any rent. So, amount of HRA. received will be fully taxable, ie, 20,000 x 3 = 60,000 0) 2. July to October (At Nagpur) During this period of 4 months, he stayed with his parents and also did not pay any rent, so HRA received shall be fully taxable ie., 20,000 x 4 = 80,000 3. November to March (At Nagpur) During these 5 months, he stayed in a rented accommodation. Salary for Calculation of taxable value of HRA ii) Basic Salary = 60,000 x 5 = 3,00,000 D.A. = 20,000 x 5 = 1,00,000 (D.A. to be taken as part of salary ie, 50%) 50,000 3,50,000 Rent paid for 5 months @ % 24,000 p.m. = 1,20,000INCOME FROM SALARIES 2.25 Exempted Portion of H.R.A. Least of following 3 amounts shall be as exempted— (1) HRA received = 20,000 x 5 = 1,00,000 (2) 40% of salary being city of Nagpur = 1,40,000 (3) Rent paid—10% of salary 1,20,000 - 10% of 3,50,000 i.e., 35,000 = 85,000 (Least) ie, & 85,000 will be exempted, +. Taxable amount of HRA for 5 months = 1,00,000 - 85,000 = 15,000 (iti) Total taxable amount of HRA = (i) + (ii) + (iii) = 60,000 + 80,000 + 15,000 = 1,55,000 = % 1,55,000 Q. No. 7 ‘Compute Gross Salary from information given below for each situation separately = () Salary @ & 30,000 p.m. (i) D.A. @ 6,000 p.m. (i) C.C.A. @ 71,000 pm. (i House Rent Allowance @ € 8,000 p.m. (4 Commission on turnover achieved by him is Z 40,000. Situation (a) living in own house (8) Living in rented house at Delhi and D.A. enters into pay for retirement benefits and rent paid Is & 7,000 p.m. (@)_ Living in rented house at Chandigarh and D.A. does not enter into pay for retirement benefits and rent Paid is @ 10,000 p.m. [Hints ; Situation (a) gross salary 5,80,000 (6) % 5,43,200 (¢) ¥ 5,00,000] Q. No. 8 Mr. Jaideep who is working with a company at Dethi submits the following information about his salary income for the previous year 2021-22 z Salary 28,000 p.m. Dearness allowance 10,000 p.m. Bonus 28,000 His employer paid him € 10,000 p.m. as house rent allowance upto 30-11-2021 and it was raised to € 12,000 p.m. from 1-12-2021. He lived with his parents in a house owned by his father and no rent was paid by him. From 1-12-2021 he shifted to a rented house and paid % 15,000 p.m. as rent Compute his Gross Salary for the assessment year 2022-23 if his salary is due on last date of month. [Hints : Exempted H.R.A. & 48,000. Gross Salary © 5,64,000] 2, Entertainment Allowance to Government Employees Discussed Later under section 16. 3. Allowances covered u/s 10(14)(i) i.e., Official Allowances These allowances are given to meet employee’s expenses incurred in performance of his official work or duties and in case any part of these allowances is saved, then the same shall be taxable in the hands of employee. . Following are the prescribed allowances for the purpose of section 10(14)(i) : (@) Helper Allowance. It is exempted upto actual amount spent on engaging a helper required to perform the official duties. (ii) Uniform Allowance. It is also exempted upto actual expenditure incurred on acquiring or maintaining of the official uniform. Excess, if any, will be taxable.206 INCOME TAX LAW AND PRACTICN (ii) Academic Research Allowance. It is exempted upio actual expenditure incuneg taxable. for (#) Conveyance Allowance. It is exempted upto actual expenditure incurred in performay official duties. In case amount received is more than actual expenditure, excess, if any ice of be taxable. Ys will (0) Travelling or Transfer Allowance. tis exempted upto actual expenditure incurred fo purposes of employment. Excess, if any, will be taxable. the Any allowance (ty whatever name it may be called) grated to meet the cost of tay tour or on transfer shall be exempted. on (v9) Daily Allowance : Any allowance whether granted to employee (While on tour or op th perc of joumey in conection with anf) to meet the ordinary daly charges ino, by such employee on account of absence from his normal place of employment shew also be exempted. Such allowance shall include any sum paid in connection with transfer, Packing ang transportation of personal effects on such transfer. Allowances mentioned in point (Dt) are exempt upto the amount spent by the employe for the purpose for which these allowance are given to the employee. So, exemption shall be the least of following two amounts— (a) The amonunt of the allowance received. (2) The amount actually spent by the employee for the purpose for which the allowance is given Allowances covered u/s 10(14)(ii), i.e. Personal Allowances Exemption regarding these allowances has been provided and fixed under rule 2BB and so the amount given under rule 2BB shall be exempted and excess, if any, will be taxable. The amount of actual expenditure incurred by the employee in this regard is to be ignored and hence it is exempt 0 the extent of — (@ Amount of actual allowance received by the employee, or (i) Amount specified under rule 2BB: whichever is less. Following are the prescribed allowances for the purposes of Section 10(14)(ii) alongwith Prescribed amount of exemption ( Any special allowance in the nature of Composite Hill Compensatory Allowance/High Altitude Allowance/Uncongenial Climate Allowance/Snow Bound Area Allowance! Avalanche Allowance : Exemption allowed upto % 300 p.m, to & 7,000 p.m. (ii) Any Special Compensatory Allowance in the nature of Border Area Allowance/Remote Area Allowance/Difficult Area Allowance/Disturbed Area Allowance Exemption allowed upto & 200 p.m. to & 1,300 p.m. (ii) Compensatory Field Area Allowance Exemption allowed upto & 2,600 p.m. (iv) Compensatory Modified Field Are: Exemption