Salary - Income Tax Notes Part - 02
INCOME TAX NOTES PART – 02
SALARY
MEANING
Meaning of salary [Section 17(1)] –
Salary includes –
a. wages;
b. any annuity or pension;
c. any gratuity;
d. any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages;
e. any advance of salary;
f. any payment received by an employee in respect of any period of leave not availed by him;
g. employer’s contribution towards Recognized Provident Fund (RPF) in excess of 12% of employee’s salary and interest credited to RPF in excess of 9.5% p.a.;
h. transferred balance in a recognized provident fund to the extent it is taxable; and
i. 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.
Profits in lieu of salary [Section 17(3)] –
It includes the following –
a. the amount of any compensation due to or received by an assessee from his employer (or former employer) at or in connection with the termination of his employment or the modification of the terms and conditions thereto;
b. any payment due to or received by an assessee from his employer (or former employer) except the following:
i. Payment of gratuity exempted under section 10(10);
ii. Payment of commuted pension exempted under section 10(10A);
iii. Payment of retrenchment compensation exempted under section 10(10B);
iv. Payment from statutory provident fund (SPF) – Section 10(11);
v. Payment from recognized provident fund (RPF) to the extent it is exempt under section 10(12);
vi. Payment from an approved superannuation fund under section 10(13);
vii. Payment of HRA exempted under section 10(13A).
c. Any payment from unrecognized provident fund (UPF) or such other fund to the extent to which it does not consist of contributions by the assessee or interest on such contributions.
d. Any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy.
e. Any amount due to or received, whether in lump sum or otherwise, by an assessee from any person prior to employment or after cessation of employment.
Computation of salary income –
Income under the head “Salaries” is computed in the following manner:
| Particulars | Amount (Rs.) |
| Income from salary | XX |
| Income by way of allowances | XX |
| Taxable value of perquisites | XX |
| Gross salary | XX |
| Less: Deductions under section 16: | |
| Standard Deduction u/s 16 (ia) | XX |
| Entertainment allowance u/s 16 (ii) | XX |
| Professional tax u/s 16 (iii) | XX |
| Income from salaries | XXX |
Retirement benefits
Leave Salary –
Employees are entitled to different types of leaves while they are in service. The leaves may either be allowed to be availed by them or if not availed, then these leaves may either lapse or encashed every year or accumulated and encashed at the time of retirement/ death/ or leaving the job.
Tax treatment – The tax treatment is given below:
| Status of employee | Taxability | |
| Government employee | It is fully exempt from tax | |
| Non-Government employee | Covered by the Payment of Gratuity Act, 1972 | See the provisions given below |
| Not covered by the Payment of Gratuity Act, 1972 | see the provisions given below | |
Government employees receiving gratuity at the time of retirement – In case of Government employees (including employees of local authority but not employees of a statutory corporation), amount of death-cum retirement gratuity received is fully exempt from tax.
Non-Government employees covered by the Payment of Gratuity Act, 1972 – In such cases, least of the following amount is exempt from tax:
a. 15 days salary (7 days salary in the case of employees of a seasonal establishment) based on salary last drawn for every completed year of service or part thereof in excess of 6 months.
For example, if service is rendered for 20 years and 6 months, then we have to take 20 years.
b. Rs. 20,00,000 being the amount specified by the Government
c. Gratuity actually received
Notes:
1. Relief under section 89 – Gratuity in excess of the aforesaid limits is taxable in the hands of the assessee. However, the assessee can claim relief under section 89.
2. Salary for this purpose means – Salary last drawn by an employee and dearness allowance (whether forming part or not) but does not include any bonus, commission, etc.
3. Calculation of 15 days’ salary – Salary of 15 days is calculated by dividing salary last drawn by 26 i.e., the maximum number of working days in a month.
For example, if monthly salary at the time of retirement is Rs. 3,000, 15 days salary would come to Rs. 1,730.77 (Rs. 3,000/26*15).
Non-Government employees not covered by the Payment of Gratuity Act, 1972 – In such cases, least of the following amount is exempt from tax:
a. Half months average salary for each completed year of service
b. Rs. 20,00,000 minus amount exempted earlier
c. Gratuity actually received
Notes:
1. Relief under section 89 – Gratuity in excess of the aforesaid limits is taxable in the hands of the assessee. However, the assessee can claim relief under section 89.
2. Salary for this purpose means – Basic salary (+) dearness allowance (if terms of employment so provide) (+) commission based on fixed percentage on turnover achieved by an employee. It is to be noted that dearness allowance/ pay shall be considered only when it is part of salary for computing all retirement benefits (like provident fund, pension, leave encashment, gratuity, etc.). If dearness allowance/ pay is part of salary for computing only some (not all) of the retirement benefits, then it is not taken into consideration for this purpose.
3. Average monthly salary – is calculated on the basis of average salary for 10 months immediately preceding the month in which the employee has retired. For example, if a person retires on February 19, 2020, average salary will be considered on the basis of salary drawn from April 1, 2019 to January 31, 2020.
4. Completed/ actual years of service – While computing completed/ actual years of service, any fraction of the year shall be ignored. The words “each year of completed service” used for the purpose of ‘gratuity’ in are not confined to completed years of service under one employer and have to be interpreted to mean an employee’s total service under two different employers including employer other than one from whose service he has retired, for purposes of calculation of period of years of his completed service, provided he was not paid gratuity by former employer.
