Income From Salaries

Learning Objectives
I. Introduction
II. Tax treatment for different forms of Salaries
III. Tax treatment for Allowances
IV. Tax treatment for Perquisites (PERKS)
V. Tax treatment for Profits – In – Lieu of Salary
VI. Tax treatment for Death Cum Retirement benefits
VII. Deductions under the head Salaries
VIII. Sections & Provisions
IX. PROBLEMS

Learning Objective
I. Introduction
1. Basis of Charge: Section 15
a. Salary is taxable on due or receipt whichever is earlier.
b. Employer and employee relationship
An income can be taxed under the head Salaries only if there is a relationship of employer and
employee between the payer and payee. It includes both full time and part-time employment. For
the purpose employer represents present employer, past employer and prospective employer. If the
relationship of employer – employee does not exist then the income would be taxed under the head
“Income from Business or profession” or “Income from other sources”.
E.g.:- Remuneration received by an actor from different producers cannot be taxed under the head
salaries as the producer is not the employer of the actor. Such remuneration would be taxable
under the head “Income from Profession”
E.g.:- Remuneration received by a professor for setting the question paper/correcting answer sheets
cannot be taxed under the head salaries as the university is not the employer of the lecturer. Such
remuneration would be taxable under the head “Income from other sources”.
E.g.:- Relation between LIC and its agents is Principal and Agent; commission received by agents
from LIC will be taxed under the head “Income from other sources”
E.g.:- A member of the parliament is not a Govt. employee and therefore remuneration received by
him is not taxable as salary income but is taxable as “Income from other sources”.

2. Place of accrued
The golden rule is that salary is deemed to accrue or arise at a place where services are rendered. If the
services are rendered in India and salary on account of such services is received outside India, it will be
treated as an income which is deemed to accrue or arise in India.
E.g.: If a person, who after rendering services in India, retires and settles abroad, receives any pension
on account of the same, such pension shall be an income, which is deemed to accrue or arise in India.
There is one exception to the above rule. In case of citizen of India who is Government employee and
renders service outside India. Salary received by him would be treated as income deemed to accrue or
arise in India though the services are rendered outside India. Any allowance or perquisites paid outside
India by the Government to a citizen of India for rendering services outside India is fully exempted
from tax.

3. Salary in grade system

Certain employees are entitled to a grade system of salary. Under this system the normal annual
increments to be given to the employees are already fixed in the grade.
E.g.:- If an employee joins service on 01.05.2020 and is placed in the grade of 12,200-300-17,400-500-
19,400, this means that he will get a basic salary of Rs.12,200 with effect from 01.05.2020. He will get
annual increment of Rs.300 pm with effect from 01.05.2021 and onwards till his salary reaches
Rs.17,400. Thereafter, he will get an annual increment of Rs.500 pm till his salary reaches Rs.19,400/-,
no further increment will be given till he is placed in other grade.
Hint: If the salary is payable on monthly basis it normally becomes due at the end of the month although it
is paid in the next month. In this case, it will be taxable on due basis because due is earlier than receipt.
Therefore salary is normally taxable from April to March. If the salary becomes due on the 1st day of the
next month 12 months salary shall be calculated from March to Feb.

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 4. Computation of Income from Salaries – Proforma
Computation of Income from Salaries of Mr. X for the Assessment Year xxxx
Particulars Rs
Salary XXX
Allowances XXX
Perquisites XXX
Profits-in-lieu of Salary XXX
Death cum Retirement benefits XXX
Gross Salary XXX
Less: Deduction u/s 16
16(i) Standard Deduction XXX
16 (ii): Entertainment Allowance XXX
16 (iii): Professional Tax XXX XXX
Income From Salaries XXX

Learning Objective
II. Tax treatment for different forms of Salaries:-
Different forms of Salary Tax Treatment

1 Basic Salary Taxable

2 Salary in lieu of notice Taxable
3 Salary to a Partner Not Taxable as IFS, but taxable as IFBP
4 Monthly Pension Taxable
5 Annuity from employer Taxable
6 Remuneration for extra duties/over time Taxable
7 Fees & Commission Taxable

8 Bonus Taxable on receipt basis, if not taxed earlier on due basis

9 Advance Salary Taxable on receipt basis. Employee can claim relief u/s 89(1)
Taxable on receipt basis and can claim relief u/s 89(1), if not taxed
10 Arrears of Salary
earlier on due basis
Taxable (Once salary accrues, it becomes taxable in the hands of
11 Foregoing of salary
employee. Subsequent waiver is not eligible for exemption)
Not Taxable (Any salary surrendered by the Government or Non-
12 Surrender of Salary Government employee, to the Central Government under Voluntary
Surrender of Salary Act, 1961 is fully exempted from tax)

13 Salary from UNO (United Nations Organization) Not Taxable

Salary received by a teacher/ researcher

14 from a SAARC (South Asian Association for Not Taxable
Regional Co-operation) member State

UNO goal: maintaining international peace and security

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Learning Objective
III. Tax treatment for Allowance
A. House Rent Allowance [HRA]
B. Allowances exempted to the least of [a] Actual amount received (or) [b] Actual amount spent
C. Allowances exempted to the least of [a] Actual amount received or [b] Maximum limit
D. Fully Taxable allowances

A. House Rent Allowance: Sec.10 (13A) & Rule 2A

Particulars Rs.
HRA received xxx
Less: Exemption U/S 10(13A) & rule 2A
Least of the following
(i) Actual HRA received xxx
(ii) 40% or 50% of salary xxx
(iii) Rent paid xxx
Less: 10% of salary xxx xxx xxx
Taxable HRA xxx

Hints:
1. Salary = Basic + DA + Commission
2. 50% of salary will be taken if the employee is staying in Metropolitan City [Bombay, Calcutta,
Delhi, and Madras]. 40% of salary will be taken if the employee is staying in any other place
other than Metropolitan cities.
3. The exemption for HRA depends upon the following 4 factors
[a] Salary [b] Place of stay [c] HRA received [d] Rent paid
As long as there is no change in the 4 factors, HRA exemption can be calculated on annual basis.
If there is change in any of the 4 factors, the exemption for HRA shall be calculated on monthly
basis and then convert into annual basis.
B. Allowances exempted to the least of [a] Actual amount received (or) [b] Actual amount spent: -
Attire Allowance/ Uniform Allowance, Academic Research Allowance, Attendant/Helper Allowance,
Conveyance Allowance, Daily Allowance, Travelling Allowance, Transfer Allowance,
Hint: The exemption is available only if received and incurred for official purpose. In other words if
these allowances are received/incurred for personal purpose, they are fully taxable.
C. Allowances exempted to the least of [a] Actual amount received (or) [b] Maximum limit:-
1. Children education allowance
2. Hostel expenditure allowance
3. Tribal area allowance
4. Transport allowance
5. Underground allowance
6. Boarder area allowance
7. Hill compensatory allowance
8. Allowances for transport employees/Duty allowance

1. Children education allowance

Least of the following is exempted from tax
a. Actual amount received for maximum of 2 children
b. Maximum of Rs. 100 p.m. per child up to maximum of 2 children
2. Hostel expenditure Allowance
Least of the following is exempted from tax
a. Actual amount received for maximum of 2 children
b. Maximum of Rs. 300 p.m. per child up to maximum of 2 children
3. Tribal area allowance
Least of the following is exempted from tax
a. Actual amount received