allowed upto 2 1,000 p.m, (%) Counter Insurgency Allowance/Compensatory Field Arca Allowance Exemption allowed upto 3,900 p.m. AllowanceINCOME FROM SALARIES 227 (vi) Highly Active Field Area Allowance Exemption allowed upto % 4,200 p.m, (vii) Underground Allowance given to coal mine workers Exemption allowed upto % 800 p.m. (vifi) Island Duty Allowance given to Armed Forces posted in Andaman & Nicobar and Lakshdweep group of islands Exemption allowed upto & 3,250 p.m. (ix) Allowance given to retired Chairman and members of UPSC An allowance given for getting the service of an orderly and for getting services of secretarial assistance on contract basis or & 14,000 per month, whichever is less, is exempt. (x) Transport Allowance for Specified Handicapped Employces. With effect from Assessment Year 2019-20, the exemption regarding transport allowance has been discontinued for normal employees. However, the exemption shall continue to be allowed @ & 3,200 p.m. to employees who are blind/deaf or dumb or orthopedically handicapped or disability of lower exremities. (xi) Tribal Area Allowance. This allowance is exempted upto € 200 p.m. in the States of Madhya Pradesh, Tamil Nadu, Uttar Pradesh, Karnataka, Tripura, Assam, West Bengal, Bihar and Orissa. (xii) Any Running Flight Allowance. granted to an employce of transport system to meet his personal expenditure during the duty performed in the course of running of such transport from one place to another place provided that such employee is not in receipt of daily allowance.......it is exempted upto 70% of such allowance or % 10,000 p.m. whichever is less. (xiii) High Altitude Allowance. This type of allowance is given to armed forces operating in high altitude areas. It is exempted as under : Altitude of 9,000-15,000 feet oe upto & 1,060 p.m Altitude above 15,000 feet a upto © 1,600 pn. (xiv) Children Education Allowance. If any amount is given by employer to employee as education allowance for the education of own children in India, it shall be exempted upto 100 p.m. per child for two children only. Example. Mr. X is employed by an MNC and is paying him € 500 p.m. as Children Education Allowance to all the three children who are studying in a school at Bangalore. Solution Exemption allowed : 1 1 0 z zg zg Received 500 p.m. 500 p.m. 500 p.m. Exemption allowed 100 p.m. 100 p.m. NIL Example. Mr. X is employed ina company at Cochin and is getting this allowance for all his three children studying in a school. I ne ¥ W % 80 pm. % 150 p.m. % 200 pm. Find out the exemption allowed to him. Solution. Exemption allowed to Mr. X shall be as under ; 1 u n NIL 100 p.m. 100 p.m,INCOME TAX LAW AND PRACT; CE PORTANT NOTES () Exemption is allowed for any two children of the employee, The term ‘child’ include: legal children including a step chid and a legally adopted child but does not include? children 1 orang (i) Child include both major or minor child. (ii). Exemption shall be allowed irrespective of the actual expenditure incurred by the ‘on the education of the children Mploye (iv) In case employee is getting both education as well as hostel allowance; he ig aly separate exemption for education and hostel allowance but for only two children, lowed 2.28 (2) Hostel Expenditure Allowance. Any allowance granted by employer to meet the hog, expenditure of employees’ children it shall be exempted upto & 300 p.m. for per eh maximum for two children only. ild (wv) Any Special Allowance. In the nature of counter insurgency allowance given to th members of the armed forces operating in areas away from their permanent locations for ¢ period of more than 30 days shall be exempted upto & 3,900 p.m. ILLUSTRATION 14 During the previous year 2021-22, an employee receives following allowances : (J) Children education allowance : His three children are studying in 7th, 9th and +1 classes and he is receiving € 300 p.m. per child (2) For +1 class son, he is getting & 500 p.m. (3) He is posted in Chhattisgarh tribal area for which he is rece’ allowance. (4) The area of his posting has been notified High Altitude area for which he is getting & 1,000 p.m, as High Altitude area allowance. (5) Area of his posting is also notified as disturbed area due to naxalite problem and for this, he is getting another & 2,000 p.m. as disturbed area allowance or it may be called as hostel expenditure allowance. ing & 400 p.m, as tribal area underground allowance. (6 For commuting between the place of his residence and the place of his duty, he is receiving % 1,000 p.m. (7) Because of the nature of place of his posting, he is being given & 1,000 p.m. to get the services of a helper. He has engaged one such helper and he is paying & 1,500 p.m. toa helper. SOLUTION Name of allowance Amount of Amount of Amount of allowance received allowance exempted allowance taxable (2) 1. Children education allowance for % 150 p.m. per child 100 p.m. per child 3,000 3 children € 150 p.m. per child for 3 children for 2 children only 2. Hostel expenditure allowance 500 p.m. % 300 p.m. 2,400 3. Tribal area allowance % 400 p.m. % 200 p.m 2.400 4. High altitude allowance % 1,000 p.m. Fully exempted NIL, 5. Disturbed/under ground area 2000 p.m % 800 p.m. 14,400 allowance 0 6. Conveyance allowance & 1,000 p.m NIL 2 % 1,000 p.m Fully exempted, as he is 7. Helper allowance paying more than he gets 1 34,200 Total taxable amount 3420"INCOME FROM SALARIES 229 Only few allowances covered u/s 10(14) to be exempt under new tax regime as contained in section 115BAC [W.e.. A.Y. 2021-22] [Notification No. 38/20, dated 