Salaries-I

UNIT 6 SALARIES-II

Structure
6.0 Objectives
6.1 Introduction
6.2 Perquisites
6.2.1 Definition of Perquisites
6.2.2 Types of Perquisites
6.3 Valuation of Perquisites – All Employees
6.3.1 Rent free Accommodation
6.3.2 Accommodation at Concessional Rent
6.3.3 Fringe Benefits
6.4 Valuation of Perquisites for Specified Employees
6.4.1 Valuation of Facility of Motor car
6.4.2 Free Lodging and Boarding facility to Hotel Employees
6.4.3 Free Supply of Gas, Electricity and Water
6.4.4 Free or Concessional Education Facilities to any Member of
Employee’s Household
6.4.5 Free Sweeper, Watchman, Gardner, or Personal Attendant etc.
6.5 Fully Exempted Perquisites (Tax free Perquisites)
6.6 Deduction from ‘Salaries’
6.6.1 Standard Deduction
6.6.2 Entertainment Allowance
6.6.3 Tax on Employment
6.7 Let Us Sum Up
6.8 Key Words
6.9 Answer to Check Your Progress
6.10 Terminal Questions/Exercises

6.0 OBJECTIVES
After going through this unit, you should be able to:
define the term ‘perquisite’;
list different types of perquisites made available to salaried employees;
compute the value of such perquisites; and
explain statutory deductions available to a salaried employee.

6.1 INTRODUCTION
In Unit 5, you have learnt about the items to be included under the head ‘Salaries’,
you will also study about allowances which are nothing but perquisites received
in cash. In this Unit, you will learn about certain perquisites which are received
in kind and can be converted into cash. You will also learn about the valuation of
these perquisites and the deductions available from salaries.
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Salaries
6.2 PERQUISITES
Perquisites are casual emoluments or benefits, which is made available to
employees in addition to normal salary or wages. Perquisites may be either in
cash or in kind, normally, they are in the form of facilities in kind. The basic
concept underlying taxation of perquisites is that it results in a personal advantage
to the recipient.

You know that ‘perquisite’ is a component of salary income. It follows, therefore,

that there should exist ‘employer-employee relationship’, before the item of
perquisite can be brought to tax as salary. The value of any perquisite to a person,
not arising out of employer-employee relationship is taxable as ‘income from
other sources’. Thus, tips received by waiters from customers are taxable as
‘income from other sources’.

It is important that the advantage arising to the employee should have a legal
basis. Any unauthorized advantage taken by the employee would not amount to
a benefit or advantage [C.I.T. v A.R. Addaikkappa Chettiar (1973) 19 ITR 90
(Mad) and C.I.T. v Kulandaivelu Konar (1975) 100 ITR 629 (Mad).] Suppose A
Ltd., allots a bungalow to one of its general manager. Subsequently, he resigns
from the company. However, he continues to live in the company’s bungalow for
a year after which he was evicted from the premises through legal proceedings.
Now, the question arises as to whether any perquisite arises in the hands of the
general manager, the value of which would be charged as salary in his hands.

It is a fact that he enjoys the possession of the bungalow which does entail some
cost to the company and hence, there arises a perquisite. In the absence of an
employer-employee relationship, it is logical to assess the perquisite value as
‘income from other sources’. Sometimes, the employees to whom a perquisite is
provided may waive it, instead of utilizing it. In this case, value of the said
perquisite cannot be assessed in his hands.

6.2.1 Definition of Perquisites [Section 17(2)]

As per section 17(2) of the Income Tax Act, 1961 “Perquisite includes”
i) The value of rent – free accommodation provided to the assessee by his
employer.
ii) The value of any concession in the matter of rent respecting any
accommodation provided to the assessee by his employer;
iii) The value of any benefit or amenity provided free of cost or at concessional
rate in the following cases. Anyone who fulfill any one of the following
condition is called as specified employee:-
a) By a company to an employee who is director thereof.
b) The employee has acquired at least 20% or more equity shares in
employer’s company, or the employee has substantial interest in
employer’s company.
c) By any employer to an employee to whom the provisions of a) and b)
above do not apply but whose income under the head ‘salaries’ (whether
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 due from or paid or allowed by one or more employers) exclusive of Salaries-II
value of all benefits or amenities not provided for by way of monetary
payment exceeds Rs. 50,000. In other words, an employee whose
monetary salary exceeds Rs. 50,000.
iv) Any sum paid by the employer in respect of any obligation which, but for
such payment, would have been payable by the assessee.
v) Any sum payable by the employer, whether directly or through a fund, other
than a recognized provident fund or an 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.
vi) The value of any specified security or sweat equity shares allowed or
transferred directly or indirectly by the employer or former employer free
of cost or at concessional rate to the assessee;
vii) The amount of any contribution to an approved superannuation fund by the
employer in respect of the assessee to the extent that it exceeds Rs. 1,50,000;
viii) The value of any other fringe benefit or amenity as may be prescribed.

6.2.2 Types of Perquisites [Section 17(2)]

On the basis of taxability, perquisites may be classified into following categories:
a) Perquisites taxable for all employees (General Perquisites)
b) Perquisites taxable for specified employees
c) Tax-Free perquisites for all employees
Let us now list the items included in the above categories of perquisites.
a) Perquisites Taxable for all categories of employees (General Perquisites)
These perquisites are provided by the employer to any type of employee
(Government, semi-government or employed in private undertakings) or to
employees of any category. Such types of perquisites are given below:

1) Rent-Free house or accommodation:

The value of rent-free accommodation provided to the assessee by his
employer is taxable perquisite in the hands of every employee. The house
provided by the employer may be owned by him or may have taken some
accommodation on rent for providing it to his employee.

2) Concessional rent free house or accommodation:

The employer may provide the accommodation to his employees charging
less amount of rent or deducting some amount of rent from his salary. It is
called concessional rent-free house.

3) Payment of employee’s obligations by employer:

Such obligation can be paid in two ways, first, directly by employer on
behalf of the employee, second, the employee may make payment first
himself and then these are reimbursed by the employer.

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Salaries The actual amount of such payment is taxable perquisite in the hands of the
employee and is included in his income from ‘Salaries’. Such obligations
may be of the following types:
i) Payment of employee’s personal loan.
ii) Payment of employee’s hotel or club bills, but if an employee becomes
the member of a club or spends in a hotel for the benefit of his employer;
this will not be treated as perquisite in the hands of the employee.
iii) Payment of education fees or other expenditure in connection with the
education of employee’s children.
iv) Payment of income tax on employee’s salary.
v) Payment of salary to the domestic servants engaged by an employee.
vi) Payment of employee’s personal and legal expenses.
vii) Payment of gas, electricity or water for household if connection is in
the name of the employee.
viii) Medical expenses reimburses in excess of Rs. 15,000.
ix) Premium paid for life insurance or an annuity of the employee.
x) Payment of employment tax or professional tax of the employee by
the employer.

Note: Any perquisite, benefit or facility, bills of which are issued in the
name of employee and the payment there of is made by the employer, shall
fall under this category, i.e. payment of employee obligation and therefore,
shall be included in the employee’s income from ‘salaries’.

4) Payment of employee’s life insurance and annuity premium:

The amount payable by an employer, directly or indirectly, for the assurance
of the life of an employee or to effect a contract of an annuity, would be
taxable perquisite in the hands of every such employee. Such premium may
be paid/payable by the employer directly or through any fund other than the
following funds:
i) Recognized provident fund.
ii) Approved superannuation fund.
iii) Deposited linked insurance fund established under Section 3G of the
Coal Mines Provident Fund and Miscellaneous Provisions Act, 1948.
But any premium paid or payable by the employer under Employee’s state
insurance scheme, would not be perquisite in the hands of the employee and
shall not be taxable for the employee as this scheme is in the interest of the
employee. It should be noted that the amount becomes taxable as soon as it
becomes due for payment. Actual payment during the previous year is not
necessary.

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5) Specified security or sweat equity share allotted or transferred to an Salaries-II
employee:

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, would be taxable in the hands
of every such employee and included in the income from salaries.

6) Employer’s contribution to an approved superannuation fund:

Any amount contributed by the employer in employee’s approved
superannuation fund in excess of Rs. 7, 50,000 would be taxable as perquisite.
[Sec 17(2) (vii)]

7) Fringe Benefits
Prescribed fringe benefits or amenities are as follows:
i) Interest free loan or concession loan to an employee [Rule 3(7)(i)]
ii) The value of travelling, touring and any other expenses paid for or
borne or reimbursed by the employer to the employee or any member
of his household.
iii) Free food, non-alcoholic beverages or refreshment facilities. [Rule
3(7)(iii)]
iv) Any gift or voucher or token. [Rule 3(7) (iv)]
v) Credit card facility [Rule 3(7)(v)]
vi) Club expenditure [Rule 3(7)(vi)]
vii) Use by an employee or any member of his household of any moveable
asset belonging to the employer.[Rule 3(7)(vii)]
viii) Transfer of employer’s moveable asset to an employee or any member
of his household. [Rule 3(7)(viii)]
ix) Any other benefit, amenity, service, right or privilege provided by
employer [Rule 3(7) (ix)]
b) Taxable Perquisites for specific employees [Section 17(2)(iii)]

According to section 17(2) (iii) of the Act, Perquisites which are taxable in the
hand of specified employees only, are called as specific perquisites.

