Income Tax Law and Accounts

Dr. Lal Baboo Jaiswal

 History Of Income Tax
• In India, Income Tax was first time introduced
in the year 1860 by Sir James Wilson in order
to meet the loss caused on account of
'military mutiny' in 1857. ...
• At present, this law is governed by the Act of
1961 which is commonly known as Income
Tax Act, 1961 which came into force on and
from 1st April 1962.
 History Of Income Tax Contd..
• In the year 1886, a separate Income Tax Act was passed, this act was
in force for a long time, subject to the various amendments from time
to time. In the year 1918, a new Income Tax Act was passed, but
again, it was replaced by another new act of 1922. The Act of 1922
became very complicated due to various amendments. This act
remains in force to the assessment year 1961-62. In the year 1956,
the Government of India referred to the Law Commission in order to
simplify the law and also to prevent the evasion of Tax.
• The Law Commission submitted its report in September 1958 in
consultation with the Ministry of Law. At present, this law is governed
by the Act of 1961 which is commonly known as Income Tax Act,
1961 which came into force on and from 1st April 1962. It applies to
the whole of India, including the state of Jammu & Kashmir.
 History Of Income Tax Contd..
• The Income Tax law in India consists of the following components;
• Income Tax Act, 1961: The Act contains the major provisions related to
Income Tax in India.
• Income Tax Rules, 1962: Central Board of Direct Taxes (CBDT) is the body
which looks after the administration of Direct Tax. The CBDT is empowered to
make rules for carrying out the purpose of this Act.
• Finance Act: Every year Finance Minister of Government of India presents the
budget to the parliament. Once the finance bill is approved by the parliament
and get the clearance from President of India, it became the Finance Act.
• Circulars and Notifications: Sometimes the provisions of an act may need
clarification and that clarification usually in a form of circulars and
notifications which has been issued by the CBDT from time to time. It
includes clarifying the doubts regarding the scope and meaning of the
provisions.
 History Of Income Tax Contd..
• Taxes are levied by the government on the taxpayer. Taxes
are broadly divided into two parts namely, Direct Tax and
Indirect Tax. Direct Tax is levied directly on the income of the
person. Income Tax and Wealth Tax are the part of Direct
Tax. Whereas, in indirect taxes, the person who pays the tax,
shifts the burden to the person who consumes the goods or
services. Before 2017 the Indirect Tax comprises of various
taxes and duties like Service Tax, Sales Tax, Value Added Tax,
Customs Duty, Excise Duty and etc. From July 1st, 2017 all
such Indirect Taxes are submerged in one tax law which was
named as ‘The Goods and Services Tax Act, 2017”.
 Types of Taxes

Taxes are levied by the government on the taxpayer. Taxes are broadly
divided into two parts namely:
1. Direct Tax.
Direct Tax is levied directly on the income of the person. Income Tax
and Wealth Tax are the part of Direct Tax
2 Indirect Tax.
Whereas, in indirect taxes, the person who pays the tax, shifts the
burden to the person who consumes the goods or services. Before 2017
the Indirect Tax comprises of various taxes and duties like Service Tax,
Sales Tax, Value Added Tax, Customs Duty, Excise Duty and etc. From
July 1st, 2017 all such Indirect Taxes are submerged in one tax law
which was named as ‘The Goods and Services Tax Act, 2017”.
 Basic Concept of Income Tax Act

“Income Tax is levied on the total income of the previous year of every
person”. To understand the basic concept. It is very important to
know the various other concepts.
Direct Tax : 298 Sections and 14 Schedule

1. Previous Year. Sec.3 (2020-21)

2. Assessment Year. Sec.2(9) (2021-22)
3. Income. Sec. 2(24)
4. Assessee Sec. 2(7)
5. Person Sec.2(31)
6. Gross Total Income Sec.80B(5)
7. Total Income Sec.2(45)
 Basic Concept of Income Tax Act contd...
Previous Year. Sec.3:

Income earned during the year is taxable in the next year. The definition of “Previous Year” is given
under section 3 of the Act. Previous Year is the year in which income is earned. Previous year is the
financial year immediately preceding the relevant assessment year. From 1989-90 onwards, every
taxpayer is obliged to follow financial year (i.e., April 1st of one year to March 31st of next year) as the
previous year. Current previous Year is 2020-21

Previous Year in case of a continuing Business :

It is the Financial Year preceding the Assessment Year. As such for the assessment year 2021-2022,
the Previous Year for continuing business is 2020-2021 i.e. 1-4-2020 to 31-3-2021.

Previous Year in case of newly set up Business :

The Previous Year in case of newly started business shall be the period between commencement of
business and 31st March next following . e.g. in case of a newly started business commencing its
operations on Diwali 2020, the Previous Year in relation to Assessment Year 2021-2022. shall be the
period between Diwali 2020 to 31 March 2021.
 Basic Concept of Income Tax Act contd...
Previous Year in case of newly created source of income :
In such case the Previous Year shall be the period between the day on which such source
comes existence and 31st March next following:

Sl. No.
Income Section Previous Year
1. Financial Year in which found to
Cash Credit [68]
be entered.
2. Financial Year preceding the
Unexplained Investment [69]
Assessment Year
3. Unexplained Bullion, Cash, Financial Year in which found in
[69A]
Jewelley the possession of the assessee.
4. Financial Year in which
Partly explained Investment [69B]
Investment was made.
5. Financial Year in which
Unexplained Expenditure [69C]
expenditure was incurred.
6. Financial Year in which such
Payment of Hundi, Money in Cash [69D]
payment was made.
 Basic Concept of Income Tax Act
contd...
• Assessment Year. Sec.2(9):

The year in which Taxes are paid ,called Assessment Year.“Assessment Year”
means the year in which income of the previous year of an assessee is taxed. The
timed lap of assessment year is of twelve months beginning from the 1st April
every year. The period starts from 1st April of one year and ending on 31st March
of next year. Broadly, assessment year is defined under section 2 (9) of the Act.
Income. Sec. 2(24):
The Income includes income from:
 Cash or Kind;
 Legal or Illegal Income;
 Temporary or Permanent;
 Receipt basis or Accrual basis;
 Gifts;
 Lump sum or Instalments;
 Causal Income Tax Rate 30% 115BB
 Basic Concept of Income Tax Act
contd...
Assessee : Sec. 2(7)
An assessee is a taxpayer means a person who under the income tax act is subject to pay taxes or any other sum of money,
as defined under section 2 (7) of the Act. The expression ‘any other sum of money’ includes other such obligations payable,
for instance fine, interest, penalty and other tax etc.

