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DIRECT TAXES

BASIC CONCEPTS

Learning Objectives
Taxes are basic source of revenue for government
thru which expenses of Govt. are defrayed.
Two types Direct & Indirect taxes.
Tax levied directly on income and wealth - called
as Direct Tax.
Income-Tax one of the Direct Taxes levy of Income
Tax is governed by Income Tax Act, 1961

Therefore naturally a question arises as to what is tax ?


Article 366 clause (28) of Constitution The
imposition of any tax or impost whether general or
local or special.
A tax is a compulsory exaction of money by public
authority for public purpose enforceable by law and is
not for payment of service rendered.
The procedural matters are governed by Income Tax
Rules, 1962.

Question is - on what is income-tax charged ?


It is charged on the Total Income.
Now here comes the objective of learning
basic concepts of Income Tax. --- objective ---- -- is to know the Total Income
for this one must know the other concepts of
Income-Tax --such as person, assessment year,
previous year, assesse etc.

BASIC CONCEPTS :
As we have seen Income Tax is levied on the total
income. the question is of which period. --- of the
previous year of every person.
Then what is Income ? It is defined under Sec 2(24)
of Income Tax Act, 1961

The definition is interesting in the sense that it starts


with the word includes ---- and therefore the list
enumerated under the word income is inclusive and
not exhaustive.
1. Profits or gains of business or profession.
2. Dividend.

3. Voluntary Contribution received by a Charitable /


Religious Trust or University / Education Institution
or Hospital
4. Value of perquisite or profit in lieu of salary
taxable u/s 17 and special allowance or benefit
specifically granted either to meet personal expenses
or for performance of duties of an office or an
employment of profit.

5. Export incentives, like Duty Drawback, Cash


Compensatory Support, Sale of licenses etc.
6. Interest, salary, bonus, commission or
remuneration earned by a partner of a Firm from such
Firm.
7. Capital Gains chargeable u/s 45.
8. Profits and gains from the business of banking
carried on by a cooperative society with its members.

9. Winnings from lotteries, crossword puzzles, races


including horse races, card games and other games of
any sort or from gambling or betting of any form or
nature whatsoever.
10. Deemed income u/s 41 or 59.
11. Sums received by an assessee from his employees
towards welfare fund contributions such as Provident
Fund, Superannuation Fund etc.

12. Amount received under Keyman Insurance Policy


including bonus thereon.
13. Amount received under agreement for (a) not
carrying out activity in relation to any business, or (b)
not sharing any knowhow, patent, copyright etc.
14. Benefit or perquisite received from a Company,
by a Director or a person holding substantial interest
or a relative of the Director or such person.

15. Gift as defined u/s 56 (2)(vi) (w.e.f. A.Y 20082009). Any sum of money exceeding ` 50,000,
received by an Individual or a HUF from any person
during the previous year without consideration on or
after 1.4.2007, then the whole of aggregate of such
sums will be taxable.

Assessee means: [Section 2(7)]


Any person who is liable to pay income-tax or any
other sum of money under the Income Tax Act, 1961,
and includes
(a) Every person in respect of whom any proceedings
has been taken for the assessment of his income or
or of the income of any other person.

loss sustained by him or other person.


refund due to him or such other person.
(b) Every person who is deemed to be an assessee
under the Act.
(c) Every person who is deemed to be an assessee in
default under the Act.
ITO v DDA (2001) 252 ITR 772 (SC)

;
Assessment Year [Section 2 (9)]
1. Assessment Year means the period of twelve
months commencing on the 1st day of April every
year and ends on 31st March next year.
2. The year for which tax is paid on the income is
called Assessment Year.
Illustration : Assessment year 2012-13 would
commence on 1/4/2012 and end on 31/3/2013

Previous Year [Section 3]


1. Previous Year means Financial Year immediately
preceding the Assessment Year.
2. The year in which the income is earned is known
as previous year.
The present previous year 2011-12 and its
Assessment Year is 2012-13.

