Income under the

Head “Salaries” –
Sections 15 to 17
Prepared By:
Mandeep Kaur
Doing Job….Great….
Compute your Income here
Heads of Income : Chargeability
Income Head Sections Charging
Section
Income from Salary 15-17 15
Income from House Property 22-27 22

Profit &Gains from Business & 28-44D 28

Profession
Capital Gain 45-55A 45 & 46(2)
Income from other Sources 56-59 56
Key Points : Salary Income
• Payer and Payee: Employer and Employee relationship.
• Surrender of Salary : Under Voluntary Surrender of Salaries (Exemption
from Taxation) Act, 1961.
• Place of Accrual : Salary shall be deemed to accrue or arise at a place
where services are rendered. (Exception – Government employee renders
any service outside India , his salary would be income deemed to accrue or
arise in India although services are rendered outside India.
• Tax Free Salary : It means employer himself pays the tax.
• Salary and Wages conceptually not different.
• The assessee can claim relief under section 89(1) for arrears or advance
salary.
Key Points : Salary Income Contd.,
• Salary from more than one source/ employer during the same previous year – All will be
taxable.
• Salary from present or former employee.
• Partner is not an employee of firm , hence any salary , bonus, commission or
remuneration received by him , is not taxable as salary, but taxable as Business Income.
• Loan from employer is not salary& not taxable , as it is advance against salary & not
advance salary.
• Once salary is taxed on receipt or due basis , it will not be charged again on falling due
or receipt basis , as the case may be.
• Bonus is taxable on receipt basis.
• Salary is taxable on due or accrual basis whichever is earlier.
• Foregoing of Salary : Taxable
 INCOME FROM SALARY
Basis of Charge
[Section 15]
As per Section 15, Salary consist of the following:
Any salary due from an employer or former employer to an assessee in the
Previous Year, whether actually paid or not; (Normal Salary)
Any salary paid to him in the previous year by an employer or a former
employer though not due or before it became due to him; (Advance Salary)
Any arrears of salary paid to him by the employer or former employer , if
not charged to income tax for any earlier previous year. (Arrears of
Salary)

Note: 1. Where salary is paid in advance is included in Total Income of any person for any previous year, it shall NOT BE INCLUDED
AGAIN in Total income of the person when salary becomes due.
2. Any salary, bonus, commission, etc received by or due to partner of a firm is not regarded as Salary. It is taxable under the head
“Profit &Gains from Business & Profession”.
 Meaning of Salary
(1) As per section 17 " Salary" includes the following:

(i) wages;

(ii) any annuity or pension;

(iii) any gratuity;

(iv) any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages;

(v) any advance of salary;

(vi) any payment received by an employee in respect of any period of leave not availed of by him;

(vi) Employer’s contribution to Recognised Provident Fund (RPF),in excess of 12% of employee’s salary and interest
credited to Recognised Provident Fund (RPF) in excess of 9.5% p.a);

(vii) the aggregate of all sums that are comprised in the transferred balance of an employee participating in a recognised
provident fund, to the extent to which it is chargeable to tax ;

(VIII) The contribution made by the Central Government or any other employer in the previous year, to the account of an
employee under a notified pension scheme referred to in section 80CCD.
NOTE: Although above income are included in salary, but there are certain incomes, mentioned above, which are either fully exempt or exempt, up to a certain limit. The aggregate of above
incomes, after the exemptions avaiLable, if any, is known as “GROSS SALARY”.
From the GROSS SALARY, THREE
DEDUCTION , are allowed under section 16

(a) Standard deduction to the maximum

extent of Rs.50,000;

(b) Deduction for entertainment

allowance1;

(c)Deduction on account of any sum paid

towards tax on employment2.
Deduction from Salary (Section 16)
1. Entertainment Allowance [Sec 16 (ii)]

Only Government employees can claim following deductions:

a. Actual Entertainment Allowance.

b. 20% i.e 1/5th of Salary ….. (Here …..Salary = Basic Pay, eccluding any allowance, benefit or other perquisite).

c. Rs. 5,000 /-

Whichever is less.

2. Professional Tax [Section 16 (iii)]:

 Deduction is available in the year in which professional tax is actually paid.

 If employee have paid professional tax for more than one year then entire professional tax so paid is allowed
as deduction.

 If Professional tax is reimbursed by employer then it will be first added as perquisite (in case of all employees,
whether specified or not & then allowed as deduction).
Treatment of various Incomes to be
included in gross salary
1. Wages : Wages are treated and taxable just like salary.
2. Treatment of Bonus :
• Bonus is taxable on receipt basis.
• It will be included in gross salary in the year in which it is received.
• If bonus is received in arrears , the assessee can claim relief under section 89.
3. Salary in lieu of notice period : Taxable in the previous year in which it is
received.
4. Fee and Commission : Both will be taxable under the ‘Salaries’ only when it is
paid by employer to employee.
5. Overtime Payments : It is included in Gross Salary and is taxable.
 Allowances
Allowance is a fixed monetary amount paid by the
employer to the employee for meeting some
particular expenses, whether personal or for the
performance of his duties.

These are taxable and included in the gross salary

unless a specific exemption has been provided.

Based on their respective tax treatment, these

allowances can be categorized into three buckets -
Taxable, non taxable and partially taxable.
 Allowances

Category 1: Category3:
Received or Spent Category 2:
House Rent
(Whichever is less) Received or Limit
Allowance (H.R.A)
(Whichever is less)
 Category 1: Prescribed Allowances which are exempt to a
certain extent Section 10(14)
Special Allowances which are exempt to the extent of actual amount received or sum spent for the
performance of duties of an office, whichever is less.
1. Travelling Allowances : “Allowance granted to meet the cost of travel on transfer”.
2. Daily Allowance: Any allowance to meet ordinarily daily charges incurred by an employee on
account of absence from his normal place of duty (granted on tour or for period of journey in
connection with transfer).
3. Conveyance Allowance : Conveyance Allowance granted to meet the expenditure on
conveyance in performance of duties of an office.
4. Helper Allowance : granted to meet expenditure incurred on a helper for performance of duties
of office.
5. Academic Allowance : research Allowance granted for encouraging the academic research and
other professional pursuits.
6. Uniform Allowance : granted to meet expenditure incurred on purchase or maintenance of
uniform for wear during performance of duties of am office.
Category 2: Allowance to meet Personal Expenses
Contd.,

These allowances can be of two types :

(1)Allowances which are exempt to the extent of
amount received or the limit specified, whichever
is less.
(2)Allowances which are exempt to the extent of
certain percentage of amount received.
(B) (1) Allowances which are exempt to the extent of amount received or the limit specified, whichever is less.

• Children Education Allowance - Up to Rs. 100 per month per child up to a maximum of 2 children is
exempt.
• Hostel Expenditure Allowance - Up to Rs. 300 per month per child up to a maximum of 2 children is
exempt.
• Tribal area allowance - given in (a) Madhya Pradesh (b) Tamil Nadu (c) Uttar Pradesh (d) Karnataka
(e) Tripura (f) Assam (g) West Bengal (h) Bihar (i) Orissa - Rs. 200 per month.
• Special compensatory Allowance (Hilly Areas) (Subject to certain conditions and locations) - Amount
exempt from tax varies from Rs. 300 per month to Rs. 7,000 per month.
• Border area allowances, Remote Locality allowance or Disturbed Area allowance or Difficult Area
Allowance (Subject to certain conditions and locations) - Amount exempt from tax varies from Rs. 200
per month to Rs. 1,300 per month.
• Compensatory Field Area Allowance - If this exemption is taken, employee cannot claim any exemption
in respect of border area allowance (Subject to certain conditions and locations) - Rs. 2,600 per month.
• Compensatory Modified Area Allowance. If this exemption is taken, employee cannot claim any
exemption in respect of border area allowance (Subject to certain conditions and locations).
 (B) (1) Allowances which are exempt to the extent of amount received or the limit specified, whichever is
less. Contd.,

• Counter Insurgency Allowance - granted to members of Armed Forces operating in areas away from their
permanent locations. If this exemption is taken, employee cannot claim any exemption in respect of border area
allowance (Subject to certain conditions and locations) - Rs. 3,900 per month.

• Transport Allowance granted to an employee to meet expenditure for the purpose of commuting between place of
residence and place of duty. –Rs. 3,200 per month granted to an employee, who is blind or deaf and dumb or
orthopedically handicapped with disability of lower extremities.

• Underground Allowance is granted to employees working in uncongenial, unnatural climate in underground

mines - Up to Rs. 800 per month

• High Altitude Allowance is granted to armed forces operating in high altitude areas (Subject to certain conditions
and locations) – a) Up to Rs. 1,060 per month (for altitude of 9,000 to 15,000 feet). b) Up to Rs. 1,600 per
month (for altitude above 15,000 feet)

• Highly active field area allowance granted to members of armed forces (Subject to certain conditions and
locations) - Up to Rs. 4,200 per month.

• Island Duty Allowance granted to members of armed forces in Andaman and Nicobar and Lakshadweep group of
Island (Subject to certain conditions and locations) - Up to Rs. 3,250 per month.
(B) (2) Allowances
which are exempt to the extent of certain
percentage of amount received.