5. Employee – Covered under Gratuity Act 1972 or not – If nothing is mentioned whether the employee is covered under the Payment of Gratuity Act, 1972 or not, it would be assumed that the employee is not covered under the Payment of Gratuity Act, 1972.
Gratuity paid while in service is taxable – Any gratuity paid to an employee while he continues to remain in service (whether or not after he has put in a minimum specified period of service) is not exempt from tax. However, here also, assessee can claim relief under section 89.
Gratuity received by family members after the death of the employee – If gratuity is paid after the death of an employee, then following situations may arise:
a. When gratuity becomes due before the death of the assessee but paid after the death of the assessee, it will be taxable (as per the provisions) in the hands of the assessee even if it is received by his legal heirs after his death.
b. When gratuity becomes due and paid after the death of a person, then the gratuity amount will neither be taxable in the hands of that person nor in the hands of legal heirs of that person.
Pension –
Pension is always given to the employee after retirement. The tax treatment of pension received by the employee from the employer is given below –
| Pension | Status of employee | Is it chargeable to tax |
| Uncommuted pension (Periodical payment) | Government/ | It is fully chargeable to tax |
| Non-Government employee | ||
| Commuted Pension (Lump sum payment in lieu of periodical payment) | Government employee (including the employees of local authority and statutory corporation) | It is fully exempt from tax |
| Non-Government employee | See the provisions given below |
Exemption of commuted pension for non-government employees depends upon the receipt of gratuity (i.e., whether employee has received gratuity also or not):
a. In case where a non-government employee receives Gratuity – the commuted value of one-third of the pension which he is normally entitled to receive is exempt from tax.
b. In case where a non-government employee does not receive Gratuity – the commuted value of one-half of such pension which he is normally entitled to receive is exempt from tax.
Notes:
1. Assessee can claim relief under section 89 in respect of taxable pension.
2. Pension received from UNO by the employees or his family members is not chargeable to tax.
3. Family pension received by the family members of armed forces is exempt from tax under section 10(19) in some cases.
4. Family Pension received by family members (not being the family members of armed forces) after the death of an employee is taxable in the hands of recipients under section 56 under the head “Income from other sources”. Standard deduction is available under section 57 which is one-third of such pension or Rs. 15,000, whichever is lower.
5. Judges of the Supreme Court and High Courts are also entitled to the exemption of the commuted pension under section 10(10A)(i) of the Act.
Retrenchment Compensation [Sec. 10(10B)] –
Compensation received by a workman at the time of his retrenchment is exempt from tax to the least of the following amounts –
a. Rs. 5,00,000 (amount specified by the Government);
b. 15 days average pay for every completed year of service or part thereof in excess of 6 months;
c. Amount actually received.
In this case, relief under section 89 is available.
Provident Funds –
Provident fund scheme is a retirement benefit scheme. Under this scheme, a set sum is deducted from the salary of the employee as his contribution towards the fund. The employer also, generally, contributes simultaneously the same amount out of his pocket to the fund.
The employee’s and employer’s contributions are then invested securities and interest earned thereon is also credited to the provident fund account of the employees. The accumulated sum is paid to the employee at the time of his retirement. In the case of death of an employee, accumulated balance is paid to his legal heirs.
Following are the different types of provident funds –
1. Statutory provident fund – This fund is set up under the provisions of the Provident Funds Act, 1925. This fund is maintained by the Government and the Semi-Government organizations, local authorities, railways, universities and recognized educational institutions.
. Recognized provident fund – A provident fund scheme to which the Employee’s Provident Fund and Miscellaneous Provisions Act, 1952 applies is recognized provident fund. As per this Act, any establishment employing 20 or more persons is covered by this Act (establishments employing less than 20 persons can also join the provident fund scheme if the employer and employees want to do so).
3. Unrecognized provident fund – If a provident fund is not recognized by the Commissioner of Income-tax, it is known as unrecognized provident fund.
4. Public provident fund – The Central Government has established the public provident fund for the benefits of general public to mobilize personal savings. Any member of the public (whether a salaried employee or a self-employed person) can participate in the fund by opening a provident fund account at the State Bank of India or its subsidiaries or other nationalized banks. Even a salaried employee can simultaneously become member of employees’ provident fund (whether statutory, recognized or unrecognized) and public provident fund. Any amount (subject to a minimum of Rs. 500 and maximum of Rs. 1,50,000 per annum) may be deposited under this account. The accumulated sum is payable after 15 years (it may be extended). Interest on this fund is credited every year but payable at the time of maturity.
Tax treatment of different types of provident funds –
| Situations | td> Statutory Provident Fund (SPF)Recognized Provident Fund (RPF) | Unrecognized Provident Fund (UPF) | Public Provident Fund (PPF) | |
| Employer’s contribution to provident fund | Exempt from tax | Exempt up to 12% of salary. Excess of employer’s contribution over 12% of salary is taxable. | Exempt from tax | Employer does not contribute |
| Interest credited to provident fund | Exempt from tax | Exempt from tax if rate of interest does not exceed 9.5%; excess of interest over this rate is taxable. | Exempt from tax | Exempt from tax |
| Lump sum payment at the time of retirement or termination of service | Exempt from tax | Exempt from taxes in some cases given below§. When not exempt, provident fund will be treated as an unrecognized fund from the beginning. | Employer’s contribution and interest thereon is taxable under the head “Salary”. However, payment received in respect of employee’s own contribution is exempt from tax. Interest on employee’s contribution is taxable under the head “Income from other sources”. | Exempt from tax |
Salary for this purpose means – Basic salary (+) dearness allowance/ dearness pay (if terms of employment so provide) (+) commission based on fixed percentage of turnover achieved by an employee.