Types of Assesse:
1 Regular Assessee
1. Deemed Assessee
2. Default Assessee

Person: Sec. 2 (31)

Income tax is levied on the total income of the previous year of every person. In general terms, the
meaning of a person can be interpreted in a short term. Whereas, as per Section 2 (31),
Person includes:
i. an individual,
ii. a Hindu undivided family (HUF),
iii. a company, Statutory Body
iv. a firm,
v. an association of persons (AOP) or a body of individuals (BOI), whether incorporated or not,
 Basic Concept of Income Tax Act
contd...
Gross Total Income Sec.80B(5) :

The sum of income of as per sec.14 are called Gross Total Income i.e
i. Income from salaries (Sec. 15 to 17)
ii. Income from House Property (Sec. 22 to 27)
iii. Profits and gains of business and profession (Sec. 28 to 44)
iv. Capital Gains (Sec. 45 to 55)
v. Income from other sources (Sec. 56 to 59)

Total Income Sec.2(45)

From Gross Total Income , Deductions u/s 80 are allowed. The resultant
figure is called “Total Income “ on which Rates of Taxes are applied
Total Income = GTI – Deductions under Chapter VI-A
 Basic Concept of Income Tax Act
Chapter VI –A contd...
Deductions
80 C, 80 = 80C to 80U;
80DDB,

80CCC, 80E,

80CCD (1), 80EE,

80CCD (1B), 80G,

80CCD (2), 80GG,

80 D, 80TTA,

80DD, 80TTB,

80U
Agricultural Income Sec. 2 (1A)

Agricultural income is not taxable under Section 10 (1) of the Income Tax Act as it is not counted as a
part of an individual's total income. However, the state government can levy tax on agricultural income if
the amount exceeds Rs. 5,000 per year.

Agriculture income is exempt from tax by virtue of Section 10(1). By virtue of Section 2(1A) the
expression Agriculture Income means:

1. Any rent or revenue derived from land, which is situated in India and
is used for agriculture purpose.
 Rent or revenue should be derived from land (may be in cash or kind).
 The land should be in India.

2. Any income derived from such land by agricultural operations including processing of the agriculture
produce, raised or received as rent-in- kind so as to render it fit for the market or sale of such products.
 Agricultural Income cont.…
3. Income is attributable to a farmhouse subject to certain conditions:

 The building should be occupied by a cultivator (as a landlord or tenant).

 He should be in the immediate vicinity of agriculture land.

 The building is used as a dwelling house or as a storehouse or other outbuilding.

 The land is assessed to land revenue or local rates or alternatively, the land is

situated outside “urban areas” i.e. any area which is comprised within the

municipality jurisdiction having a population of not less than 10,000 persons

(Population) or within 8 km from the limits of any such municipality.

 Agricultural Income cont.…
Examples of Agricultural Income:
1. The following are some of the examples of agricultural income:
2. Income derived from sale of replanted trees.
3. Income from sale of seeds.
4. Rent received for agricultural land.
5. Income from growing flowers and creepers.
6. Profits received from a partner from a firm engaged in agricultural produce or
activities.
7. Interest on capital that a partner from a firm, engaged in agricultural
operations, receives.
 Agricultural Income cont.…
Examples of Non-Agricultural Income:

The following are some of the examples of non-agricultural income:

1. Income from poultry farming.
2. Income from bee hiving.
3. Any dividend that an organization pays from its agriculture income.
4. Income from the sale of spontaneously grown trees.
5. Income from dairy farming.
6. Income from salt produced after the land has flooded with sea water.
7. Purchase of standing crop.
8. Royalty income from mines.
9. Income from butter and cheese making.
10.Receipts from TV serial shooting in farm house.
Agricultural Income cont.…
Particulars of Agricultural (Exem Non-
business pt) portion agricultural (Taxabl
e) portion

Growing &
Manufacturing of 60% 40%
tea

Growing &
Manufacturing of 65% 35%
rubber

Growing &
Manufacturing of 75% 25%
coffee

Growing &
Manufacturing of
coffee grown,
60% 40%
cured,
roasted and groun
ded
 Income Tax Slab
Taxable income Tax Rate Tax Rate
(Existing Scheme) (New Scheme)
Up to Rs. 2,50,000 Nil Nil
Rs. 2,50,001 to Rs. 5,00,000 5% 5%
Rs. 5,00,001 to Rs. 7,50,000 20% 10%
Rs. 7,50,001 to Rs.
20% 15%
10,00,000
Rs. 10,00,001 to Rs. 30% 20%
12,50,000
Rs. 12,50,001 to Rs. 30% 25%
15,00,000
Above Rs. 15,00,000 30% 30%
 Income Tax Slab Cont…
Individuals who are below the age of 60 years

Income Tax Slab

(in Rupees) Tax Rate for Individual Below the Age Of 60 Years

0 to 2,50,000* Nil

2,50,001 to 5,00,000 5% of total income exceeding 2,50,000

Tax Amount of 12,500 for the income up to 5,00,000

5,00,001 to 10,00,000
+ 20% of total income exceeding 5,00,000

Tax Amount of 1,12,500 for the income up to

Above 10,00,000 10,00,000
+ 30% of total income exceeding 10,00,000
 Income Tax Slab Cont.…
Senior citizens who are between 60 years and 80 years old.