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 b. Maximum of Rs 200 p.m.
4. Transport Allowance
Least of the following is exempted from tax
a. Actual amount received
b. Nil. [3,200 p.m. in case of deaf and dumb, blind (or) handicapped assessee]
5. Underground Allowance
Least of the following is exempted from tax
a. Actual amount received
b. Maximum of Rs 800 p.m.
6. Boarder area allowance
Least of the following is exempted from tax
a. Actual amount received
b. Maximum of Rs 1,300 p.m.
7. Hill compensatory allowance
Least of the following is exempted from tax
a. Actual amount received
b. Maximum of Rs 7,000 p.m.
8. Duty Allowance/Allowances for transport employees
Least of the following is exempted
a. 70% of amount received
b. Maximum of Rs.10,000 p.m.
Hint:
i. Actual expenses incurred have no relevance in the case of above allowances.
ii. Meaning of some allowances:
a) Transport Allowance: For commuting between residences to office and back.
b) Traveling Allowance: To meet the cost of travel on tour
c) Transfer Allowance: To meet the cost of travel on transfer
d) Duty Allowance: To meet personal expenditure during duty performed in running transport
from one place to other
e) Conveyance allowance: To meet expenditure on conveyance for official duties.
D. Fully taxable allowances:
All allowances except those discussed above are fully taxable.
E.g. City Compensation Allowance (CCA), Dearness Allowance (DA), Entertainment Allowance, Family
Allowance, Helmet Allowance, Holiday Home Allowances, Lunch Allowance, Medical Allowance, Non-
practicing Allowance, Overtime Allowance, Project Allowance, Servant Allowance, Tiffin Allowance etc.
If an employee opts to be taxed u/s 115BAC (new regime), he shall be entitled to exempt only Conveyance
Transport allowance (in case of deaf and dumb, blind (or) handicapped assessee upto 3,200 p.m.), Allowance,
Daily Allowance, Travelling Allowance, Transfer Allowance

Learning Objective
IV. Tax treatment for perquisites (Perks):
A. Perks taxable for all types of employees
B. Perks taxable only for specified employees
C. Tax free perks.
(same rule for both old & new tax regime)
A. Perks taxable for all types of employee
1. Valuation of accommodation
2. Employees obligation met by the employer
3. Interest free or concessional rate of interest loans.
4. Use of movable assets
5. Transfer/sale of movable assets
6. Value of insurance premium/differed annuity premium paid by the employer.
7. ESOPs
1. Valuation of accommodation
a. Rent-free unfurnished accommodation
b. Rent-free furnished accommodation
c. Accommodation at concessional rent
d. Accommodation in a hotel
e. Accommodation in remote area.
f. Accommodation at off-shore site.

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 g. Accommodation provided at new place of posting on transfer while retaining the accommodation at old
place. [Valuation of >1 accommodation].
a) Valuation of rent free unfurnished
accommodation

Govt. Employee Non – Govt. Employee

(Central or State)
Accommodation is
Perk = License fees.
Hint: Fair rental Value, Actual
Owned by the employer Hired by the employer
rent paid etc. are immaterial
Accommodation is provided
in a city where population is Least of the following is
the value of the perk
i. Actual hire charges
paid by the employer
≤10 lakhs >10 lakhs but  25 lakhs > 25 lakhs ii. Salary x 15%
Perk= salary X 7.5% Perk= salary X 10% Perk= salary X 15%

Hint: If the accommodation is provided from 1st Jan to 31st Mar, then salary for the month of Jan, Feb &
March only shall be taken for valuation.

b) Valuation of rent free furnished accommodation

[Furniture = TV, Washing Machine, Refrigerator, A/C, etc]
Step (i) Calculate the value of rent free unfurnished accommodation.
Step (ii) Add the value of furniture provided (both for Govt. employees & Non Govt. employer)
Where Furniture is

Owned by the employer Hired by the employer

Perk = Original cost of furniture X 10% p.a. Perk= Actual hire charges paid/payable by the employer.

Hint: Year of purchase of furniture & Hint: Original Cost & Book Value are immaterial
book value are immaterial.

c. Valuation of accommodation provided at concessional rent

Step (i): Calculate the value of rent free unfurnished accommodation.
Step (ii): Add: Value of furniture.
Step (iii): Less: Rent paid/payable by the employee.

d. Valuation of accommodation in a hotel/guest house

Least of the following
(i) Actual hotel charges paid/payable by the employer XXX
(ii) Salary X 24% XXX XXX
Less: Amount recovered from the employee XXX
Perk XXX

Hint:
1. The value of perk is nil, if the following 2 conditions are satisfied
a) Accommodation in hotel is for ≤ 15 days in aggregate in previous year [and]
b) It has been provided on account of transfer of an employee from one place to other.
2. Value of perk is nil if accommodation in hotel is on account of official tour.
e. Accommodation in remote area: Value of perk is nil.

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 Note: Remote area is the area located at least 40 KMS away from a town having a population ≤ 20,000
f. Accommodation at off-shore site: Value of perk is nil.
g. Accommodation at more than one place:
1st 90 days Least of the following is the value of perk.
(i) Value of old accommodation (or)
(ii) value of new accommodation
After 90 days Perk = value of old accommodation + value of new accommodation
Hints:
i. Meaning of salary:
Basic + DA (only if forming part of all retirement benefits) + commission (always) + Bonus (whether
received or due) + all other forms of salary, except advance and arrears of salary + all taxable allowances
Salary does not include,
a). All perk [whether it is monitory payment or not]
b). All Profits-in-lieu of salary
c). Retirement benefits received at the time of retirement or while in service
d). Advance salary and arrears of salary.
ii. Rent-free furnished/unfurnished house provided to a High Court Judge, Supreme Court Judge, Union
Minister, Leader of opposition in Parliament, an official in Parliament and serving Chairman/members of
UPSC: Value of perk is nil.
2. Employee’s obligation met by employer
Perk = Actual expenses paid/payable by the employer – Amount recovered from employee.
E.g. a) watchman is engaged by the employee and salary is paid by the employer.
b). Gas connection is in the name of employee and bill is paid by the employer.
c). Car is owned by the employee and maintenance expenses are paid by employer etc.
d). Income tax paid by employer on behalf of employee.
e). Accommodation is hired by employee and hire charges are paid by employer

3. Interest free or Concessional rate of interest loans

Maximum Loan Outstanding x SBI Rate of Interest on the
on the last day of each month first day of previous year xxx
Less: Amount recovered from employee xxx
Perk xxx
e.g. If a loan of Rs 1,00,000 repaid on December 31, outstanding loan balance on December 31 in the
morning is Rs 1,00,000 and in the evening is Rs Nil. Maximum outstanding loan balance is Rs 1,00,000 and
interest should be paid on Rs 1,00,000.
Perk
Medical loan/Loan taken for medical treatment of employee or his family members NIL
Loan taken in a year is ≤ Rs. 20,000/- NIL
e.g. Loan taken during the year Rs.14,000; Perk = Nil
Loan taken during the year Rs.25,000; Perk = 25,000 X 7.5% or 8%.... p.a [but not (25,000-20,000) X 7.5%
or 8%....p.a.]
4. Use of movable assets

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 Use of Movable assets

Laptop & Computer Movable assets other than laptop & computer

Perk = NIL
Owned by the employer Hired by the employer

Original cost X 10% p.a XXX Actual hire charges paid

Less: Amount recovered by the Employer XXX
from the employee XXX Less: Amount recovered
------- from the employee XXX
Perk XXX -------
------ Perk XXX
-------
5. Transfer/sale of movable assets

Transfer/sale of movable assets

Computer & Electronic items Motor car Any other movable assets

Original Cost XXX Original Cost XXX Original cost XXX

Less: Dep. @ 50%
p.a (WDV Method) XXX Less: Dep. @ 20% Less: Dep @ 10% p.a [SLM] XXX
------- p.a (WDV method) XXX XXX
XXX ------- Less: Amount recovered
Less: Amount recovered XXX from the employee XXX
from the Employee XXX Less: Amount recovered -------
------- From the employee XXX Perk XXX
Perk XXX ------- ====
==== Perk XXX
-------

Hint: Depreciation for part of the year shall be ignored.

6. Value of the insurance premium/deferred annuity premium paid by employer

Valuation of insurance premium/deferred annuity premium paid by employer

Under certain schemes such as Any other case

E.S.I Scheme, Labor laws etc.