• Transport Allowance to an employee working in any transport business to meet his

personal expenditure during his duty performed in the course of running of such
transport from one place to another place provided employee is not in receipt of
daily allowance - Amount of exemption shall be lower of following:
a) 70% of such allowance; or
b) Rs. 10,000 per month.
Question
R is in receipt of the following allowances from his employer during the P.Y 2019-2020:
1. Conveyance allowance Rs. 600 p.m. He spends Rs. 5,000 during P.Y for official
purposes.
2. Transport Allowance Rs. 2,200 p.m for commuting from residence to office and back.
He spends Rs.1,400 p.m during the year.
3. Uniform Allowance Rs. 5,000 p.a. He spends Rs. 4,000 on purchase and maintenance
of uniform.
4. Education & Hostel Expenditure Allowance Rs.450 p.m per child for 3 children.
5. Personal assistant allowance Rs. 2,000 p.m. He engaged personal assistant for official
work and paid him salary of Rs.1,500 p.m for 9 months. Personal assistant spends
60% of his time for official work of R.
Compute how much of the above allowances are taxable.
Solution : Computation of Taxable Salary
S.No. Particulars Rs. Rs.
1. Conveyance Allowance (600*12) 7,200
Less: Exempt to the extent spent for official purpose 5,000 2,200
2. Transport Allowance (2,200 *12) 26,400
Less: Exempt NIL 26,400
3. Uniform Allowance 5,000
Less: Exempt to the extent spent for purchase & maintenance of 4,000 1,000
uniform

4. Education and Hostel Allowance (450*3*12) 16,200

Less: Exempt [100*2*12+300*2*12] 9,600 6,600
5. Personal Assistant Allowance (Helper Allowance) (2,000*12) 24,000
Less: Exempt to the extent spent for official purposes (1500*9=13,500) 8,100 15,900
Now 13,500*(60/100)

Total Taxable allowances to be included in gross salary 52,100

 Specific Exemptions from Salary
Category 3: House Rent Allowance (HRA) – Section 10(13A)
Particular Exemption
In case of all employees Lower of the following is exempt :
a. Actual HRA received.
(Here, Salary means , Basic Pay + DA, b. Rent paid in excess of 10% of salary
if terms of employment so provide + c. 40%* of Salary
Commission , if based on fixed % of [*50% of salary if house is situated at
turnover.) Delhi, Mumbai, Kolkata and Chennai]
*Allowances and Perquisites will not be
included.
House Rent Allowance (HRA)
Contd.,
• HRA is calculated monthly and can be calculated together for the period
where :
a. Salary
b. HRA received
c. Rent Paid
d. Place of Residence is same.

If any of the above changes H.RA shall be calculated separately.

 Question 1
(Where there is no change in any factor during the
Previous Year)
A is entitled to a basic salary of Rs.25,000 p.m
and dearness allowance of Rs.5,000 p.m., 40%
of which forms part of retirement benefits. He
is also entitled to HRA of Rs. 10,000 p.m. He
actually pays Rs. 10,000 p.m as rent for a
house in Delhi. Compute the taxable HRA.
 Solution:
• The minimum of he following three amounts shall be exempt under section 10
(13A):
Rs.
(i) Actual HRA received (10000*12) 1,20,000
(ii) Rent Paid in excess of 10% of salary (1,20,000 – 32,400) 87,600
(iii) 50% of salary 1,62,000

Therefore, Rs. 87,600 shall be exempt and balance Rs. 32,400 shall be included in gross salary.

Working Note: Rs.

(i) Salary (25,000*12) 3,00,000
(ii) Dearness Allowance (40% of 60,000) 24,000
3,24,000
 Question 1
(Where there is change in the Rent Paid)
X is employed at Delhi as the Finance Manager of R Company Ltd. The particulars of
his salary for the P.Y 2019-20 are as under:
Rs.
(i) Basic Salary 30,000 p.m
(ii) Dearness Allowance (forming part of basic salary) 10,000 p.m
(iii) Conveyance Allowance for Personal Purpose 5,000 p.m
(iv) Commission @ 2% of the turnover achieved which was Rs. 45,000
22,50,000 during the P.Y and the same was evenly distributed.
(v) House Rent Allowance 15,000 p.m

The actual Rent paid by him is Rs.10,000 p.m for an accommodation at Noida till 31.12.2019. From 1.1.2020,
the rent was increased to Rs. 20,000 p.m. Compute the taxable HRA.
 Solution
The exemption would be calculated in two parts as rent paid has changed w.e.f 1.1.2020.
Period of 9 months Period of 3 months

1.4.2019 to 31.12.2020 1.1.2020 to 31.3.2019

Actual HRA received 1,35,000 (15,000*9) 45,000 (15,000*3)

Less: Exemption under section 10 (13A)

(i) Actual HRA received 1,35,000 45,000
(ii) Rent Paid – 10% of Salary of relevant period
(a) 90,000 - 10% of Rs. 3,93,750 50,625
(b) 60,000 - 10% of Rs. 1,31,250 46,875

(iii) 40% of Salary 1,57,500 (Rs. 3,93,750) 52,500 (Rs. 1,31,250)

50,625 45,000
Exemption Amount = Rs.50,625 + Rs. 45,000 = Rs. 95,625
Taxable HRA received = 1,35,000 - Rs. 50,625 = Rs. 84,375 and Rs. 45,000 – Rs. 45,000 = 0
Taxable Amount = Rs. 84,375 + NIL = Rs. 84,375
Working Note:
Meaning of Salary :
Time Period Item Calculation Amount
1.4.2019 to 31.12.2020 Salary (30,000*9) Rs. 2,70,000

1.4.2019 to 31.12.2020 DA (10,000*9) Rs. 90,000

1.4.2019 to 31.12.2020 Commission (45,000/12) = 3,7,50*9 Rs. 33,750

TOTAL Rs. 3,93,750

1.1.2020 to 31.3.2020 Salary (30,000*3) Rs. 90,000

1.1.2020 to 31.3.2020 DA (10,000*3) Rs. 30,000

1.1.2020 to 31.3.2020 Commission (45,000/12) = 3,7,50*3 Rs. 11,250

TOTAL Rs. 1,31,250

Entertainment Allowance
Question
X, an employee of Central Government gets
Rs. 30,000 p.m as basic salary and is entitled to
Rs. 1,500 p.m as entertainment allowance.
Compute deduction under section 16(ii) from
gross salary in respect of entertainment
allowance.
 Solution
Particulars Rs. Rs.
Basic Salary (30,000 p.m *12) 3,60,000
Entertainment Allowance (1,500 p.m *12) 18,000