26.06.2020] Notwithstanding anything contained in section 10(14), an employee who has exercised his option to be taxed under section 115BAC (i.e. under new slab rate regime) shall be entitled to exemption only in respect of the following allowances : (a) Any allowance granted to meet the cost of travel on tour or transfer; (®) Daily allowance granted on tour or for the period of journey in connection with transfer, to meet the ordinary daily charges incurred by an employee on account of absence from his normal place of duty; (c) Any allowance granted to meet the expenditure incurred on conveyance in performance of duties of an office or employment of profit (i.e. conveyance allowance) + (d) Transport allowance upto & 3,200 p.m. granted to a divyang (handicapped employee) to meet his expenditure for commuting between the place of his residence and the place of his duty. MEANING OF SALARY FOR DIFFERENT PURPOSES 1. For H.R.AJPF/Gratuity and Leave Pay + D.P. + D.A. (which enters) + Commission on tumover encashment achieved by him 2. For specified cases ‘All what he gets in cash less exemptions, if any, less deductions u/s 16, must be more than % 50,000 3. For deduction w/s 16(ii) Only Basic Salary 4. For gratuity under Payment of Pay + Full D.A. Gratuity Act 5. For rent free house Pay + D.P + D.A. (which enters) + any fee, conimission, bonus (except gratutious bonus) + All fully taxable allowances + ‘Taxable portion of other allowances + Taxable E.A. + Leave encashment pertaining to current year. .LUSTRATION 15 Mr. Ramesh Swain is employed at Hyderabad at a Basic Salary of € 25,000 p.m. and he is also getting following allowances : x 1, Dearness Allowance 2,000 p.m. 2. Lunch Allowance 1,000 p.m. 3. Servant Allowance (He is paying & 1,200 p.m. to a servant) 1,000 p.m. 4, Transport Allowance 2,000 p.m. 5, Education Allowance @ 200 p.m. per child for three children. 6. Hostel Allowance to one child 500 p.m. 7. Conveyance Allowance (He does not spend anything) 800 p.m. 8. Overtime Allowance 2,000 p.m. 9. Officiating Allowance 2,000 p.m. 10, Cash Allowance 1,200 p.m. 11, Entertainment Allowance 2,000 p.m. 12, Medical Allowance 800 p.m. 13, City Compensatory Allowance 600 pm. 14, House Rent Allowance 5,000 p.m.INCOME TAX LAW aij D “ is posti se ina PRAGTICR He is having a family house at the place of his posting but he is living ying a rent of © 7,000 p.m. Find out his Gross salary : (A) If he does not opts to be taxed ws IISBAC ie. under new slab rates: (B) If he opts to be taxed u/s 115BAC. in a rented house 7 is pa md SOLUTION (A) Computation of Gross Salary of Mr. Ramesh Swain if he does not opts for tax u/s 115BAC ic Salary @ 25,000 p.m. aaa Dearness Allowance @ 2,000 p.m, oe s . 24.000 Lunch Allowance 12,009 Servant Allowance (Taxable if servant is for his personal use) 12, Transport Allowance Received—Fully Taxable ant Education Allowance Received 7.200 Less : Exempted 100 x 2 x 12 2,400 Hostel Allowance Received & 500 p.m. 6,000 “800 Less : Exempted 300 p.m 3,600 2.400 Conveyance Allowance @ 800 p.m 600 Overtime Allowance @ 2,000 p.m. 24,000 Officiating Allowance @ 2,000 p.m. 24,000 Cash Allowance @ & 1,200 p.m. 14.400 Entertainment Allowance @ & 2,000 p.m. 24,000 Medical Allowance @ & 800 p.m. 9,600 City Compens:tory Allowance @ % 600 p.m. 7,200 House Rent Allowance Received @ & 5,000 p.m. 60,000 Less : Exempted Least of 3 items (8) Received & 60,000 (ii) 40% of Salary & 1 (iii) Rent paid—10% of salary 84,000 - 30,000 54000 6 99 GROSS SALARY 4,98,000 (B) Computation of Gross Salary of Mr. Ramesh Swain ie if he opts to be taxed w/s 11SBAC Basic Salary (25,000 x 12) 3,00,000 Deamess Allowance (2,000 x 12) 24,000 Luneh Allowanes 12,000 Servant Allowance 12,000 Transport Allowance 24,000 Children Education Allowance {fully taxable] 7.200 Children Hostel Allowance [fully taxable] 6,000 Conveyance Allowance 9,600 Overtime Allowance 24,000 Officiating Allowance 24,000 Cash Allowance 14,400INCOME FROM SALARIES 2.31 Entertainment Allowance Medical Allowance City Compensatory Allowance House Rent Allowance [fully taxable] GROSS SALARY Note. 1. With effect from assessment year 2019-20, Transport allowance is fully taxable. Exemption (upto 3,200 per month) shall be allowed in case of blind, handicapped (Divyang) employees only. 2. In case employee opts for reduced tax slab rites, exemption regarding ILR.A. children education owed and 40 these will be fully taxable. pted only if it is actually spent in discharging his official duties. Wer section LISBAC (Le. under new tax reytime), exemption in respect 1 still be available. allowance and children hostel allowance will Conveyance allo Is important to note U of conveyance allowance as p RQUISITES [Section 17(2)] Us 17(1) ‘Salary’ includes the value of any perquisite allowed or am to employee. ‘The world ‘perquisite” has not been defined under Inc x Act 1961, Perquisite simply means any casual emolument attached to lish Dictionary also defines perquisite as “any castal emolument, fee or profit atached to an office or position, in addinon to salary or wages”. Perquisites may be given in a variety of forms, If the per¢ employee it will not be taxable, [Barclays Bank Lid. ived in cash or in kind, For voluntarily or under a contr -e will be exer ity provided by employer isite docs not accrue to Naylor 39 (1.C.) 256}. They may be {ax purposes it is immaterial whether the perquisites are paid ion obliga Value of perquisites is charg Ie 10 tax under the head salary only if these perks are received by an employee from his or hier employer and employer may be a present, past