Previous Year & Assessment Year will be same in


the following cases:
1. Shipping business of nonresident [Section 172]
2. Persons leaving India [Section 174]
3. AOP or BOI or Artificial Juridical Person formed
for a particular event or purpose [Sec. 174A]
4. Persons likely to transfer property to avoid tax
[Section 175]
5. Discontinued business [Section 176]

However, Previous Year for newly established


business - From the date of setting up of the
business to the end of the Financial year in which
business was set up.
Example : X Ltd. Started business on 1.11.11. So
for X Ltd. Previous year will be considered as
1.11.11 to 31.3.12.

PERSON : Sec 2(31)


As we have seen Income Tax is charged on the Total
Income of the previous year of every Person. So,
who is a person Person includes
-- an individual
--- a Hindu undivided family
----- a company
------ a firm

---- an association of persons or a body of individuals


whether incorporated or not
---- a local authority
either artificial, juridical person, not falling within
any of the above categories .

Illustrations : DSNLU AJP, DCM Ltd C.


Visakhapatnam Municipal Corporation - LA
Taxmann Publication (P) Ltd C
Laxmi commercial bank Ltd - C
ABC group housing co-operative society - ASP
Firm of X & Y a f
A joint family of X - HUF
X and Y who are legal heirs of Z , carried on business
after death of Z without entering to partnership.- ASP

Capital and Revenue receipts:


Receipts are of two kinds Capital & Revenue
Capital receipts are those which are exempt from
tax unless they are expressly taxable.
Example: Capital gains are specifically taxable
under sec 45 of IT Act, even though they are capital
receipts.
On the other hand revenue receipts are those which
are taxable unless specifically exempt.
Example: Income exempt under Sec 10

Concept of real income


Under Income Tax Act only real income is taxable
unless otherwise specifically provided by law.
Example: A gives interest free loan to B who is carrying
on business or profession the income tax officer cannot
estimate the interest on notional basis and assess it.
Income does not arise in a transaction between head
office and branch office even if goods are invoiced at
higher price than the cost price.
Thus fictional income does not come under real income.

Gross Total Income : Sec 14


The aggregate of income under the five heads namely:
i) Salaries
Ii) Income from house property
Iii) Profits and gains of business or profession
Iv) Capital Gains
V) Income from other sources
Is called as Gross Total Income
i.e Income without making any deductions

Total Income Sec 2(45)


The total income of an assessee is gross total income
as reduced by the amount permissible as deductions
under Sec 80 C to 80 U.
Illustration : pg 12-13 Dr. Vinod K. Singhania
Students guide to Income Tax 47th Edition, 2012-13,
Taxmann,

Learning Objective
Income Tax is levied on taxable income of every
person.
So what is the basis on which Income Tax is charged

Basis of Charge:
Sec 4 of the Act is charging section.
A section in an Act, which imposes charge & is referred to as
charging section.
It is levied on the following basis:

i) at the rate at which it is prescribed


Ii) charge is on the persons specified in Section 2(31)

Iii)income sought to be taxed is of the previous year


and not of the assessment year.
Iv) levy of tax on the assessee is on his total or
taxable income.
The assessment should in every case be made in
accordance with provisions of law in force in the
relevant assessment year - and not law applicable to
the previous year.

Thus for making assessment, the general rule is


income of the previous year alone should be taxed in
the immediately following assessment year.
However, there are five exceptions to the rule:
i) Assessment of non-residents in respect of their
income from shipping business
Ii)Assessment of persons leaving India

Iii) Assessment of association of persons or body of


individuals or artificial juridical person formed for a
particular event or purpose.
Iv) assessment of persons trying to alienate their
assests with the object of avoiding tax liability
V) Assessment
business.

of

Income

from

discontinued

CONCEPT OF INCOME
Income
i) periodical monetary return
Ii) some regularity
Exceptions :
Winnings from lotteries, cross-word puzzles.

Other attributes of Income i) Cash or (Kind Valuation under IT rules 1962)


Ii) Receipt basis / Accrual basis
Income on accrual basis is received without actual
receipt. It accrues on the basis of right to receive.