Gross Salary 3,78,000

Less: Standard Deduction 50,000

Deduction under section 16(ii) 5,000 55,000

Income from Salary 3,23,000

Working Note: Deduction under Section 16(ii) shall be allowed to the extent of
minimum of following 3 amounts:
(i)Actual Entertainment Allowance = Rs. 18,000
(ii) 20% of Salary – 20% of 3,60,000 = Rs. 72,000
(iii) Rs. 5,000
Allowances which are exempt in case of
certain persons
(i) Allowances to a citizen of India, who is a Government Employee,
rendering services outside India. [Section 10(7)]
(ii) Allowances to High Court Judges under section 22A(2) of High
Court Judges.
(iii)Sumptuary Allowance (in the nature in entertainment allowance)
given to High Court and Supreme Court Judges.
(iv)Allowances received by an employee of United Nations
Organisation (UNO) from his employer.
 Allowances which are Fully Taxable
• Dearness Allowance (DA) - Dearness allowance is allowed to be paid to public sector employees and pensioners as a cost of
living adjustment to neutralize the impact of inflation and difference is cost of living for employees living in different cities
and towns.
• City Compensatory Allowance (CCA) - CCA is offered by companies to its employees compensate for a relatively high cost of
living in metropolitan cities. This allowance is used to incentivize and retain employees in towns and cities where the cost of
living is higher compared to employees working in other locations.
• Fixed Medical Allowance (Fully taxable, irrespective of whether any amount has been spent on medical treatment or not).
• Lunch/Tiffin Allowance - Meal allowances are paid for meals/refreshments/tiffin services to their employees and are
completely taxable.
• Overtime Allowance - This allowance is received by employees who tend to work more than the operational hours decided by
the company. It can happen due to urgent assignments and firm project deadlines. Any Overtime Allowance received by the
employees is completely taxable.
• Non-Practising Allowance - When a doctor gets associated with clinics of various laboratories or medical institutes, any non
practicing allowance paid to them is taxable.
• Family Allowance - a grant to an employee made typically by a government or an employer in addition to regular salary and
graded according to occupation and the number of dependent children
• Warden Allowance - If an employee pays tax to an employee who is working as a warden/keeper in any institute. This
allowance is considered as taxable.
• Servant Allowance - Allowance provided for employees for hiring the services of servant, such allowance is always taxable.
What is the difference between reimbursement and an
allowance?
• Allowance: Allowances are basically a part of an individual's salary package to
cover the expenses that may incur in the course of his employment. For instance, if
a person uses his own vehicle to commute from home to workplace, then the
company will provide a transport allowance for the same. Similarly, there are
many other allowances endowed by the employers for the benefit of employees.
Allowances are categorized under three parts, taxable, non taxable and partially
taxable allowances.
• Reimbursement: A reimbursement is an expense which is made for an employee on
the employer's behalf. Reimbursements are always related to business expenses
and do not add anything to an employee's income. Thus, a reimbursement is not
taxable at all.
Perquisites
 Perquisites
• The perquisite may be in cash (by way of allowance) or in kind or in money or
money’s worth, and also amenities which are not convertible into money. Thus, the
Perquisite can be either monetary or non-monetary and they will always form a part
of the income under the head.
• Perquisites are included in salary only if they are received by an employee from his
employer (may be former , present or prospective). Perquisite received from a person
other than employer , are taxable under the head “PGBP” or “Income from Other
Sources”.
• A benefit or advantage would be taxable as perquisites only if it has legal origin. As
unauthorized advantage taken by the employee , without employer’s authority would
create a legal obligation to restore such advantage , it would not amount to perquisite
taxable under the Act.
Difference between Allowances and Perquisites
Perquisites
• In respect of all the perquisites whenever any concession is
given or any amount is recovered from the employee , the value
of the perquisite shall be calculated as follows:
Step 1 : Determine value of Perquisite as if nothing has been
recovered from the employee.
Step 2: Determine the amount recovered from the employee.
Step 3: (Step1-Step2) shall be taxable value of the perquisite; if
positive.
Taxability of Perquisites
For Income-tax purposes, perquisites may be divided into five categories:
(A) Perquisites (B) Perquisites (C) Specified (D) Contribution (E) Tax Free
which are which are security or by the employer Perquisites.
taxable in the taxable only sweat equity to the approved
hands of all when employee shares allotted Superannuation
categories of belongs to a to or fund in respect of
employees. specified group transferred by assessee to the
i.e he is a the employer to extent it exceeds
specified the assessee. Rs.1,50,000.
employee.
(A) Perquisites which are taxable in the hands of all categories of employees.
(i) Rent Free Accommodation : provided by employer to the employee. Such
accommodation may be furnished or unfurnished.
(ii) Any concession in the matter of Rent in respect of accommodation provided or
granted by the employer to the employee.
(iii) Any sum paid by the employer in discharging the monetary obligation of the
employee which otherwise would have been payable by employee. Payment of
school fees of employee’s children and School fees of the family members of the
employees, paid by the employer directly to the school.
(iv) Any sum payable by employer whether directly or though a fund {[other than
recognized provident fund (RPF)] , Approved Superannuation Fund or Deposit
Linked Insurance Fund} to effect an assurance on the life of assessee or to effect a
contract for an annuity.
(v) The value of any other fringe benefits or amenity as may be prescribed.
 Valuation of Perquisites :
1. Rent Free Accommodation or Accommodation provided at Concessional
Rate
Accommodation provided to the employee may be –
(i) Unfurnished
(ii) Furnished
Further, such accommodation may be provided:
(a) Rent Free; or
(b) At concessional rate.
Meaning of Salary for Rent Free
Accommodation
Here, Salary means
Salary = Basic Pay
+ DA , (to the extent it is a part of retirement benefit)
+ Bonus
+ Commission
+ taxable portion of all allowances
+ any monetary payments which is chargeable
BUT DOES NOT INCLUDE;
• Value of any perquisite [under section 17(2)
• Employer’s contribution to PF.
• Benefits received at the time of retirement like gratuity, pension etc
Value of Rent Free Accommodation
Accommodation provided by the
Government to its employees
(i) Where accommodation is Unfurnished:
(a) If the accommodation is provided rent free: As per Government Rules (License
Fees).
(b) If accommodation is provided at concessional Rates: Here , the license fees shall be
reduced by the rent actually paid by the employee.
(ii) Where accommodation is furnished: If furniture is provided then 10% p.a of Cost of
furniture or actual hire charges if taken on rent shall be added with unfurnished house.
NOTE: Rent free official residence provided to a judge of a High Court or to a judge of
Supreme Court is exempt from Tax.
Rent free accommodation given to an official of Parliament , a Union Minister and a
Leader of Opposition in parliament is exempt from Tax.
 Where Accommodation is provided by any other employer/
Other than Government Employees
(i) Where accommodation is unfurnished:
(a) Where the accommodation is owned by the employer.
(b) Where the accommodation is taken on lease or rent by the employer.
Population Owned by the employer Not owned by the employer
Up to 10 Lakhs 7.5% of salary 15% of Salary OR
10-25 Lakhs 10% of salary Actual Rent
More than 25 Lakhs 15% of salary (whichever is Less).

(ii) Where accommodation is furnished:

If furniture is provided then 10% p.a of Cost of furniture or actual hire charges if
taken on rent shall be added with unfurnished house.
Where accommodation is provided by the employer
(Government or other employer) in a hotel
Least of the following is taxable :
(a) Actual Rent Charges
(b) 24% of Salary
Whichever is Less.
There will be no perquisite value if accommodation is provided in a hotel and two
conditions are fulfilled:
(c) Such accommodation is provided for a period not exceeding 15 days ; and
(d) It has been provided on the transfer of the employee from one place to another.
These rules discussed about RFA shall not apply in certain cases:
(A)Accommodation provided at certain site or in a remote area
(mining site or an onshore oil exploration site a dam site or a
power generation site or an offshore site) – tax free perquisite.
(B) Accommodation provided at new place of posting on transfer
while retaining the accommodation at the other place – value of
perquisite shall be determined with reference to only one such
accommodation which has lower value for a period not exceeding 90
days and thereafter value of perquisite shall be charged for both such
accommodations.
Question
R furnishes the following particulars of his remuneration for the previous year 2019-2020:
Rs.
Basic Salary 24,000 p.m
Dearness Allowance (40% of which forms part of salary for retirement benefits) 2,000 p.m
Lunch Allowance 400 p.m
Medical Allowance 1,000 p.m
City Compensatory Allowance 600 p.m
Children Education Allowance (per child for 2 children) 360 p.m

He is provided with a rent free accommodation in Delhi. The cost of furniture provided is Rs.2,00,000 and
two air-conditioners, which have been taken on hire by the company , have also been provided in the
accommodation. Hire charges of each AC is Rs.4,000 p.a. Compute the value of RFA if accommodation is
provided by:
(i) Government and the value of accommodation as per Government rule is Rs. 1,000 p.m.
(ii) RBI and the accommodation has been taken on rent by RBI at Rs. 10,000 p.m.
(iii) XYZ Ltd. And the accommodation has been taken on rent by company at Rs. 10,000 p.m.
 Accommodation provided by Government to its employee

(i) The perquisite value shall be the value of accommodation as per government rules
which in this case is Rs.1,000 p.m. Therefore, the value of furnished accommodation
shall be:

Rs. Rs.
Value of unfurnished accommodation (Rs.1,000*12) 12,000
10% of cost of furniture (2,00,000) 20,000
Hire Charges of 2 Acs (4,000*2) 8,000 28,000
40,000
 Accommodation provided by RBI or XYZ Ltd.
(ii) & (iii) The perquisite value shall be 15% of the salary or rent paid by RBI/Company , whichever is less. Salary for this purpose
shall include the following:
Rs. (p.m)
Basic Salary 24,000
Dearness Allowance (only that portion which is taken into account for retirement benefits) (2,000*40%) 800
Lunch Allowance 400
Medical Allowance 1,000
CCA 600
Children Education Allowance [360*2 – 100*2] i.e (Rs. 720-200) 520
27,320

The perquisite value of unfurnished accommodation shall be Rs. 4,098 p.m (27,320 *15%) or Rs.
10,000 p.m whichever is less.
Therefore , Perquisite value of furnished accommodation shall be as under:
Rs.
Value of unfurnished accommodation (Rs.4,098 *12) 49,176
Value of Furniture (as calculated in case of Government employees) 28,000
77,176
 Alternatively Contd.,
Since the RFA has been given for full year , we can calculate 15% of yearly salary
also.
Yearly Salary shall be :
Rs. 2,88,000 (24,000*12) + 9,600 [40%(2,000*12)] + 4,800 (400*12) + 12,000
(1,000*12) + 7,200 (600*12) + 6,240 (360*2*12-100*2*12) = Rs. 3,27,840

Rs.
15% of salary (Rs. 3,27,840) shall be 49,176
+ perquisite value of furniture 28,000
77,176
2. Valuation of monetary obligation of the employee
discharged by the employer
Any monetary obligation of the employee is discharged by the employer , which
otherwise would have been payable by the employer, it is considered as a
PERQUISITE and is TAXABLE in the hands of all employees whether he is a
specified employee or any other employee.
EXAMPLES:
(a) Gas, electricity bill paid or reimbursed.
(b) Medical Expenses reimbursed.
(c) Children Education Expenses paid or reimbursed.
(d) Income-tax or Professional tax paid by employer.
3. Valuation of Life Insurance Premium/deferred
annuity premium paid/payable by the employer
• Any sum payable by the employer, whether directly or through a fund
other than a recognized provident fund or an approved superannuation
fund or deposit linked insurance fund is a perquisite taxable in the
hands of all employees.
• The amount is taxable as soon as it becomes due for payment. Actual
Payment during the year is not necessary.