or prospective one. In case any perk has been received from a person other than employer, then also the value of petk is taxable but either under the head ‘Business or Profession’ or ‘Income from other Sources’ Any benefit derived by an employce from his employer whether received in lump-sum or is being received every month and if such benefit comes out of employment agreement and it is providing « personal benefit to the employee or his family members, vi chargeable to tax under the head salary, of such a benefit is Under section 17(2) perquisites are of the following types (i) the value of rent-free accommodation provided to the asses [See. I7(2)(i)] + (ii) the value of any concession in the matter of rent respecting any accommodation provided to the assessee by his employer (Sec. 17(2)(ii)] + iii) the value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases ; (a) by @ company to an employee who is a director thereof: (b) by a company to an employee being a person who has a substantial interest in the company ; (©) by any employer (including a company to an employee to whom the provisions of section 17(2)(iii(a) and (b) do not apply and whose income under the head “Salaries”, exclusive of the value of all benefits or amenities not provided for by way of monetary payment, exceeds © 50,000 (Sec. 17(2Miti)] 3 by his employer2.32 INCOME TAX Layy 0 | “For the removal of doubts, itis hereby declared that the use of an a company or an employer for journey by the assessee from hig restore Providag ather place of work or ftom such offee or place to his residence, shal ne 9 8 offcg a benefit or amenity grantes or provided to him tree of cost or at conete dey Purposes of this sub-clause.” [Explanation to Section 17(2)(i)) Slonal rate my (iv) any sum paid by the emplover in respect of any obligation which, bas for would have been pasable by the employee [Employee's eleciicin, ill pat Pen employer} [Sec. 17(2Kiv)} : Paid bya (©) any sum payable by the employer, whether directly through a fund, othep than provident fund or an approved superannuation fund to effect an assurance on iva assessee or to effect a contract for an annuity [Sec. 17(2)(v)); "life of he (vi) the value of any specified security or sweat equity shares allotted or transferred gi indirectly, by the employer or former employer, free of cost or at concessional rag” assessee [Section 17(2M vi]: rate 10 ty (oii) the amount or the aggregate of amounts of any contribution made to the account assessee by the employer— the (a) ina recognised provident fund; (0) in the scheme referred to in sub-section (1) of section 80CCD; (c) in an approved superannuation fund, to the extent it exceeds €7,50,000 in a previous year [Sec. I7(2\vii)] [wef AY. 20212) (iia) the annual accretion by way of imerest, dividend or any other amouna of snilon ature during the previous year to the balance at the credit of the fund or scheme referred ton sub-clause (vit) t the extent it relates 10 the contribution referred to in the said subelocs which ts included in total income under the said sub-clause in any previous year ‘computed in such manner as may be prescribed [Sec. 17(2)(viia)} def. AY, 2021-22]: and (wii) the value of any other fringe benefit or amenity as may be prescribed. [Sectionl7(2\vi ‘Provided’ that nothing in his clause shall apply 10 and | (0 the value of any medical treatment provided to an employee or any member of his fan {in any hospital maintained by the employer + any sum paid by he employer in respect of any expenditure actually incured by the employee on his medical treatment ar of any member of his family + (ih any hospital maintained by the Government or any local authority or any oie hospital approved by the Government Jor the purposes of medical treatment of is employees (D) in respect of the prescribed diseases or ailmems, in any hospital approved by the Chief Commissioner having Provided that, in a case of income a certificate mreaime regard to the prescribed guidetines niet falling in sub-clause (b), the employee shall attach with i bi i from the hospital specifying the discase or ailment for which m emt was required and the receipt ec! an employer in relation to an employee a i? "the health of such employee under an Me Mor the Insurance Regulatory and Deve Clause (ib) of sub-section (1) af section NEY employee 10 4 ily miber of his fam aor Jor the amount paid to the hospital (i) any portion of the premium paid by or to keep in force an insurance an approved by the Central Governme Authority (IRDA) for the purposes of (iv) any sum paid by the em inlover in respect of any premium paid by the or to Keep in force an insurance on his heatth or the health of any men under any scheme approved by the Central Government or the Insurance Regi Development Authority (IRDA) for the purposes of section 80D : :INCOME FROM SALARIES 2.33 (v) any sum paid by the employer in respect of any expenditure actually | | | | | incurred by the | employee on his medical treatment or treatment of any member of his family [other than the treatment referred to in clauses (i) and (i)J; so, however, that such sum does not exceed fifieon thousand rupees, in the previous year. | (vi) any expenditure incurred by the employer on : | (1) medical treatment of the employee, or any member of the family of such employee, | outside India ; | (2) travel or stay abroad of the employee or any member of the family of such employee | for medical treatment ; | (3) travel and stay abroad of one attendant who accompanies the patient in connection with such treaiment, subject to