Income Tax Slab Senior Citizens (between 60 years – 80

years)
Up to 3,00,000 Nil
3,00,001 to 5,00,000 5% of income exceeding 3,00,000
Tax Amount of 10,000 for the income up to
5,00,001 to 10,00,000 5,00,000
+ 20% of total income exceeding 5,00,000
Tax Amount of 1,10,000for the income up
Above 10,00,000 to 10,00,000
+ 30% of total income exceeding 10,00,000
 Income Tax Slab Cont.…
Super senior citizens who are above 80 years old.

Income Tax Slab Very Senior Citizens of and above 80 years of age
Up to Rs.5,00,000 Nil
5,00,001 to 10,00,000 20% of income exceeding 5,00,000
Tax Amount of 1,00,000 for the income up to 10,00,000
Above 10,00,000
+ 30% of total income exceeding 10,00,000
Surcharge and Cess:
Above Rs.50,00,000 and up to Rs.1 crore – then 10% surcharge is applicable
Above Rs.1 crore and up to Rs.2 crore – then 15% surcharge is applicable.
Between Rs.2 crores and up to Rs.5 crore –then 25% surcharge is applicable;
For Above Rs. 5 crore – then 37% surcharge is applicable.

An additional Cess of 4% for Health & Education (HEC) is applicable to the income tax
plus surcharge.
 Residence and Tax Liability
The tax liability of a person under the Income-
tax Act depends upon his residential status in
the financial year in which the income accrues
or arises to him or is received by him. Financial
year means the period of twelve months
commencing on the I st day of April every year.
Types of Residential status
 Types of Residential status Cont.…
Individual Sec.6
Resident
A taxpayer would qualify as a resident of India if he satisfies one of the following 2 conditions :
1. Stay in India for a year is 182 days or more or
2. Stay in India for the immediately 4 preceding years is 365 days or more and 60 days or
more in the relevant financial year
Exception:
In the event an individual leaves India for employment during an FY, he will qualify as a resident
of India only if he stays in India for 182 days or more. This otherwise means, condition (b) above
of 60 days would not apply to him
Additional Conditions:
1. Has been a resident of India in at least 2 out of 10 years immediately previous years and
2. Has stayed in India for at least 730 days in 7 immediately preceding years
Resident but Not Ordinarily Resident
If an individual qualifies as a resident, the next step is to determine if he/she is a Resident
ordinarily resident (ROR) or an RNOR. Therefore, if any individual fails to satisfy even one of the
above additional conditions, he would be an RNOR.
 Types of Residential status Cont.….
Non-resident
The individual qualifies as NR in India if he/she meets all the following conditions:

His/her cumulative stay in India during the financial year is less than 181 days and

His/her cumulative stay in India does not exceed 60 days or more during the financial year His/her cumulative stay in India exceeds 60

days or more during the financial year but does not exceed 365 days or more during the 4 previous financial years.

Residential status of a Hindu Undivided Family [Sec. 6(2)]

Basic Condition:

A Hindu undivided family is said to be a resident in India if the control and management of its affairs is wholly or partly situated in India.

Additional Conditions:

1. Karta has been a resident in India in at least 2 out of the 10 previous years immediately preceding the relevant previous year. and

2. The karta has been present in India for a period of 730 days or more during 7 years immediately preceding the relevant previous year.
 Residential Status of Firms, AOP,BOI
Sec.6 (2)(4)

Resident:
Control and management of its business fully OR Partly situated in India

Non-Resident:
Control and management of its business situated fully outside of India

Not- Ordinarily Resident:

Not applied for these types of assesse.

Residential Status of Company Sec.6 (3):