Where employer pays insurance premium under certain schemes such as

Employees’ State Insurance Schemes, Fidelity Guarantee Scheme, it shall
not be regarded as Perquisite for the employee.
 4. Fringe benefits or amenities which shall be taxable perquisite in hands of all employee
(i) Interest free or concessional loans [Rule 3(7)(i): an interest-free or concessional loan provided by an employer is
taxable as a ‘perquisite’ for an employee. Therefore, the employer should deduct tax at source (TDS) on the
interest chargeable on the loan, as part of the employees’ salary. The employer is responsible to deduct tax on
the ‘perquisite’ value and deposit the TDS to the government.

The value of perquisite arising from such loans would be the excess of interest payable at prescribed interest rate
over interest, if any, actually paid by the employee or any member of his household.

The prescribed interest rate would now be the rate charged per annum by the State Bank of India as on the 1st day
of the relevant financial year in respect of loans of same type and for the same purpose advanced by it to the general
public. The interest has to be calculated on maximum monthly balance as reduced by interest, if any, actually paid
by him or any such member of his household. HOWEVER

• small loans up to Rs. 20,000/- in the aggregate are exempt.

• Loans for medical treatment of diseases specified in Rule 3A are also exempt, However, in this case, exemption , so
provided, shall not apply to so much of the loan as has been reimbursed to the employee under any medical
insurance scheme.

Member of Household*: “spouse(s); children & their spouses; parents; servants & dependents”.
 Question : X ltd. Has advanced an interest –free loan of Rs.5,00,000 to R for purchase of Car on 1.5.2019. R has been regularly
repaying loan in installments of Rs.20,000 p.m at the end of each month. Compute the value of perquisite on account of interest
assuming interest charged by SBI is 10% p.a.
Calculation of interest
Month Ending Maximum amount of loan outstanding
May 2019 4,80,000
June 2019 4,60,000
July 2019 4,40,000
August 2019 4,20,000
September 2019 4,00,000
October 2019 3,80,000
November 2019 3,60,000
December 2019 3,40,000
January 2020 3,20,000
February 2020 3,00,000
March 2020 2,80,000
41,80,000

Interest on Rs. 41,80,000 @ 10% p.a for one month

Rs. 41,80,000 *10/100*1/12 = Rs. 34,833
(ii) Facility of travelling, touring and accommodation availed of
by the employee or any member of his household for any holiday
Rule 3(7)(iii)
a) Perquisite value taxable in the hands of employee shall be
expenditure incurred by the employer less amount recovered
from employee.
b) Where such facility is maintained by the employer, and is not
available uniformly to all employees, the value of benefit shall be
taken to be the value at which such facilities are offered by other
agencies to the public less amount recovered from employee.
(iii) Value of free food and non-alcoholic
beverages Rule3(7)(iii)
Circumstances Value of Benefit
(a) Tea or snacks provided during working hours NIL
(b) Free food and non-alcoholic beverages during working hours NIL
provided in a :
(i) Remote area; or
(ii) An offshore installation
(c) Free Food and non-alcoholic beverages provided by the NIL, if value in either case is upto Rs 50 per meal.
employer during working hours: Amount in excess of Rs 50 per meal shall be value of
(i) At office or business premises ; or such taxable perquisite.
(ii) Through paid voucher which are not transferable and usable
only at eating joints.
(d) In any other case Actual amount of expenditure incurred by employer
as reduced by amount if any paid or recovered from
employee for such benefit.

• The value of free meals provided by the employer is taxable to the extent cost incurred by the
employer as reduced by the amount recovered from the employee.
• Working hours includes extended office hours (like working on holidays, overtime)
(iv) Value of Gift, Voucher or token Rule 3(7)(iv)
• The value of any Gift, Voucher or token may be
received by the employee or by member of his
household on ceremonial occasions or otherwise from
the employer, shall be determined as Sum equal to
amount of such gift.
However, where the value of such gift is below Rs.5,000,
then value of perquisite is NIL.
(V) Expenses on Credit Cards Rule3(7)(v)
The perquisite in respect of credit card is taxable as follows:
• Expenses incurred* by employer in respect of credit card used by employee / his household
member
• Less: Expenditure on use for official purposes
• Less: Amount, if any, recovered from the employee
*Expenses incurred means the amount of expenses + membership fees + annual fees for
credit card, provided or otherwise paid or reimbursed by the employer.
NOTES:
There shall be no value of such benefit where the expenses are incurred wholly and
exclusively for official purposes provided complete details in respect of such expenditure are
maintained by the employer i.e. the date of expenditure and the nature of expenditure; and
the employer gives a certificate for such expenditure to the effect that the same was incurred
wholly and exclusively for the performance of official duties.
 VI. Club Membership and Expenses incurred in a Club Rule 3(7)(vi)
The perquisite in respect of club facility shall be any expenditure incurred (including the amount of annual or
periodical fee) in a club by employee or any member of his household or reimbursed by the employer on that
account. The amount so determined shall be reduced by the amount, recovered from the employee for such benefit.
Expenses incurred includes:
• Any expenses on club facility, which is paid or reimbursed by the employer.
• Amount of annual or periodical fees paid or payable to a club.
But does not includes:
• Expenses incurred on health club, sports facilities, etc. provided uniformly to all classes of employees by the
employer at employer’s premises.
NOTES:
• where the employer has obtained corporate membership of the club and the facility is enjoyed by the employee or
any member of his household, the value of perquisite shall not include the initial fee paid for acquiring such
corporate membership.
• This sub-rule shall not apply in case if such expenditure is incurred wholly and exclusively for business purposes
and complete details in respect of such expenditure are maintained by the employer i.e. date of expenditure, the
nature of expenditure and its business expediency; and the employer gives a certificate for such expenditure to the
effect that the same was incurred wholly and exclusively for the performance of official duties.
Vii. Use of employer’s movable assets Rule 3(7)
(vii):
• Taxable Value shall be 10% p.a. of the actual cost of
asset (if owned by the employer) or Actual amount of
hire charges (if taken on hire by the employer) as
decreased by amount paid by the employee for such
use.
• Exception: Nothing is taxable for use of LAPTOPS and
COMPUTERS.
NOTE : Completed years of Use is not required. Even use of asset for part of year will be perquisite.
 Vii. Transfer of any movable assets Rule3(7)(viii)

NOTE:-
• Depreciation shall be calculated only if asset has been used by employer for business purpose.
• Depreciation is deductible for completed years of use only. (Fraction of years → Ignored)
• Electronics items do not include household electronic appliances.
VIII. Any other benefit or amenity extended by
employer to employee Rule 3(7)(ix)
• Taxable value of perquisite shall be computed on the basis of
cost to the employer (under an arm’s length transaction) less
amount recovered from the employee.
• However expenses on telephones including a mobile phone
incurred by the employer on behalf of employee shall not be
treated as taxable perquisite.
• Communication expenses incurred by an employee as part of
work are reimbursable. They are non-taxable in the hands of
the employee. The rule includes both land line, mobile
connections, and internet connection.
Question
Find out the taxable value of the perquisite in the following cases for the AY 2019-20:
1. Mr. X is given a laptop by his employer for using it for private purpose. Cost of the
laptop is Rs. 96,000.
2. On 18.10.2018, the company gives its music system to Mr. X for domestic use.
Ownership is not transferred. Cost of music system (in 2010) to the employer is Rs.
30,000.
3. The employer sells the following assets to the employees on 1.1.2019
Name of employee W X Y
Asset sold Car Computer Fridge

Cost of the asset to employer Rs. 8,50,000 Rs. 95,000 Rs. 30,000
Date of purchase 14.5.2016 14.5.2016 14.5.2016
[put to use on the same day)
Sale price Rs. 3,00,000 Rs. 19,000 Rs.10,000

Before sale on 1.1.2019, these assets were used for business purpose by the employer.
Solution
1. Free use of laptop is not a taxable perquisite.
2. S is provided a music system by the employer. Taxable perquisite is
determined @ 10% p.a. of cost for the period of use (From 18.10.2018
– 31.3.2019). Thus Taxable perquisite = Rs. 1,356 [Rs. 30,000 x 10% x
165/365].
14 (Oct.) + 30 (Nov.)+ 31 (Dec.) + 31 (Jan.)+ 28 (Feb.)+ 31 (Mar.) = 165
days
3. The taxable value of the perquisite in the hands of W, X & Y shall be
determined as follows-
Note: Normal wear & tear for a part of the year is not taken into
consideration.
(B) Perquisites which are taxable only when employee belongs to a specified
group i.e he is a specified employee.
Who is a specified employee ?
The following employees are called specified employee :
 Director of a company.
 An employee who is drawing a salary in excess of Rs. 50,000 (Excluding non
monetary perquisites).
 Employee who has substantial interest in the employer company.

Having not less than 20% voting power.