It is to be noted that dearness allowance/ pay shall be considered only when it is part of salary for computing all retirement benefits (like provident fund, pension, leave encashment, gratuity, etc.). If dearness allowance/ pay is part of salary for computing only some (not all) of the retirement benefits, then it is not taken into consideration for this purpose.
Approved Superannuation Fund –
It means a superannuation fund which is approved by the Commissioner of Income-tax. Like Provident 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 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 –
1. Employer’s contribution towards an approved superannuation fund will be chargeable to tax to the extent it exceeds Rs. 1,50,000 per annum.
2. Employee’s contribution towards such fund is exempt from tax under section 80C.
3. Interest on accumulated balance is exempt from tax.
4. Payment from the fund is not chargeable to tax in the following cases:
a. refund of contribution or any payment from fund on the death of employee (i.e., payment to widow); and
b. lump sum payment by way of commutation of annuity to the employee on his retirement.
Allowances
Allowances are fixed monetary amount paid by the employer to the employee for meeting some particular expenses. These are generally fully taxable and thus, included to compute gross salary unless a specific exemption has been provided in respect of that particular allowance which is received.
Allowances are divided under three categories for the purpose of taxability:
1. Fully taxable allowances;
2. Fully exempt allowances; or
3. Partially exempt allowances:
a. Exemption depending upon actual expenditure; or
b. Fixed exemption depending upon the provisions of the Act.
Fully taxable allowances –
There can be hundreds of fully taxable allowances. All those allowances which are not covered under exempt category becomes fully taxable. Some of the common fully taxable allowances are –
1. City compensatory allowance (CCA)
2. Tiffin allowance
3. Fixed medical allowance
4. Servant allowance
5. Dearness allowance
6. Deputation allowance
7. Lunch/ meal/ dinner/ refreshment allowance
8. Overtime allowance
9. Family allowance
10. Non-practicing allowance
11. Warden allowance 12. Planning allowance, etc.
Special allowances prescribed as exempt under section 10(14) –
When exemption depends upon actual expenditure by the employee –
In the case of given below six allowances, lower of the following is allowed as deduction:
• the amount of the allowance; or
• the amount utilized for the specific purpose for which allowance is given.
These allowances are as follows –
1. Travelling allowance/ Transfer allowance –
An allowance (by whatever name called) granted to meet the cost of travel on tour or on transfer (including any sum paid in connection with transfer, packing and transportation of personal effects on such transfer).
2. Conveyance allowance –
Conveyance allowance is exempt from tax to the extent it is utilized for performance of official duties. It is an allowance which is granted to meet the expenditure on conveyance in performance of duties of an office. It may be noted that any expenditure for covering the journey between office and residence is not treated as expenditure in performance of duties of the office.
3. Daily allowance –
An allowance whether granted on tour or for the period of journey in connection with transfer, to meet the ordinary daily charges incurred by an employee on account of absence from his normal place of duty.
4. Helper allowance –
An allowance (by whatever name called) to meet the expenditure on a helper where such helper is engaged for the performance of official duties.
5. Research/ Academic allowance –
An allowance (by whatever name called) granted for encouraging the academic research and other professional ethics.
6. Uniform allowance –
An allowance (by whatever name called) to meet the expenditure on the purchase or maintenance of uniform for wear during the performance of duties of an office.
When exemption does not depend upon the actual expenditure –
In case of given below allowances, the amount of exemption does not depend upon the expenditure actually incurred by the employee. Amount of exemption is – ▪ the amount of allowance; or
▪ the amount specified in rule 2BB, whichever is lower.
1. House rent allowance [Section 10(13A) and rule 2A] –
In case of house rent allowance, least of the following amount is exempt from tax –
1. An amount equal to 50% of salary, where residential house is situated at Bombay, Calcutta, Delhi or Madras and an amount equal to 40% of salary where residential house is situated at any other place.
2. House rent allowance received by the employee in respect of the period during which rental accommodation is occupied by the employee during the previous year.
3. The excess of rent paid over 10% of salary.
Notes:
1. Salary for this purpose means – Basic salary (+) dearness allowance (if terms of employment so provide) (+) commission based on fixed percentage of turnover achieved by an employee.
It is to be noted that dearness allowance/ pay shall be considered only when it is part of salary for computing all retirement benefits (like provident fund, pension, leave encashment, gratuity, etc.). If dearness allowance/ pay is part of salary for computing only some (not all) of the retirement benefits, then it is not to be taken into consideration for this purpose.
2. Due basis – Salary for this purpose is determined on “due” basis in respect of the period during which rental accommodation is occupied by the employee in the previous year. It, therefore, follows that salary of a period, other than the previous year, is not considered even though such amount is received during the previous year and is taxable on “receipt” basis. Likewise, salary of the period during which rental accommodation is not occupied in the previous year, is left out of the aforesaid computations.
3. Exemption is denied where an employee lives in his own house, or in a house for which he does not pay any rent or pays rent which does not exceed 10% of salary.