Iii) Legal or Illegal source IT does not make a


distinction between a legal and an illegal income.
CIT v Pyra Singh 1980 3 Taxman 1967
smuggling activity.
Iv) Temporary or Permanent Income No distinction
- Both are taxable.

v) Income in Lump sum or installments No


differentiation between both. Both are taxable.
vi) Gifts Do not constitute income subject to
maximum of Rs 50000/- received in cash. above
Rs 50000/- taxable.
vii) Revenue or capital receipt

Learning Objective
To determine taxable income, understanding the
residential status of the person for tax purpose is
important because - the basis for determination of
residential status varies person wise.

BASIC PRINCIPLES Sec 6


Residential status of the person has to be
determined with reference to previous year.
Concept of residential status is nothing to do with
nationality or domestic status of a person.
Eg: A person who is a citizen of India can be nonresident for IT purpose.
conversely a foreigner can be resident of India for
tax purpose.

Total income of a person cannot be computed unless


residential status of a person in a previous year is
known
Therefore, the determination of the residence status of
a person is very significant in order to find out his tax
liability.
Broadly a assessee can be
i) Resident or
Ii) Non-resident

However an individual or HUF cannot be called


simply as resident in India. If they are resident in
India they will either be ---- i) Resident and Ordinarily resident in India (ROR) or
Ii) Resident and but not Ordinarily resident in India
(NROR)
In case of persons other then individual or HUF
will be resident or non-resident in India.

Residential Status
RESIDENTIAL STATUS OF AN INDIVIDUAL
UNDER INCOME TAX ACT, 1961

RESIDENT AND
ORDINARILY
RESIDENT
Sec 6(1)
(Satisfies any one
condition from 1
2 & 3)

NOT
ORDINARILY
RESIDENT
Sec 6(6)
(Satisfies any one
condition from 1
& 2)

NONRESIDENT
Sec 3 (30)
(Does not Satisfy
any condition
from 1 & 2)

Basic Conditions for being Sec 6

i) If the Individual stayed in India for a


period of 182 days or more during the
Relevant Previous Year (RPY) --ii) he is Resident of India (OR)

If he stayed in India for a period of 60 days or


more during Relevant Previous Year (RPY)
and 365 days or more during the four preceding
previous years he is Resident of India.
If the above two conditions are not satisfied, he is
Non Resident.
Note: The day on which he enters India as well as
the day on which he leaves India shall be taken
into account as the stay of the Individual in India.

Additional Conditions: Sec. 6(6)(a)


1. Resident in India for at least 2 years out of the
preceding 10 previous years.
2. Physically present in India for at least 730 days
during the 7 preceding previous years.

Status
of
Individual

an Basic
Additional
condition condition/(s)

Resident
and Satisfies
ordinarily Resident
u/s 6(6)

Satisfies
conditions

Resident but not Satisfies


ordinarily Resident
u/s 6(6)

May or may not


satisfy any additional
condition

Non Resident

both

Fails to Not required to check


satisfy

X, after about 30 years stay in India, returns


to America on January 29, 2009.
He returns to India in June 2011 to join an
American company as its overseas branch
manager.
What is his residential status for the
assessment year 2012-13.

For the assessment year 2012-13, the year 2011-12


is the previous year. During 2011-12, X is in India
for more than 274 days. He is, therefore, resident in
India. He is resident in India for 2 years out of 10
years (i.e., 2001-2002 to 2010-11), and he has stayed
for more than 730 days during the seven years
preceding the previous year 2011-12.
He is, therefore, resident and ordinarily resident in
India for the assessment year 2012-13.

Indian citizen and businessman Shri Hari,


who resides in Kolkata, went to France for
employment purposes on 15.8.2011 and
came back to India on 10.11.2012. He has
never been out of India in the past.
(a) Determine residential status of Shri Hari
for the assessment year 2012-13.

(a) The previous year for the assessment year 2012-13


is 2011-12. During this period he was in India for 137
days (30+31+30+31+15). As he is not in India for 182
days, he does not satisfy the first condition of category
A. The second condition of category A is also not
satisfied because he is a citizen of India and leaves
India during the previous year for employment outside
India and is therefore, covered under exception No. 1
where 60 days will be substituted by 182 days.