An employee who is not a specified employee is a Non-Specified Employee.
PERQUISITES TAXABLE ONLY IN HANDS OF
SPECIFIED EMPLOYEES [SECTION 17(2)(iii)]

 Monetary perquisites are taxable in the hands of all employees [Specified + Non-
Specified].
 Non- Monetary perquisites are taxable in the hands of specified employees only.
Followings perquisites will be taxable in the hands of specified employees.
1. Use of motor car.
2. Provision of sweeper, gardener, watchman or personal attendant.
3. Facility of use of gas, electricity or water supplied by employer.
4. Free or concessional educational facilities.
5. Free or concessional tickets.
Perquisites taxable in the hands of Specified employees
1. VALUATION OF MOTOR CAR/OTHER VEHICLES [Rule 3(2)]
a. If motor car is owned or leased by the employer
a) Used exclusively for official purpose
b) Used for both official and personal purpose
c) Used exclusively for personal purpose
b. If motor car is owned by the employee but running and maintenance and driver’s salary
reimbursed by employer:
a) Used exclusively for official purpose
b) Used for both official and personal purpose
c.   If Employee owns any other automotive conveyance but running and maintenance is
reimbursed by employer:
a) Used exclusively for official purpose
b) Used for both official and personal purpose
 Engine Capacity upto 1600 cc (value Engine Capacity above 1600 cc (value
S. No. Circumstances
of perquisite ) of perquisite)

1 Motor Car is owned or hired by the employer

1.1 Where maintenances and running expenses including remuneration of the chauffeur are met or reimbursed by the employer.

If car is used wholly and exclusively in the Fully exempt subject to maintenance Fully exempt subject to maintenance
1.1-A
performance of official duties. of specified documents of specified documents

Actual amount of expenditure incurred by the employer on the running and

If car is used exclusively for the personal maintenance of motor car including remuneration paid by the employer to
1.1-B purposes of the employee or any member of his the chauffeur and increased by the amount representing normal wear and
household. tear of the motor car at 10% p.a. of the cost of vehicle less any amount
charged from the employee for such use is taxable

Rs. 1,800 per month (plus Rs. 900 per Rs. 2,400 per month (plus Rs. 900 per
The motor car is used partly in the performance month, if chauffeur is also provided month, if chauffeur is also provided
1.1-C of duties and partly for personal purposes of the to run the motor car) to run the motor car)
employee or any member of his household.
Nothing is deductible in respect of any amount recovered from the
employee.
 1.2 Where maintenances and running expenses are met by the employee.

If car is used wholly and exclusively in

1.2-A Not a perquisite, hence, not taxable Not a perquisite, hence, not taxable
the performance of official duties.

Expenditure incurred by the employer (i.e. hire charges, if car is on rent or

If car is used exclusively for the
normal wear and tear at 10% of actual cost of the car) plus salary of chauffeur
1.2-B personal purposes of the employee or
if paid or payable by the employer minus amount recovered from the
any member of his household
employee.

Rs. 600 per month (plus Rs. 900 per Rs. 900 per month (plus Rs. 900 per
month, if chauffeur is also provided to month, if chauffeur is also provided to
The motor car is used partly in the
run the motor car) run the motor car)
performance of duties and partly for
1.2-C
personal purposes of the employee or
any member of his household
Nothing is deductible in respect of any amount recovered from the employee.
 2 Motor Car is owned by the employee
2.1 Where maintenances and running expenses including remuneration of the chauffeur are met or reimbursed by the employer.

Fully exempt subject to

The reimbursement is for the use of the vehicle wholly Fully exempt subject to maintenance
2.1-A maintenance of specified
and exclusively for official purposes of specified documents
documents

The reimbursement is for the use of the vehicle

Actual expenditure incurred by the employer minus amount recovered
2.1-B exclusively for the personal purposes of the employee
from the employee
or any member of his household

• Actual expenditure incurred by

• Actual expenditure incurred
the employer minus Rs. 1800 per
by the employer minus Rs.
month and Rs. 900 per month if
2400 per month and Rs. 900
The reimbursement is for the use of the vehicle partly chauffer is also
per month if chauffer is also
2.1-C for official purposes and partly for personal purposes provided minus amount
provided minus amount
of the employee or any member of his household. recovered from employee.
recovered from employee.
• Maintenance of specified
• Maintenance of specified
documents
documents
 Where the employee owns any other automotive conveyance and
3 actual running and maintenance charges are met or reimbursed by
the employer

Fully exempt subject to Fully exempt subject to

Reimbursement for the use of the vehicle wholly and
3.1 maintenance of specified maintenance of specified
exclusively for official purposes;
documents documents

Actual expenditure incurred by

Reimbursement for the use of vehicle partly for official
the employer minus Rs. 900 per
3.2 purposes and partly for personal purposes of the Not Applicable
month minus amount recovered
employee.
from employee
 Contd.,

Where more than one car is being provided for use for employee or member of
his family then valuation will be as under:
Only one car will be valued as partly used for official purpose and partly for
private purpose.
Other cars will be valued as fully used for private purpose.
Note 1: Car facility between office and residence 
The use of motor car by an employee for the purpose of going from residence to the office or from office back to
residence, is not chargeable to tax at all.
Note-2: Conditions to be satisfied if the Car is used for official purpose:
The employer has maintained complete details of journey undertaken for official purpose which may include date of
journey, destination, mileage, and the amount of expenditure incurred thereon.
The employer gives a certificate to the effect that the expenditure was incurred wholly and exclusively for the
performance of official duties.
Note 3 : Meaning of Month: Month means completed months.
 Question

Compute the perquisite value of the car for the assessment year 2019-2020 in the following situation if the taxable monetary
emoluments of X are Rs. 1,50,000:
(i) Car is owned by X but running and maintenance expenses amounting to Rs. 40,000 during previous year are met by employer. The
car is used : (a) For personal benefit of X (b) Only for official duties.
(c)30% for personal benefit and 70% for official use.
(ii)Employer provides a car of 1.5 ltr. Engine cc costing Rs. 5,00,000 exclusively for the personal benefit of X. Expenses incurred on
the car are Rs. 52,000.
(iii) Employer provides a car below 1.6 ltr. along with a driver to X partly for official and partly for personal purpose. Expenses
incurred by the company are:
a. running and maintenance expenses – Rs. 32,000
b. Driver’s salary – Rs. 36,000
(iv) In case (iii) the employer maintains a log book and it is established that 30% of total mileage of car is for personal use of X and
70% for official duties.
(v) Employer provides a car (above 1.6 lt.) to X which is used for official work and is also used by X for commuting from his residence
to office and back.
(vi) X is provided with 2 cars to be used for official and personal work and following information is available from company’s records:

Car 1 exceeding 1.6 lt. (Rs) Car 2 below 1.6 lt. (Rs)
Cost of Car 6,00,000 4,00,000
Running and maintenance 60,800 48,000
Salary of driver 44,000 44,000
 Solution
(i) (a) Actual expenditure incurred by the employer minus amount recovered from the employee
The entire amount of expenditure of Rs. 40,000 met by the employer shall be a taxable perquisite. This
is an obligation of the employee being discharged by the employer and is therefore, a perquisite
taxable in the hands of all employees.
(b) Fully exempt subject to maintenance of specified documents
Not a perquisite, if the specified documents are maintained.
(c) In this case, The perquisite value shall be the amount of expenditure incurred by employer as
reduced by Rs.1,800/2,400 as the case may be, unless specified documents are maintained to claim
deduction higher than Rs. 1800/2400 p.m.
Therefore, Rs. 40,000 – Rs. 21,600 (1,800*12) = Rs. 18,400 will be perquisite.
(ii) Actual amount of expenditure incurred by the employer on the running and maintenance of motor
car including remuneration paid by the employer to the chauffeur and increased by the amount
representing normal wear and tear of the motor car at 10% p.a. of the cost of vehicle less any amount
charged from the employee for such use is taxable.
The entire running and maintenance and 10% of cost being normal wear and tear of the car will be a
perquisite, i.e Rs.52,000 + Rs.50,000 = Rs. 1,02,000 will be taxable.
 Contd.,
(iii) Rs. 1,800 per month (plus Rs. 900 per month, if chauffeur is also provided to run the motor car) The perquisite
value shall be :

Rs.
For Car : (Rs. 1,800*12) 21,600
For Driver : (Rs. 900*12) 10,800
32,400

(iv) Same as calculated under (iii) above.

(v) In this case , there is no perquisite because the car is not used for the personal benefit of X. Conveyance
facility for commuting from residence to office and back is not considered as a perquisite. However
specified documents shall have to be maintained.