Problem –
N who resides in Gurgaon gets Rs. 60,000 per annum as basic pay. He gets Rs. 9,000 per annum as house rent allowance, though he actually pays Rs. 14,000 per annum as rent. During the previous year 2017-18, he receives Rs. 10,000 as advance salary of April 2018. Calculate the amount of house rent allowance exempt from tax as well as taxable salary for the assessment year 2018-19?
Solution:
Computation of income under the head “Salaries” for the assessment year 2020-21:
| Particulars | Amount (Rs.) |
| Basic pay | 60,000 |
| Advance salary | 10,000 |
| HRA [9,000 – 6,000] | 3,000 |
| Gross salary | 73,000 |
Notes –
Out of Rs. 9,000 received as HRA, least of the following amount is exempt from tax:
a. Rs. 24,000 [40% of salary]
b. Rs. 9,000 [HRA actually received]
c. Rs. 12,000 – 10% of Rs. 60,000 [Rent paid – 10% of salary] = Rs. 6,000
Rs. 6,000, being the least is exempt per annum and Rs. 3,000 per annum is taxable. Therefore, annual taxable house rent allowance is Rs. 3,000.
2. Entertainment allowance [Sec. 16(ii)] –
It is first included in salary income under the head “allowances” and thereafter a deduction is given on the following basis:
a. In case of a Government employee, the least of the following is deductible:
- Rs. 5,000;
- 20% of basic salary; or
- Amount of entertainment allowance granted during the previous year.
Basic salary for this purpose excludes any allowance, benefit or other perquisites. Further, amount actually expended towards entertainment (out of entertainment allowance received) is not taken in to consideration.
b. In the case of a non-government employee (including employees of local authority and statutory corporation), entertainment allowance is not deductible. It if fully taxable.
3. Allowance for transport employees working in any transport system –
It is an allowance granted to an employee working in any transport system to meet his personal expenditure during his duty performed in the course of running of such transport from one place to another place provided that such employee is not in receipt of daily allowance.
Amount of exemption is 70% of such allowance or Rs. 10,000 per month whichever is lower.
4. Transport allowance (Available only to the person suffering from disability) –
It is granted to an employee to meet his expenditure for the purpose of commuting between office and residence. Amount of exemption is limited to Rs. 3,200 per month in case of an employee who is blind or orthopaedically handicapped.
It is to be noted that expenditure for covering the journey between office and residence is not treated as expenditure in performance of duties of the office.
5. Children education allowance –
Amount exempt from tax is limited to Rs. 100 per month per child up to a maximum of two children.
6. Hostel expenditure allowance –
Amount exempt from tax is limited to Rs. 300 per month per child up to maximum of two children.
7. Tribal/ scheduled areas allowance –
Rs. 200 per month if an employee is posted in U.P., M.P., Tamil Nadu, Karnataka, West Bengal, Bihar, Orissa, Assam or Tripura.
8. Underground allowance –
Underground allowance is granted to an employee who is working in uncongenial, unnatural climate in underground mines. Exemption is limited to Rs. 800 per month.
9. Highly active field area allowance –
It is granted to the members of armed forces in the nature of special compensatory highly active field area allowance. It is exempt from tax up to Rs. 4,200 per month.
10. Island duty allowance –
This special allowance is granted to the members of armed forces in the nature of island (duty) allowance in Andaman and Nicobar and Lakshadweep group of islands. It is exempt from tax up to Rs. 3,250 per month.
11. Allowance to Government employees outside India –
Any allowance paid or allowed outside India by the Government to an Indian citizen for rendering service outside India is wholly exempt from tax.
12. Allowance received from UNO –
Not chargeable to tax
13. Allowance to High Court and Supreme Court Judges –
Not chargeable to tax
14. Allowances to Chairman/ members of UPSC –
In the case of serving Chairman and members of UPSC, transport allowance and sumptuary allowance are not chargeable to tax.
Perquisites
Perquisite may be defined as any casual emolument or benefit (monetary or non-monetary) attached to an office or position in addition to salary or wages.
Definition of ‘Perquisite’ as per the Act [Section 17(2)] –
Under the Act, the term “perquisites” includes the following –
a. the value of rent-free accommodation provided to the assessee by his employer;
b. the value of any concession in the matter of rent respecting any accommodation provided to the assessee by his employer;
c. the value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases:
i. by a company to an employee who is a director thereof;
ii. by a company to an employee, being a person who has substantial interest in the company;
iii. by any employer (including a company) to an employee to whom provisions of (i) and (ii) above do not apply and whose income under the head “Salaries” exclusive of the value of all benefits or amenities not provided for by way of monetary benefits, exceeds Rs. 50,000;
d. any sum paid by an employer in respect of any obligation which but for such payment would have been payable by the assessee;
e. any sum payable by the employer, whether directly or through a fund other than a recognized provident fund or approved superannuation fund or a deposit-linked insurance fund, to effect an assurance on the life of the assessee or to effect a contract for an annuity;
f. the value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at concessional rate to the assessee;
g. the amount of any contribution to an approved superannuation fund by the employer in respect of the assessee, to the extent it exceeds Rs. 1,50,000;
h. the value of any other fringe benefits or amenity as may be provided.