Perk = Actual expenditure

Perk = NIL incurred by the employer

Hint: Employee can claim rebate u/s 80 C on the LIP paid by the employer on the life of employee.

7. Allotment of shares Employee’s stock option plan [ESOP] or sweat equity plan
FMV of share on the date on which option is exercised by the employee xxx
Less: Amount recovered from employee xxx
Perk xxx
B. Perks taxable in the heads of specified employees:-
Any employee who satisfies any one of the following conditions will be treated as specified employee.

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1. He is a Director of a company
2. The employee has substantial interest in the company i.e. carrying not less than 20% of equity shares voting
power in the company.
3. Taxable monitory benefits is more than Rs. 50,000/-
Taxable monitory benefits:
Includes: [Basic, D.A [forming or not forming part of salary, commission(always),Advance salary, Arrears of
salary, fees, bonus, retirement benefits [while in service or at the time of retirement], all taxable allowances,
perks reimbursed, profits-in-lie of salary] – [ deductions U/s 16(ii) & 16(iii)].
Excludes: Employer contribution to RPF and interest there on, non-monitory perks, perks directly paid by the employer.
The following are perks taxable only in the hands of specified employees.
1. Free domestic servant (sweeper, Gardner, watchman or personal attendant).
2. Free or concessional use of gas, electricity & water for personal purpose.
3. Free or concessional educational facility.
4. Expenditure on Credit Card
5. Club facility provided by the employer
6. Valuation of Motor Car
7. Transport from own source
1. Free domestic servant like (sweeper, Gardner, watchman):-
Perk = Actual salary paid by employer to domestic servant – Amount recovered from employee
Hint: 1. If domestic servant is appointed by the employer, then it is taxable perk only for specified employees.
However, if domestic servant is appointed by the employee and salary is paid by the employer, then it is taxable
perk for all types of employees.
2. If the employer provides accommodation along with the gardener, salary paid to gardener shall not be
considered while computing value of accommodation.
2. Free or concessional use of gas, electricity & water for personal purpose:-
Supply of gas, electricity & water

From own source From outside agency

(No. of Units used * (cost p.u Actual amount paid by

by employee) of employer) XXX the employer XXX
Less: Amount recovered Less: Amount recovered
from employee XXX from employee XXX
------- --------
Perk XXX Perk XXX
==== =====

Hint: If gas connection etc. is in the name of the employer, then it is taxable perk only in the hands of
specified employees. However, if gas connection etc. is in the name of employee and expenses are paid by
employer then it is an employee’s obligation met by the employer which is taxable for all types of
employees.

3. Free or concessional educational facility

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 Free or concessional Educational facility

Training to Fees for education of Educational facility is provided in

employees employee’s children/family an institute owned or maintained by
members is paid or the employer to the employee’s
reimbursed by the employer
Perk = NIL

Children Family Members

Actual amt. paid/reimbursed

by the employer XXX Cost of such education Cost of such education
Less: Amount recovered in a similar institute xxx in a similar institute xxx
from the Employee XXX Less: 1) Exemption up to Less: Amount recovered
Perk XXX Rs 1,000 p.m per child xxx From employee xxx
Hint: It is taxable perk for all employees 2) Amt. recovered Perk xxx
from employee xxx xxx
perk xxx

Hint: - 1) Family members include even grand children and other members of house hold.
2) Scholarship given by employer to the children of employee is a tax free
--- income.
--
4. Expenditure on Credit Card paid/reimbursed by the employer
Expenditure incurred by the employer (including membership fees and annual fess) Rs xxx
Less: 1. Expenditure pertaining to official use xxx
2. Amount recovered from employee xxx Rs xxx
Perk Rs xxx
Hint: If the credit card is in the name of employee and expenditure is paid/reimbursed by employer
then it is taxable perk in the hands of all employees (employee’s obligation met by employer)
5. Club facility provided by the employer
Club facility provided by the employer

Initial one time deposit/
fees for corporate/
Institutional membership
Health club/Sports In all other cases (like annual or periodical fees
club facility given paid by the employer)
uniformly to all
employees in
employer’s premises

Perk = Nil (because, Perk = Nil Actual amount paid by employer xxx
benefit does not remain Less: Expenditure pertaining to office use xxx
with employee after xxx
cessation of employment) Less: Amount recovered from employee xxx
Perk xxx

6. Valuation of Motor Car

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 Private Purpose Official Purpose Private and Official Purpose
Car is owned/hired by the employer and expenses met by the employer
Expenditure incurred by employer xxx Not a perquisite/ i)Small car (≤ 1600 cc/16 hp)
Add: Actual driver’s salary xxx Perk = Nil Rs.1,800p.m+Driver‘s salary Rs.900p.m
Add: Depreciation @ 10% on original cost of the Hint: Amount recovered from employee is not
car/actual hire charges, if car is hired xxx deductible
xxx ii) Big car (> 1600cc/16 hp)
Less: Amount recovered from employee xxx Rs.2,400p.m+ Driver‘s salary,Rs.900p.m
Perk xxx
Car is owned/hired by the employer and expenses met by the employee
Depreciation @ 10% on original cost of the Not a perquisite/ Hint: Amount recovered from employee is not
car/actual hire charges, if car is hired xxx Perk = Nil deductible
Add: Actual driver’s salary xxx i)Small car (≤ 1600 cc/16 hp)
xxx Rs.600p.m+Driver‘s salary Rs.900p.m
Less: Amount recovered from employee xxx ii) Big car (> 1600cc/16 hp)
Perk xxx Rs.900p.m+ Driver‘s salary,Rs.900p.m
Car is owned/hired by the employee and expenses met by the employer
Expenditure incurred by employer xxx Not a perquisite/ Least of Standard rate method or non standard rate method
Add: Actual driver’s salary xxx Perk = Nil Standard rate method
xxx Actual amount paid by employer xxx
Less: Amount recovered from employee xxx Less: Expenditure pertaining to office use xxx
Perk xxx i)Small car (≤ 1600 cc/16 hp)
Rs.1,800p.m+Driver‘s salary Rs.900p.m
ii) Big car (> 1600cc/16 hp)
Rs.2,400p.m+ Driver‘s salary Rs.900p.m xxx
xxx
Less: Amount recovered from employee xxx
Perk xxx
Non-Standard rate method
Actual amount paid by employer xxx
Less: Expenses pertaining to office use as per log sheet xxx
xxx
Less: Amount recovered from employee xxx
Perk xxx
If expenditure pertaining to office use as per log sheet
is not given, perk = value under standard rate method
Car is owned/hired by the employee and expenses met by the employee
Not a perquisite/ Perk = Nil
Hint: Conveyance facility between office and residence is not chargeable to tax for all types of employees.
If more than one car is provided for use for employee then only car will be valued as partly used for official
purpose and partly for private purpose and other cars will be valued as fully used for private purpose
7. Free transport from own source:
Value at which employer offers such benefit to public xxx
Less: Amount recovered from employee xxx
Perk xxx
It is tax free perk in the hands of employees of Railways and Airways

C) Tax free Perks:-

1. Expenditure on food:-
a. Tea & Snacks provided during office hours (tea includes coffee, soft drinks & similar non-alcoholic beverages)
b. Free meal provided when the employee is on official tours.
c. Subsidized lunch or dinner.
d. Free meal in remote area or offshore installation
e. Lunch/refreshments during office hours and in office premises/vouchers
Actual amount paid by the employer xxx
Less: Exemption @ Rs 50 per meal xxx
xxx
Less; Amount recovered from employee xxx
Perk xxx
2. Rent free accommodation:-

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a. Rent free accommodation provided for less than 15 days in a hotel if the employee has been transferred from
one place to another.
b. Rent free accommodation in remote area.
c. Rent free accommodation at offshore.
d. Rent free accommodation to high court and Supreme Court judges.
3. Medical facility:-
a. Medical treatment in a hospital maintained by the employer: perk = NIL.
b. Medical treatment in a Govt. Hospital: perk = NIL.
c. Medical treatment in hospitals approved by chief commissioner of Income tax: perk = NIL.
d. Medical Insurance premium paid or reimbursed by the employer: perk = NIL
Medical treatment in a private hospital in India :
Value of perk is exempted up to Rs 15,000/-.The excess amount is taxable only in the hands of specified
employee.
Medical facility in foreign Country:-
(i) Medical Expenses to patient (i) Tax free perk to the extent permitted by RBI
(ii) For boarding & lodging for patient and one attendant (ii) Tax free perk to the extent permitted by RBI
Hint: - In the above two cases, if the problem is not specific, perk = NIL.
(ii) Traveling Expenses for patient and one attendant

If GTI is ≤ Rs. 2,00,000 If GTI is > Rs.2,00,000

Perk = NIL perk = Actual expenses incurred by the employer.