1. An Indian company is always resident in India.

2. Residential status of foreign company :
A foreign company will be resident in India if its place of effective management (POEM) during the
relevant previous year is in India. For this purpose, the place of effective management means a place where
key management and commercial decisions that are necessary for the conduct of the business of an entity as
a whole are in substance made.
Tax Liability
 Exempted Income Sec.10
1. Agriculture Income [Section 10(1)]
2. Amount received out of family income, Hindu Undivided Family (H.U.F.) [Section 10(2)]
3. Share of profit from Partnership firms [Section 10(2A)]
4. Interest paid to Non-Resident [Section 10(4)(i)]
5. Interest to Non-Resident on Non-Resident (External) Account [Section 10(4)(ii)]
6. Interest paid to a person of Indian Origin and who is Non-Resident [Section 10(4 B)]
7. Leave Travel Concession or Assistance [Section 10(5)]
8. Remuneration or Salary received by an individual who is not a citizen of India [Section 10(6)] a. Remuneration [U/s 10(6)
(ii)] b. Remuneration received as an employee of foreign enterprise [U/s 10(6)(vi)] c. Employment on a foreign ship [U/s
10(6)(viii)] d. Remuneration received by an employee of foreign government [U/s 10(6)(xi)]
9. Tax paid by Government or Indian concern on Income of a Foreign Company [Section 10(6A), (6B), (6BB) and (6C)]
10. Perquisites/Allowances paid by Government to its Employees serving outside India [Section 10(7)]
11. Employees of Foreign Countries working in India under Cooperative Technical Assistance Programme [Section 10(8)]
12. Income of a Consultant [Section 10(8A)]
13. Income of Employees of Consultant [Section 10(8B)]
14. Income of any member of the family of individuals working in India under cooperative technical assistance programmes
[Section 10(9)]
15. Gratuity [Section 10(10)] a. Gratuity received by Government servants [Section 10(10)(i)] b. Gratuity Received by a Non-
Government Employee covered by Payment of Gratuity Act, 1972 [Section 10(10)(ii)]
 Exempted Income Sec.10 cont.…
16.Commuted value of Pension Received [Section 10(10A)]
17.Amount received as Leave Encashment on Retirement [Section 10(10AA)]
18.Retrenchment Compensation received by Workmen [Section 10(10B)]
19.Payment received under Bhopal Gas Leak Disaster (Processing of Claims) Act 1985 [Section 10
(10BB)]
20.Compensation received in case of any disaster [Section 10(10BC) ]
21.Retirement Compensation from a Public Sector Company or any other Company [Section 10(10C)]
22.Tax on Non-monetary Perquisites paid by Employer [Section 10(10CC)]
23.Amount received under a Life Insurance Policy [Section 10(10D)]
24.Statutory Provident Fund [Section 10(11)]
25.Recognized Provident Fund [Section 10(12)]
26.Superannuation Fund [Section 10(13)]
27.House Rent Allowance-HRA [Section 10(13A)]
28.Business Expenditure Allowance [Section 10(14)]
29.Interest Incomes [Section 10(15)]
30.Scholarship [Section 10(16)]
 Exempted Income Sec.10 cont.…
31. Allowance of M.P./M.L.A.I or M.L.C. [Section 10(17)]
32. Awards Instituted by Government [Section 10(17A)]
33. Pension received by certain winners of gallantry awards [Section 10(18)]
34. Family pension received by family members of armed forces including para military forces [Section 10(19)]
35. Income of a Local Authority [Section 10(20)]
36. Income of Scientific Research Association [Section 10(21)]
37. Income of a News Agency [Section 10(22B)]
38. Income of some Professional Institutions [Section 10(23A)]
39. Exemption of Income Received by Regimental Fund [Section 23AA] a. Income of a Fund set-up for the welfare of
employees or their dependents [Section 10(23AAA)] b. Income of a pension fund set up by LIC or other insurer [Section
10(23AAB)]
40. Income of State Level Khadi and Village Industries Board [Section 10(23BB)] a. Income of certain Authorities set up to
manage Religious and Charitable Institutions [Section 10(23BBA)] b. Income of European Economic Community [Section
10(23BBB)] c. Income of a SAARC Fund for regional projects [Section 10(23BBC)] d. Any income of Insurance
Regulatory and Development Authority [Section 10(23BBE)] e. Income of Prasar Bharti [Section 10(23BBH)] [Inserted by
the Finance Act 2012, w.e.f. 2013-14]
41. Any income received by a person on behalf of following Funds [Section 10(23C)]
42. Income of Mutual Fund [Section 10(23D)]
43. Exemption of income of a securitization trust [Section 10(23DA)j [w.e.f. A.Y. 2014-15]
44. Income of Investor Protection Fund [Section 10(23EA)]
45. Exemption of income of investor protection fund of depository [Section 10(23ED)] [w.e.f. A.Y. 2014-15]
 Exempted Income Sec.10 cont.…
46. Exemption for Certain Incomes of a Venture Capital Company or Venture Capital Fund from Certain Specified Business or
Industries [Section 10 (23FB)]
47. Income of Registered Trade Unions [Section 10(24)]
48. Income of Provident and Superannuation Funds [Section 10(25)]
49. Income of Employee’s State Insurance Fund [Section 10 (25A)]
50. Income of Schedule Tribe Members [Section 10(26) and 10(26A)]
51. Income of Sikkimese individual [Section 10(26AAN] (With retrospective effect from 1-4-1990)
52. Regulating the marketing of agricultural produce [Section 10[26AAB]
53. Income of a corporation set-up for promoting the interests of Scheduled Castes, Scheduled Tribes or Backward Classes
[Section 10(26B)]
54. Income of a corporation set-up to protect the interests of Minorities [Section 10(26BB)]
55. Any income of a Corporation established for Ex-Servicemen [Section 10(26BBB)]
56. Income of cooperative society looking after the interests of Scheduled Castes or Scheduled Tribes or Both [Section 10(27)]
57. Any income accruing or arising to Commodity Boards etc. [Section 10(29A)]
58. Amount received as subsidy from or through the Tea Board [Section 10(30)]
59. Amount received as subsidy from or through the concerned Board [Section 10(31)]
60. Income of Child Clubbed U/s 64 (IA) [Section 10(32)]
61. Income by way of dividend from Indian company [Section 10(34)]
62. Exemption of income to a shareholder on buyback of shares of unlisted company [Section 10 (34A) [w.e.f. A.Y. 2014-15]
63. Exemption of income from Units [Section 10(35)]
64. Exemption of income from Securitization Trust [Section 10(35A)] [w.e.f A.Y. 2014-15]
 Income from salaries
(Sec. 15 to 17)

Nature of Salary Is it Taxable as income of the Previous Year

2019-20
Salary becomes due during the previous year 2019-20
(whether paid during the same year or not) Yes

Salary is received during the previous year 2019-20

(whether it becomes due in a subsequent year) Yes

Arrears of salary received during the previous year

2019-20 although it pertains to one of the earlier years
and the same were not taxed earlier on due basis Yes

Arrears of salary received during the previous year

2019-20 although it pertains to one of the earlier years
but the same were taxed earlier on due basis Yes
 Income from salaries
(Sec. 15 to 17)

According to Section 17(1) salary includes the following amounts received by an employee from his employer, during the previous
year :
1. Wages;
2. any annuity or pension; (Family pension received by heirs of an employee is taxable under income from other sources);
3. any gratuity;
4. any fees, commission, perquisites or profits in lieu of or in addition to any salary or wages;
5. any advance of salary;
6. any payment received by an employee in respect of any period of leave not availed of by him; (Leave encashment or salary
in lieu of leave);
7. the annual accretion to the balance at the credit of an employee participating in a recognised provident fund, to the extent to
which it is chargeable to tax under Rule 6 of part A of the Fourth Schedule; and
8. the aggregate of all sums that are comprised in the transferred balance as referred to in sub-rule (2) of Rule 1] of Part A of
the Fourth Schedule, of an employee participating in a recognised provident fund, to the extent to which it is chargeable to
tax, under sub-rule (4) there, i.e., taxable portion of transferred balance from unrecognised provident fund to recognised
provident fund.
9. the contribution made by the Central Government or any other employer in the previous year, to the account of an
employee under a pension scheme referred to in Section 8OCCD.
 Income from salaries
(Sec. 15 to 17)

Salary
+Provident Fund
+ Allowance
+ Perquisites
+ Profit in lieu of Salary Retirement Benefits