Meaning of a Specified Employee:

A person who fulfills any one of the following condition shall be considered as a
specific employee:

i) If the employee is a director in employer’s company – full time or part time.

ii) The employee has acquired at least 20% or more equity shares in employer’s
company or the employee has substantial interest in employer’s company.

iii) The total monetary receipts of an employee must exceed Rs. 50,000. An
employee (not covered under any of the above two categories) whose taxable
‘monetary income’ under the head ‘salary’ (excluding the value of non-
monetary perquisites) exceeds Rs. 50,000 is a specified employee. In case
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Salaries an employee gets salary from more than one employer, he will be treated as
specified employee, if the aggregate monetary salaries from all the employers
exceed Rs. 50,000.

‘Monetary salaries income’ includes all taxable cash receipts e.g., basic salary,
dearness allowance, bonus, commission, taxable allowance, obligations of
employee paid by employer, e.g.- income tax, employment tax, payment of gas,
electricity and water and also received at the time of retirement, e.g., taxable
gratuity, encashment of earned leave or sum received from provident fund, etc.
Name of specific perquisites, taxable in the hands of specific employees
1) Facility of motor car.
2) Facility of domestic servants
(Sweeper, Gardner, Watchman, or Personal Attendant) for the personal works
of an employee employed and engaged by the employer and paid by the
employer.
3) Facility of free gas, electricity and water
4) Free education facility provided by the employer to the children of an
employee in a school run by the employer or in some other school.
5) Personal or private journey provided free of cost or at concessional rate to
an employee or member of his household.
6) The value of any other benefit, amenity, service, right or privilege provided
by the employer.
c) Tax – Free Perquisites for all employees
i) Medical facility
ii) Facility of refreshment
iii) Transport facility or conveyance facility
iv) Employer’s contribution
v) Use of laptop or computer of employer
vi) Facility of entertainment
vii) Accommodation in remote area
viii) Perquisites provided outside India
ix) Facility of telephone
x) Facility of refresher course or training
xi) Payment of accidental insurance premium
xii) Educational facility for children of the employee
xiii) Tax paid by the employer on non-monetary perquisites
xiv) Leave travel concession
xv) Free conveyance facility to employees by an undertaking engaged in
transport business
xvi) Facility of residence and conveyance to high court/Supreme court judges.
xvii) Facility of rent free accommodation to minister of parliament (including
maintenance).
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 Salaries-II
6.3 VALUATION OF PERQUISITES – ALL
EMPLOYEES
For the purpose of computing the income chargeable under the head ‘Salaries’,
the value of the perquisites, not provided by way of monetary payment to the
assessee shall be determined in accordance with the provisions of Rule 3 of
Income Tax Rules, 1962.

6.3.1 Rent Free Accommodation – Rule 3(1)

As per rule 3(1), for the purpose of valuation of rent-free accommodation, all
employees are divided into two categories.
1) A) Government employees: The following are included under this
category:
a) Employees of Central and State Governments.
b) Government employees on deputation and presently serving with
any body or undertaking under the control of Government. Foreign
Government employees are not included in this category. They
are included in the second category.
B) Other than Government employees: All employees not covered under
first (A) category are included under this category.
Types of Rent free accommodation: The accommodation provided
by the employer to his employee may be of one of the following two
categories:
i) Unfurnished accommodation – The accommodation which in not
fitted with any furniture or other things of amenities is termed as
unfurnished.
ii) Furnished accommodation – The accommodation which is
equipped with furniture or other things of amenities such as
television, refrigerator, air conditioning plant or equipment and
other domestic appliances, etc. is termed as furnished.
Further, such accommodation may be provided.
a) Rent free, or
b) At concessional rate
2) In case accommodation provided by Government to its employees
i) Where the accommodation is unfurnished: The value shall be the
license fee determined by Union or State Government is respect of
accommodation in accordance with the rules framed by that government
as reduced by the rent actually paid by employee.
Valuation = License fee determined by Central or State Government in
respect of accommodation in accordance with the rules framed by that
government – Rent actually paid by the employee.
ii) Where the accommodation is furnished: The value of perquisite shall
be determined as if it is an unfurnished accommodation (i.e. value 103
Salaries determined as per clause (i) above). Such value shall be increased by
10% of the cost of furniture (including television, radio, refrigerators,
other household appliances, air conditioning plant or equipment) or if
such furniture is hired from third party, the actual hire charges paid or
payable for the same. The valuation of furniture shall be reduced by
any charges paid or payable for such furniture by the employee during
the previous year.
Valuation = as unfurnished + 10% of the cost of furniture installed in the
accommodation (if the furniture is owned by the Government)
Or
Actual rent or hire of furniture installed in the accommodation paid by the
Government (if the furniture installed in the accommodation has been taken
on hire by the Government)
Note:
1) Meaning of salary = Basic salary due (except advance and arrears of salary)
+ Dearness allowance or pay (if under the terms of employment) + fees +
bonus and commission + all other taxable allowances (excluding the portion
not taxable) + any monetary payment (by whatever name called), but does
not include the following:
a) Dearness Allowance or Dearness Pay (which in not under the terms of
employment)
b) Employer’s contribution to assessee’s Provident Fund.
c) Exempted Allowances
d) Value of any Perquisites under section 17(2).
e) Any payment or expenditure specifically excluded under proviso to
sub clause (iii) of clause (2) relating to employees stock option plan or
scheme) or proviso to clause (2) of section 17 (relating to medical
facility or reimbursement of medical expenses);
f) Any lump sum payment like Gratuity, Leave Encashment, Commuted
Pension, etc, received at time of termination of service or at the time
of voluntary retirement or superannuation.
2) ‘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.
3) Rent free official residence provided to a judge of a high court or to a judge
of the Supreme Court is exempt from tax.
4) Rent free accommodation given to an official of parliament, a union minister
and a leader of opposition in parliament is exempt from tax.
Illustration 1
Mr. Y. is an I.A.S. Officer in the Ministry of Home Affairs, New Delhi. He draws
a basic pay of Rs. 12,000 p.m. and dearness allowance of Rs. 1,200 p.m. He is
provided a rent free house at Jor Bagh, the fair market rent of which is Rs. 72,000
p.a., Bonus – 3 months’ basic pay; education allowance @ 6,000 p.m.; city
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compensatory allowance @ 6,000 p.m.; cost of furniture – Rs 50,000; license Salaries-II
fee determined by the government – Rs 12,000 p.a. Determine the value of rent-
free accommodation if the house is (i) unfurnished (ii) furnished and hire charges
of furnishing are Rs. 2,000 p.a.

Solution:
i) Mr. Y (Government employee - unfurnished)
Valuation for rent free house = License fee determined by the Government
= Rs. 12,000.
Note:
1) License fee determined by the Government is Rs. 12,000 p.a. Hence, Rs.
12,000 shall be the value of rent free accommodation.
2) Market rental value of the accommodation and the salary of the employee
are irrelevant for valuation and rent free accommodation of a Government
employee, when license fee is given.
ii) Mr. Y (Government employee - furnished)
Valuation for rent free house = License fee determined by the Government
+ hire charges of furnishing.
= Rs. 12,000 + 2,000 = Rs. 14,000
B) In case accommodation is provided by any other employer
Accommodation provided as rent free or at concessional rate may be owned
by the employer or taken on lease or rent by the employer.
It includes other employees like employees of Reserve bank of India,
nationalized banks, educational institutions, universities, statutory
corporations, companies of private sector, partnership firms and other
industrial and trading institutions etc.
The taxable value of this facility shall be determined as follows:
1) Where the Accommodation is Unfurnished
Table 6.1: Unfurnished Accommodation
Nature of Accommodation Accommodation Accommodation
Accommo- provided in cities provided in cities with provided in cities
dation having population population exceeding having population
upto 10 lakh as per 10 lakhs but not exceeding 25 lakhs as
2001 census exceeding 25 lakhs as per 2001 census
per 2001 census
(a) Where the 7.5% of salary in 10% of salary in respect 15% of salary in respect
accommodation respect of the period of the period during of the period during
is owned by during which the said which the said which the said
the employer accommodation was accommodation was accommodation was
occupied by the occupied by the occupied by the
employee during the employee during the employee during the
previous year. previous year. previous year.
(b) Where the Actual amount of lease Actual amount of lease Actual amount of lease
accomm- or rent paid or payable or rent paid or payable or rent paid or payable
odation is by the employer or by the employer or by the employer, or
taken on lease 15% of salary, 15% of salary, 15% of salary,
or on rent by whichever is less whichever is less whichever is less.
the employer
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Salaries Explanation:
1) In case, the house is provided at concessional rate, the value determined as
per (a) or (b) above shall be reduce by the rent, if any, actually paid by
employee.
2) Where the Accommodation is furnished: The value of perquisite shall be
determined as if it is an unfurnished accommodation (i.e. value determined
as per chart given above. Such value shall be increased by 10% of the cost
of furniture (including television, radio, refrigerators, other household
appliance, air conditioning plants or equipment or other similar appliance
or gadgets) or if such furniture is hired from a third party, the actual hire
charges payable for the same. Such valuation of furniture shall be as reduced
by any charges paid or payable for such furniture by the employee during
the previous year.