.
4. Interest free loans:-
a. Medical loan
b. Loan taken in a year is ≤ Rs. 20,000
5. Gift, voucher or token to employee or family members: Perk = Actual expenditure of employer (taxable for
all employees). Gifts in kind up to Rs 5,000 per annum is exempt from tax. Gift in Cash – Fully taxable
6. Use of laptop and computers.
7. Perks to Govt. employees working in foreign country.
8. Recreational facilities.
9. Telephone expenses including mobile phone expenses paid/reimbursed by Employer.
10. Conveyance facility to and from residence to place of work. However, conveyance facility for private
purpose is taxable [Perk = Actual expenses incurred by the employer – Amount recovered from employee].
11. Periodicals and journals for discharge of official work.
12. Goods manufactured by the employer sold to employee at concessional rate.
13. Club facility for use of health club, sports club etc.
14. Expenditure for training of employee.
15. Premium paid by employer on accident policy.
16. Leave travel concession: -
Only 2 journeys in a block of 4 years is exempt as follows. However carry over concession is available.
a) Where journey is performed by Air:-
Maximum exemption shall be an amount not exceeding the air economy fare of the national carrier by the
shortest route to the place of destination.
b) Where place of origin of journey and destinations are connected by rail and the journey is performed
by any mode of transport other than by Air:-
Maximum exemption shall be an amount not exceeding the air-conditional 1st class rail fare by the shortest route
to the place of destination.
c) Where place of origin of journey and destinations are not connected by rail:-
(i) Where a recognized public transport system exists:-
Maximum exemption is an amount not exceeding the 1 st class or deluxe class fare, as the case may be, on such
transport by the shortest route to the place of destination.
(ii) Where no recognized public transfer system exists:-
Maximum exemption shall be an amount not exceeding the air-conditioned 1st class rail fares by the shortest
route, as if the journey had been performed by rail.
Hint: If the problem is not specific, it shall be assumed that LTC is fully exempted from tax.

Tax treatment for holiday home facility

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Learning Objective
V. Tax treatment for profit-in-lieu of salary:-
1. Any amount received/due before joining or after cessation of employment.
2. Employer contribution towards approved superannuation fund.
3. Provident Fund.
4. Pension under National Pension Scheme (NPS)
5. Death cum Retirement benefits

1. Any amount received/due before joining or after cessation of employment – fully taxable

2. Employer contribution towards Superannuation fund:-

Least of the following is exempted from tax
a. Actual amount contributed by the employer
b. Maximum of Rs 1,00,000

3. Provident Fund:-
Statutory Public
Recognised
Particulars provident Un Recognised provident fund Provident
Provident fund
Fund fund
1.Employees contribution
Deduction Deduction
(not allowed as deduction in Deduction U/S 80C No Deduction U/S 80C
U/S 80C U/S 80C
new tax regime)
2.Employer contribution Fully exempted. Taxable as
Fully Exempted up to transfer balance Not
(same rule for both old
exempted 12% of salary applicable
&new tax regime)
3.Interest on provident fund
Fully Exempt up to 9.5% Fully exempted. Taxable as Fully
(same rule for both new &
exempted rate of interest. transfer balance exempted
old tax regime)
Employer Contribution and
interest thereon taxable U/H “
4.Repayment of lump sum Fully Exempted, if Salaries”
amount on retirement or 5 years of service is
Fully Employee’s Contribution fully Fully
resignation completed.
exempted exempted Exempted
(same rule for both old & Otherwise fully
new tax regime) taxable Interest on employee’s
contribution - Taxable U/H
“other sources”
Hint: - Salary = Basic + D.A + Commission.

4. Pension under National Pension Scheme (NPS)

Employer Contribution
Taxable as salary
Also eligible for Deduction u/s 80 CCD
Least of the following
i. Actual amount contributed by the employer
ii. 10% of Salary
Employee's Contribution
Eligible for Deduction u/s 80 CCD
Least of the following
i. Actual amount contributed by the employee
ii. 10% of Salary
Pension received
Taxable as salary in the year of receipt
Salary = Basic + DA [only if it is forming part of retirement benefits]

5. Tax Treatment For Death Cum Retirement Benefits

12
 Retirement benefits can either be received by employee at the time of retirement or by legal heirs in
case of death of the employee. Retirement benefits received by the employee are taxable under the head
salaries. However, retirement benefits received by the legal heirs of deceased employee shall not be
taxable [i.e. fully exempted] in the hands of legal heirs.
The following are the list of retirement benefits

A. Gratuity
B. Pension
C. Encashment of leave salary
D. Retrenchment compensation
E. Voluntary retirement

A. Gratuity:-

Tax treatment for Gratuity

Govt. Employee 10(10)(i) Non – Govt. Employee

Fully Exempted
Governed under Gratuity Act 10(10)(ii) Not Governed under Gratuity Act 10(10)(iii)

Least of the following is exempted Least of the following is exempted

(i) Actual Gratuity received
(ii) Maximum of Rs. 20,00,000/- (i) Actual Gratuity received
(iii) 15/26 X Salary Last drawn p.m X (ii) Maximum of Rs. 20,00,000/-
completed years service or part thereof in
(iii) ½ X Average salary p.m. X completed
excess of 6 months
years of service

Hints:
Section 10(10)(ii)
1. 33 years ≤6 months = 33 years
33 years > 6 months = 34 years
2. Salary = Basic + D.A. [Dearness Allowance]. DA includes ADA [Additional Dearness Allowance].
DA and ADA always forms part of salary, whether problem is specific or not. However for the
purpose of rest of the chapter, if the problem is not specific, it shall be assumed that DA and
ADA are not forming part of salary. For the rest of the chapter DA & ADA will form part of
salary only if the problem is specific that they are forming part of retirement benefits.
3. DA which forms part of retirement benefits is known as Dearness Pay [DP].