Deductions:
1.Deduction from Salary Income (Section 16)
2.Relief when Salary is paid in Arrear or in Advance, etc. [Section 89/
Rule 21A]
3.Qualifying Amount (Q.A.) for Deduction u/s 80C
= Taxable Salary
 Income from salaries
(Sec. 15 to 17)
Allowances

L Fully Taxable Allowances Partly Taxable Allowances Fully Exempted Allowances

1. Dearness Allowance (DA) 1. House Rent Allowance (H.R.A) 1. Allowances Paid to Government
2. City Compensatory Allowance Sec. 10 (13A) Rule 2-A Employees Abroad:
(CCA) When Indian government servants are
3. Medical Allowance: Fully taxable, 2. Entertainment Allowance
3. Special allowance exempt up to paid while serving their employment
irrespective of whether any
amount has been spent on spent amount u/s 10(14)(i): tenure in other countries, this allowance
medical treatment or not. is considered as non taxable.
a) Daily Allowance
4. Lunch Allowance/Tiffin/ Meal b) Helper Allowance
allowance 2. Allowances Paid to UNO
5. Overtime Allowance c) Academic Allowance Employees:
6. Servant Allowance d) Uniform Allowance Allowances that are paid to UNO
7. Warden / Proctor Allowance e) Conveyance Allowance Employees are completely non taxable.
8. Non-practising Allowance
9. Family Allowance
4. Special allowance meet to personal 3 Sumptuary allowances:
10. Interim Allowance Allowances that are paid to the judges of
11. Cash Allowance
expenses exempt u/s 10(14)(ii):
High Court and Supreme Court are
12. Project Allowance completely exempted from tax. These
13. Hill Allowance f) Education Allowance
g) Hostel Allowance allowances are called as sumptuary
14. Deputation Allowance allowances.
h) Under ground Allowance
i) Allowance to employee who 4. Compensatory Allowances:
working in transport system When Judges of High Court and
j) Special compensatory Allowances Supreme Court receive any
(Tribal /Schedule/ Agency area) compensatory allowances, these are
k) Special compensatory Allowances exempted allowances in income tax.
(Border/ Remote Locality/ Difficult
area/ Disturb area)
 House Rent Allowance (H.R.A) Sec. 10 (13A) Rule 2-A

The exemption for HRA benefit is the minimum of:

i) Actual HRA received or

ii) 50% of salary if living in metro cities, or 40% for non-metro cities; and or
iii) Excess of rent paid annually over 10% of annual salary

Salary considered is:

1.‘Basic salary'

2.In case 'Dearness Allowance (DA)' (if it forms a part of retirement benefits)

3. 'commission received on the basis of sales turnover' is applicable, they too are added to compute the
minimum HRA exemption available.
 Entertainment Allowance
Sec. 16 (ii)
Entertainment allowance is the fund given to an employee by the company to pay for client
meetings, drinks, food, hotel stay.
Government employee Non-Government employee

Least of the following is Fully Taxable i.e no

exempt from tax as deductionsare allowed u/s
entertainment allowance: 16(ii)

a) Rs 5,000

b) 1/5th of salary (excluding

any allowance, benefits or
other prerequisites)

c) Actual entertainment
allowance received
 Children’s Education Allowance: Rs. 100 per month per child up to a maximum of 2 children. Sec. 10 (14) (ii)

Hostel Expenditure Allowance: Rs.300 per month per child up to a maximum of 2 children. Sec. 10 (14) (ii)

a) Under ground Allowance: Exempt Rs.800/pm

b) Allowance to employee who working in transport system: 70% of such allowance or 10,000 per month whichever is less will be exempt
c) Special compensatory Allowances (Tribal /Schedule/ Agency area) : Exempt 200/ month

Perquisites

“Perquisite” may be defined as any casual emolument or benefit attached to an office or position in addition to
salary or wages.
“Perquisite” is defined in the section 17(2) of the Income tax Act as including:
(i) Value of rent-free/concessional rent accommodation provided by the employer.

(ii) Any sum paid by employer in respect of an obligation which was actually payable by the assessee.

(iii) Value of any benefit/amenity granted free or at concessional rate to specified employees etc.

‘Amenities or Facilities which are provided by employer to its employees in the terms of other than cash
afterward these are converted in the terms of cash, called Perquisites’

Taxable Perquisites for all types
of Employees
1. Rent –free accommodation
2. Concessional-rent accommodation
3. Any obligation of employee paid by
employer
4. Interest-free or concessional interest
loan
5. Holiday enjoyment
6. Free food
7. Gift, credit card, club expenses
8. Use of movable assets
9. Transfer of movable assets
10. Any other benefit or amenity
Types of Perquisites
Taxable Perquisites for Specific
Employee
1. Facility of car
2. Facility of sweeper, watchman,
Gardener and personal attendant.
3. Gas, electric energy and water
4. Education facility to the member of
employee’s household
5. Transport facility
Tax-free Perquisites for all types
of Employees
1. Medical facility
2. Tea or snacks in office or factory
(work place)
3. Residential accommodation provided
at site
4. Expense of telephone including
mobile
5. Employer’s contribution to staff GIS
6. Scholarship to employees or their
children paid by employer
 Rent –free accommodation

1. Accommodation given by Govt.

Unfurnished Accommodation:

License Fee determined by Central or State Govt. xxx

(Less) Rent paid by the Employee (xxx)
Taxable value of perquisite for Unfurnished Accommodation xxx
Furnished Accommodation:
License Fee determined by Central or State Govt. xxx

Add: 10% the value of furniture/ Actual rent paid. XXX

(Less) Rent paid by the Employee (xxx)
Taxable value of perquisite for Unfurnished Accommodation xxx
 Rent –free accommodation contd.
1. Accommodation given by Non- Govt.
i. Unfurnished Accommodation
in case of Unfurnished Accommodation, it should first be ascertained whether the
accommodation is owned by the employer or the employer has taken the accommodation on
lease.
Owned by Employer:
Population exceeds 25 Population exceeds 10 Population is less than
Lakhs Lakh but less than 25 10 Lakh
Lakh
15% of Salary 10% of Salary 7.5% of Salary
(Less) Rent paid by (Less) Rent paid by (Less) Rent paid by
Employee Employee Employee
 Rent –free accommodation contd.
Not owned by employer: unfurnished accommodation
Actual Rent paid by Employer or 15% of Salary xxx
(whichever is lower)