(vi) In this case for one car the perquisite value shall be as if it is used for official and personal benefit. The
other car will be valued as if it is used exclusively for the personal purpose of X.
The perquisite value shall be calculated as under:
Step 1: Assume Car 1 is used for official and personal use and second car exclusively for the personal
purpose of X.
 Rs.
Car1 (2,400*12)+ (900*12) 39,600
Car 2 : Running and Maintenance expenses 48,000
10% of cost being normal wear and tear of the car 40,000
Salary of Driver 44,000
1,32,000

Therefore total value of perquisite = 39,600+ 1,32,000 = Rs. 1,71,600

Rs.
Car 2 (1,800*12)+ (900*12) 32,400
Car 1 : Running and Maintenance expenses 60,800
10% of cost being normal wear and tear of the car 60,000
Salary of Driver 44,000
1,64,800

Therefore total value of perquisite = 32,400+ 1,64,800 = Rs. 1,97,200

In this case, he should treat Car1 to be used partly for performance of duties and
partly for personal use. Thus the perquisite value of the cars shall be 1,71,600.
2. Provision by employer of services of a sweeper, a gardener, a
watchman or personal attendant [Rule 3(3)]

Servant Servant’s Salary Taxable in the

Value of Perquisite
Appointed by paid by hands of

Actual cost to the Specified

Employer Employer
employer Employee

Actual cost to the

Employee Employer All Employees
employer

Less: The amount recovered from the employee for such service.
Note: Domestic Servant Allowance given to an employee is always fully chargeable
to tax.
3. Value of benefit to the employee resulting from the supply of
gas, electric energy or water for household consumption [Rule
3(4)]
Circumstances Value of Benefit
(a) Where such supply is made from resources owned It shall be the manufacturing cost per unit incurred by
by the employer without purchasing from the outside the employer.
agency.

(b) In any other case Amount paid on this account by the employer to the
agency supplying the gas, electric energy or water

However, in both the above cases, if employee is paying any amount in respect of such services, the
amount, so paid, shall be deducted from the value so arrived at.
Note:
If the gas, electricity/water connections are in the name of the employees and the expenses on the
supplies are met by the employer, it is an obligation of the employee being discharged by the employer
and therefore this perquisite is taxable in the hands of all employees.
4. Valuation in respect of free or concessional educational facilities to any member of
employees’ household [Rule 3(5)]
Circumstances Value of Benefit
(a) Where the educational institution is itself maintained • The cost of education in a similar institution in or near the locality.
and owned by the employer
• However, if educational facilities are provided to the children of the
employee (any other member of the household not covered here), the
value of this perquisite shall be NIL... if the cost of such education or the
value of benefit per child does not exceed Rs. 1,000 p.m.

(b) Where free education facilities for such members of
employees' household are allowed in any other educational
institution by reason of his being in employment of that
employer
• The cost of education in a similar institution in or near the locality.
• However, if educational facilities are provided to the children of the
employee (any other member of the household not covered here), the
value of this perquisite shall be NIL ... if the cost of such education or the
value of benefit per child does not exceed Rs. 1,000 p.m.

However, in all the above cases, if any amount is paid or recovered from the employee on this account,
the value of benefit computed above shall be reduced by the amount so paid or recovered.
Contd.,
• Where cost of education exceeds Rs.1,000 p.m. per child, the
whole amount shall be taxable in the hands of the employee
and no deduction of Rs.1,000 p.m. shall be allowed.
Working Note:
• Payment of fee by the employer directly to educational institution for the education of members of household
including children or reimbursement of such fee to the employee shall be taxable in the hands of all employees.

• Amount incurred by the employer for providing free education facility or training to an employee is not taxable.
5. Free or concessional Journey given to transport employees and
their family members [Rule 3(6)]
Particulars Value of Perquisites

Provision of transport to the employee or to a member of his

household by the employer who is engaged in the carriage of  
passengers or goods—

(a) in the case of employee of an airline or the railways NIL

(b) in the case of any other employee :  

Value at which such benefit or amenity is offered by

(i) if provided free of cost
such employer to the public.

Reduce from the above value, the amount paid by or

(ii) if provided at concessional rate recovered from the employee for such benefit or
amenity.
C. Value of any specified security or sweat equity shares

• Stock option or sweat equity shares are shares of the company issued to the
employee at low rate so as to keep them motivated. Giving a Lower rate
means giving an incentive.
• The amount taxable in the hands of the employee would be difference
between the Fair Market Value and the amount at which the security is made
available to the employee.
• Perquisite = FMV on Exercise Date – Amount Actually paid by the
Employee.
• Year of taxability: Taxable in the year of Allotment of Shares.
The fair market value of the option as on the date of exercise of the option by
the employee is to be taken. The same shall be calculated as follows.
 Contd.,

When the share is listing more

Situations When the share is listed on one stock exchange
than stock exchange
Quoted Shares Average of opening & closing price on the date of (a) If Listed on more than one
exercise of option. RSE in India on Exercise Date:
Average value on Recognized
stock exchange (RSE) which
have highest volume of trading in
the shares.
(b) If No Trading on Exercise
Date:
Closing price on any RSE on
closest date of exercise date
Unquoted Value determined by Merchant Banker on the specified date.
shares Specified Date = (i) Date of Exercising options or (ii) Any date earlier (not more than
180 days) than the date of exercise of option.
D. Contribution to an approved superannuation fund

Contribution by the employer to the approved

superannuation fund is exempt up to
Rs.1,50,000 per year per employee. If the
contribution exceeds Rs.1,50,000 the balance
shall be taxable in the hands of the employee.
E. Tax-Free Perquisites (for all employees)
• Medical facility:
The value of any medical treatment provided to an employee or any member of his family
in a hospital, dispensary or a nursing home maintained by the employer shall be a tax free
perquisite.

• Medical reimbursement:
Any sum paid by the employer in respect of any expenditure incurred by the employee on
his medical treatment or treatment of any member of his family subject to maximum of Rs.
15,000 in the previous year .

• Recreational facilities:
Any recreational facility provided to a group of employees (not being restricted to a select
few employees) by the employer is not taxable.

• Training of employees:
Any expenditure incurred by the employer, for providing training to the employees or by
way of payment of fees of refresher courses attended by the employees.
 Tax-Free Perquisites (for all employees)

•Use of health club, sports and similar facilities provided uniformly to all
employees by the employer.

•Expenses on telephone, including a mobile phone, actually incurred on

behalf of the employee by the employer.

•Employer's contribution: Employer's contribution to superannuation fund of

the employee or provided such contribution does not exceed Rs. 1,50,000 per
employee per year.

•The premium paid by the employer on an accident policy taken out by it in

respect of the employee would not be a perquisite.

•Amount given by employer of assessee to assessee's child as scholarship is

exempt under section 10(16).
 Tax-Free Perquisites (for all employees)

•Food and beverages provided to employees:

The following shall be a tax free perquisite in the hands of the
employees—
i.free food and non-alcoholic beverages provided by the employer
to his employees during working hours:
a.at office or business premises or
b.through paid vouchers which are not transferable and usable
only at eating joints. Provided the value of such meal is up to
Rs. 50 per meal.
ii.Any tea or snacks provided during working hours.
iii.Free food and non-alcoholic beverages during working hours
provided in a remote area or on offshore installation.
 Tax-Free Perquisites (for all employees)
•Loans to employees:
In the following cases the value of benefit to the assessee resulting from the provision of
interest free or concessional loan shall be nil:
a.where the amount of loans are petty, not exceeding in the aggregate Rs. 20,000;
b.loans made available for medical treatment in respect of diseases specified in rule 3A of the
Income-tax Rules. However, the exemption so provided shall not apply to so much of the loan
as has been reimbursed to the employee under any medical insurance scheme.

•Perquisites provided outside India:

Perquisites provided by the Government to its employees, who are citizens of India for
rendering services outside India, are not taxable. [Section 10(7)]

• Rent free House/Conveyance facility:

Rent free official residence and conveyance facilities provided to a Judge of the Supreme
Court/High Court is not a taxable perquisite.
 Contd.,

• Residence to officials of Parliament, etc.: Rent free furnished residence

(including maintenance thereof) provided to an officer of the Parliament, a
Union Minister or Leader of Opposition in Parliament, is not a taxable
perquisite.

• Accommodation in a remote area:

The accommodation provided by the employer shall be a tax free perquisite if
the accommodation is provided to an employee working at mining site or an
onshore oil exploration site or a project execution site, or a dam site or a
power generation site or an offshore site which—
a.being of a temporary nature and having plinth area not exceeding 800
square feet, is located not less than eight kilometres away from the local
limits of any municipality or a cantonment board; or
b.is located in a remote area.
 Contd.,
• Educational facility for children of the employee: Where the educational
institution itself is maintained and owned by the employer and free
educational facilities are provided to the children of the employee or
where such free educational facilities are provided in any institution by
reason of his being in employment of that employer, there shall be no
perquisite value if the cost of such education or the value of such benefit
per child does not exceed Rs.1,000 p.m.

• Use by the employee or any member of his household of laptops and

computers belonging to the employer or hired by him.