Perquisites are divided under five categories for the purpose of taxability: 1. Perquisites which are taxable for specified as well as non-specified employees;
2. Perquisites which are exempt for specified as well as non-specified employees;
3. Perquisites which are taxable only for specified employees and exempt for nonspecified employees;
4. Contribution by the employer to the approved superannuation fund in respect of the assessee to the extent it exceeds Rs. 1,50,000;
5. Specified equity or sweat equity shares allotted or transferred by the employer to the assessee.
Specified employee –
The following employees are known as “specified employee”:
1. A director-employee – An employee, who is a director in the employer-company at any time during the previous year, is a specified employee of the company in which he is a director.
2. An employee who has substantial interest in the employer-company – An employee who has a substantial interest in the employer-company at any time during the previous year is a specified employee of the company in which he has substantial interest. A person has substantial interest in the employer-company, if he is a beneficial owner of equity shares carrying 20% or more voting power in the employer-company.
3. An employee drawing in excess of Rs. 50,000 – An employee (not covered by the above two cases), whose income chargeable to tax under the head “Salaries” (exclusive of the value of all benefits or amenities not provided by way of monetary payments) exceeds Rs. 50,000, is a specified employee. For computing the sum of Rs. 50,000, the following are excluded or deducted:
a. all non-monetary benefits;
b. monetary benefits which are not taxable under section 10 (for example, house rent allowance to the extent exempt under section 10(13A) is excluded); and
c. deduction on account of entertainment allowance and professional tax.
Where salary is received from more than one employer, the aggregate salary from these employers will have to be taken into account for the purpose of determining the aforesaid monetary ceiling.
Perquisites taxable only in the hands of a specified employee –
The following perquisites are taxable only in the hands of specified employees:
• Service of a sweeper, gardener, watchman or personal attendant
• Supply of gas, electricity or water for household purposes
• Education facility to employee’s family members
• Leave travel concession (LTC)
• Medical facility
• Car or any other automotive conveyance
• Transport facility by a transport undertaking
Valuation of different perquisites
Accommodation –
‘Accommodation’ includes a house, flat, farm house (or part thereof) or accommodation in a hotel, motel, service apartment, guest-house, caravan, mobile home, ship or other floating structure. For the purpose of valuation of this perquisite, employees are divided into two categories:
▪ Central and State Government employees; and
▪ Private sector employees or other employees (including employees of local authority or a foreign Government)
1. Rent-free unfurnished accommodation [Rule 3(1)] –
For Central and State Government employees –The value of perquisite in respect of accommodation provided to such employees is equal to the licence fee which would have been determined by the Central or State Government in accordance with the rules framed by the Government for allotment of houses to its officers.
However, rent-free official residence provided to a Judge of a High Court or to a judge of the Supreme Court is exempt from tax. A similar exemption is extended to an official of Parliament, a Union Minister, a Leader of Opposition in Parliament and serving Chairman/ members of UPSC.
For private sector or other employees (including the employees of a local authority or a foreign Government):
| Population of city as per 2001 census where accommodation is provided | Where the accommodation is owned by the employer | Where the accommodation is taken on lease or on rent by the employer |
| Exceeding 25 lakh | 15% of salary in respect of the period during which the accommodation is occupied by the employee | Amount of lease rent paid or payable by the employer or 15% of salary, whichever is lower |
| Exceeding 10 lakh but not exceeding 25 lakh | 10% of salary in respect of the period during which the accommodation is occupied by the employee | |
| Any other | 7.5% of salary in respect of the period during which the accommodation is occupied by the employee |
Notes:
1. Salary for this purpose includes – Basic salary, dearness allowance/ pay (if terms of employment so provide), bonus, commission, fees, all other taxable allowances (excluding amount not taxable) and any monetary payment which is chargeable to tax (by whatever name called).
It is to be noted that dearness allowance/ pay shall be considered only when it is part of salary for computing all retirement benefits (like provident fund, pension, leave encashment, gratuity, etc.). If dearness allowance/ pay is part of salary for computing only some (not all) of the retirement benefits, then it is not taken into consideration for this purpose.
2. Salary does not include –
• employer’s contribution to provident fund account of an employee;
• all allowances which are exempt from tax;
• value of perquisites [under section 17(2)]; and
• lump-sum payment received at the time of termination of service or superannuation or voluntary retirement, like gratuity, severance pay leave encashment, voluntary retrenchment benefits, commutation of pension and similar payments.
3. Salary shall be determined on “accrual” basis – For example, advance salary of a period other than the previous year is not included even if the same is received in the previous year. Similarly, salary due in the previous year is included, even if it is received after the end of the previous year. In other words, we can say that salary accrued for the period during which rent-free accommodation is occupied by the employee will be considered whether it is received during the previous year or not.
In all we can say that advance salary/ bonus for a period other than the previous year will not to be included in salary for the above purpose.
4. Monetary payments which are in the nature of perquisites under section 17(2) shall not be included. Conversely, monetary payments which are not in the nature of perquisites under section 17(2) shall be included. For example, bonus (not being a perquisite, but being a monetary payment) is taken into consideration. However, income tax payment of an employee by the employer, being a monetary payment but also a perquisite is not included for the purpose of computing salary.
5. Salary from two or more employers – Salary from all employers in respect of the period during which an accommodation is provided will be taken into consideration.