Special Exceptional Situations:


condition mentioned in 1(a) above only shall apply to
determine their Residential Status
(a) Individual, Indian citizen, leaving India for
employment outside India, or
(b) Indian Citizen being a crew member of an
Indian ship leaving India, or
(c) Individual, Indian citizen or person of Indian
origin, visiting India.

Residential Status of HUF/FIRM [Sec. 6(2), Sec.


6(4)]
Control and Management and Residential Status
of the Manager of HUF.
1. Wholly or partly situated in India - Resident
2. Wholly outside India - Non-resident

RESIDENTIAL STATUS OF A COMPANY


[SECTION 6 (3)] - RESIDENT
1. Indian Company
2. Other Companies - Control and management is
(a) Wholly in India Resident
(b) Wholly or partly outside India - Non-resident

Control and Management means place where


decisions are taken,
instructions originate and Board meetings are held.
An Indian Company is always a resident
The criteria of control and Management does not
apply to an Indian Company

Firm, AOP and other persons - Resident


1. if Control and management is
(a) Wholly or partly in India Resident
(b) Wholly or partly outside India -

If a person is a resident for one source of income in a


previous year,
he shall be deemed to be a resident for all other
sources of income also. [Section 6(5)]

Taxation under Constitution


Article 265 {Taxes not to be imposed save by
authority of law}
No tax shall be levied or collected except by
authority of law.

Thus the basic scheme of taxation in India is :


Art. 246 (1) of the Constitution of India
states that the Parliament has exclusive
powers to make laws with respect to any
matters -- enumerated in List I in the Seventh
Schedule to the Constitution i.e Union
List.

As per Art. 246(3), State Government


has exclusive powers to make laws for
state with respect to any matter
enumerated
--- in List II of the Seventh Schedule of
the Constitution i.e State List.

List III of the Seventh Schedule i.e


Concurrent list contains entries where both
Union and State Government can exercise
powers.
Thus the Seventh Schedule referred to in
Art. 246 indicates bifurcation of powers to
make laws between Union Govt. and State
Govt.

Entry 82 - The Union Govt. will get tax


revenue from Income Tax (Except on
Agricultural Income), Excise (except on
alcoholic drinks) and Customs.

While Municipalities will get tax revenue from


house property tax.

Constitutionality of both substantive tax law and


procedural tax law can arise.
Case Law :
R.K Garg v Union of India (1982) 133 ITR 239 SC

Normally tax laws are challenged, when


i) provision is introduced
Ii) on the ground that they violate the
provisions of constitution

The presumption is in favour of


constitutionality of statute
Burden of proof is on the person who attacks
the provision

CASE STUDY METHOD


Introduciton to the subject/Case
1. Presentation of material and non material
Facts.
2. Identification of the relevant issues.
3. Explaining the relevant legal Principle and the
law/Section involved.
4. Applying the law to the issues with logical
conclusions

5. Relevant precedents Applicability of the


Ratio to the given case.
6. Judgment and its critical appraisal.
7. Current trends and position in the legal
provision, if any.
Your conclusion

HISTORY OF TAXES

Kalidas
Also prevalent in ancient communities
Origin of word Tax Meaning estimate.

Initially levied on sale or purchase of


merchandise or livestock
History of 2000 years Ceaser Augusts decree
In Greece Germany and the Roman empire
taxes - on basis of turnover and sometimes
occupation

Initially revenue from taxes went to Monarch.


In 1188 in England the first taxes were levied
on land and moveable property.
Then came poll taxes taxes known as Ancient
Customs tax on wool leather and hides
Taxes levied to meet military and civil
expenditure and other administrative
expenditure.

POSITION IN INDIA
Direct Taxation in vogue Manu Smriti and
Arthashatra
Manu King could levy taxes according to
shahstras
He advocated that taxes should be levied related
to income and expenditure.
Caution absence of taxes or exorbitant taxes

Thus well planned taxation system was in place.