Valuation = Valuation as unfurnished accommodation + 10% of the cost

of furniture
Or
Valuation as unfurnished accommodation + actual rent or hire charge of
the furniture paid by the employer (if furniture is taken on lease or hire)

C) Where the accommodation is provided by the employer (Govt. or other

employer) in a hotel
The value of the accommodation shall be –
i) 24% of salary paid or payable for the previous year, or
ii) The actual charges paid or payable to such hotel, whichever is lower,
for the period during which such accommodation is provided. However,
if the employee pays any rent, the value so determined shall be reduced
by the rent actually paid or payable by the employee.
There will be no perquisite value, if the accommodation is provided in a
hotel if the following two conditions are fulfilled:
a) Such accommodation is provided for a period not exceeding 15 days;
and
b) It has been provided on the transfer of the employee from one place to
another.
Valuation = 24% of salary paid or payable for relevant period of the
previous year
Or
Actual charge paid or payable by the employer to such hotel, whichever is
less. (Such accommodation is treated as furnished)
Note: For the purpose of valuation of rent-free accommodation, the following
should be understood clearly:

1) Meaning of Salary – Salary for this purpose is to be taken as salary of the

period for which rent free accommodation is given to the employee. Salary
means and includes the following:
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 a) Basic salary Salaries-II

b) Dearness Allowance or Dearness Pay, if it is under the terms of

employment. All the allowances paid by the employer to the employee
on monthly basis or otherwise, such as fees, bonus, commission,
dearness allowance or dearness pay (if it is under terms of employment)
and all other taxable allowances (excluding the portion not taxable)
c) Bonus
d) Commission
e) Any monetary payment (by whatever name called)
But, the following are not included in the salary:
i) Dearness Allowance or Dearness Pay, if it is not under the terms of
employment.
ii) Employer’s contribution to provident fund account of the employee
iii) All Allowances exempt from income tax.
iv) Value of any Perquisite u/s 17(2).
2) “Accommodation” includes a house, flat, farm house or part thereof, or
accommodation in hotel, motel, service apartment, guest house, caravan,
mobile home, ship or other floating structure.
3) “Hotel” includes licensed accommodation in the nature of motel service
apartment or guest house.
4) Salary is to be computed on ‘due’ basis for the period for which the rent free
accommodation has been provided to the employee e.g., if the rent free
accommodation is provided for the period from 1.1.2021 to 31.3.2021, then
only the salary due for the months of January, February and March shall
only be taken.
5) If the employee receives salary from more than one employer, the aggregate
of the salary received from both the employers, for the period for which the
accommodation is provided, has to be taken into account for valuation of
rent free accommodation even though the accommodation has been provided
only by one employer.

Illustration 2
A is a pilot in Air India. He draws Rs. 72,000 p.a. as basic pay, Rs. 12,000 p.a. as
D.A. (it is under terms and conditions), Rs. 6,000 as bonus and Rs. 6,000 p.a. as
educational allowance. He has got two children studying in the nearby school.
While on duty, he has been provided with a rent-free flat at Santa Cruz, Mumbai,
the fair rental value of which is Rs. 30,000 p.a. Determine the taxable value of
the perquisite if
i) The house is unfurnished
ii) The house is furnished and the cost of furnishing is Rs. 1,00,000/-

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Salaries Solution:
i) When accommodation is unfurnished
Valuation = 15% of salary
Total salary = 93,600
15% of salary (As population of Mumbai is above 25 lakhs) = Rs 14,040
Note:
1) Meaning of salary = 72,000 (B.S.) + 12,000 (D.A.) + 6,000 (B) + 3,600
(E.A.) = Rs. 93,600
2) D.A. is under terms of conditions so it will be included.
3) Education allowance is exempt upto 100 p.m. per child (maximum two
children, i.e. 2,400 is exempt). Taxable portion of education allowance and
all other allowances will be included in salary.
ii) When accommodation is furnished
Valuation = 15% of salary + 10% of cost of furniture
= 14,040 + 10,000 = 24,040
Note:
Salary = Rs. 93,600 (15% of Rs 93,600 = Rs 14,040)
Cost of furniture = Rs. 1, 00,000
Illustration 3
Mr. Ajay Dubey is a General Manager in a M.N.C. He gets Rs. 25,000 p.m. as
salary, Rs. 1,500 p.m. as marriage allowance, Rs. 2,000 p.m. children allowance
and Rs. 1,500 p.m. dearness allowance (of which half the amount is added in
salary to ascertain the contribution to Provident Fund.). He also gets a transport
allowance for commuting from residence to office @ Rs. 400 p.m. Besides, he
gets a bonus equal to 3 month’s basic pay per year. The company has provided
him a rent free bungalow in which air conditioning plant, refrigerator, radio set
and other furniture of the cost of Rs. 1,60,000 belonging to the company, are
installed. The monthly rent of the bungalow payable by the company is Rs. 7,000
p.m. Calculate the Rent free accommodation value of the bungalow.

Solution:
As the bungalow is not owned by the company, the valuation of rent free furnished
bungalow will be as under.
Valuation = Lease or rent paid or payable or 15% of salary (whichever is less)
+ 10% of the cost of furniture.
= [Rs. 84,000 or 15% of Rs. 4, 30,800] + 10% of Rs. 1, 60,000
= [Rs. 84,000 or Rs. 64,620] + Rs. 16,000
= [Rs. 64,620 + Rs. 16,000 = Rs. 80,620]

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Note: Salaries-II

1) For this purpose, salary will include one half of the dearness allowance as it
is deemed to be under the terms of employment. Thus, salary will be Rs.
4,30,800 [Rs. 3,00,000 (salary) + Rs. 18,000 (marriage allowance)+Rs.
24,000 (children allowance) + Rs. 9,000 (D.A.) + Rs. 4,800 (T.A.) + Rs.
75,000 (bonus)]

2) Marriage Allowance and Children Allowance are fully taxable.

6.3.2 Accommodation at Concessional Rent

When the accommodation is provided to the employee at a concessional rate of
rent, the value of such accommodation is determined as if the accommodation
was provided free of rent.

From the value, the rent paid or payable by the employee for the period during
which he occupied the house during the previous year, should be deducted. The
resulting amount will be added to the salary as value of concession. Generally,
the employer deducts a fixed sum from the salary of his employee towards the
rent of the accommodation provided to him. The sum deducted as rent is less
than the actual fair rental value of the accommodation. If the employee pays fair
rent of the accommodation, it cannot be said that he is receiving any concession
in the matter of rent. There would be no perquisite in such a case. But, when the
rent paid by him or deducted from his salary is less than the fair rental value of
the accommodation, he is said to have received concession in the matter of rent.
This would be a perquisite. Generally, 20% of salary or 15% of salary, as the
case may be, is taken to be fair rent of the accommodation. The accommodation
provided to an employee at concessional rent may be either furnished or
unfurnished. Concession in rent will be valued as below:

A) In case of an unfurnished accommodation provided by an employer

other than the Central Govt. or any State Government:
a) Where the accommodation is owned by the employer:
Value of Concession in rent = 15% or 10% or 7.5% of salary (as the
case may be ) – Rent recoverable from, or payable by the assessee
b) When the accommodation is taken on lease or hire by the employer:
value of Concession in rent = Actual lease or rent paid or 15% of
salary, (whichever is less) – Rent recoverable from the assessee
B) In case of an unfurnished accommodation provided by the Central or
any State Government-
Value of concession in rent =
License fee determined – Rent recoverable from the assessee

C) In case of a furnished accommodation provided by the Central or any

State Government-
Value of concession in rent = License fee determined + 10% of the cost of
furniture – Rent (or charges for furniture recoverable from the assessee)
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Salaries D) In case of a furnished accommodation provided by an employer other
than the Central or any State Government –
a) Where the accommodation is owned by the employer:
Value of concession in rent = Value as unfurnished + 10% of the cost
of furniture or rent (charges for furniture Recoverable from the
assessee)
b) Where the accommodation is taken on lease or rent by the employer:
Value of concession in rent = Value as unfurnished + 10% of the cost
of furniture – Rent or charges for furniture recovered from the assessee
E) In case of an accommodation provided by the employer in a hotel –
Value of concession in rent = 24% of salary or Actual charge of hotel paid
(Whichever is less) – Rent recoverable from the assessee
Note:
1) If accommodation in hotel is provided for 15 days or less, its value shall not
be taxable.
2) Value of furniture installed in an unfurnished accommodation, 10% of the
cost of furniture or actual hire charge of the furniture, if furniture is taken
on hire.
In brief, value of concession in rent will be calculated as below.
For all category of employees
Value of concessional Valuation as Rent paid or payable by
Rent free accommodation = rent free – or deducted from the
(Furnished & unfurnished) accommodation employee