6. Accommodation provided on transfer – Where on account of the transfer of an employee from one place to another, he is provided with accommodation at the new place of posting while retaining the accommodation at the other place, the value of perquisite shall be determined with reference to only one such accommodation which has the lower value for a period not exceeding 90 days and thereafter the value of perquisite shall be charged for both such accommodations.
b>7. Exemption – The above perquisite is not chargeable to tax in respect of any accommodation located in a ‘remote area’ [i.e., an area located at least 40 kilometres away from a town having a population not exceeding 20,000] provided to an employee working at a mining site or an onshore oil exploration site, or a project execution site or a dam site or power generation site or an offshore site.
2. Rent-free furnished accommodation (not being a hotel) –
First, find out the value of the perquisite assuming that the accommodation is unfurnished and to the figures so arrived, add the value of furniture on the following basis –
a. 10% (p.a.) of the original cost of furniture, if furniture is owned by the employer;
b. actual hire charges (whether paid or payable) if furniture is hired by the employer.
Furniture, here, includes radio sets, televisions sets, refrigerators, air–conditioners and other household appliances.
3. Rent-free furnished accommodation provided in a hotel –
Besides, accommodation in a hotel, it includes licensed accommodation in the nature of motel, service apartment or guest house.
The value of perquisite shall be taken as 24% of salary paid or payable for the period during which such accommodation is provided in the previous year or actual charges paid/ payable by the employer to such hotel, whichever is lower.
However, in case of an accommodation provided in a hotel, nothing is chargeable to tax (subject to the fulfilment of given below two conditions) –
1. The hotel accommodation is provided for a period not exceeding in aggregate 15 days in a previous year and
2. Such accommodation is provided on an employee’s transfer from one place to another place.
It is to be noted that if in the aforesaid case, the hotel accommodation is provided for more than 15 days, then the perquisite is not taxable for the first 15 days. After that, it is chargeable to tax.
4. Accommodation provided at concessional rent –
Accommodation may be furnished or unfurnished or it is provided in a hotel. However, if it is provided at a concessional rent, the valuation should be made as follows –
Step 1: Find out the value of the perquisite on the assumption that no rent is charged by the employer (as per the above stated rules).
Step 2: From the value so arrived at, deduct the rent charged by the employer from the employee.
Employee’s obligation met by the employer –
Amount paid by the employer in respect of any obligation which otherwise would have been payable by the employee is taxable in all cases whether the employee is specified or nonspecified.
Amount payable by the employer to effect an assurance on the life of the employee – Amount payable by an employer, directly or indirectly, to effect an assurance on the life of the assessee or to effect a contract for an annuity is taxable in the hands of all employees. This rule is, however, not applicable if the employer makes contribution/ payment towards the following:
1. RPF (up to 12% of salary of the employee);
2. Approved superannuation fund (up to Rs. 1,50,000 per annum);
3. Group insurance schemes;
4. Employee’s state insurance schemes; and
5. Fidelity guarantee schemes.
Interest-free loan or loan at concessional rate of interest –
If a loan is given by an employer to the employee (or any member of his household), it is a perquisite chargeable to tax. Value of perquisite is computed at the rate of interest charged by SBI as on the first day of the relevant previous year in respect of loan for the same purpose advanced by it.
Interest is calculated on the maximum outstanding monthly balance for each loan as on the last day of each month.
Given below are the rates of State Bank of India:
| Type of loan | Different limit | As on April 1, 2019 (applicable for the assessment year 2020-21) |
| Housing loan | 8.65% (8.60% for women) | |
| Car loan | 9.25% (9.20% for women) | |
| Education loan | Up to Rs. 7.5 lakh | 10.00% |
| Above Rs. 7.5 lakh | 10.75% | |
| Personal loan | 14.00% (Approx.) |
In the following cases, however, the above perquisite is not chargeable to tax:
1. If a loan is made available for medical treatment in respect of diseases specified in rule 3A (the exemption is, however, not applicable to so much of the loan as has been reimbursed to the employee under any medical insurance scheme; in such a case, perquisite will be chargeable to tax from the date of receipt of insurance compensation).
2. Where the amount of original loan (or loans) does not exceed Rs. 20,000 in aggregate. Where, however, the amount exceeds Rs. 20,000, entire amount is chargeable to tax.
Use of movable assets –
The value of this perquisite is determined @ 10% p.a. of the actual cost of such asset (if the asset is owned by the employer) or the amount of rent paid or payable (if the asset is taken on hire by the employer).
From the value so arrived, deduct the amount received from the employee.
However, no perquisite is chargeable to tax in respect of use of computer/ laptops.
Movable assets sold by employer to its employees (or any member of his household) at a nominal price –
The value of this perquisite is calculated as an actual cost of such asset to the employer minus normal wear and tear at the rate given below for each completed year during which such asset was put to use by the employer for his business purposes minus amount received from the employee.
Following are the rates for normal wear and tear:
• Electronic items/ computers : 50% by reducing balance method (WDV)
• Motor Car : 20% by reducing balance method (WDV)
• Any other asset : 10% of the actual cost
[Electronic item means data storage and handling devices like computer, digital diaries and printers but does not include household appliances like mixers, washing machines, ovens, etc.]