the condition that the expenditure on travel referred to in sub-clauses (2) and (3) of this clause shall be excluded from perquisite only in the case of an employee whose gross oral income, as computed before including therein the said expenditure, does not exceed | Tivo lakhs. | (vii) any sum paid by the employer in respect of any expendiwre actually incurred by the | employee for any of the purposes specified in clause (vi) subject to the conditions specified in or under that clause ; Explanation : For the purposes of clause (2) (i) “hospital” includes a dispensary or a clinic; or a nursing home + Gi) “family”, in relation to an individual, shall have the same meaning as in clause (5) of section 10 ; and ii) “gross total income” shall have the same meaning as in clause (5) of section 80B; ‘The value of all perquisites is included in the total income of an employee under the head ‘Salary’. TYPES OF PERKS Perks can be divided Into three categories ‘A. Perks exempted for all employees ; B. Perks taxable for all employees ; C. Perks taxable only for specified employees, A. Exempted From Tax Value of following benefits is not added in salary income : A-1. Free medical facilities or reimbursement of medical expen section shall be allowed for treatment of self, wife, children (children may be dependent or independent, married or unmarried) parents, brothers and sisters (Who are mainly dependent upon him). With effect from assessment year 2019-20, the exemption regarding medical re-imbursement has been discontinued when treatment is taken from a private/unapproved hospital, nursing home ete. and hence medical re-imbursement by employer will be treated as a perquiste and will be taxable. But if medical treatment is taken from a Government hospital and medical bills for the same are re-imbursed by employer, such re-imbursement shall be exempted, Medical Facilities in India (Exempted} : (H If treament was taken from a hospital owned or maintained by employer : Fully Exempted (ii) If treatment is taken from a hospital maintained by Central, State Govt,, local authority or even a private hospital if approved or recommended by the Govemment for the purpose of medical treatment of its employees Fally Exempted wre : Exemption under this,respect of prescribed diseases or ailments le 3A. in any hospital approved by the Principal joner or Chief Commissioner No exemption shall be allowed if (iv) In case employer, under a scheme approved by the Central Govt, pays or re-imburses medical insurance Premium of employees = (») In case any health insurance premium is paid by employer to General Insurance Corporation under notified scheme (Mediclaim ws 80D) to insure the health of its employees and members of their families Medical facilities in India (Taxable in India] (vi) Any other expenditure incurred or re-imbursed by employer [except mentioned in points (i) and (x) above] to provide medical facilities in India (vii) Any fixed medical allowance given by employer to its employees the whole or even more to get medical facilities. INCOME TAX LAW ann _ tment is taken from an approved hospital but disease is not specified j (b) Disease is specified in Rule 3A but treatment is taken from a Privatefunappro m Role 34, Fully Bxempig Pally taxable Fully taxable Note. Fixed medical allowance received is always fully taxable even if this employee sp | Medical facilities outside India : (# If the employee or any member of his family goes outside India for treatment, medical expenses paid or reimbursed by employer (ii) Expenses on the stay outside India of the patient (may be employee or any other member of his family) and one attendent paid or reimbursed by employer (iii) Expenses incurred by employer on the travelling to a foreign country of the patient and one attendant who is required to attend the patient when he goes abroad for treatment Itis fully exempted to the extent it is is permitted by the RBI. Fully exempted but again up to the amount permitted by RBI. Fully exempted provided GTI of the employee does not exceed % 2,00,000 pa. as computed before including therein the said expendi- ture on travelling. [ Notes : Value ofthis perk will not be taxable if employee is a non-specified employee. cl A-2. Free refreshment supplied by employer to its employees during office hours in office premises except free meals A-3, Free meals given at remote area or offshore installation shall be. A-4. Free recreational facilities provided by employer to its employees. 4-5. Provision of telephones including mobile phones given by the employer to employee to facilitate the business of the employer. It is exempted even if it is used for personal purposes of the employee. Fully exempted Fully exempted Fully exempted Fully exempted | | | |INCOME FROM SALARIES. TAXABILITY OF PERQUISITES REE 15, 16. 20. 