Table 6.2: Valuation of Rent Free House

Unfurnished Government Private sector employees

employees
License fee Accommodation owned Accommodation hired
determined by by the employer: by the employer:
the
a) 15% of salary (in Hire charges or rent
government
cities with paid or payable
population exceeding Or
25 lakhs) Or 15% of salary
b) 10% of salary (in ( whichever is less)
cities with population (In respect of all cities)
exceeding 10 lakhs but
not exceeding 25
lakhs) Or
c) 7.5% of salary
( in other cities)
Furnished Valuation as unfurnished + 10% of the cost of furniture or actual rent
( for all or hire of the furniture paid by the employer
employees)

110
6.3.3 Fringe benefits Salaries-II

Prescribed fringe benefits or amenities are as follows:

1. Interest free loan or concession loan to an employee [Rule 3(7)(i)]
Following points shall be kept in mind:
i) The loan shall be given to the employee or his family member (Spouse,
children and their spouses, Parents, Servants and dependents) by his employer
or on his behalf in the previous year.
ii) Interest shall be calculated on the maximum outstanding monthly balances.
iii) The taxable value of the loan shall be the sum equal to the interest calculated
at the rate charged per annum by State Bank of India on 1st day of previous
year.
iv) No value is taxable, if the loan is taken for the treatment of diseases specified
in Rule 3A.
v) If the total amount of loan does not exceed Rs 20,000, it shall not be included
in employee’s salary.
Note:
a) The rate of interest for such loans is given by State Bank of India for every
financial year.
b) Maximum outstanding monthly’ balance means the aggregate outstanding
balance for each loan as on the last day of each month.
Illustration 4
Determine the taxable value of taxable interest in case of interest free loan
provided by the employer to the employees for assessment year 2021-22.

a) An employer, Ambani Ltd, gives the following interest free loan to Mr Amit,
an employee of the company, Rs 10,000 for children education and Rs 6,000
for purchasing a washing machine. No other loan is given by Ambani ltd.
Compute taxable value of interest.

b) Ambani Ltd gave loan to Mr Amit on 1st April, 2020 to buy a car of Rs
50,000. Ambani Ltd recovers interest @ 2.90% per annum from Mr Amit.
Find out taxable value of interest.
Solution:
For the assessement year 2021-22, the taxable value of interest free loan shall be
following:
a) Nothing is taxable in the hands of Mr Amit as the amount of loan does not
exceeds Rs 20,000.
b) The SBI lending rate on April, 2020 for car loan is 9.25%, but only 2.90%
interest is recovered from Mr Amit, i.e. Rs 3,175 @ interest 6.35% (9.25%
- 2.90%) on Rs 50,000 for one year is taxable in the hands of Mr Amit.

111
Salaries 2) The value of travelling, touring and any other expenses paid for or borne
or reimbursed by the employer to the employee or any member of his
household [Rule 3(7) (ii)].
Sometimes, the expenses incurred for holidays tour by the employee or his family
member is reimbursed by the employer. The following points shall be kept in
mind:
Table 6.3: Conditions and Taxable value for travelling and touring
Conditions Taxable value
If all employees are provided similar Expenses borne by the employer minus
type of facilities. Sum recovered from the employee
If all employees are not provided similar Value of facilities provided by other
type of facilities. agencies minus Sum recovered from the
employee.
If the employee is on official tour work Sum paid by the employer
and these expenses are paid for any
member of his household who went with
him.
If the employee is on official tour and The expenses paid by the employer during
this tour is extended in the form of the extended period.
holidays.
Note:
i) In all above conditions, if any amount is recovered from the employee, it
will be deducted from taxable value of fringe benefit and the remaining
amount will be treated as the value of that particular amenity.
ii) The remaining value shall be taxable only if it is positive.
3) Free food, non-alcoholic beverages or refreshment facilities. [Rule
3(7)(iii)]
Following points shall be kept in mind:
Table 6.4: Conditions and taxable value for food and beverages
Conditions Taxable value
If free tea and snacks is provided during Nil
office hours.
If free meal and non-alcoholic beverages Nil
are provided during office hours in remote
area or offshore place.
If free meal and non-alcoholic beverages i) If the rate of meal is upto Rs. 50 per
are provided during office hours at place meal, the taxable value shall be zero.
of work. ii) If the rate of meal exceeds Rs 50 per
meal, this excess value shall be
taxable.
If free meal is provided during office hours The taxable value shall be the sum
at place of work through non-transferable exceeding Rs 50 per meal.
paid vouchers.
In any other case Actual expenditure by the employer
minus Sum recovered from the
employee.
112
Note: Salaries-II

i) Office hours include over time and work in holiday.

ii) Free meals include meal, tea and snacks.
iii) Lunch allowance and free meal are separate; the value of lunch allowance,
dinner allowance, refreshment allowance shall be taxable.
Illustration 5
An employer provides tea/coffee to his employee Mr Rajiv during the office
hours costing Rs 5,500 in a year which is borne by the employer. Besides this, he
also provides free lunch to him during office hours. The cost of this lunch for
300 working days in a year is Rs 100 per diet. The employer recovers Rs 40 per
diet from his employee. Find the taxable value of this facility.

Solution:
i) Taxable value of tea or coffee shall be nil as it is provided during the
office hours. Rs.
ii) Taxable value of lunch (300 × 100) 30,000
Less: i) Tax free amount (300 × 50) 15,000
ii) Recovered from Mr Rajiv (300×40) 12,000 27,000
Taxable value of lunch 3,000
4) Any gift or voucher or token. [Rule 3 (7) (iv)]
Following points shall be kept in mind:
i) Gift can be in cash or kind.
ii) Gift can be given by the employer to his employee or any member of
his family.
iii) If the cost of gift (given on any ceremonial occasion) exceeds Rs 5,000,
then, it shall be taxable.
iv) Cash gift or any gift which can be converted into money (e.g. Cheque),
is not exempt, but, its value shall be included in employee’s salary
even its value is less than Rs 5,000.
v) Any gift given by the employer to the employee on the social and
religious functions (e.g.- Deepawali, Christmas, New Year, Holi etc.),
if it is given in kind, it is exempt, and not included in employee’s
salary provided its value is not more than Rs 5,000 per year. If the
value of gift exceeds Rs. 5,000, this excess value shall be taxable and
included in employee’s salary.

5) Credit card facility [Rule 3 (7)(v)]

It’s taxable value is calculated as follows:
Total expenses paid by the employer
Less: i) Expenses in connection to office or duty
ii) Sum recovered from the employee
113
Salaries Expenses on credit card for official use:
For deduction in these expenses, following conditions are to be fulfilled:
i) The employer will keep complete details in connection with these
expenses, e. g, date of expense, nature of expense etc.
ii) The employer will give a certificate for this purpose that these expenses
have been paid for official purpose.
Note:
i) The employer shall give credit card to the employee or any member of
his family or the expenses of credit card should be reimbursed by the
employer.
ii) Expenses on credit card will not include membership fee and other fee
or expenses which have been paid by the employee or any member of
his family through credit card in connection with household purpose.
6) Club expenditure [Rule 3 (7)(vi)]
Its taxable value is calculated as follows:
Expenses done on club facility or reimbursed by the employer
Less: i) Expenses on club facility if any paid or recovered by the employee
Important point: Where such expenses are incurred wholly or exclusively
for official purpose, then value of benefit would be Nil, provided the
conditions specified below are fulfilled.
Note:
i) Health club and sports club facilities are provided by the employer in
the company for all categories of the employees, these values shall be
exempt for the employees.
ii) If such club facilities are provided for official purpose, the expenses
paid on it by the employer shall be tax free for the employees but for
this exemption certain conditions are essential to be fulfilled. These
conditions are the same which have been mentioned in earlier point
no. 5 (Expenses on credit card).
iii) Club membership fee: Initial one time deposit or fees for corporate
membership, where benefit does not remain with a particular employee
after employment are exempt.
7) Use of employer’s moveable assets by an employee or any member of
his household. [Rule 3 (7) (vii)]
If an employee uses the movable asset of the employer, its taxable value is
calculated as follows:
Table 6.5: Taxable value of Movable Assets

Movable asset Taxable value of perquisite

i) Use of computer or laptop Nil
ii) Any other movable assets other than
(i) above 10% p.a of cost of asset
a) If the employer is the owner. Rent by employer every year.
b) If the employer has hired the asset.
114
 Note: Salaries-II