However the real basis of taxation was laid down
with kautilyas arthrashastra
Trade and commerce with foreign countries finds a
mention import and export
Import duty -- vartanam

Varodaya
Income Tax now became major source of revenue.
Equity and justice in taxation
Records were maintained by revenue collectors

Emphasis was on equity and justice in taxation.


In case of natural calamities
Thus kautilyas arthashastra first authoritative text in
fiscal laws in india

Post-1922
Organizational history of Income Tax started in
the year 1922.
In 1939 two vital structural changes made

In 1940, for better coordination


In Bombay Directorate of inspection (Income
Tax) was created
World war II period profit tax & business
profits tax introduced

Disclosure scheme introduced


Indian revenue service constituted
Investigative techniques introduced

Cadre of Income Tax Inspectors


Internal audit scheme introduced
VDS introduced

Tax recovery officer and Tax recovery


commissioner
In order to improve work new cadre of
assessment and appeals created

Tax reforms:
i) Policy reforms
ii) Administrative reforms
Settlement Commission - 1987
Restructuring of Income Tax 31/8/2000

Benami Transactions prohibition Act


introduced 1988
New PAN introduced 1994
Rates of Income Tax reduced significantly
1997
To increase tax base

Sec 260 A introduced enabling direct appeals


to High Court
Gift tax abolished for gifts made after
1/10/1998

Computerized process all over the country


introduced
Kelkar committee report
i) outsourcing non core functions of the dept
Ii) reductions in exemptions, deductions,
reliefs and rebates
Direct taxes code bill

HEADS OF INCOME
Learning objective:

Taxability of a person depends on chargeability of


such income
i.e - Heads of income which it connotes
------ under which heads of income the income of
assessee will fall.

There are five heads of income :

i) Salaries
Ii) Income from house property
Iii) Profits and gains of business or profession
Iv) Capital Gains
V) Income from other sources

Basic and preliminary issue to be decided:


Whether heads are mutually exclusive ?
Yes.
Scope of income with reference to each one of the
above five heads of income -- has to be understood
distinctly.

Illustration :
Rent from building property let out is chargeable to
tax under the head Income from House Property
However if the property is again sub-let by the tenant
Income derived by the tenent from sub-letting ---- is
chargeable under the head Income from Other
Sources

And not under the head Income from House Property


Because --- he is not the owner
A Professor receives his salary from his college is ---chargeable under the Head Salaries

However if he sets papers and evaluates answer


papers -- he receives fees
then it will be chargeable under the head Income
from Other Sources of Income. -- Why ? Because there is no employer and
employee relationship between him and the college
.

Further - Inclusion of one item of income under one


head of income -- Instead of another head of income will lead to a
different result --------- because each head of income gives distinct relief and
deductions

Illustration :
Claim for depreciation in computing a taxable income
in respect of assets used, is possible -------- only under the head profits and gains from business
and profession and not income from other sources

A Ltd. has carry forward of loss of Rs 12 Crores


Production is stopped and plant and machinery is let
out for Rs 3 Crores per annum during the previous
year 2011-12
If the lease rent is treated as assessable under the head
profits and gains from business or profession then
assessee need not pay tax for the assessment year
2012-13 in view of the brought forward loss benefit

Such a would be available in the subsequent


assessment years till the entire loss is wiped out.
On the other hand if the lease rent assessed under the
head income from other sources - then the benefit to
set off of such carried forward loss
shall not be available and the assessee will have to
pay tax on lease rental income.

However criteria to be satisfied


lease rental income should have character of business
income ---- and this will depend on facts of the case.

CASE LAWS
When there was a temporary suspension of business
with the object of tiding over the crisis condition and
during such period --the machinery, hitherto used in the business, is leased
out then the rental income there from is to be
identified as' business income'.
CIT vs. Vikram Cotton Mills Ltd 169 ITR 597
(SC)

Lakshmi Silk Mills Ltd., 20 ITR 451 (SC).