(Less) Rent paid by Employee (xxx)

(=) Taxable value of Perquisite xxx

Furnished accommodation:

Value of Unfurnished Owned Accommodation as computed above xxx

(Add) Lease Charges of Furniture in case of Rented Furniture or 10% Depreciation on Furniture in xxx
case it is owned by Employer

(Less) Rent received (xxx)

(=) Taxable Value of Perquisite xxx
 Rent –free accommodation contd.
Accommodation provided by Employer in a Hotel:
Lease Charges payable to the Hotel or 24% of Salary (whichever xxx
is lower)

(Less) Rent paid by the Employee (xxx)

(=) Taxable Value of Perquisite xxx

1. Meaning of Salary for the purpose of computation of Taxable Value

2. Salary includes pay, allowance, bonus, commission or any other monetary payment by whatever name
called but does not include:-
3. Dearness Allowance or Dearness Pay unless it enters into the computation of Superannuation or
Retirement Benefits of the Employee
4. Employers Contribution to the Provident Fund Account of the Employee
5. Allowance which are exempted from the payment of Tax
6. Value of Perquisites specified in Section 17(2)
Valuation of Car
Valuation of Car
 Rule 3(3): Domestic servant i.e. Sweeper, Gardener, Watchman etc.

Servant Appointed Servant’s Salary Value of Perquisite Taxable in the hands

by paid by of

Employer Employer Actual cost to the employer Specified Employee

Employee Employer Actual cost to the employer All Employees

Less: The amount recovered from the employee for such service
Note: Domestic Servant Allowance given to an employee is always chargeable to tax fully.
Rule 3(5): FREE OR CONCESSIONAL EDUCATION FACILITY

Where the educational facilities are provided in an educational institution which is owned and
maintained by the employer or in any other institution by reason of employee’s employment with
employer
A to the employee’s children and cost of such education or the value of such benefit
 Does not exceed 1,000 p.m. per children – Taxable Value is Nil

 Does exceed 1,000 p.m. per children – Taxable Value is =

Cost of such education in a similar institution in or near the locality
Less: 1000 p.m. per children
Less: Amount paid or recovered from the employee
B to the member of his household (other than employee’s children)
Taxable Value is = Cost of such education in a similar institution in or near the locality
Less: Amount paid or recovered from the employee
Notes:
i. Amount spent for providing free education facilities to, and training of the employee is not taxable.
ii. School fees paid by the employer directly to the school or reimbursement of expenditure incurred
is taxable as a perquisite in case of all employees u/s 17(2)(iv)
iii. Children includes stepchild as well as the adopted child of the employee but does not includes
grandchildren and other members of household.
 Interest free loan or Loan at concessional rate of interest
Sec.17 (2) (viii)
Rule 3 (7) (i)

Interest free loan or loan at concessional rate of interest given by an employer to the employee (or any member of his household) is
a perquisite chargeable to tax in the hands of all employees on following basis:
1. Find out the ‘maximum outstanding monthly balance’ (i.e. the aggregate outstanding balance for each loan as on the last day of
each month);
2. Find out rate of interest charged by the SBI as on the first day of relevant previous year in respect of loan for the same purpose
advanced by it;
3. Calculate interest for each month of the previous year on the outstanding amount (mentioned in point 1) at the rate of interest
(given in point 2)
4. Interest actually recovered, if any, from employee
5. The balance amount (point 3-point 4) is taxable value of perquisite
Nothing is taxable if:
a) Loan in aggregate does not exceed Rs 20,000
b) Loan is provided for treatment of specified diseases (Rule 3A) like neurological diseases, Cancer, AIDS, Chronic renal failure,
Hemophilia (specified diseases). However, exemption is not applicable to so much of the loan as has been reimbursed to the
employee under any medical insurance scheme.
 Free food and beverages provided to the employee
Sec.17 (2) (viii)
Rule 3 (7) (iii)

1) Fully Taxable: Free meals in excess of Rs. 50 per meal less amount paid by the employee shall
be a taxable perquisite
2) Exempt from tax: Following free meals shall be exempt from tax
a) Food and non-alcoholic beverages provided during working hours in remote area or in an
offshore installation;
b) Tea, Coffee or Non-Alcoholic beverages and Snacks during working hours are tax free
perquisites;
c) Food in office premises or through non-transferable paid vouchers usable only at eating joints
provided by an employer is not taxable, if cost to the employer is Rs. 50(or less) per meal.
 Gift or Voucher or Coupon on ceremonial occasions or otherwise
provided to the employee
Sec.17 (2) (viii)
Rule 3 (7) (iv)

a) Gifts in cash or convertible into money (like gift cheque) are fully taxable
b) Gift in kind up to Rs.5,000 in aggregate per annum would be exempt,
beyond which it would be taxable.
 Medical facilities in India/Abroad

1) Expense incurred or reimbursed by the employer for the medical treatment of the employee or his family (spouse and children,
dependent - parents, brothers and sisters) in any of the following hospital is not chargeable to tax in the hands of the employee:
a) Hospital maintained by the employer.
b) Hospital maintained by the Government or Local Authority or any other hospital approved by Central Government
c) Hospital approved by the Chief Commissioner having regard to the prescribed guidelines for treatment of the prescribed
diseases.
2) Medical insurance premium paid or reimbursed by the employer is not chargeable to tax.
However, the medical facility is taxable only in case of Specified Employees
Any expenditure incurred or reimbursed by the employer for medical treatment of the employee or his family member outside
India is exempt to the extent of following (subject to certain condition):
a) Expenses on medical treatment - exempt to the extent permitted by RBI.
b) Expenses on stay abroad for patient and one attendant - exempt to the extent permitted by RBI.
c) Cost on travel of the employee or any family or one attendant - exempt, if Gross Total Income (before including the travel
expenditure) of the employee, does not exceed Rs. 2,00,000.
 Retirement Benefits
Gratuity Sec. 10 (10)