Any amount received from employee in connection with movable asset shall
be deducted from the above value.
8) Transfer of employer’s moveable asset to an employee or any member
of his household [Rule 3 (7)(viii)]
The taxable value of this perquisite shall be determined as follows:
Table 6.6: Taxable value of transfer employer’s Moveable Assets
Assets Taxable value of perquisite
i. Computer and Written down value (WDV) of asset used by the employer
electronic items for each completed year -50% of the cost to the employer for
each completed year during which such asset was put to use by
the employer on the basis of reducing balance method.
ii. Motor car WDV of asset used by the employer for each completed year-
20% of the cost to the employer for each completed year during
which such asset was put to use by the employer on the basis of
reducing balance method.
iii. Any other Cost of asset used by the employer for each completed year
movable asset - 10% depreciation on the basis of straight line method.
except(i) and
(ii) above
Note:
i) Electronic items or electric appliances includes data storages, computer,
digital diaries and printers, this does not include domestic electrical
appliances, viz., washing machine, microwave, oven, mixer.
ii) Other assets include those assets which are additional from point no.
(i), viz., fridge, video camera.
iii) Any amount paid by employee or received from employee shall be
deducted from the value of above perquisite determined on the basis
of above rules.
9) Any other benefit, amenity, service, right or privilege provided by
employer [Rule 3(7) (ix)]
If the employer provides any other benefits, right or special right to the
employee, its value shall be determined on the basis of cost of employer,
any payment made by the employee to attain these benefits, shall be deducted
from this taxable value.
Illustration 6
The company has given Sachin a housing loan of Rs. 10, 00,000 on 01-10-2020
@ 6% interest p.a. The entire loan is outstanding till the end of the F.Y. Determine
the taxable amount of interest for the assessment year 2021-22, assuming that
the rate of interest on housing loan charged by the SBI is 10% p.a.
Solution:
Interest charged by SBI @ 10% p.a.

10 6
= 10, 00,000 = Rs. 50,000
100 12
115
Salaries
6 6
Interest charged by company = Rs. 10, 00,000
100 12
= Rs. 30,000
Chargeable interest = Rs. 50,000 – Rs. 30,000 = Rs. 20,000

Illustration 7
Mr. Y is employed in a private college on a monthly salary of Rs. 15,000. He
took a loan of Rs. 20,000 from the college for purchasing a second hand car.
Valuate the perquisite.

Solution:
Valuation = ‘NIL’ as the amount of loan does not exceed Rs. 20,000

Illustration 8
Mr. X took a loan of Rs. 50,000 from his employer for his personal purpose. He
used the loan for repaying his old debts. What is the value perquisite?

Solution:
Valuation – ‘NIL’ as the rate of interest is not given. It is presumed that the
employee pays full interest. Hence, it is not a perquisite.

Check Your Progress A

1) Who is a specific employee?
......................................................................................................................
......................................................................................................................
......................................................................................................................
2) What does “Perquisite includes” as per Section 17(2) of the Income Tax
Act, 1961?
......................................................................................................................
......................................................................................................................
......................................................................................................................
3) Fill in the blanks
1) Arrears of salary is taxable under the head ‘……………………..’
2) Tax free salary received by the employee means tax will be paid by the
……………
3) Facility of telephone for employees is …………perquisite.
4) The taxable value of moveable assets, other than computer or laptop,
is ………….. p.a of cost of asset, when the employer is the owner.
5) When the accommodation is provided in a hotel for ……. Days, its
value shall not be taxable.

116
 Salaries-II
6.4 VALUATION OF PERQUISITES FOR
SPECIFIED EMPLOYEES
Perquisites which are taxable in the hands of specified employees are termed as
“Specific Perquisites”, rules regarding this are as follows:

6.4.1 Valuation of Facility of Motor-car [Rule 3(2)]

Motor-car or other mode of conveyance provided by the employer to his employee
is a ‘Specific Perquisite’ and therefore, it is taxable in the hands of specific
employee only. However, unauthorized use of company’s car by director for his
personal purpose could not be taken as perquisite in his hands. The provisions of
the rule are stated below:

I) When motor car is owned or hired by the employer:

When the employer has provided to his employee, a motor car owned or
hired by him, its valuation will be made as follows:

A) When maintenance and running expenses are borne and

reimbursed by employer:
i) If the car is wholly used for official purposes, it is not supposed to
be perquisite, so value shall be nil.
ii) If the car is used wholly for the private or personal purpose of the
employee, its value shall be actual amount spent by the employer.
Valuation = The actual amount spent by the employer on
maintenance and running of the car + salary of chauffeur, if any +
Normal wear and tear @ 10% of actual cost of the car or hire
charges – Amount charged from employee.
iii) If the car is used partly for official and partly for private purpose,
its value shall be as follows:
Valuation = [If capacity of the engine of car is upto 1.6 liters] Rs.
1,800 p.m. plus Rs. 900 p.m. for chauffeur’s facility
= [If engine capacity of car is above 1.6 liters] Rs. 2,400 p.m. Rs.
900 p.m. for chauffeur’s facility
B) When maintenance and running expenses are borne by the employee.
i) If the car is wholly used for official purposes, its value shall be
Nil.
ii) If the car is used wholly for private purposes, its value shall be as
below:
Valuation = Expenditure incurred by the employer, hire charges
or normal wear and tear of the car @ 10% of the actual cost of car
+ Salary of chauffeur, if any paid – Amount recovered by the
employee.
iii) If car is used partly official and partly private purpose.
Valuation = [If capacity of engine of car is upto 1.6 ltr] Rs. 600
p.m. plus Rs. 900 p.m. for chauffeur facility. 117
Salaries = [If capacity of engine of car is above 1.6 ltr] Rs. 900 p.m. plus Rs.
900 p.m. for chauffeur facility.
II) When car is owned by the employee:
a) When maintenance and running expenses are borne by employer, it
will not be treated as perquisite; its valuation shall be Nil.
b) When maintenance and running expenses are borne by employer.
i) If car is used wholly for official purpose:
It shall not be regarded as perquisite, so value shall be Nil.
ii) If car is used wholly for private purpose:
Actual expenses spent by the employer shall be the value of perquisite.
This is assumed to be general perquisite and taxable for all employees.
iii) If car is used partly for official purpose and partly for private purpose.
Valuation = Actual expenses incurred by the employee – Rs. 1,800
p.m. (if car is upto 1.6 ltr. capacity) or Rs. 2,400 p.m. (if car is above
1.6 ltr. capacity) and 900 p.m. for chauffeur (any amount recovered
from employee).
III) Use of more than one motor car belonging to the employer.
When more than one car are owned or hired by the employer and employee
uses them for both personal and official use, the value shall be as follows:
Valuation = Actual amount spent by the employer + salary of driver, if any
+ normal wear and tear i.e. 10% of actual cost of car.
Table 6.7: Valuation of Motor Car
When expenses are met by the employee
For official purpose Not taxable
Personal purpose All the expenses of car like petrol, diesel, driver salary and
(Fully taxable) 10% depreciation on car fully taxable If more than 1 car
given then, second car deemed to use for private purpose

Partly official partly Upto 1.6 ltrs More than 1.6 ltrs
personal Rs 600 p.m. + Rs 900 p.m. , Rs 900 p.m. + Rs 900 p.m.
purpose(some (if driver is also provided by (if driver is also provided
amount taxable) employer) by the employer)
When expenses are met by the employer
For official purpose Not taxable

Personal purpose Actual amount incurred on running and maintenance +

chauffer remuneration+ 10% p.a of cost of asset + amount
charged from employee

Partly official partly Upto 1.6 ltrs More than 1.6 ltrs
personal Rs 1,800 p.m. + Rs 900 p.m. , Rs 2,400 p.m. + Rs 900
purpose(some (if driver is also provided by p.m. (if driver is also
amount taxable) employer) provided by the
employer)

118
Illustration 9 Salaries-II

Mr. Sanjeev Kant is manager in Roadways. He gets salary @ 25,000 p.m., value
the perquisites of car under the following different circumstances:
a) The employer has provided him a car of 1.6 ltr capacity. Total expenses and
drivers salary incurred by employer i.e. Rs. 18,000. Car is used for both
private and official purpose.
b) The employer has provided him a 1.4 ltr capacity of car with driver only for
private use. Expenses of car are Rs. 18,000. The cost of car is Rs. 5, 00,000.
c) The employer has provided with a facility of bus (50 horse power) which
carries him along with other employees from home to office and back from
office to home.

Solution: Rs.
Salary @ Rs. 25,000 p.m. × 12 months 3, 00,000
a) Use of 1.6 ltr car @ 1800 p.m. × 12 21,600
Salary of driver @ 900 × 12 10,800
32,400
b) Value of 1.4 ltr car use only for private purpose =
Actual expenses + salary of driver + 10% of cost of car.
Rs. 18,000 + 900 p.m. x 12 (Rs 10,800) +Rs 50,000
78,800
c) This is no perquisite

6.4.2 Free Lodging and Boarding Facility to Hotel Employees

i) Lodging facilities: This is taxable for all employees, and calculated as rent-
free house given to an employee of private sector.
ii) Food facilities: The actual amount of food paid by employer and deducts
the amount if recovered by employee.