• Leave Travel Concession

• Tax paid by the employer on non-monetary perquisites: Tax paid by the

employer on nonmonetary perquisites of the employee shall be exempt in
the hands of the employee. [Section 10(10CC)]
 Treatment of Medical facilities [Proviso to Section 17(2)]
Before discussing the broad provisions, we should keep in mind the following points –
 Treatment of medical facilities [Proviso to Section 17(2)] Contd.,
(A). Medical Facilities / Reimbursement in INDIA
The provisions are given below—
1. Employer’s hospital/Government hospital/approved hospital -
The perquisite in respect of medical facility provided by an employer in the following hospitals/clinic is NOT
Chargeable to Tax—
• hospital owned/maintained by the employer,
• hospital of Central Government/State Government/local authority,
• private hospital if it is also recommended by the Government for the treatment of Government employees,
• specified medical facility (given in rule 3A) in a hospital approved* by the Chief Commissioner.
2. Health insurance premium -
Medical insurance premium paid or reimbursed by the employer is NOT Chargeable to Tax.
3. Any other facility in India -
Any other expenditure incurred or reimbursed by the employer for providing medical facility in India is chargeable
to tax (exemption of Rs. 15,000 was available for such reimbursement up to the assessment year 2018-19).
 Treatment of medical facilities [Proviso to Section 17(2)] Contd.,
(B). Medical Facilities Outside INDIA
Any expenditure incurred by the employer (or reimbursement of expenditure incurred by the employee) on medical
treatment of the employee or any member of the family of such employee outside India, is taxable subject to the
conditions given below —

1. Perquisites Not Chargeable to Tax

• Medical treatment of employee or any member of family of such employee outside India.
• Cost on travel of the employee/any member of his family and one attendant who accompanies the patient in
connection with treatment outside India
• Cost of stay abroad of the employee or any member of the family for medical treatment and cost of stay of one
attendant who accompanies the patient in connection with such treatment.

2. Conditions to be Satisfied are :

Question
Contd.,
 Solution : (a)
Taxable Expenses (Rs.)
(i) Treatment of X 4,200

(ii) Treatment of Mrs. X 3,600

(iii) Treatment of X’s mother 1,200

(iv) Treatment of X’s brother 400

(v) Treatment of X’s grandfather 1,500

10,900
So, entire Rs.10,900 shall be taxable perquisite.

(b) Payment of insurance premium on the health of employee is a tax-free perquisite. Hence nothing is taxable.

(c ) Expenses of medical treatment of employee and his family members in a hospital maintained by employer
are tax-free. So expenses on treatment of X, X’s Son, X’s Windowed sister and Mrs. X are not taxable. Only
following expenses are taxable:
1. Treatment of X’s Uncle – Rs. 4,600
2. Treatment of X’s Handicapped nephew – Rs. 2,500
So Taxable Perquisite will be Rs.7,100 (4,600 +2,500)
 Solution Contd.,
(d) Expenses on medical treatment of employee/family members in respect of prescribed diseases, in
any hospital approved by Chief Commissioner of Income Tax, are tax – free. In this case , as cancer is
a prescribed disease and Tata Memorial Hospital, Bombay is approved by Chief Commissioner of
Income Tax, there is no taxable perquisite.

(e) In respect of medical treatment outside India, expenses on actual treatment and on stay abroad
(of the patient and one attendant) are exempt from tax to the extent permitted by RBI ., i.e up to Rs.
60,000 and Rs. 45,000 respectively.

So balance 15,000 (75,000-60,000) and Rs. 20,000 (65,000-45,000) shall be taxable perquisite.

In case of (a) GROSS TOTAL INCOME shall be Rs. 1,85,000 (1,50,000+ 15,000+ 20,000) HENCE,
expenditure on travel is tax free perquisite.

In case of (b) GROSS TOTAL INCOME shall be Rs. 2,15,000 (1,80,000+ 15,000+ 20,000) HENCE,
expenditure on travel amounting to Rs. 120,000 shall be taxable perquisite.
Treatment of Leave Travel Concession or Assistance
Section 10(5)
Value of travel concession or assistance received by employee or due to him from his employer or former employer for himself
and his family, in connection with his proceeding—

• on leave to any place in India.

• to any place in India after retirement from service or after the termination of his service.
 Points to Remember Contd.,

 Only 2 journeys in a block of 4 years are exempt : The block of 4 years applicable for AY 2020-21 is
2019-2022. Earlier blocks were 2018-2021 and so on.
Profits in lieu of Salary [Section 17(3)]
These payments are received by the employee in lieu of or in addition to
salary or wages. These payments include the following:
(1) Terminal Compensation
(2) Payment from an Unrecognised Provident Fund or an Unrecognized
Superannuation Fund
(3) Payment under Keyman Insurance Policy
(4) Any amount due or received before joining or after cessation of
employment
(5) Any other sum received by the employee from the employer
 Contd.,
However, the following receipts, will not be termed as 'profits in lieu of salary' to the extent they are
exempt under section 10.

• Death-cum-retirement gratuity — Section 10(10)

• Commuted value of pension — Section 10(10A)

• Retrenchment compensation received by a workman — Section 10(10B)

• Payment received from a statutory provident fund — Section 10(11)

• Payment received from recognised provident fund — Section 10(12)

• Any payment from an approved superannuation fund as per section 10(13)

• House rent allowance exempt under section 10(13A)

In short, except for the terminal and other payments specifically exempted under clauses (10) to (13A)
of section 10, all other payments received by an employee from an employer or former employer are
liable to tax under this head.
Treatment of
Retirement
Benefits
Gratuity
Gratuity is a payment made by the employer to an employee in appreciation of the
past services rendered by the employee. Gratuity can either be received by:
• the employee himself at the time of his retirement; or
• the legal heir on the event of the death of the employee.
Gratuity received by an employee on his retirement is taxable under the head
"Salary" whereas gratuity received by the legal heir of the deceased employee shall
be taxable under the head "Income from other sources".
However, in both the above cases, according to section 10(10) gratuity is exempt
upto a certain limit. Therefore, in case gratuity is received by employee, salary
would include only that part of the gratuity which is not exempt under section
10(10) as discussed in the Table below :
 Contd.,
Government Employees covered under Gratuity Act. Any other Employees
employees &
employees of local
authority
Fully Exempt Minimum of the following 3 limits: Minimum of the following 3 limits:
• Actual gratuity received, or • Actual gratuity received
• 15 days’ salary for every completed year of • Half month’s average salary of each
service, or part thereof exceeding 6 months. completed year of service.
* 7 days salary for each season in case of • Rs. 10,00,000
employee in seasonal establishment; or
• Rs. 20,00,000 Meaning of Salary:
• Basic Salary plus D.A. to the extent the
Meaning of Salary: terms of employment so provide
• Basic salary plus dearness allowance. Commission, if fixed percentage of
• Last drawn salary. Average salary for turnover.
preceding 3 months in case of piece rates • Average salary of last 10 months
employees. preceding the retirement month.
• No. of days in a month to be taken as 26 • Only completed year of service is to be
taken.
 Contd.,
IMPORTANT POINTS :
1.Where an employee had received gratuity in any earlier year(s) and had claimed exemptions under section 10(10) in respect of the
gratuity received earlier also, he will still be entitled to this exemption but the limit which at present is Rs. 10,00,000 shall be
reduced by the amount of exemption(s) availed in the earlier year(s). There will be no change in the other two limits.

2.The words "completed service" occurring in section 10(10) should be interpreted to mean an employee's total service under
different employers including the employer other than the one from whose service he retired, for the purpose of calculation of
period of years of his completed service, provided he was not paid gratuity by the former employer.

3.Any gratuity paid to an employee, while he continues to remain in service with the same employer is taxable under the head
"Salaries" because gratuity is exempt only on retirement or on his becoming incapacitated or on termination of his employment or
death of the employee. In this case, however the assessee can claim relief under section 89.

4.The expression "termination of employment" would cover an employee who has resigned from the service.

5.How to determine 15 days’ salary -

Salary of 15 days is calculated by dividing salary last drawn by 26, i.e., maximum number of working days in a month. For
instance, if monthly salary at the time of retirement is Rs. 2,500, 15 days’ salary would come to Rs. 1,442.31 [i.e., Rs. 2,500 × 15÷26].

6.How to determine 15 days’ salary for each year of service in the case of a piece-rated employee -
In the case of a piece rated employee, daily wages shall be computed on the average of the total wages received by him for a period
of three months immediately preceding the retirement. For this purpose, the wages paid for any overtime work shall not be taken
into account.
 Question
R, who was employed with P Company Ltd., retired on 21.10.2018, received Rs. 3,60,000 as gratuity. He served the company for 26 years and 8
months. At the time of retirement, his salary was Rs.15,000 p.m. However, average salary for 10 months preceding month of retirement is
Rs.14,400 p.m. He is not covered under the Payment of Gratuity Act, 1972. Compute taxable gratuity.

(B) What amount of gratuity shall be taxable, if R, earlier to his appointment with P Company Ltd, had worked for 4 years with X Ltd. And was
not entitled to gratuity from X Ltd.?

Solution : The minimum of the following three amount will be exempt:

(a) Actual amount received , i.e., Rs 3,60,000

(b) Half month’s salary for every completed year of service, i.e. = 14,400/2 x 26 (YOS) = Rs.1,87,200

(c) Rs.10,00,000

Hence, Rs.1,87,200 shall be exempt and balance Rs. 1,72,800 (3,60,000- 1,87,200) would be included as gross salary.

(B) The minimum of the following three amount will be exempt:

(d) Rs. 3,60,000

(e) 14,400/2 x 30* (26+4) = Rs.2,16,000

(f) Rs.10,00,000

Hence, Rs.2,16,000 shall be exempt and balance Rs.1,44,000 (Rs. 3,60,000 - Rs.2,16,000) shall be taxable.