21 (A) Exempted for All Employees Free medical facilities as given ws 17(2) (Proviso) (see details on next pages). . Free refreshments during working hours. . Free recreational facilities. Provision of telephone whether basic or cellular for official use. It is exempted even if it is used for private or personal purposes. . Free meals provided in remote area or at offshore installation are fully exempted. . Free cducation, training or refresher course for employees. . Leave Travel Concession if given twice in a block of 4 years. Free ration received by members of armed forces. Perquisites allowed by Government to its employces posted abroad. |. Rent free house given to an officer of Parliament, a Union Minister, and leader of Opposition in Parliament Free residence and Conveyance facili- ties to Judges of Supreme Court and High Court Free conveyance provided by employer to employee for going to or coming from place of employment. Any amount contributed by employer towards pension or deferred annuity scheme . Employer's contribution to staff group insurance scheme. Computers, laptops givn to [not trans- ferred] an employce for official/per- sonal use. ‘Transfer of a moveable asset (computer, car or clectronic items] more than 10 years old without consideration, Accident insurance premium paid by employer for his own benefit. Interest free loan or loan at concessional rate of interest taken by employee from employer if amount of loan does not exceed % 20,000 or Joan is taken for medical treatment. . Value of any shares or debentures given free of cost or at concessional rate to employees under stock option scheme ‘approved by the Central Govt Tax on perks paid by employer. Rent free accomodation given in remote or offshore areas. (B) Taxable for All Employees 1, Rent free house. 2. Concessional Rent House. 3. Obligation of employee met by employer. 4, Any amount of life insurance premium paid by employer on the life of employee during the previous year. 5. Value of specified security or sweat equity shares allotted or transferred. 6. Contribution to approved superannuation fund of the employee in excess of Rs. 1,50,000, . Other fringe benefits = (Interest free or concessional loan. (i Travelling, Touring, ‘Accomodation. (iii) Food or beverages facility. (iv) Gift or Voucher or Token facility. (v) Credit card facility. (vi) Club facility. (vii) Use of movable assets. (vii) Transfer of movable assets. (ix) Any other benefit or amenity 8. Specified perquisites allowed to Chief —_ Election Commissioner, Election Commissioner, Chairman or retired Chairman, member or retired member of UPSC. [wef AY, 2021-22] (C) Taxable for Specified Employees Only Car, or any other automotive conveyance, Services of domestic servants including sweeper, watch-man, — gardner. personal attendent provided by employer. Gas, water and electricity facility. Education facility for employee's children. Free transport allowed by employer engaged in transport business. Medical facility Free transport facility to its employees by any transport undertaking.7 INCOME Tax LAW Any D Pas A-6. Prev education which is provided by employer from its own ges AGH who is engaged in such business provided value of such benen ees not exceed © 1,000 p.m. per child, Mt does A-7. Cost of refresher course attended by employee met by Fut case employer meets. expenditure of higher education ee IA” ap P expenditure of higher education or ier whether in India or abroad, ning AS. Any rent-free residential accommodation to Judges of Hi Pally Y a ch Court Ly xe Supreme Court. or ed A-9. Goods sold by an employer to his employees at concessional rate SHY exemy The amount of concession given, : Bred AcI0. Free ration nveived by members of armed forces. Fully emp A-LL. Perquisites allowed by Govt. to its employees posted abrond, Billy exempt A-I2, Rent free house given to an officer of Parliament, a Union Minister, oY &%my and leader of opposition in Parliament, . Conveyance facilities to Judges of Supreme Court and High Court ny SXempteg ~ v exempy ted Free conveyance provided by employer to employees for going to or coming from place of employment. 7. Fi Any amount contributed by employer towards pension or deferred MY exergy amity scheme Fully exe Employer's contribution to staff group insurance scheme. Fully exentt A-I7. Computers, laptops given to [no transferred] an employee for official) personal use, Fully exempted ACIS. Transfer of a moveable asset [computer, car or electronic items] without consideration to an employee after such asset had been used for more than 10 years. Fully exempted Accident insurance premium paid by employer for his own benefit. Fully exempted such premium is paid for an insurance whose benefit is to accrue to the employee, it will be taxable. Interest free loan tal amount of all loans taken by an employee from his employer does not exceed & 20,000 Fally Exempted Note : In case the employee takes another loan from his employer and so total amount of loa exceeds 20,000, then interest will be calculated on the total amount of Joan and it will -d from the date of second loan is taken. For example, employee has takea't 1 and another loan of & 15,000 is taken on 1Sit © 15,000 +] be calcula: foan of Z 15.000 on 10th April 21 September, then interest will be calculated on the entire amount of loan of 15,000 = % 30,000 and from 1th September 2021 to 31-3-2022. (b) In case loan is taken for treatment of notifies illness [Aids, cancer, mental disorders, renal failure, hemophilia, thelessemia] and no claim is received from insurance company In case any insurance claim is received, such amount shall be treated as loan and difference between rate of interest charged by employer and rate fixed by SBI on 1-4-2021 shall be taxable. (c) In case loan is taken for any other purpose and rate of interest is equal to or higher than the rate preeribed by SBI on 1-4-2021. Fully anne A-2). Income tax on perquisites if paid by employer. Fully ex! ze A-22. Any unauthorised use of a benefit. Fully exe! : S Fully exemptedINCOME FROM SALARIES 2.37 Taxation of Sweat Equity shares or Employee’s Stock Option (ESOPs) ‘The value of this benefit will be taxable as perquisite in the hands of the employee ILLUSTRATION 16 From the following information, explain the treatment of the following