6.4.3 Free Supply of Gas, Electricity and Water [Rule 3(4)]

If a facility of free gas, electricity and water is provided to the employee by the
employer, the valuation of such perquisites is added in the salary of employee.
Let us study its valuation under following situations:
Table 6.8: Valuation of free Gas, Electricity and Water

Situation Value of Perquisite

a) If the employer is the manufacturer Cost per unit borne by the employer shall
of gas, electricity and water, i.e. the be the taxable value of perquisite for the
employer supplies these facilities employee.
from his own resources and does not
purchase from outside agencies.
b) In any other situation. Actual amount paid by the employer for
these facilities to other agencies providing
these facilities.
119
Salaries In the above situations, any amount paid by the employee or received from the
employee shall be deducted from the taxable value determined as above.
Note:
i) If the connection of the above perquisite is in the name of employer, the
amount of perquisite will be taxable in case of specified employee only.
ii) If the connection of the perquisite is in the name of employee, the amount
of perquisite is taxable to all categories of employees (specific and non-
specific).

6.4.4 Free or concessional education facilities to any member

of employee’s household [Rule 3(5)].
Table 6.9: Conditions and valuation of free or concessional education
Conditions Valuation
a) Where the education Institution is The cost of education in a similar
itself maintained and owned by the institution in or near the locality. However,
employer. if educational facilities are provided to the
children of the employee (any other
member of the household not covered
here), the value of this perquisite shall be
nil, if the cost of such education or the
value of benefit per child does not exceed
Rs. 1,000 p.m.
b) Where free education facilities for – do-
such members of employee’s
household are allowed in any other
educational institution by reason of
his being in employment of that
employer.
c) Payment of fee by the employer Such payment or reimbursement is taxable
directly to the educational to all types of employees (specified and
institution or reimbursement of fee non-specified both)

d) Educational facilities for family If educational facility is provided to any

members other than employee’s family member of specified employee, in
children the institution run by the employer, then
the value of perquisite shall be the amount
equivalent to fee of other institution of
such level.If, it is provided in other
institution, the value shall be actual
expenditure spent by the employer.In case
of family member of non-specified
employee, the value of such perquisite
shall be exempt.

However, in all the above cases, if any amount is paid or recovered from the
employee on this account, the value of benefit computed above shall be reduced
by the amount so paid or recovered.

120
6.4.5 Free Sweeper, Watchman, Gardener, or Personal Salaries-II

Attendant etc. [Rule 3(3)]

The employer may provide the facility of household servants to the employee,
which includes sweeper, chowkidar, gardener or other domestic servants like
cook etc. They can be appointed either by the employer or by employee. The
rules of their monetary valuation are as under:

1) Appointment of servant by employer and payment of remuneration by

the employer:

Servants are provided with rent house, the’ owner of house being or the
employer has provided the house to the employee by taking it on rent or the
house is owned by the employee and the remuneration of the servant is paid
by the employer. The following amounts of these facilities are included in
the salary of specified employees under section 17(2) (iii).

Sweeper, gardener, cook, watchman and other household servants: Sweeper

is known as cleaning employee. In chowkidar, security man or guards are
included. The taxable value of these perquisites to be included in the salary
of employee will be the actual amount paid by employer to sweeper, gardener,
cook, watchman and other household servants or total cost regarding these
servants to the employer. But, the expenses incurred by the employer on
maintaining garden, swimming pool and ground attached to the house shall
not be taxable separately.
2) Appointment of servant by employee and payment of remuneration by
employer or the payment of remuneration by employee and
reimbursement by employer:
The whole amount for every type of employee will be taxable u/s 17(2)
(iv). The house may be of employee or employer or on rent basis.

6.5 FULLY EXEMPTED PERQUISITES (TAX FREE

PERQUISITES)
There are certain other perquisites which are exempt in the hands of all employees.
They are as follows:
1) Medical facility
A) Medical facility in a hospital etc. maintained by the employer
Medical facility which is given to employee and his/her family member
in hospital, dispensary and nursing home which belongs to employer
is fully tax free.
B) Medical treatment in India
The following expenditure incurred by employer shall not be a
perquisite:
a) Any sum paid by employer in respect of:
i) Actual expenditure incurred by employee on his or his family
member’s medical treatment in any hospital maintained by the
121
Salaries government or any local authority or in a hospital approved by the
government for medical treatment for its employees.
ii) Expenditure actually incurred by employee on his or his family
member’s medical treatment in respect of prescribed diseases or
ailments as prescribed in Rule 3A of the income tax rules, in any
hospital approved by the principal chief commissioner or chief
commissioner of income tax, having regard to the prescribed
guidelines. However, in this case, the employee has to attach along
with his return of income, a certificate from the hospital specifying
the disease or ailment for which medical treatment was required
and the receipt for the amount paid to the hospital.
b) Any amount of insurance paid by the employer for insurance of
the health of the employees under a scheme approved by the central
government or the insurance regulatory and development authority.
c) Any reimbursement by the employer of any insurance premium
paid by the employee, for an insurance for his health or the health
of any member of his family a scheme approved by the central
government or the Insurance Regulatory and Development
Authority is also tax free perquisite.
C) Medical treatment outside India
The following expenditure incurred by employer on treatment of the
employee or his family members outside India is also tax free perquisite:
a) Expenses on medical treatment of the employee or any member
of his family outside India. However, such expenses shall be tax
free perquisite to the extent permitted by Reserve Bank of India.
b) Expenses on stay abroad of the employee or any member of his
family for medical treatment with one attendant who accompanies
the patient in connection with such treatment. These expenses
shall also be tax free perquisite to the extent permitted by Reserve
Bank of India.
c) Travel expenses of the patient (employee or his family member)
and one attendant who accompany the patient in connection with
such treatment. It shall be tax free in the case of those employees
whose gross total income (before including therein such travel
expenditure as perquisite) does not exceed Rs 2, 00,000. In other
words, if the gross total income of the employee before including
the taxable medical perquisite on account of travel expenditure
exceeds Rs 2, 00,000, the expenses on travel of the patient as well
as of the attendant shall become taxable.
Note:
1) ‘Family’ for the purpose of medical facility means:
i) The spouse and children of the employee. Children may be
dependent or independent, married or unmarried.
ii) Parents, brothers and sisters of the employee, who are wholly or
mainly dependent on such employee.
122 2) ‘Hospital’ includes a dispensary, a clinic, and a nursing home.
 Table 6.10 : Medical facility Salaries-II

A) Medical facility in a Medical facility which is given to employee and

hospital etc. maintained his/her family member in hospital, dispensary and
by the employer nursing home which belongs to employer is fully
tax free.

B) Medical treatment in India The following expenditure incurred by employer

shall not be a perquisite:Any sum paid by
employer in respect of:
i) Actual expenditure incurred by employee on
his or his family member’s medical treatment
in any hospital maintained by the government
or any local authority or in a hospital
approved by the government for medical
treatment for its employees.
ii) Expenditure actually incurred by employee
on his or his family member’s medical
treatment in respect of prescribed diseases or
ailments as prescribed in rule 3A of the
income tax rules, in any hospital approved
by the principal chief commissioner or chief
commissioner of income tax, having regard
to the prescribed guidelines.
iii) Any amount of insurance paid by the
employer for insurance of the health of the
employees under a scheme approved by the
central government or the insurance
regulatory and development authority.
iv) Any reimbursement by the employer of any
insurance premium paid by the employee, for
an insurance for his health or the health of
any member of his family a scheme approved
by the central government or the Insurance
Regulatory and Development Authority is
also tax free perquisite.
C) Medical treatment outside The following expenditure incurred by employer
India on treatment of the employee or his family
members outside India is also tax free perquisite:
i) Expenses on medical treatment of the
employee or any member of his family
outside India to the extent permitted by
Reserve Bank of India.
ii) Expenses on stay abroad of the employee or
any member of his family for medical
treatment with one attendant who
accompanies the patient in connection with
such treatment to the extent permitted by
Reserve bank of India.
iii) Travel expenses of the patient (employee or
his family member) and one attendant who
accompany the patient in connection with
such treatment. It shall be tax free in the case
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Salaries
of those employees whose gross total income
(before including therein such travel
expenditure as perquisite) does not exceed
Rs 2,00,000, if the gross total income of the
employee before including the taxable
medical perquisite on account of travel
expenditure exceeds Rs 2,00,000, the
expenses on travel of the patient as well as
of the attendant shall become taxable.

2) Facility of refreshment
This exemption is provided only when refreshment is given during office
hours and at place of duties.

3) Transport facility or conveyance facility

This shall be tax free to all types of employees, if an employer provides any
vehicle or other transport or conveyance facility to the employee for the
purpose of carrying him from the place of residence to the place of his duty
and back to his residence. The conveyance facility to employee shall be tax
free provided the enterprise is engaged in business of transport, e.g., facility
of free pass to railway employees.