Lunch/ Refreshment, etc. –
The value of free food, tea and snacks etc. shall be as under:
| Circumstances | Value of perquisite |
| Tea or similar non-alcoholic beverages and snacks (in the form of light refreshments) provided during working hours | NIL |
| Food and non-alcoholic beverages is provided in working hours in remote area or in an offshore installation | NIL |
| Food and non-alcoholic beverages is provided in working hours at any other place (other than remote area or in an offshore installation) i.e., either in office or business premises or through non-transferable paid vouchers usable only at eating joints provided by an employer | NIL, if the value thereof in either case is up to Rs. 50 per meal. However, expenditure in excess of Rs. 50 per meal should be treated as perquisite. Amount received from the employee is deducted to compute the taxable value of the perquisite. |
| In any other case | Actual amount of expenditure incurred by the employer minus amount paid or recovered from the employee |
Travelling, Touring and Accommodation –
Following is the treatment in respect of travelling, touring, accommodation and any other expenses paid by employer for any holiday availed by employee (or any member of household) other than leave travel concession (LTC):
Where such facility is available uniformly to all employees:
Expenditure incurred by the employer minus amount recovered from the employee is the taxable value of the perquisite.
Where such facility is not available uniformly to all employees:
Value at which such facilities are offered by other agencies to the public minus amount recovered from the employee is the taxable value of the perquisite.
Gift, Voucher or taken –
The value of any gift, voucher or token in lieu of which gift may be received by the employee (or by the member of his household) on ceremonial occasions or otherwise shall be determined as the sum equal to the amount of such gift. Such gift is exempt from tax where, the value of such gift, voucher or token, as the case may be, is below Rs. 5,000 in aggregate during the previous year. Beyond Rs. 5,000, gift-in-kind is taxable.
However, gifts made in cash or convertible into money (gift cheques) are not exempt from tax even if their value is less than Rs. 5,000.
Credit card –
Any expenditure incurred by the employer in respect of credit card used by the employee or any member of his household after deducting the expenditure on use of this credit card for official purposes is the taxable value of the perquisite. The expenditure incurred by the employer includes the membership fees and annual fees incurred by the employee or any member of his household, which is charged to a credit card (including any add-on-card), provided by the employer (or otherwise paid or reimbursed by the employer).
Club expenditure –
This perquisite includes any expenditure on club facility used by the employee or any member of his household which is paid or reimbursed by the employer. It also includes amount of annual or periodical fees paid or payable to a club.
The amount of expenditure incurred by the employer in respect of club facility used by the employee or any member of his household after deducting the expenditure on use of this club facility for official purposes is the taxable value of the perquisite.
Expenditure for official use:
The amount of expenditure incurred on use of club facility for official purposes is deductible, provided following conditions are satisfied:
1. Complete detail in respect of such expenditure is maintained by the employer which may, inter alia, include the date of expenditure, the nature of expenditure and its business feasibility.
2. 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.
The following expenditure is exempt from tax:
1. Health club, sports facilities etc. provided uniformly to all classes of employees by the employer at employer’s premises.
2. The initial one-time deposit or fees for corporate or institutional membership, where benefit does not remain with a particular employee after cessation of employment.
Sweat equity shares or Employees stock option plan (ESOP) –
Perquisite in respect of “sweat equity shares” or “ESOP” is chargeable to tax in the hands of employees, provided such shares are allotted or transferred to the concerned employee after March 31, 2009.
For the purpose of valuation of this perquisite, fair market value (FMV) of shares or securities has to be calculated on the date on which the employee exercises the option. Amount actually paid or recovered from the employee in respect of such shares or securities shall be deducted.
This perquisite will be taxable in the hands of employee in the previous year in which shares or securities are allotted or transferred to him. However, fair market value shall be calculated on the date on which the employee exercises the option.
“Sweat equity shares” means shares issued by a company to its employees or directors at a discount or for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called. Such shares may be equity shares, any other shares, scrips, debentures, derivatives or units. These may be transferred/ allotted (directly or indirectly) to the employee.
Domestic servants –
The value of perquisite shall be the actual cost to the employer minus amount paid by the employee for such services.
If an employer provides a rent-free house (owned by the employer) to his employee, expenses (inclusive of salary of a gardener) incurred by the employer on maintenance of garden and ground attached to the house, are not taxable separately.
Gas, Electricity or Water supply –
The value of perquisite shall be the cost to the employer as reduced by the amount recovered from the employee.
Education –
A. Any amount spent for providing free education facilities to, and training of, the employees is not taxable.
B. Any payment of school fees of the family members of the employee directly to the school or any reimbursement of expenditure incurred for education of the family members of the employee is taxable as a perquisite in all cases.
C. Education facility in employer’s institute:
a. It means:
b. an educational institute which is owned and maintained by the employer and educational facility is provided; or
c. an educational facility is provided in any institute by reason of employee’s employment with the employer.
| Different situations | Amount chargeable to tax |
| Where educational facility is provided to employee’s children: a. If cost of education or value of such benefit does not exceed Rs. 1,000 per month per child (no restriction on number of children) b. Where such amount exceeds Rs. 1,000 per month per child | (a). Nil (b). Cost of such education in a similar institution in or near the locality minus amount paid or recovered from the employee |
| Where education facility is provided to member of his household (other than children) | Cost of such education in a similar institution in or near the locality minus amount paid or recovered from the employee |
A literal meaning of the line indicates that if the cost of education per child exceeds Rs. 1,000 per month, the entire cost will be the value of the perquisite. Also, the Punjab and Haryana High Court in the case of CIT v. Director, Delhi Public School [2011] 202 Taxmann 318 ruled that nothing is taxable if cost of education in a similar institute is equal to or less than Rs. 1,000 per month. In case, it exceeds Rs. 1,000 per month, the entire amount is chargeable to tax.