medical benefits received by Mr. X, an employee having monthly salary of & 60,000. (1) Received & 500 p.m, as medical allowance. (2) During the year Mr. X met with an accident and his employer made the following payments = (a) Directly paid to a private specialist doctor's hospital 20,000. (b) Reimbursed medical expenditure incurred by employee in an approved hospital % 50,000 for a non-notified disease. (3) Employce was referred to a specialist doctor in London and employer met the following expenses in this connectior ()_ Expenses on travelling of the employee and one attendant & 60,000. Gi) Operation fees of the specialist doctor & 50,000. Giii) Exper spitalization & 80,000. Reserve Bank of India permitted an expenditure of % 1,00,000. (4) During the year employer also reimbursed the following expenses incurred on the medical treatment of members of employee's family. (a) On the medical treatment of employee's grandfather, who is dependent on him & 6,000. (&) On the medical treatment of wife of the employee & 5,000. (c) On the medical treatment of employee's brother who is dependent on him & 3,000. ‘Treatment in all the three cases was got from an approved hospital. (5) During the year employer got the medical insurance of all the important employees and paid a premium of 5,000 on each employee's policy. SOLUTION Treatment of Medical Benefits (1) Fixed medical allowance received is fully taxable in case of all types of employees. (2) Expenses met by employer in connection with the accident of the empolyee : (a) Fully taxable wef. A.Y. 2019-20. (6) Reimbursement of € 50,000 incurred in an approved hospital for a non-notified disease is fully taxable wef. A.Y. 2019-20. (3) Expenses incurred in a foreign country : ( Expenses on travelling of patient and one attendant is exempted only if Gross Total Income of the employee does not exceed & 2,00,000 p.a. In this case G.T.I. of the employee is more than & 2,00,000, so expenses on travelling met by employer are fully taxable. (ii) & (ii) i.e., Operation fees of € 50,000 plus expenses on medicines and hospitalization % 80,000 (Total & 1,30,000) are exempted up to the amount permitted by RBI. In this cAse only & 1,00,000 as permitted by RBI shall be exempted and balance % 30,000 will be taxable. (4) (a) Medical treatment expenses reimbursed by employer on the illness of grandfather is fully taxable as grandfather does not fall in the category of employee's family. (b) Reimbursement of expenses on wife’s illness are fully taxable. (c) Reimbursement of expenses of brother's illness are fully taxable. (5) Medical insurance premium paid by employer on the medical insurance policy of employee and his family members is fully exempted.INCOME TAX LAW AND Prag Tet men = craption al gud payee IMbUTENENC AT eA Was on medicines or medical teazment Tis Been withdrawn and instead a standatd dedug 8 . Uction is Telia) has been alloweel upto & 50,000 Pt MLUSTRATION 17 . Hees an enginect working with an TT company at Benga. AS per is 1 oF het of employment he is getting free medical facilities in India and abroad for himself and fort members, Find out jxability of these perquisties. is family TP Me, A gets ® 1,000 pm. as fixed medical allowance. But in ease Mr, : A Me abet of his family gets admitted in a clinic, hospital or nursing home, he gets he, other 8 the fag re thee wreatment or all expenses incurred by him wil be reimbursed. ity During the year, his employer paid the following, expenses : al treatment of Mr. A, spouse and children z treatment of his old parents : 20.9 (ii) Expenses on medical treatment of his brother (dependent on him) i 0 (i) Expenses on medical treatment of mother of his spouse who is also +000 dependent upon him / © 100m (0) Free medical treatment of his family members in the dispensary run by \ employer in its premises worth ci (8) Mr. B’s company is providing following medical facilities : Mr. B’s company pays him & 2,000 p.m. as fixed medical allowance. During the previous 2021-22, his actual expenditure incurred to get medical treatment is ® 18,400 which includes purchase ae inedicines, various medical tests, doctor's fees etc. He has got proper bills for all these expenses [Alongwith fixed medical allowance, his employer got medical insurance of Mr. B and al fil members of Mr. B. During the year, the employer company pays medical insurance premium 2 under z (@ On Mr. B's medical insurance 10,500 p.a, (ii) On medical insurance of Mrs. B 6,400 pa (iii) On medical insurance of minor children 8,200 pa, (iv) On medical insurance of B's father and mother (not dependent upon him) 20,000 p. (v) On medical insurance of B's grandfather who is dependent upon him 24,000 p. (vi) On medical treatment of Mr. B's mother-in-law who is also dependent upon Mr. B 6,000 p.a, Find out taxable value of this perk. SOLUTION (A) Taxable Value of Perk of medical facilities provided to employees Fixed medical allowance & 1,000 p.m.—Fully taxable Expenses on medical treatment of Mr. A, his wife and children Ny Expenses on medical treatment of Mr. A's old parents we Expenses on medical treatment of Mr, A's brother who is dependent upon him NL Expenses on medical treatment of mother of A's spouse (dependent upon him) 10.000 Free treatment of family members in the dispensary run by his employer a Taxable Value of Perk aeINCOME FROM SALARIES 2.39 Notes: (1) Fixed medical allowance received is always fully taxable in the hands of the recipient employees, 1Wis fully taxable even if the employce spends the whole amount received on medical treatment. It should be treated as an allowance and not « perquisite. 