Section 10(10)(ii)
1. 33 years </=/> 6 months = 33 years
2. Salary = Basic + DA + Commission [only when it is given as a % on turnover]
3. Average salary per month = preceding 10 months salary/10. The month in which employee
retires shall not be considered for determining preceding 10 months. For example if the employee
retires on 31st Dec, salary shall be taken from February to November. Salary for the month of
December shall be ignored.
 Maximum limit of Rs 20,00,000 will be reduced by the amount of exemption already availed under
the same section. Example: If employee already availed an exemption of Rs 13,00,000 u/s 10(10)(ii)
from previous employer and now the current employer also falls u/s 10(10(ii) then the maximum
exemption employee can claim for gratuity from current employer is Rs 7,00,000 (20,00,000 –
13,00,000). However if the current employer falls u/s 10(10)(iii), then the maximum exemption
employee can claim for gratuity from current employer will be Rs 20,00,000
 If the employee resigns and rejoin the same company (even if it is on the same day), period of service
before resignation should be excluded unless terms of employments provide the same – see problem 2
 If the problem is not specific, it shall be assumed that employee is not covered under Gratuity Act

B. Tax treatment for pension

13
 Tax treatment for pension

Un-commuted/ Monthly pension Commuted Pension

Fully taxable
for all types of Govt. Employees (Central, State, local Non- Govt. Employees
authority and statutory corporation
employees
Employee is receiving
Fully Exempted
Hint: Commuted Pension Only pension Pension + gratuity
Pension = Received
Rate
Least of the following is exempted Least of the following is exempted
(i) Actual pension received (i) Actual pension received
(ii) ½ of Commuted pension (ii) 1/3rd of Commuted pension
C. Tax treatment for Encashment of Leave Salary:-

Govt. Employee (both State and Non – Government Employee 10(10AA)(ii)

Central Govt.) 10(10AA)(i)
Least of the following is exempted from tax.
(i) Actual amount received
Fully exempted
(ii) Maximum of Rs. 3,00,000
(iii) 10 months Average salary
(iv) (Leaves @ 30 days p.a. for every completed year
of service - Leaves utilized/encashed) X Average
salary p.m
Hints:
1. Salary = Basic + DA + Commission
2. Average salary p.m = 10 months salary [including the month and date on which employee retired]
10 months
3. 33 years < 6 months or > 6 months = 33 years
4. Actual amount received = (Leaves @ xxx days p.a. as per terms of employment for every
completed year of service - Leaves utilized/ encashed) x salary last drawn p.m.
Note: If the leaves at the credit of employee is calculated in terms of days, point (i) and (iv) in the
exemption should be divided by 30 days. Alternatively if the leaves at the credit of employee is
calculated in terms of months, point (i) and (iv) in the exemption need not be divided by 30 days
5. Leave Encashment received while in service is fully taxable for all types of employees

D. Tax treatment for Retrenchment Compensation:-

Least of the following is exempted from tax
(i) Actual amount received
(ii) Maximum of Rs.5,00,000
(iii) 15/26 X Average salary p.m. X completed years of service or part thereof in excess of 6 months
Hint: Salary = Basic + DA + Commission
Average salary:
If workman is getting monthly salary, on the basis of last 3 calendar months
If weekly wages, on the basis of last 4 completed weeks
If daily wages, on the basis of last 12 full working days

E. Tax Treatment for compensation received on voluntary retirement:

Least of the following is exempted from tax
(i) Actual amount received
(ii) Maximum of Rs.5,00,000
(iii) Higher of the following
a. 3 X salary last drawn p.m. X completed years of service

14
 b. Left over service in months X salary last drawn p.m.
Hints:
1. Salary = Basic + DA + Commission
2. Exemption is available to an employee only once in a life time, i.e. if the assessee has already availed the
exemption for any assessment year, it shall not be allowed to him for any other assessment year.
3. No exemption will be given if compensation is received by the directors under VRS scheme.
Note: On taxable portion of all retirement benefits assessee can claim tax relief U/S 89 except for Voluntary
retirement
Learning Objective
IV. Deductions under the head salaries:
The following are the 3 deductions U/H salaries.
A. Standard Deduction U/S 16(i)
B. Entertainment Allowance U/S 16(ii)
C. Professional Tax U/S 16(iii)

A. Standard Deduction U/S 16(i)

Rs 50,000

B. Entertainment Allowance: Sec.16 (ii)

Entertainment Allowance [Sec 16(ii)]

Govt. Employees Non – Govt. Employees

Least of the following is allowed as Deduction is not available

deduction.
(i) Actual E.A received
(ii) Maximum of Rs. 5,000
(iii) Basic salary X 20%

Hints:
1. EA is not eligible for exemption but eligible for deduction U/S 16(ii). Therefore EA received will be first
included into the gross salary and then deduction will be claimed.
2. If the assessee is a government employee for some time during the year and non-government employee
for balance of the year, deduction U/S 16(ii) can be claimed only for that period in which he is a
government employee. In such cases,
Maximum amount = 5000 X No. of months he is a Govt. Employee / 12
3. Actual amount expended by employee is immaterial.
4. EA received for official purpose is fully exempted from tax.

C. Professional Tax: Sec.16 (iii)

C. Professional Tax

Paid by the employee Paid by the employer

Fully allowed as deduction First include into the Gross salary

and then full amount will be
allowed as deduction U/S 16(iii)

Problems:
Gratuity
1. X is employed by A Ltd. since May 1, 2004. The company adopted new pay scale on January 1, 2012. At
that time, he was placed in the grade of Rs 20,000 – Rs 1,000 – Rs 60,000 and his salary was fixed at
Rs24,000. Besides, he is entitled for 10% of salary as dearness allowance which (according to service rules)
will be treated as part of salary for calculation of gratuity but not for calculation of pension and provident

15
 fund. Before joining A Ltd. in 2004, X was employed with B Ltd. He retired from B Ltd. in April 2004 after
rendering service of 15 years and at that time he took an exemption u/s 10(10)(iii) of Rs 2,50,000 from
gratuity received from B Ltd. X retires from service of A Ltd. on February 14, 2016 and gets a sum of Rs
6,00,000 as gratuity. Find out the gratuity chargeable to tax for the assessment year 2016 -17 in the
following two situations
Situation 1 – Payment of Gratuity Act, 1972 is applicable
Situation 2 – Payment of Gratuity Act, 1972 is not applicable
ANS: Taxable Gratuity (i) Rs 3,86,769 (ii) Rs 4,50,950
2. X gives the following information
1st employer 2nd employer
Name of the employer A Ltd. B Ltd.
Date of joining April 6, 1996 May 12, 2001
Date of retirement May 11, 2001 December 20, 2015
Gratuity paid No Yes
A Ltd. and B Ltd. are under the same management and controlled by D, an industrialist. X resigned from A
Ltd on May 11, 2001 to join B Ltd. at the time of leaving A Ltd. He did not get any gratuity but at the same
time an undertaking was given that the service period with A Ltd shall be considered at the time of
retirement from B Ltd. for computing retirement benefits. From the information given below, find out the
amount of gratuity chargeable to tax for the assessment year 2016-17.
Gratuity paid by B Ltd Rs 7,00,000 under Payment of Gratuity Act
Salary at the time of retirement Rs 14,000 per month
Dearness allowance at the time of retirement Rs 2,000 per month
Annual Bonus Rs 18,000
ANS: Taxable Gratuity (i) Rs 5,15,385 (Hint: period of service = April 6, 1996 to May 12, 2001)
Encashment of Leave Salary
3. Assuming in problem 1 that at the time of retirement from A Ltd., X gets a sum f Rs 4,30,000 on account of
Leave encashment of salary. According to service rules, he is entitled for 45 days of leave for each year of
service and during the service time he has availed leave of 15 days
At the time of retirement from B Ltd. in April 2004, he took an exemption of Rs 30,000 for leave
encashment. Find out the amount of taxable leave encashment for salary for the assessment year 2016-17
ANS: Taxable Gratuity (i) Rs 1,60,000

Motor Car
4. X and Y are employed by A Ltd. (salary being Rs 48,000 p.m.). as per the company’s policy, an employee
is entitled for a car (1600 CC) and a driver. The car can be used for official and personal purposes. A car
owned by the company can be provided along with driver and the company will bear running and
maintenance expenditure up to a maximum of Rs 72,000 p.a. and actual salary of the driver (u to Rs 60,000
p.a.). An employee, at his option, can use his own car for official and personal purposes and company will
reimburse actual expenditure on maintenance of the car but up to a maximum of Rs 72,000 p.a. and salary
of driver up to Rs 60,000 p.a.
X has taken a car and driver from the company for official and personal purposes (actual expenditure is Rs
72,000 p.a. for car and Rs 60,000 p.a. for driver). However Y used his own car and driver for official and
personal purposes (actual expenditure is Rs 72,000 p.a. for car and Rs 60,000 p.a. for driver)
Find out the taxable value of perquisite in the hands of X and Y for the assessment year 2016 – 17 in the
following cases, assuming Rs 1,000 p.a. is recovered from X and Y for providing the perquisite
Case 1: Log book of the cars is not maintained. It is not possible to determine expenditure attributable for
private use of cars
Case 2: As per log book of cars 90% of expenditure is attributable towards private use and 10% for official
use of car for both X and Y.
Case 3: As per log book of cars 20% of expenditure is attributable towards private use and 80% for official
use of car for both X and Y.
ANS: X: Rs 32,400 in both cases
Y- Case 1: Rs 98,600 & Case 2: Rs 98,600 Case 3: Rs 25,400