Leave Travel Concession in India [Section 10(5)] –
Leave travel assistance extended by an employer to an employee for going anywhere in India along with his family is exempt according to the provisions mentioned in the table given below:
| Different situations | Amount of exemption (exemption is available only in respect of fare for going anywhere in India along with the family twice in a block of four years) |
| 1. Where journey is performed by air | Amount of economy class fare of the national carrier by the shortest route or the amount spent, whichever is less |
| 2. Where journey is performed by rail | Amount of air-conditioned first-class rail fare by the shortest route or the amount spent, whichever is less |
| 3. Where the places of origin of journey and destination are connected by rail and journey is performed by any other mode of transport | Same as (2) |
| 4. Where the places of origin of journey and destination (or part thereof) are not connected by rail: a. Where a recognized public transport exists b. Where no recognized public transport exists | (a). First class or deluxe class fare by the shortest route or the amount spent whichever is less (b). Air-conditioned first-class rail fare by the shortest route (as if the journey had been performed by rail) or the amount actually spent, whichever is less. |
Notes:
1. Family for this purpose includes:
a. spouse and children of the employee; and
b. parents, brothers and sisters of the employee, who are wholly or mainly dependent upon the employee.
2. Only two journeys performed in a block of four years is exempt:
Exemption of this perquisite is available in respect of two journeys performed in a block of four calendar years. The different blocks are:
a. 2010-2013 (i.e., January 1, 2010 to December 31, 2013);
b. 2014-2017 (i.e., January 1, 2014 to December 31, 2017);
c. 2018-2021 (i.e., January 1, 2018 to December 31, 2021)
3. “Carry-over” concession:
If an assessee has not availed travel concession or assistance during any of the specified fouryear block periods on one of the two permitted occasions (or on both occasions), exemption can be claimed in the first calendar year of the next block (but in respect of only one journey). This is known as “carry-over” concession. In such case, exemption so availed will not be counted for the purposes of claiming the future exemptions allowable in respect of two journeys in the subsequent block.
4. Exemption is based on actual expenditure.
5. Exemption is available in respect of fare:
Exemption is strictly restricted to expenses on air fare, rail fare, bus fare etc. No other expenditure, like scooter charges, lodging and boarding expenses etc. are qualified for exemption.
6. Exemption is available in respect of shortest route.
Medical Facility –
The following expenses whether incurred or reimbursed by the employer are exempt from tax:
Medical facilities in India:
1. Medical facility in employer’s hospital (including clinic, dispensary or nursing home).
2. Medical facility in a hospital maintained by Central/ State Government or by a local authority or by any other person approved by the Government for the treatment of its employees.
3. Treatment of prescribed disease given in rule 3A(2) in a hospital approved by the Chief Commissioner.
4. Medical insurance premium for employees on any health insurance policy.
Medical facility outside India:
The amount is exempt from tax subject to the conditions given below in the table:
| Perquisite not chargeable to tax | Conditions to be satisfied |
| Medical treatment of employee or any member of family of such employee outside India | Expenditure shall be excluded from perquisite only to the extent permitted by RBI |
| Cost on travel of the employee/ any member of his family and one attendant who accompanies the patient in connection with treatment outside India | Expenditure shall be excluded from perquisite only in the case of an employee whose gross total income, as computed before included therein the said expenditure (i.e., travelling) does not exceed Rs. 2,00,000 |
| 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 | Expenditure shall be excluded from the perquisite only to the extent permitted by RBI |
Family for this perquisite means:
1. the spouse and children of the individual; and
2. the parents, brothers and sisters of the individual or any one of them wholly or mainly dependent on the individual.
Free transport provided by a transport undertaking to its employees –
The value of this perquisite is equal to the value at which such benefit is offered by the employer to the public minus amount recovered from the employee.
However, nothing is chargeable to tax in the hands of employees of railways/ airlines.
Any other benefit or amenity –
It covers any other benefit or amenity, service, right or privilege provided by the employer and it is applicable to all employees. However, it does not cover the following –
1. Perquisites already discussed above
2. Telephone/ mobile phones
Value of such perquisites shall be determined on the basis of cost to the employer under an arm’s length transaction as reduced by the employee’s contribution, if any.
Deductions from salary
Deductions from salary are given in section 16. There are two deductions available from gross salary –
1. Standard deduction [16(ia)] to the maximum extent of ` 50,000.
2. Entertainment Allowance [Sec. 16(ii)]
3. Professional tax [Sec. 16(iii)]: Professional tax or tax on employment, levied by a State under article 276 of the Constitution, is allowed as deduction. Deduction is available only in the year in which professional tax is paid. If the professional tax is paid by the employer on behalf of an employee, it is first included in the salary of the employee as a “perquisite” and then the same is allowed as deduction on account of “professional tax” from gross salary. It is to be noted that there is no monetary ceiling under the Income-tax Act. Under article 276 of the Constitution, a State Government cannot impose more than Rs. 2,500 per annum as professional tax. However, under the Income-tax Act, whatever professional tax is paid during the previous year is deductible.
Note: The summary of Income Tax Notes Part-02 Capital Gains summarise from the content of Book of School of Open Learning. © School of Open Learning.