Commuted Value of Pension Sec. 10 (10 A)

Leave Encashment Sec. 10 (10 AA)

Retrenchment Compensation Sec. 10 (10 B)

Voluntary Retirement Sec. 10 (10 C)

Amount Received from Provident fund

{PPF/SPF/RPF/URPF} Sec.10 (11)(12)
 Gratuity Sec. 10 (10)

1. 10(10) (i) Gratuity received by Government Employees (Other than Fully Exempt
employees of statutory corporations)
2. 10(10) (ii) Death -cum-Retirement Gratuity received by other Least of following amount is exempt from
employees who are covered under Gratuity Act, 1972 tax:
(other than Government employee) (Subject to certain 1. (*15 / 26) X Last drawn salary** X
conditions). completed year of service or part thereof in
excess of 6 months. or
2. Max. Rs. 20,00,000 or
3. Gratuity actually received.

*7 days in case of employee of seasonal

establishment.
** Salary = Last drawn salary including DA
but excluding any bonus, commission,
HRA, overtime and any other allowance,
benefits or perquisite
3. 10(10)(iii) Death -cum-Retirement Gratuity received Least of following amount is exempt from
by other employees who are not covered under Gratuity Act, tax:
1972 1. Half month’s Average Salary* X
(other than Government employee) (Subject to certain Completed years of service
conditions). 2. Rs. 20,00,000
3. Gratuity actually received.
*Average salary = Average Salary of last 10
Commuted
Example of Commuted Pension:

Pension = 1, 00,000/- month

Commuted 2/3 and received Rs.,9, 00,000
Determine the value of exempted pension u/s 10 (10A)

i. if he does not get the amount of Gratuity

ii. if he does get the amount of Gratuity

Solution:
i) if he does not get the amount of Gratuity
Commuted value of pension 2/3 = 9, 00,000
Total value of commuted pension = 9, 00,000* 3/2 = 13,50,0000
Exempted value = 13,50,000 / 2 = 6,75,000
Taxable = Received – Exempt
= 9,00,000 – 6,75,000 = Rs.2,25,000

ii) if he does get the amount of Gratuity:

Commuted value of pension 2/3 = 9, 00,000
Total value of commuted pension = 9, 00,000* 3/2 = 13,50,0000
Exempted value = 13,50,000 / 3 = 4,50,000
Taxable = Received – Exempt
= 9,00,000 – 450,000 = Rs.4,50,000
Leave Encashment Sec. 10 (10 AA)
 Non-Government Employees [Section 10(10AA)(ii)]

Any payment received as leave encashment at the time of retirement or on leaving job
otherwise shall be exempt up-to the least of following amounts Under Section 10
(10AA)(ii)

Minimum of the following four limits:

i. Leave encashment actually received; or
ii. 10 months average salary; or
iii. Cash equivalent of unavailed leave calculated on the basis of maximum 30 days leave for
every year of actual service rendered; or
iv. Maximum Limit Rs. 3,00,000
 Voluntary Retirement Sec. 10 (10 C)

This exemption is available to employee of any of the following:

 a public sector company
 any other company
 an authority established under a Central, State or Provincial Act
 a local authority
 a co-operative society
 a University established or incorporated by or under a Central, State or Provincial Act and an
institution declared to be a University under section 3 of the University Grants Commission Act,
1956
 an Indian Institute of Technology within the meaning of clause (g) of section 378 of the Institutes of
Technology Act, 1961 (59 of 1961)
 any State Government
 the Central Government
 an institution, having importance throughout India or in any State or States, as the Central
Government may, by notification in the Official Gazette82, specify in this behalf
 such institute of management as the Central Government may, by notification83 in the Official
Gazette, specify in this behalf
 Voluntary Retirement Sec. 10 (10 C) Contd..

 Conditions for claiming exemption [Rule 2BA]

It applies to an employee who has completed 10 years of service
or completed 40 years of age. (This condition doesn’t apply to
employees of public sector company)
It applies to all employees including workers and executives except
directors of a company or co-operative society.
Such scheme has been drawn to result in overall reduction in no. of
employees
The vacancy caused by voluntary retirement is not to be filled up.
The retiring employees of a company shall not be employed in
another company or concern belonging to the same management.
 Voluntary Retirement Sec. 10 (10 C) contd…

At least of the following amount will be exempt:

i. Actual Received amount or
ii. Maximum limit Rs. 5,00,000 or
iii. 3 months x Last Drawn Salary x completed year of service or
iv. Last Drawn Salary x (Multiply) balance of months left before the date of retirement or superannuation

Notes:
a. Salary includes basic pay, dearness allowance (if it forms part of the retirement benefits) and
percentage wise fixed commission on turnover.
b. If the assessee has already taken relief u/s 89, then exemption under this section is not available.
c. Deduction u/s 10(10C) can be taken once only, therefore if deduction under this section is taken
once then deduction is not available in any subsequent years.
 Amount Received from Provident fund {PPF/SPF/RPF/URPF}
Sec.10 (11)(1 2) of Income Tax Act,1961 Rules 1962

Statutory Provident Fund

Employer’s Contribution Employer’s contribution to such fund is not treated as income of the employee

Interest Interest credited to such fund is exempt in the hands of the employee.

Amount received at the time Lump sum amount received from such fund, at the time of termination of service is exempt in the hands
of termination of employees.
 Un-Recognised Provident Fund

Employer’s Contribution Employer’s contribution to such fund is not treated as income of the
employee.

Interest Interest credited to such fund is exempt in the hands of the employees.