*Completed YOS will include period of 4 years of earlier appointment as he was not entitled to gratuity at that time.
Treatment of Pension
Pension is a payment made by the employer after the retirement/death of the employee as a
reward for past service.

Pension is normally paid as a periodical payment on monthly basis but certain employers may
also allow an employee to forgo a portion of the pension and receive a lump sum amount by
surrendering such portion of pension. This is known as commutation of pension. The pension may
be fully or partly commuted i.e. in lieu of the pension, a lump sum payment is made to the
employee. The treatment of these two kinds of pension is as under:

• Uncommuted pension i.e. the periodical pension: It is fully taxable in the hands of all
employees, whether government or non-government. For instance, X gets monthly pension of
Rs. 2,000. It is taxable as salary under section 15 in the hands of a Government employee as well
as non Government employee.

• Commuted pension: Exemption of Commuted Pension U/s 10(10A)

 Contd.,
Status of Employee Gratuity Received / Not Received Exemption in respect of Commuted
Pension under Section 10(10A)

1. Govt. employees, employees of local authorities and Gratuity may or may not be Received Entire Commuted Pension is Exempt
employees of statutory corporations from Tax.

2. Non-Government Employee Gratuity Received 1/3 rd of the Pension* which he is

normally entitled to receive is
Exempt from tax.

3. Non-Government Employee Gratuity is Not Received 1/2 of the Pension which he is

normally entitled to receive is
Exempt from tax.

If payment in Commutation of Pension received by an employee exceeds the aforesaid limits, such excess is
liable to tax in the assessment year relevant to the previous year in which it is due or paid. The assessee can,
however, claim relief in terms of section 89.
POINTS TO REMEMBER :
 Pension received by the employee is taxable under the head "Salaries".
 Pension received from UNO by the employee or his family members → Exempt.
 Family Pension received by the family members of Armed forces → Exempt u/s 10(19).
 Family Pension received by family members after death of an employee (Other than armed forces) →
Taxable under the head “Income from other sources” Deduction is available u/s 57 which is = Lower of Rs
15000 OR 1/3rd of Pension.
 Total Pension* = 𝐶𝑜𝑚𝑚𝑢𝑡𝑒𝑑 𝑃𝑒𝑛𝑠𝑖𝑜𝑛 DIVIDED BY % 𝑜𝑓 𝑐𝑜𝑚𝑚𝑢t𝑎𝑡𝑖𝑜𝑛.
Question : Mr. Sunder retires from PQR Ltd. on 31.3.2017. He is paid Rs. 1,800 p.m. as pension. On
his request, PQR Ltd. Pays Rs. 36,000 in lieu of 50% of monthly pension from 1.12.2017. Assume
that i) Gratuity is paid, (ii) No Gratuity is paid. Calculate taxable pension includible in the salary
income for AY 2019-20.
Solution: Mr. Sunder has commuted his pension from 1.4.2017. Till 31.11.2017 (i.e for 8 months), he was receiving monthly
pension of Rs.1,800. Now from 1.12.2018, he will receive only Rs. 900 as monthly pension since he has commuted 50% of his
monthly pension. Total pension = 𝑅𝑠.36,000/50% = Rs. 72,000 for the purpose of exemption.
 Treatment of Leave Salary
• An employee can even encash his accumulated privileged/earned leaves and can get salary for the said period of leave. Such
receipt of salary by an employee from his employer in lieu of his accumulated leaves is called “Leave Encashment”.

• Such encashment can be done by an employee either during the service or at the time of leaving job due to retirement or any
other reason. However, in case of death of an employee, the salary for his/her accumulated leave is given to his/her legal heirs.
 Contd.,
Any payment received as leave encashment at the time of retirement or on leaving job otherwise shall be exempt upto the least of
following amounts Under Section 10 (10AA)(ii).

Meaning of salary :

1. Basic salary + D.A. (to the extent the terms of employment so provide) + Commission, if fixed percentage of turnover.

2. Average salary of last 10 months immediately proceeding the date of retirement.

Points to remember Contd .,
• If employee receives leave encashment for the 1st time in his life at the time of leaving job:
While calculating exemption, the maximum notified limit of Rs. 3,00,000 shall be applicable and he shall be
granted exemption as per the least of 4 limits.

• If employee receives leave encashment for the second/third or subsequent times:

While calculating exemption in respect of leave encashment on subsequent occasions, the maximum notified
exemption limit shall be reduced by the exemption claimed in the past.

• Receipt of leave encashment simultaneously from two or more employers in same P.Y. In such a case, the
maximum exemption in respect of leave encashment received from all the employers cannot exceed the
maximum notified limit of Rs. 3,00,000.

• Relief u/s 89(1). In respect of taxable leave encashment included in salary income of any previous year, the
employee is entitled to claim relief u/s 89(1).
Question

AMS = Average Monthly Salary

Retrenchment Compensation Section 10(10B)
Compensation received on Voluntary
Retirement Section 10(10C)
Provident Fund
To encourage savings for the social security of employees, the Government has set
up various kinds of provident funds. The employee contributes a fixed percentage
of his salary towards these funds and in many cases employer also contributes. The
whole contribution along with interest is credited to employee’s account. He will get
payment out of this fund at the time of retirement and at some other important
occasions. If the employee dies, his heirs will get the full payment.
Provident Funds are of four kinds
(i)       Statutory Provident Fund or the Fund to which the Act of 1925 applies
(S.P.F.).
(ii)      Recognised Provident Fund (R.P.F.).
(iii)     Unrecognised Provident Fund (U.R.P.F.).
(iv)     Public Provident Fund (P.P.F.).
Kinds of Provident Fund

Exempt subject to certain Conditions

Question
Approved Superannuation Fund

Superannuation fund is also a scheme of retirement benefits for the employee. These are
funds, usually established under trusts by an undertaking, for the purpose of providing
annuities, etc., to the employees of the undertaking on their retirement at or after a specified
age, or on their becoming incapacitated prior to such retirement, or for the widows, children
or dependents of the employees in case of the any employee's earlier death. The trust invests
the money contributed to the fund in the form and mode prescribed. Income earned on these
investments shall be exempt, if any such fund is an Approved Superannuation Fund.
Tax treatment: The tax treatment as regards the contribution to and payment from the fund is
as under:
• Employee's contribution: Deduction is available under section 80C from gross total income.
• Employer's contribution: Contribution by the employer to the approved superannuation
fund is exempt up to Rs. 1,50,000 per year per employee. If the contribution exceeds Rs.
1,50,000 the balance shall be taxable in the hands of the employee.
• Interest on accumulated balance: It is exempt from tax.
 Approved Superannuation Fund
Payment from the fund: Any payment from an approved superannuation fund shall be
exempt if it is made:
1. on the death of a beneficiary; or
2. to any employee in lieu of or in commutation of an annuity on his retirement at or after a
specified age or on his becoming incapacitated prior to such retirement; or
3. by way of refund of contributions on the death of a beneficiary; or
4. by way of refund of contributions to an employee on his leaving the service in connection
with which the fund is established otherwise than by retirement at or after a specified age
or on his becoming incapacitated prior to such retirement, to the extent to which such
payment does not exceed the contributions made prior to the commencement of this Act
and any interest thereon; or
5. by way of transfer to the account of the employee under a pension scheme referred to in
section 80CCD and notified by the Central Government.
Deductions from Gross
Total Income
Deduction from Gross Total Income
While computing total income of an individual/HUF a deduction is allowed under section 80C from the gross
total income on account of certain savings and investments made by such assessee.
The deduction is limited to maximum amount of Rs.1,50,000.
Some of the eligible savings and investments for which deduction under section 80C is allowed to an
individual consist of following:
1. Employee’s contribution to SPF.
2. Employee’s contribution to RPF.
3. Employee’s contribution to PPF.
4. Life insurance premiums paid by assessee for himself or his spouse and his children..
5. Subscription to notified bonds issued by NABARD.
6. Payment to Unit Linked Insurance Plans (ULIPs).
7. Amount invested in National Savings Certificate.
8. Term Deposit for a fixed period of not less than 5 years with a scheduled bank.
9. Contribution to Sukanya Samriddhi Account.
Question (2014)
 Solution : Computation of Income under the head “Salaries” of A for the AY 2011-12

Rs. Rs.

Basic Salary (20,000x12) 2,40,000

DA (10,000x12) 1,20,000

Children Education allowance (200x2x12) 4,800

Less: Exempt (100x2x12) 2,400 2,400

Free Lunch (80-50)=30x300 9,000

Credit Card Expenses Reimbursed 10,000

Value of Gift in Kind (12,000-5,000) 7,000

Motor Car (2,400+900)=3,300x12 39,600

Watchman (1,000x12) 12,000

Telephone Facility TAX FREE

Rent Free Unfurnished Accommodation (15% of Salary) i.e Rs.3,14,400 47,160

(2,40,000 +72,000+2,400)
GROSS SALARY 4,87,160

Less: Standard Deduction u/s 16(ia) 50,000

Income under the Head “Salaries” 4,37,160

Salary = Basic Pay

+ DA , (to the extent it is a part of retirement benefit)

+ Bonus

+ Commission

+ taxable portion of all allowances

+ any monetary payments which is chargeable

Question
Question (2012)
THANK YOU!