IFS
5. X (34 years) is employed by A Ltd. His basic salary is Rs 50,000 per month. He is also entitled for dearness
allowance at the rate of 35% of basic salary. 40% of DA is taken into consideration for retirement benefit
purpose. He gets Rs 20,000 per month as HRA which is increased to Rs 25,000 p.m. with effect from
December 1, 2015. Besides with effect from March 1, 2016 he gets a special increment in his basic salary of
Rs 5,000 p.m. Rent paid by X is as follows.

16
 Up to May 31, 2015 – Nil (he leaves in New Delhi with his parents without paying any rent)
From June 1, 2015 to October 31, 2015 – Rs 35,000 p.m. (in Delhi)
From November 1, 2015 to April 24, 2016 Rs 28,000 p.m. (in Noida)
Besides the company provides commission on the basis of turnover as follows
a. 1% Commission on turnover achieved by X (turnover achieved by X – Rs 1,00,000 p.m. up to October
2015, Rs 1,50,000 p.m. till February 2016 and Rs 2,00,000 p.m. from March 2016 onwards)
b. 0.5% special commission for achieving target of turnover Rs 2,00,000 p.m.
Employer provides the following perquisites
a. Domestic servant (expenditure of employer Rs 3,000 p.m.)
b. Car (1200 CC) for domestic and official purpose (expenditure of employer on running and maintenance
Rs 11,000 per month)
c. Car Insurance (Rs 12,000 per annum)
d. Driver (Rs 6,000 p.m.)
e. X Contributes 15% of the basic salary toward recognized provident fund. Employer Company makes a
matching contribution. X also contributes Rs 1,20,000 annually to the public provident fund account.
Compute Income chargeable to tax under the hear salaries for the assessment year 2016-17
ANS: Rs 9,59,336

6. X is appointed as production manager by a company in Mumbai on November 1, 2013 in the pay scale of
Rs 60,000 – Rs 1,000 – Rs 95,000. At the time of joining, his salary has been fixed at Rs 64,000. Besides,
he gets Rs 2,000 p.m. as dearness allowance (not forming part of retirement benefits). As per service rules,
he is entitled for the following
Fixed medical allowance: Rs 1,250 p.m. Fixed lunch allowance: Rs 1,500 p.m.
Conveyance allowance: Rs 2,000 p.m. Domestic servant allowance: Rs 1,700 p.m.
These allowances are used for personal purposes. However, conveyance allowance has been discontinued
with effect from January 1, 2016. A car (1,400 cc) is provided for official and private use with effect from
January 1, 2016. The entire expenditure Rs 50,000 including driver salary is paid by employer.
The employer has provided a rent-free residential house at Mumbai with effect from October 1, 2015. The
house is taken on lease by the employer @ Rs 17,000 p.m. The employer has incurred the following
expenses in respect of this house from October 1, 2015 to March 31, 2016
Water bill: Rs 1,250 Repairs: Rs 1,200 Electricity: Rs 7,000 Telephone: Rs 8,000
X contributes 14% of his salary towards recognized provident fund. A matching contribution is made by the
employer. Compute Income chargeable to tax under the hear salaries for the assessment year 2016-17
ANS: Rs 9,76,605

7. X is employed by A Ltd. as marketing manager in Pune. The following information is given by X for the
previous year ending March 31, 2016.
Basic Salary: Rs 12,00,000 p.a. Dearness allowance: Rs 40,000 p.a. (40% is taken into
consideration for Gratuity but not for pension) club allowance: Rs 5,000 p.m Furnishing allowance
Rs 2,000 p.m. HRA Rs 40,000 p.m. Conveyance allowance: Rs 2,800 p.m. (it can be used for
private purpose including for journey between office and residence).
Up to September 1, 2015, he resides with his parents and does not pay any rent. From September 1, 2015,
he has been allotted a duplex flat at Pune (owned by the company, assuming that population of Pune is 23
lakh). Club allowance has been discontinued with effect from January 1, 2016, as X has been provided by
the company club facility for private and office use at Oriental Club in Pune. Expenditure of the company
for the period ending on March 31, 2016 is Rs 20,500 (of which 20% is for private purpose)
He has taken a interest-free loan of Rs 20,000 from the company on November 20,105. SBI lending rate for
a similar loan is 18.5%. He contributes 10% of his salary towards RPF. A matching contribution is made by
the company. Interest credited in RPF account by company @ 9.7% is Rs 2,11,200.
Compute Income chargeable to tax under the hear salaries for the assessment year 2016-17
ANS: Rs 16,06,095

8. X, an employee of a private sector company at Coimbatore, retires on January 31, 2016. He submits the
following information
1. Basic Salary Rs 80,000 p.m.
2. Dearness allowance (forming part of salary) Rs 5,000 p.m.
3. Retirement Gratuity (not covered by the payment of Gratuity Act) Rs 11,50,000

17
 4.He does not have any leave to his credit at the time of retirement. However, the employer has paid
leave encashment of Rs 30,000 under company’s service rules
5. He has been allotted a furnished house at Coimbatore (population: 26 lakh) by the company. He has not
vacated this property till March 31, 2016. Lease rent of the property paid by the employer company is
Rs 20,000 p.m. Besides, the company pays Rs 3,000 p.m. as rent of furniture provided along with the
house. The company does not charge any rent till the date of retirement. However a nominal rent of Rs
9,000 p.m is charged in respect of the facility of rent free furnished house
6. He has been provided with big car without driver but only for coming and going from residence to
office and back
7. A company maintains RPF to which each employee along with the company contributes 12% of salary
8. Interest credited to RPF @ 8.5% is Rs 95,000
9. Professional tax paid by X Rs 2,000 on April 1, 2016
Compute Income chargeable to tax under the hear salaries for the assessment year 2016-17
ANS: Rs 11,75,500

9. X, an employee of A Ltd., Mumbai, furnishes following information for the period ending March 31, 2016
Basic Salary Rs 52,000 p.m. (increased to Rs 53,000 p.m. from November 1, 2015)
Dearness allowance Rs 10,000 p.m. (43% is part of salary for computing different retirement benefits)
House rent allowance Rs 17,000 p.m. (he resides in his own house)
Leave Travel Concession Rs 42,000 (economy class air fare Rs 39,000)
He retires from service on January 1, 2016 after rendering service of 16 years and 8 months. At the time of
retirement he gets Rs 10,16,885 as Gratuity under the Payment of Gratuity Act. In addition he gets leave
encashment of Rs 48,000 (he has already availed exemption of Rs 3,00,000 in respect of earned leave in
1993at the time of retirement from earlier employer).
After retirement he gets pension of Rs 10,00 p.m. 25% of the commuted pension is withdrawn on March 1,
2016 Rs 3,52,000. At the time of retirement he gets Rs 25,40,000 on account of Recognized Provident Fund
balance (35% is employer’s contribution, 40% is contribution made by X and the balance is interest on
provident fund contribution).
At the time of retirement, he gets a laptop by way of gift from the employer (cost of laptop to the company
Rs 38,000) and music system costing Rs 55,000 from his colleagues.
Determine Income chargeable to tax under the hear salaries for the assessment year 2016-17
ANS: Rs 12,23,500