{Treatment of payment (at the time of termination) from un-recognised provident

fund:
a. Payment on termination will include 4 things, viz., employee's contribution and
interest thereto and employer’s contribution and interest thereto, the tax
Amount received at the time of termination treatment of such payment is as follows:
b. Employee's contribution is not chargeable to tax; interest on employee
contribution is taxed under the head “Income from other sources”.
c. Employer's contribution and interest thereon are taxed as salary income,
however, an employee can claim relief under section 89 in respect of such
payment.}
 Public Provident Fund (PPF)
Employer’s Contribution Employers do not contribute to such fund
Interest Interest credited to such fund is exempt.
Lump sum amount received from such fund
Amount received at the time of termination at the time of termination of service is
exempt from tax
 Payment from Recognised Provident Fund [Section 10(12)]

Recognised Provident Fund

Employer’s contribution to such fund, up to 12% of salary is not treated as
Employer’s Contribution
income of the employee (see Note 1).
Interest credited to such fund up to 9.5% per annum is exempt in the hands of
Interest the employee, interest in excess of 9.5% is charged to tax in the hands of the
employee.
If certain conditions are satisfied, then lump sum amount received from such
Amount received at the time of termination fund, at the time of termination of service, is exempt in the hands of employees.
(Notes)
Notes
Accumulated balance paid from a recognised provident fund will be exempt from tax in following cases:
(a) If the employee has rendered a continuous service of 5 years or more. If the accumulated balance includes amount
transferred from other recognised provident fund maintained by previous employer, then the period for which the employee
rendered service to such previous employer shall also be included in computing the aforesaid period of 5 years.
(b) If the service of employee is terminated before the period of 5 years, due to his ill health or discontinuation of business of
the employer or other reason beyond his control.
(c) If on retirement, the employee takes employment with any other employer and the balance due and payable to him is
transferred to his individual account in any recognised fund maintained by such other employer, then the amount so transferred will
not be charged to tax.
Except above situations, payment from a recognised provident fund will be charged to tax considering such fund as un-recognised
from the beginning (See note 3 given below for tax treatment of un-recognised provident fund).
 Deductions
The Chapter VI A of Income Tax Act contains the following sections:

Section 80C
80C came into force with effect from 1st April,
2006. Section 80C provides deductions for savings
for deduction under income tax and their limits.
Section 80C enables tax payers to claim a deduction
of Rs 1,50,000 from total income. Claimants can
include individuals or a Hindu Undivided Family
(HUF). For those who have paid excess taxes and
made suitable investment in LIC, PPF, Mediclaim,
and expenses incurred towards tuition fees etc.
 Section 80CCC

Section 80CCC – Insurance Premium

Deduction for Premium Paid for Annuity Plan of LIC or Other Insurer

Section 80CCC

provides a deduction to an individual for any amount paid or deposited in any

annuity plan of LIC or any other insurer. The plan must be for receiving a
pension from a fund referred to in Section 10(23AAB). Pension received from
the annuity or amount received upon surrender of the annuity, including
interest or bonus accrued on the annuity, is taxable in the year of receipt.
 80CCD(1) & 80CCD(1B)
Sec. 80CCD(1):
Deduction in respect of contribution to pension scheme
of Central Government – in the case of an employee, 10
per cent of salary (Basic+DA) and in any other case, 20 per
cent of his/her gross total income in a FY will be tax free.
Overall limit is Rs 1.5 lakh together with 80C and 80CCC

Sec. 80CCD(1B): Deduction up to Rs 50,000 in respect of

contribution to pension scheme of Central Government
(NPS).
 80CCD(2) & 80 CCE

Sec. 80CCD(2):
Deduction in respect of contribution to pension scheme of
Central Government by employer. Tax benefit is given on 14 per
cent contribution by the employer, where such contribution is
made by the Central Government and where contribution is made
by any other employer, tax benefit is given on 10 per cent.

Sec. 80 CCE:
80C +80CCC+80 CCD (1B) = 1,50,000
 Sec. 80D and Sec.80DD
Sec. 80D:
Deduction in respect of Health Insurance premium. Premium
paid up to Rs 25,000 is eligible for deduction for individuals,
other than senior citizens. For senior citizens, the limit is Rs
50,000 and overall limit u/s 80D is Rs 1 lakh.

80DD: Deduction in respect of maintenance including medical

treatment of a dependent who is a person with disability. The
maximum deduction limit under this section is Rs
75,000/1,25,000
 Sec.80DDB, 80E and 80 EE

Sec.80DDB:
Deduction in respect of expenditure up to Rs
40,000/1,00,000/1,00,000 on medical treatment of specified disease
from a neurologist, an oncologist, a urologist, a haematologist, an
immunologist or such other specialist, as may be prescribed.
Sec.80E:
Deduction in respect of interest on loan taken for higher education
without any upper limit.
Sec.80EE:
Deduction in respect of interest up to Rs 50,000 on loan taken for
residential house property.
 Sec.80EEA ,80EEB and 80G
80EEA:
Deduction in respect of interest up to Rs 1.5 lakh on loan taken for certain
house property (on affordable housing).

80EEB:
Deduction in respect of interest up to Rs 1.5 lakh on loan taken for purchase
of electric vehicle.

80G:
Donations to certain funds, charitable institutions, etc. Depending on the
nature of the donee, the limit varies from 100 per cent of total donation, 50
per cent of total donation or 50 per cent of donation with a cap of 10 per
cent of gross income.
80GGA, 80GGC, 80TTA, 80TTB and 80U
Sec.80GGA:
Full deductions in respect of certain donations for scientific research or rural
development.
Sec.80GGC:
Full deductions in respect of donations to Political Party, provided such donations are
non-cash donations.
Sec.80TTA:
Deductions in respect of interest on savings bank accounts up to Rs 10,000 in case of
assessees other than Resident senior citizens.
Sec.80TTB:
Deductions in respect of interest on deposits up to Rs 50,000 in case of Resident senior
citizens.
Sec.80U:
Deduction in case of a person with disability. Depending on type and extent of disability
maximum deduction allowed under this section is Rs 1.25/ 0.75 lakh.