However, lease of factory after assessee stopped
business with no intention of reviving the business
will amount to earning lease rental which is not in the
nature of business income.
In such a case the income is assessable head '
income from other sources ' Universal Plast Ltd. vs. CIT, 237 ITR 454 (SC).

INCOME FROM SALARIES


Meaning of Salary
Any amount due to or received by an employee
including arrears of salary
From an employer or former employer
and falling within the preview of meaning of the term
salary
--- is chargeable to tax under the head Salaries

Important ingredients
There should be employer-employee relationship
Either in the present or in the past
Between the person liable to pay the amount
And person entitled to receive the amount.

If such relationship does not exist


Then the income falls outside the scope of the head
salaries
However the same has to be decided from the facts of
each case whether
Whether the relationship of employer and employee
exists.

Illustrations:
Principal and Agent
Salaries of M.Ps and MLAs
Managing Director of Company
CIT v Navnitlal Sakarlal (2001) 247 ITR 70(SC)

Salary -- in simple words, means remuneration of a person,


which he has received
from his employer for rendering services to him.
But receipts for all kinds of services rendered cannot
be taxed as salary.

The remuneration received by


professionals like doctors, architects, lawyers etc.
cannot be covered under salary
since it is not received from their employers but
from their clients. So, it is taxed
under business or profession head.

Section 17 of the Act gives an inclusive definition of


salary. Broadly, it includes:
1. Basic salary
2. Taxable value of cash allowances
3. Fees, Commission and Bonus
4. Taxable value of perquisites
5. Retirement Benefits

Although, all the components of salary income are


included in salary, there are
certain incomes in each of these categories, which
are either fully exempt or
exempt upto a certain limit.

All employees are entitled to a basic salary which is


fixed as per their respective terms of employment
either as a fixed amount or at a graded system of
salary.
Under this graded system, apart from the basic salary
at which the employee will start,
annual increments to be given to the employee are pre
fixed in the grade.

For example, if a person is employed on 1st May,


2004 in the grade of 12000 300 15000,
this means that he will start at a basic salary of
Rs.12000 from 1st May, 2004. He will get an annual
increment of Rs.300 w.e.f. 1st May, 2005 and
onwards every year on the same date till his basic
salary reaches Rs.15,000. No further increment is
given thereafter till he is promoted and placed in
other grade.

Allowance is a fixed monetary amount paid by the


employer to the employee (over and above basic
salary) for meeting certain expenses, whether
personal or for the performance of his duties.
These allowances are generally taxable and are to
be included in gross salary unless specific
exemption is provided in respect of such
allowance.
For the purpose of tax treatment, we divide these
allowances into

3 categories:
I. Fully taxable cash allowances
II. Partially exempt cash allowances
III. Fully exempt cash allowances

This category includes all the allowances, which


are fully taxable.
The main allowances under this category are
enumerated below:
(i) Dearness Allowance and Dearness Pay

As is clear by its name, this allowance is paid to


compensate the employee against the rise in price
level in the economy.
Although it is a compensatory allowance against high
prices, the whole of it is taxable.
When a part of Dearness Allowance is converted into
Dearness Pay, it becomes part of basic salary for the
grant of retirement benefits and is assumed to be
given under the terms of employment.

City Compensatory Allowance


This allowance is paid to employees who are posted
in big cities.
The purpose is to compensate the high cost of living
in cities like Delhi, Mumbai etc.
However, it is fully taxable.

This category includes allowances which are


exempt up to certain limit.
For certain allowances, exemption is dependent on
amount of allowance spent for the purpose for which
it was received and for other allowances, there is a
fixed limit of exemption.

Partially exempt cash allowances


House Rent Allowance (H.R.A.)
An allowance granted to a person by his employer to
meet expenditure incurred on payment of rent in
respect of residential accommodation occupied by
him is
exempt from tax to the extent of least of the
following three amounts:
a) House Rent Allowance actually received by the
assessee

b) Excess of rent paid by the assessee over 10% of


salary due to him
c) An amount equal to 50% of salary due to assessee
(If accommodation is situated in Mumbai, Kolkata,
Delhi, Chennai)
Or an amount equal to 40% of salary (if
accommodation is situated in any other place).