4) Employer’s contribution
Employer’s contribution in schemes like group insurance scheme, deferred
annuity or pension shall be tax free.

5) Use of laptop or computer of employer

The use of laptops or computers (belongs to employer or hired by employer)
by the employee or his family member, its value shall be exempted.

6) Facility of entertainment
This facility should be provided to employees collectively, to avail its
exemption; else it shall not be tax free.

7) Accommodation in remote area

If the employer provides accommodation facility to such employees in
remote area or offshore locality, its value shall be exempt. Such facility
shall also be exempted for the employees who are employed at mining sites
or oil exploration site.

8) Perquisites provided outside India

Such exemption is provided to Indian citizen and Government employees
who are employed in foreign countries.

9) Facility of telephone
The payment of telephone (including mobile phones) bills installed at
employee’s residence by the employer is tax free. The telephone can be
used for any purpose.

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10) Facility of refresher course or training Salaries-II

Such perquisite is tax free provided the employees do the work with much
skills, it includes lodging and boarding expenses for this purpose.

11) Payment of accidental insurance premium

Any payment made by the employer for insurance premium on policy taken
by employer against any loss of employee, shall not be taxable.

12) Educational facility for children of the employee

The educational institutions is run by the employer or the employer has
provided free educational facilities to the children of employees in another
educational institution, the value of these facilities shall be exempt provided
that such value should not be more than Rs 1,000 per child per month.

13) Tax paid by the employer on non-monetary perquisites

If an employer provides non-monetary perquisite and pays any tax on these,
it shall be tax free and shall not be included in computing income under the
head’ salaries’. It should be noted that no deduction shall be allowed to the
employer while computing income under the head ‘profits or gains of
business and profession’.

14) Leave Travel Concession (LTC)

An employer (present or former employer) may grant the facility of LTC to
his employees with members of his family in connection with the journey
to home town or any other place in India.
Leave Travel Concession shall be allowed for maximum two children since
1.10.1998. This rule shall not be applicable to those children whose birth
before 1.10.1998 and also in case of multiple birth after one child.
The employee is entitled to exemption under section 10(5) in respect of the
value of travel concession or assistance received by or due to him from his
employer or former employer for himself and his family, in connection
with his proceeding:
a) On leave to any place in India.
b) To any place in India after retirement from service or after termination
of his service.
The exemption shall be allowed subject to the following:
i) Where journey is performed by air, maximum exemption shall be an
amount not exceeding the air economy fare of the national carrier by
the shortest route to the place of destination;
ii) Where place of origin of journey and destination are connected by rail
and the journey is performed by any mode of transport other than by
air- maximum exemption shall be an amount not exceeding the air-
conditioned first class rail fare by the shortest route to the place of
destination; and
iii) Where the places of origin of journey and destination or part thereof
are not connected by rail and the journey is performed between such
places- the amount eligible for exemption shall be: 125
Salaries a) Where a recognized public transport system exist, an amount not
exceeding the 1st class or deluxe class fare , as the case may be, on
such transport by the shortest route to the place of destination; and

b) Where no recognized public transport system exits, an amount

equivalent to the air-conditioned first class rail fares, for the distance
of the journey by the shortest route, as if the journey had been performed
by rail.

An employee or assessee can avail exemption for any two journeys in a

block of 4 years. For this purpose, the first block of 4 years was 1986-89
calendar years, the second block 1990-93 calendar year, the third block
1994-97 calendar years, the fourth block 1998-2001 calendar years and
fifth block 2002-05, sixth block 2006-2009, seventh block 2010-2013, eight
block 2014-2017, ninth block 2018-2021 and so on. If the assessee has not
taken the benefit of this exemption of LTC in any block, whether for both
journeys and one journey, he may avail the exemption of one journey in the
calendar year immediately succeeding the end of the block of 4 years, mean
in the fifth calendar year. In other words, maximum one journey can be
carried forward.
Clarification:
i) The exemption regarding LTC can be availed for the journey undertaken
while on leave during the tenure of service or even after retirement
from service.
ii) If the journey is not performed after taking LTC, the entire amount
received by employee shall be taken from him.
iii) The family of the employee includes i. the spouse and children of the
employee, parents, brother, sister of the employee who is wholly
dependent upon him.
iv) In any case, no exemption shall be allowed exceeding the actual amount
spent on travel by the employee.
v) If the travel is performed after retirement from service or being on
leave during the service, the benefit of exemption may be availed.
vi) The exemption is allowed only in respect of fare. Expenses incurred
on porterage, conveyance from residence to the railway station/airport/
bus stand and back, boarding and lodging’ or expenses during the
journey will not be qualified for exemption.
vii) Exemption is available in respect of shortest route, where journey is
performed from the place of origin to different places in a circular
form or in any other manner, the exemption for that journey will be
limited to what is admissible for the journey from the place of origin
to the farthest point reach, by the shortest route.
15) Accommodation to judge
Rent free official residence provided to High Court or Supreme Court judges
is tax free perquisite.

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16) Free accommodation to ministers, etc Salaries-II

Rent free furnished residence, including maintenance, thereof, provided to

a Union Minister, an officer of Parliament or to an Opposition Leader in
Parliament is regarded as tax free.

17) Scholarship to employee’s children

Scholarship given by the employer to the children of an employee is a tax
free perquisite.

18) Use of health club, sports or similar facility provided uniformly to all
employee by employer.

19) Conference
Any expenditure incurred by the employer for an employee in connection
with a conference, such as conveyance, tour and travel, hotel expenditure
or boarding and lodging expenses etc. are not be included in the employee’s
income as perquisite. This perquisite is tax free in the hands of an employee.

20) Travelling expenses paid or reimbursed

Actual travelling expenses paid or reimbursed by the employer for journeys
undertaken by employees’ business purpose are exempt.

21) Interest free loan

Any loan provided by the employer to an employee either free of interest or
at concessional rate of interest, is tax free perquisite, if the amount of loan
does not exceed Rs. 20,000.

6.6 DEDUCTIONS FROM ‘SALARIES’

The income chargeable under the head ‘Salaries’ is subject to certain deductions
allowable under section 16. They are:
i) Standard Deduction – Section 16(i)
ii) Entertainment Allowance – Section 16(ii)
iii) Tax on Employment – Section 16(iii)
Let us now discuss these deductions.

6.6.1 Standard Deduction [Section 16(i)]

This deduction is now again allowed W.e.f. assessment year 2019-20. The least
of the following two amounts shall be deducted from gross salary of the employee:
a) Rs 50,000
b) Actual amount of gross salary

6.6.2 Entertainment Allowance [Section 16(ii)]

Entertainment allowance is normally given to Senior Officer. An employer gives
allowances to his employee to spend it on the reception of the customers.
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Salaries An entertainment allowance is part of salary. Hence, it is first to be included in
the salary income. Thereafter, a deduction on Entertainment allowance which is
given to both types of employee, government and non-government employee as
explained below, will be allowed.
i) Government employee: The least of the following will be allowed as a
deduction:
a) Rs. 5,000, or
b) 1/5th or 20% of the employee’s salary, or
c) Amount of entertainment allowance granted during the year.
Meaning of Salary: For the purpose of entertainment allowance, only basic
salary shall be considered. Any other allowance even dearness allowance
(Inspite of being under terms of employment), fixed percentage of
commission on turnover and dearness pay shall not be included in the salary
for the purpose of deduction of entertainment allowance.

ii) Non-government employee (including semi-Government employee,

employees of statutory corporation and local authority): From the
assessment year 2002-03, the deduction of entertainment allowance to non-
government employees has been abolished.

6.6.3 Tax on Employment [Section 16 (iii)]

This tax is also known as professional tax and it shall be deducted in the year in
which it is actually paid. If any tax is realized on salary of the employee by the
state government, this amount shall be deducted from the gross salary of the
employee. As per the constitution of India, professional tax more than Rs 2,500
p.a cannot be levied upon the employee. If the professional tax is paid by the
employer, it is first included in the salary income of the employee and after it is
deducted from gross salary of the assessee, it is treated as general perquisite u/s
17(iv).

Illustration 10
Mr. Sanjay is employed in Reserve Bank of India as Manager. He gives the
following details for the P.Y. 2020-21. Compute gross and taxable salary income
for the A.Y. 2021-22.
i) Basic pay Rs. 48,000 p.m.
ii) Dearness allowances Rs. 18,000 p.m. (20% is used for benefits of retirement)
iii) House Rent Allowance (HRA) Rs. 15,000 p.m. He pays 18,000 p.m. as rent
for his accommodation in Chennai

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Solution: Salaries-II

Computation of Gross Salary of Mr Sanjay for AY 2020-21 Rs.