10. X is employed by ABC Ltd., Surat (population is above 25 lakh). From the information given below find
out Income from salary for the assessment year 2016-17.
Basic Salary: Rs 46,000 p.m.
Commission (@10% on sales achieved made by X) Rs 90,000 for the period ending on December 31, 2015
and Rs 45,000 for the period ending March 31, 2016.
Dearness allowance Rs 8,000 p.m. (1/4is part of salary for computing pension but only 20% is part of salary
for computing all other retirement benefits)
House rent allowance Rs 25,000 p.m.
Tiffin allowance Rs 10,000 p.m. (but only with effect from February 1, 2016)
Besides, he has been provided with the following amenities
1. Gas, electricity and water, the expenses of which amounting to Rs 18,000 are paid by the employer
2. Domestic servant Rs 10,500
3. He resides in a rented accommodation at Surat (rent paid by X Rs 21,00 p.m.). From January 1, 2016
he has been allotted with rent-free unfurnished house and House rent allowance has been discontinued
on the same day
X contributes Rs 6,000 p.m. towards recognized provident fund. Contribution by the employer is not more
than 12% of salary. Interest on provident fund is credited at the rate of 8% which comes to Rs 2,94,000 for
the previous year 2015-16
Besides, he gets a pension of Rs 3,600 per month from the previous employer with whom X was employed
till 1996 and contributes Rs 20,000 towards public provident fund
ANS: 9,95,330
11. X is the head of the HR department of A Ltd. he furnishes the following information for his income
pertaining to the previous year 2015-16
He gets the following emoluments
Basic salary Rs 55,000 p.m.
Dearness allowance Rs 12,500 p.m. (forming part of retirement benefits)
Domestic servant allowance Rs 5,000 p.m.

18
 Overtime allowance Rs 2,500 p.m.
Education allowance for grand children Rs 6,000 p.m.
Overtime allowance has been withdrawn with effect from December 15, 2015. With effect from September
1, 2015, the employer company has provided furnished accommodation in a guest house for X and his
family members. Before September 1, 2015, he resides in a rented accommodation but house rent allowance
is not paid to him. Guest house tariff paid by A Ltd. is Rs 1,35,000 for the period ending March 31, 2016.
On November 1, 2015, A Ltd. has given an option to get 2,000 equity shares in A Ltd. at a pre-determined
price of Rs 70 per share. This option he can exercise at any time during December 1, 2015 and December 1,
2016. He exercises the option of purchasing 1700 equity shares in A Ltd. on February 25, 2016. Shares are
allotted on March 25, 2016 and transferred to X on April 1, 2016
Taking into consideration the following information, find out Income from salary for the assessment year
2016-17
1. X contributes 15% of his salary towards unrecognized Provident fund, it comes to Rs 1,21,500 for the
previous year 2015-16. A matching contribution is made by the employer.
2. Provident fund interest is credited at the rate of 11% which comes to Rs 1,11,500
3. Market value of shares in A Ltd is as follows – on November 1, 2015 : Rs 700, December 1, 2015: Rs
760, February 25, 2016 Rs 725, March 25, 2016: Rs 810 and April 1, 2016: Rs 900
ANS: Rs 22,10,730

12. X is appointed by a company in Patna on salary of Rs 33,000 p.m. in addition to salary he gets dearness
allowance at the rate of 48% of basic salary out of which 10% is part of salary for calculating pension and
gratuity. Besides, he gets the following
Club allowance Rs 900 per month which is increased to Rs 1,500 p.m. effective January 1, 2016.
Further, he gets house rent allowance at the rate of Rs 6,000 p.m. (rent paid is Rs 9,000 p.m. at Noida)
The employer has provided him a sweeper, watchman, cook and gardener (salary paid by the employer Rs
1,200 per month per person). However the facility of gardener has been withdrawn from March 1, 2016.
From this date he gets servant allowance of Rs 1,500 per month
He has been provided a car (1000 cc). Car can be used for official and private purposes. Total expenditure
incurred by the company is Rs 42,000 (approximately 5% of the expenditure is attributable towards
personal use of the car)
The employer and employee each contribute 14% of salary towards recognized provident fund. However,
with effect from November 1, 2015, he makes an additional contribution of Rs 15,000 p.m.
Find out Income from Salaries of Mr X for the Assessment year 2016-17
Ans: Rs 6,91,981

13. B Ltd. owns a property in Rohit Nagar, Madhya Pradesh. Population of Rohit Nagar is 8 lakh. This property
is given on rent to A Ltd. since 1993. Rent is Rs 10,000 per month which is increased to Rs 18,000 per
month with effect from July 1, 2015. In addition A Ltd. pays a sum of Rs 3,000 per month for rent of
furniture provided in the house. This property is purchased by A Ltd. on December 1, 2015 for
consideration of Rs 54,00,000 (out of which Rs 1,44,000 is give for furniture in the house).
X is employed by A Ltd. Basic Salary is Rs 50,000 per month. Besides, he gets the following during the
previous year 2015-16 (annual figures are given below)
Dearness allowance (not part of salary) Rs 60,000 Bonus Rs 1,20,000
Commission Rs 90,000 Tiffin allowance Rs 24,000
Overtime allowance Rs 30,000 Medical allowance Rs 15,000
Professional tax paid by the company Rs 2,000
Income tax penalty paid by the company Rs 60,000
During the previous year 2015-16, A Ltd., has provided rent-free accommodation in Rohit Naga. The
company has provided X a Maruti car 800 cc which is used by him both for official and personal purposes
The running and maintenance expense of motor car which amounts to Rs 14,000 per annum is met by the
employer. X’s major son is studying in IIM, Indore. His fee of Rs 43,000 is paid by employer directly to the
institute. Determine his Salary Income for the assessment year 2016-17 on the assumption that X pays 5%
of his salary towards PPF and a matching contribution is made by the employer company.
ANS: Rs 12,29,316
14. Mrs. X is medical officer of A Ltd., Kolkata. During the previous year she gets Rs 10,00,000 as salary and
Rs 3,00,000 as dearness allowance. Besides, she gets the following perks and allowances
 Free tea, coffee and snacks etc. in office Rs 10,000
Free lunch Rs 45 per day for 100 days and Rs 56 per day for 200 days – Rs 15,700
Food coupons (these are coupons for multipurpose and actually used for purchasing grocery) Rs 10,000

19
  Car purchased from company (cost of car to the company Rs 8,00,000; sold to Mrs. X after 3 years and
10 months for Rs 75,000)
A painting purchased from company (cost of painting when purchased during September 2012 Rs
1,00,000; sold to Mrs. X in June 2015 for Rs 23,000, during this period the painting was used for
decoration purposes in company’s office. Current market value of the painting is Rs 6,00,000).
Gift of computer in December 2015 (it was purchased by company in May 2011 for Rs 80,000 and
since then it was used in company’s office)
 Personal loan of Rs 5,00,000 is given to Mrs. X on May 5, 2015 out of which Rs 4,90,000 is repaid by
Mrs. X on May 30 2015 and Rs 10,000 is repaid on June 27, 2015. Another loan of Rs 15,00,000 is
given to Mrs. X on November 2, 2015, which is repaid on November 30, 2015. SBI lending rate for
similar loan is 18.5% per annum on April 1, 2015 and 17.5% per annum with effect from June 1, 2015.
A sum of Rs 4,404 is recovered from Mrs. X by the employer on account of interest
Calculate Income from Salary of Mrs. X for the assessment year 2016-17
ANS: Rs 17,21,675