Salary for this purpose includes Basic Salary,


Dearness Allowance
The criteria for exemption of HRA depends upon the
following factors:
(1) Basic Salary (3) Rent paid
(2) Place of residence (4) HRA received
If an employee is living in his own house and
receiving HRA, it will be fully taxable.

(ii) Entertainment Allowance


This allowance is first included in gross salary under
allowances and then deduction is given to only
central and state government employees under
Section 16 (ii).
(iii) Special Allowances for meeting official
expenditure
Certain allowances are given to the employees to
meet expenses incurred

exclusively in performance of official duties and


hence are exempt to the extent actually incurred for
the purpose for which it is given.
Examples :
travelling allowance, daily allowance, conveyance
allowance, helper allowance, research allowance and
uniform allowance.

(iv) Special Allowances to meet personal expenses


There are certain allowances given to the employees
for specific personal purposes and the amount of
exemption is fixed i.e. not dependent on actual
expenditure incurred in this regard.
These allowances include:
a) Children Education Allowance

This allowance is exempt to the extent of Rs.100 per


month per child for maximum of 2 children (grand
children are not considered).
b) Children Hostel Allowance
Any allowance granted to an employee to meet the
hostel expenditure on his child is exempt to the extent
of Rs. 300 per month per child for maximum of 2
children.

This allowance is generally given to government


employees to compensate the ---- cost incurred in commuting between place of
residence and place of work.
An amount uptoRs. 800 per month paid is exempt.
However, in case of blind and orthopaedically
handicapped persons, it is exempt up to Rs. 1600 p.m.

(iv) Out of Station allowance:


An allowance granted to an employee working in a
transport system to meet his personal expenses in
performance of his duty in the course of running of
such
transport from one place to another is exempt upto
70% of such allowance or Rs.6000 per month,
whichever is less.

c) Transport Allowance
An allowance granted to an employee working in a
transport system to meet his personal expenses in
performance of his duty in the course of running of
such transport from one place to another
is exempt upto 70% of such allowance or Rs.6000 per
month, whichever is less.

III. FULLY EXEMPT ALLOWANCES


(i) Foreign allowance
This allowance is usually paid by the government to
its employees being
Indian citizen posted out of India for rendering
services abroad. It is fully exempt from tax.

(ii) Allowance to High Court and Supreme Court


Judges of whatever nature are exempt from tax.

TAXABLE VALUE OF PERQUISITES


Perquisites are defined as any casual emolument
or benefit attached to an office or position in
addition to salary or wages.
It denotes some thing that benefits a man by going
into his pocket; it does not cover mere
reimbursement of necessary disbursements.

Perquisites are taxable and included in gross salary


only if they are
(i) allowed by an employer to an employee,
(ii) Allowed
employment,

during

the

continuation

of

(iii) directly dependent on service,


(iv) resulting in the nature of personal advantage to the
employee and

(v) derived by virtue of employers authority.


Section 17 (2) of the Act, perquisites include:
1. Value of rent free accommodation provided to the
employee by the employer.
2. Value of concession in the matter of rent in
respect of accommodation provided to the
employee by his employer.

3. Value of any benefit or amenity granted free of


cost or
at a concessional rate in any of the following cases:
a) by a company to an employee who is a director
thereof
b) by a company to an employee who has
substantial interest in the company

c) by any employer to an employee who is neither


a director, nor has substantial interest in the
company,
- but his monetary emoluments under the head
Salaries exceeds Rs. 50,000.
4. Any sum paid by the employer towards any
obligation of the employee.
5. Any sum payable by employer to effect an
assurance on the life of assessee.