2) Expenditure incurred by employer on the medical wewtment of an employ children (whether minor or major, whether dependent upon him or not) is fully exempted. 3) Expenditure incurred by emplyer on the medical treatment of his employee's parents, brothers ‘and sisters are also exempted, if they are dependent upon the employee, otherwise it is taxable, (4) Expenses on treatment of mother-in-law is taxable. hhis wife and his (B) Taxable Value of Perk in case of Mr. B z Fixed medical allowance @ % 2,000 p.m.—Fully taxable 24,000 Medical insurance premium paid or reimbursed by employer On B's medical insurance NL On medical insurance of Mrs. B NL On medical insurance of minor children of Mr. B NIL On medical insurance of parents of Mr. B—Not dependent upon him—Taxable 20,000 On medical insurance of B's grand father—Taxable 24,000 On medical treatment of Mr. B's mother-in-law—Taxable 6,000 Taxable Value of Perk 74,000 Ne iotes: (1) Fixed medical allowance received by an employee is always taxable. (2) Medical insurance permium paid or reimbursed by employer in case of employee, spouse, children and his parents, brothers, sisters (who are mainly dependent upon the employee) are exempted, (3) Medical insurance premium paid regarding his granc-parents, and any other family member like mother or father-in-law, brother-in-law etc. is fully taxable. Q. No. 9 What will be the treatment of following benefits for tax purposes for A.Y. 2022-29 : (2) A loan of © 200,000 for purchase of motor car is taken from employer. Rate of inlerest Is 8.20%. Prescibed rate of interest of SBI as on 1-4-2021 is assumed to be 9.70%, (8) Mrs. G, wite of Mr. X a works manager is suffering from cancer. For her treatment Mr. X borrowed © 60,000 from his employer at 11.20% p.a. Insurance company reimbursed % 25,000 towards cost of treatment. Prescribed rate of interest of SBI as on 1-4-2021 is assumed to be 14.20% (©) Employer transiers an air conltioner tots employee Mr. 0. The air condloner was acquired In 1996. (A) Col. Singh is provided tree ration valued at & 5,600 p.m. (6) Mr. Pis a computer engineer working in a software development company. He is provided with a laplop Computer for his use. He uses it both for personal as well as olficial purposes. [Hints : (a) Taxable amount % 3,000 (4) Taxable interest is 3% of ® 25,000 = % 750, SBI has not prescribed any rate of interest on personal loan, so we have assumed it to be 14.20%. (0) Exempted (a) Exempted (e) Exempted] Perks Taxable For All Employees - Rent Free House [Section 17(2)() Rule 3(1) as amended by notification No. 94/ 2009 dated 18-12-2009] Before calculating the value of rent free house, following information is collected : 1. Nature of employment : Govt., Semi Govt. or any other.246 INCOME TAX LAW AKD Pract 2. Place where rent free huuse is provided : ; ded into 3 categories depending upon ther population as naving population exceeding 25 lakhs. nd runs having population exceeding 10 lakhs but not exceeding 25 tap (C) ASS other cities, wns having population of 10 lakhs or less than 10 lakhs, ‘ 3. Meaning of uecommodation. ft stall include a house, frm-howse, Mat, hotel eccommodtion guest house, 2 caravan, mibile home, ship etc. Exempted accommodation : For an employee who is working 5° 0 kans, away from city limits of a town whose is up to 20,00) 2s per latest census| at mining site ; or at project execution fa) in remere popule site ; oF (6) in offshore azea [there is no limit as regard to distance] such accommodation shall be exempted. (c) Value of rent free eocommodation is not taxable, if remt free house has been provided to Supreme Coun and High Court Judges, Union Minister, Leader of Opposition and Official of Parliament. More than one accommodation at the time of transfer : In case @ person is allowed to retain more than one accommodations at the time of transfer then, for first three months value of on house having lower value shall be taxable. If such accommodation is retained for more than three months thereafter value of both such houses shall be taxable. Hotel accommodation : An employee may be provided hotel accommodation (including motels, guest houses, etc.) on his transfer. It is treated in following manner : (a) If hotel accommodation is provided as a result of shifting of employee from one place to other (e., transfer) for @ total period not exceeding in aggregate 15 days in a previous year. it shall be fully exempted (b) If hotel accommodation is provided for a period exceeding 15 days, the perk shall be taxable in following manner ( Calculated salary for rent free house as given below : (ii) Compute salary for [Number of days he stayed in the hotel—15 days]; Gif) Calculate 24% of this salary ; . (iv) Compare it with actual bill paid by employer to the hotel for such accommodation ; Whichever is less is taxable. ‘Note. In case hotel accommodation is provided for more than 15 days then this perquisite is not taxable for first 15 days and it will be taxable for remaining days, 4. Nature of accommodation, Owned by Employer/Hired or leased by employer- 5. Meaning of Sala For the calculation of value of rent free accommodation, the word ‘salary’ includes : () Basic salary, pay or wages, . (ii) Dearess Pay, Dearness Allowance if term of employment so provide or jt enters into salary for calculation of value of service or retirement benefits. (ii) Commi: (iv) Bonus. (v) Fees, (vi) Value of all taxable allowances. (vii) Any other monetary payment, which is chargeable to tax (by whatever wi called),