15. X is finance officer of A Ltd. During the previous year, X gets Rs 50,000 per month as salary and Rs
10,000 per month as dearness allowance (which is taken into consideration for calculating pension but not
gratuity). Besides, he gets following allowances
Special Bonus Rs 2,00,000
Transport allowance Rs 1,800 per month (for commuting between office and residence)
Travelling allowance Rs 3,000 per month (approximately 75% is used for official purposes)
Research allowance Rs 2,000 per month (nothing is spent)
Helper allowance Rs 9,000 per month (approximately 80% is paid for engaging domestic helper and
remaining amount is not used)
House rent allowance Rs 17,000 per month (till May 2015, he resides in a rented house in Delhi for which
he pays rent of Rs 5,500 per month and from June 2015, he occupied his own house).
On May 1, 2015, X takes housing loan of Rs 55,00,000 from A Ltd. SBI lending rate on April 1, 2015 and
May 1, 2015 is 10.4% and 10.5% p.a. respectively. Rs 5,00,000 out of the housing loan is repaid on January
31, 2016. Rs 2,00,000 is recovered during the year by A Ltd. as interest on housing loan given to X
Find out Income from Salary of Mr. X for the assessment year 2016-17 on the assumption that A Ltd. does
not maintain provident fund account but annually deposits Rs 70,000 in Public Provident Fund account of X
ANS: Rs 16,52,067

16. X is employed by A Ltd. and B Ltd. on part time basis. From A Ltd. he gets the following
Basic Salary Rs 26,000 p.m. Commission Rs 10,000 p.m. HRA (rent not paid) Rs 8,000 p.m.
Besides, A Ltd. has provided a 1600cc BMW car (cost Rs 48,00,000) for official and private purposes.
Entire expenditure of Rs 2,20,000 is met by A Ltd. Driver is not provided. However, from January 1, 2016,
X bears expenses of the car which are pertaining to private use. A Ltd. reimburses ordinary medical
expenditure of X and his family (total reimbursed during the year is Rs 26,000 out of which Rs 12,000 is
pertaining to treatment of brother of X, not dependent upon X, in a private hospital)
A Ltd. contributes 12% of salary towards recognized provident fund. X however contributes 15% of his
salary towards provident fund
From B Ltd. he gets the following during the financial year 2015-16
Basic salary Rs 55,000 p.m.; Dearness allowance Rs 12,000 p.m. (60% is part of salary); Lunch allowance
Rs 2,000 p.m.; Conveyance allowance Rs 15,000 p.m. (90% is used for official purpose); Transport
allowance Rs 1,600 p.m.
Besides, B Ltd. has provided a ret-free unfurnished house in Delhi for which B Ltd. pays a sum of Rs
20,000 p.m. as rent. Nothing is recovered from X.
B Ltd. contributes 10% of salary towards unrecognized provident fund. X contributes 12% of salary.
B Ltd. reimburses Rs 20,000 on account of medical expenditure of X and his family.
B Ltd. provides a 1800 cc car for official and private use with effect from March 1, 2016. The entire
expenditure for the period ending March 31, 2016 Rs 6,000 is paid by B Ltd. This car can be used for office
and private purposes. Cost of the car is Rs 8,00,000 and B Ltd. has paid registration charges of Rs 20,000.
On an official tour of X to Sri Lanka for 5 days, Mrs. X accompanied. The entire expenditure of Mrs. X Rs
32,000 is paid by B Ltd. (cont…..)
Before joining A Ltd and B Ltd., X was with C Ltd. He retired from C Ltd. in June 2013. From C Ltd he
gets Rs 5,000 p.m. as pension. There was a dispute with C Ltd. regarding settlement of retirement benefits.
After the verdict of Delhi High Court of September 10, 2015, C Ltd. pays a sum of Rs 5,00,000 as special
allowance
Find out Income from Salary of Mr. X for the assessment year 2016 -17

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ANS: 22,34,293
17. X, a Non-Government employee, receives Rs 3,06,000 as leave salary at the time of retirement on February
20, 201. On the basis of the following information, determine the amount of taxable leave salary
Basic Pay: Rs 18,000 per month since 2011 Duration of service: 32 years
Leave at the credit of X at the time of retirement: 17 months entitlement of leave salary: 45 days
salary for every year of serve and leaves availed while in service: 31 months
ANS: Rs 2,88,000
18. From the flowing information, find out the amount chargeable to tax for the assessment year 2016-17
Date of retirement of X from a private job November 15, 2015
Basic salary from January 1, 2015 to April 30, 2015 Rs 20,000 p.m.
Basic salary from May 1, 2015 onwards Rs 22,000 p.m.
Dearness allowance: Rs NIL Commission: Rs NIL Duration of service: 18 years
Leave standing to the credit at the time of retirement (according to service rules) 600 days
Rate of leave entitlement according to the service rule: 45 days salary for every year of serve
Amount of leave encashment given at the retirement (leave encashment was not given earlier) (i.e. Rs
22,000 x 600/30): Rs 4,40,000
ANS: 2,27,000
19. X, an employee of LMN Ltd., receives Rs 93,000 as Gratuity under the Payment of Gratuity Act, 1972. He
retires on January 2, 2016 after rendering service of 20 years and 6 months. At the time of retirement
monthly salary was Rs 8,000 (inclusive of dearness allowance of Rs 200 per month). Calculate amount f
Gratuity chargeable to tax.
ANS: Rs 692
20. X, not being covered by the Payment of Gratuity Act, 1972, retires on January 25, 2016 from PQR and
receives Rs 3,76,000 as Gratuity after service of 40 years and 2 months. His average monthly salary during
March 1, 2015 to December 31, 2015 is Rs 16,590. Determine the amount of taxable gratuity for
assessment year 2016-17
ANS: Rs 44,200
21. X, a marketing specialist of Madras, is working with two concerns, viz., P Co. and Q Co. He retires from P
on June 30, 2008 and receives Rs 29,000 as gratuity out of which Rs 28,000 is exempt from tax under
section 10(10)(iii). He retires from Q Co. on December 2, 2105 after 6 years and 11 months service and
receives Rs 3,70,000 as Gratuity. Basic salary drawn from Q Co. for preceding 10 months ending
November 30, 2015 is Rs 22,000. Besides, he has received Rs 1,000 p.m. as dearness allowance which
forms part of salary for the purpose of computation of retirement benefits and 5% commission on turnover
achieved by him. Total turnover achieved by him during the period of 10 months ending November 30,
2015 is Rs 6,70,000. Determine the amount of Gratuity taxable for the assessment year 2016-17.
ANS: Rs 2,90,950
22. X, who resides in Agra, gets Rs 2,20,000 p.a. as basic salary. He receives Rs 65,000 p.a. as House Rent
Allowance. He pays Rs 60,000 p.a. as rent. Determine the amount of hose rent allowance chargeable to tax
for the assessment year 2016-17
ANS: Rs 27,000
23. X, who lives in Meerut, gets Rs 4,00,000 p.a. as basic salary and Rs 90,000 p.a. as dearness allowance (1/3
of which is part of salary for computation of retirement benefits). During the previous year 2015-16, X has
received salary of 11 months and salary of March 2016 is received in April 2016. Besides basic salary he
receives Rs 1,76,000 as house rent allowance, thought he pays Rs 1,80,000 as rent to landlord. He claims
that the entire house rent allowance is exempt from tax. Is he legally correct? If not, find out the amount of
house rent allowance exempt from tax
ANS: HRA Exempted from tax Rs 1,37,000 and taxable HRA is Rs 39,000
24. X, an officer of Punjab Government, gets Rs 25,000 p.m. as salary and Rs 600 per month as entertainment
allowance. Besides, he gets Rs 10,000 p.m. as dearness allowance and Rs 5,000 p.m. as commission (on
sale achieved) hose rent allowance as per the Government rules. During the relevant previous year, he has
utilized the entire entertainment allowance for private purpose. The assessing office is, therefore of the view
that the entertainment allowance is fully taxable. Is he legally correct? If not, determine amount of
entertainment allowance deductable form salary
ANS: Rs 5,000

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