For tax purposes,


perquisites specified under Section 17 (2) of the
Act may be classified as follows:

(1) Perquisites that are taxable in case of every


employee, whether specified or not
(2) Perquisites that are taxable in case of specified
employees only.
(3) Perquisites that are exempt from tax for all
employees

(1) Perquisites Taxable in case of All Employees


The following perquisites are taxable in case of every
employee, whether specified or not:
1. Rent free house provided by employer
2. House provided at concessional rate
3. Any obligation of employee discharged by
employer
e.g. payment of club or hotel bills of employee,
salary to domestic servants engaged by employee,
payment of school fees of employees children etc.

4. Any sum paid by employer in respect of insurance


premia on the life of employee
(2) Perquisites taxable in case of Specified
Employees only
The following perquisites are taxable in case of such
employees:
1. Free supply of gas, electricity or water supply for
household consumption

3. Free or concessional transport facilities


4. Sweeper, watchman, gardener and personal
attendant
5. Any other benefit or amenity
Specified employee is an employee who is either a
director or - has substantial interest in the company
where he is employed or is drawing monetary
salary of more than Rs 50,000 during the previous
year.

(3) Perquisites which are tax free for all the


employees
This category includes perquisites which are tax free
for the employees and also
other perquisites on which employer has to pay a tax
(called Fringe Benefit Tax)
if they are given to the employees and so are not
taxable for them.

1. Medical benefits (provided within or out of India)


subject to limits.
2. Value of Leave Travel Concession in India.
3. Free meals provided to the employees during
working hours.
4. Amount spent by the employer as its contribution
to staff welfare schemes.
5. Laptops and computers provided for personal use.

6. Rent free official accommodation provided to a


Judge of High Court or Supreme Court or an official
of Parliament including Minister and Leader of
Opposition in Parliament.
7. Health Insurance Premium of employee or member
of household paid by the employer.

8. All such facilities (like motor car, lunch


refreshments, travelling, touring, gift, credit cards,
club etc.) provided by employer on which employer
has to pay Fringe Benefit Tax.
With effect from Assessment Year 2006-07, a Fringe
Benefit Tax has been introduced,
where companies giving certain fringe benefits to its
employees are required to pay Fringe Benefit Tax on
the expenditure incurred for the same.
Hence, these benefits are tax free for the
employees.

VALUATION OF PERQUISITES
The perquisites which are taxable in the hands of
employees are valued in accordance with the
provisions laid down under the Income Tax Rule 3.
These benefits can be provided to the employee or
member of his household.

Member of household shall include:


(1) Spouse (2) Children and their spouses (3) Parents
(4) Servants and dependents

Valuation of rent free accommodation


For the purpose of valuation of house, employees are
divided into 2 categories:
a) Central and State Government employees: If
accommodation is provided by the State or
Central Government to their employees,

the value of such accommodation is simply the


amount fixed by the government (called the licence
fees) in this regard.

Illustration :
Mr X, a Senior Officer in Delhi administration draws
Rs.20,000 per month as basic salary. The government
has provided him with a rent free unfurnished flat
whose market rent is Rs. 3000 per month, though as
per government rules, its licence fees is fixed at
Rs. 700 per month.
What is the value of perquisite in respect of rent
free accommodation.

In a case of government employee, the value of


rent free accommodation is Rs.8,400 (Rs.700 x 12)
i.e. the licence fees fixed by the government.

Other Employees
The valuation of accommodation for this category
of non government employees
depends upon whether the accommodation given
to the employee is owned by the employer or taken
on lease.
1. Accommodation owned by employer
The value of accommodation is:
(i) 20% of salary in cities having population
exceeding four lakhs as per 1991 census.

(ii) 15% of salary in other cities in respect of the


period for which the
accommodation was occupied by the employee
during the previous year.
2. Accommodation is taken on lease / rent by the
employer
The value of such accommodation is actual amount of
lease rental paid or payable
by the employer or 20% of salary, whichever is lower.
Definition of salary for rent free accommodation:
Basic Salary + Taxable cash allowances + Bonus or
Commission + any other monetary payment.

(ii) Valuation of furnished accommodation


where the accommodation is furnished, 10% per
annum of the original cost of furniture given to the
employee shall be added to the value of unfurnished
accommodation.
If the furniture is taken on rent by employer, then
actual hire charges are to be added to the value.