Basic salary (Rs. 48,000 × 12) 5, 76,000
D.A. (Rs. 18,000 ×12) 2, 16,000
H.R.A 25,920
Gross Salary 8, 17,920
Less: Standard deduction 50,000
Taxable Salary 7, 67,920
Calculation of H.R.A
Least of the following amount will be exempt.
i) Actual H.R.A. received (15,000×12) 1,80,000
ii) (Rent paid – 10% of salary)
(2, 16,000– 61,920) 1, 54,080
Salary = (5, 76,000 + 43,200) 6, 19,200
iii) 50% of salary 3,09,600
Exempted amount 1, 54,080
Taxable amount = Rs. (1, 80,000 – 1, 54,080) 25,920
Note:
1) Salary = 48,000 × 12= Rs 5,76,000
2) DA= 2,16,000 × 20%= Rs 43,200
Illustration 11

Mr. Rajeev an employee in a firm gets Rs 5,000 p.m. as salary, Rs. 800 p.m. as
dearness allowance and Rs. 300 as city compensatory allowance. He is getting
entertainment allowance of Rs. 800 p.m. He paid professional tax of Rs. 2,500.
He is also getting a bonus equal to three month’s salary. He resides in Agra
(having population more than 25 lakhs) in a house owned by the firm. Fair rent
of house is 1,500 p.m.
Compute his income under the head ‘Salaries’ for A.Y. 2021-22.
Solution:
Computation of Taxable Salaries of Mr Rajeev for AY 2021-22 Rs.
Salary @ Rs. 5,000 p.m 60,000
D.A. @ 800 p.m 9,600
C.C.A. @ 300 p.m 3,600
Entertainment allowance @ 800 p.m 9,600
Bonus equal to three month’s salary 15,000

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Salaries Perquisite:
Rent-free house @ 15% of salary 15% of 88,200 Rs.
[60,000 (B.S) + 3,600 (C.C.A.) +9,600 (E.A.) + 15,000 (B)] 13,230
Gross salary 1,11,030
Les: (i) Standard deduction 50,000
61,030
Less: (ii) Professional tax 2,500
Taxable salary 58,530
Note:
i) D.A. is not included in salary for calculation of rent-free accommodation
because it is not under the terms of employment.
ii) No deduction is allowed in respect of Entertainment allowance, as Mr. Rajeev
is not a government employee.

Illustration 12
Mr. Radhey Shyam is employed in a company. He gets the following from the
company:
i) Salary @ 20,000 p.m.
ii) Dearness allowance @ Rs. 2,000 p.m.
iii) Medical allowance @ Rs. 5,000 p.m.
iv) Bonus equal to 2 month’s salary
v) Commission @ Rs. 20,000 p.a.
The following perquisites are provided by the employer:
i) A sweeper and a cook getting salary of Rs. 1,500 p.m. each.
ii) A car of 1400 cc for his personal use for which the employer pays.
iii) Rent-free unfurnished house in Etawah (Population less than 10 lakhs) owned
by employer, annual rental value of which is Rs. 1,00,000
iv) A gardener whose salary is Rs. 2,000 p.m.
v) Free gas, electricity and water facility for private use, employer actually
paid for this facility Rs. 20,000 for previous year.
Compute taxable salary of Mr. Radhey Shyam for the A.Y. 2021-22.
Solution:
Taxable salary of Mr. Radhey Shyam for the A.Y. 2021-22 Rs.
Salary @ Rs. 20,000 p.m 2, 40,000
D.A. @ Rs. 2,000 p.m 24,000
Medical allowance @ Rs. 5,000 p.m 60,000
Bonus equal to 2 months’ salary 40,000
Commission 20,000
Rent free house (7.5% of salary) 26,250
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Sweeper and Cook Nil Salaries-II

Car Nil
Free gas, electricity and water Nil
Gross salary 4, 10,250
Less: Standard deduction 50,000
Taxable Salary 3, 60,250
Note:
1) Valuation of rent-free house 7.5% of 3,50,000 = Rs, 26,250 [Salary = Rs.
2,40,000 (B.S) + Rs. 50,000 (Medical Allowance.) + Rs. 40,000 (Bonus) +
Rs. 20,000 (Commission) = 3,50,000]
2) Mr. Radhey Shyam is not a specific employee, so perquisite of sweeper,
cook, gas, electricity, water and car is not taxable.
3) Facility of gardener is not regarded as perquisite because it is provided with
a house owned by the employer.
4) Standard deduction can be allowed maximum up to gross salary.
Check Your Progress B
1) State whether following statements are True or False:
i) In respect of Government employees, ten percent of cost of furniture
should not be added while computing the perquisite value of the
furnished house.
ii) For computing the value of rent-free accommodation ‘salary’ for the
entire year should be considered irrespective of the period of occupation
of the house.
iii) Facility of telephone provided to a specified employee is taxable
perquisite.
iv) If the house is not owned by the employer, salary of gardener and
maintenance expenses of the garden should not be added.
v) Free gas, supplied by Indian Oil Corporation to its employees is a
taxable perquisite.
vi) Value of subsidized lunches is exempt while the value of free lunches
is taxable perquisite.
vii) When car is owned by employer and all the expenses are borne by
employee if car is used only for official use, the values of perquisite
will be Nil.
viii) Any gift or token received from employer shall be exempted upto
Rs. 10,000.
ix) Mr. Sahil went to Shimla. He stayed there in guest house of the company
and saved Rs. 5,000 on account of accommodation. It is taxable.
x) Advance salary is not taxable under the head ‘Salaries’.

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Salaries 2) What are the provisions relating to Leave Travel Concession as per Income
Tax Act, 1961?
......................................................................................................................
......................................................................................................................
......................................................................................................................
3) What do you understand by Deductions? Explain.
......................................................................................................................
......................................................................................................................
......................................................................................................................

6.7 LET US SUM UP

Apart from cash payment, an employee also receives certain benefits in kind
which can be convert into cash. These are called Perquisites. There are three
types of Perquisite; it may be tax-free, taxable for specified employees, taxable
for all employees. These Perquisites are to be valued and included in the salary
of an employee. After the value of Perquisites is calculated and included in the
salaried income, certain deductions are available from the gross salary. They
are:
i) Standard deduction
ii) Entertainment allowance
iii) Tax on employment
The net taxable income under the head salary is arrived at after deducting the
quantum of permissible deductions mentioned above, from the gross income
from salaries.

6.8 KEY WORDS

Accommodation: This refers to the residential house provided to the employee
by the employer either free of rent or at concessional rent.

Monetary income: This represents receipts obtained by a salaried employee by

way of money. Obviously, perquisite in kind is to be excluded while calculating
monetary income.

Perquisite: Casual emolument, Payment, fee or profit attached to an office.

Personal accident policy: This is policy usually taken on the life of certain key
executives whose functions and movement may expose then to fatal accidents or
whose existence is for the company’s prosperity. The premiums are invariably
paid by the employer.

Specified Employee: The term denote those employees who are directors,
employees substantially interested in a company or when monetary income under
the head ‘salaries’ exceeds Rs. 50,000.
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 Salaries-II
6.9 ANSWERS TO CHECK YOUR PROGRESS
Check Your Progress A
1) Salaries
2) Employer
3) Tax free
4) 10%
5) 15
Check Your Progress B
i) False, ii) False, iii) False, iv) True, v) False, vi) False, vii) True,
viii) False, ix) True x) False

6.10 TERMINAL QUESTIONS / EXERCISES

1) What is not included in ‘Salary’ for calculating the value of rent-free
accommodation for a public employee?
2) What are the provisions of section 16 (ii) regarding entertainment allowance
for non-government employees?
3) Compute the monetary income of ‘A’ from the following particular for A.Y.
2021-22 to ascertain whether he is a specified employee or not. Rs.
a) Basic salary 18,000 p.m.
b) D.A. (not forming part of salary for calculating
retirement benefits) 5,000 p.m.
c) Education allowance 2,000 p.m.
d) Income tax paid by the employer on behalf of A. 1,000 p.m.
[Answer: A is a specified employee as his monetary income is more
than Rs. 50,000 i.e. Rs. 38,000]

4) Mr. Sanjay is a private sector employee. He received the

following emoluments. Rs.
a) Basic pay 8,000 p.m.
b) D.A. (not included for computing retirement benefits) 800 p.m.
c) Bonus (for the year) 15,000
d) H.R.A. received 9,000 p.a.
e) Exempted H.R.A. 5,000
f) Education allowance (He has two children) 500 p.m.
Compute ‘salary’ for the purpose of arriving at the perquisite value for rent-
free accommodation.
[Answer: Rs. 1, 18,600]

133
Salaries 5) Mr. Rakesh is employed in MNC. He received the following
from the company. Rs.
a) Salary 20,000 p.m.
b) D.A. 2,000 p.m.
c) Medical allowance 5,000 p.m.
d) Bonus equal to 2 months basic salary.
e) Commission 20,000 p.a
The following perquisites are also provided by the employer.
i) Rent-free unfurnished accommodation at Agra owned by employer.
ii) Sweeper and a Cook getting salary of Rs. 1,500 p.m. each.
iii) A Gardner getting salary of Rs. 2,000 p.m.
iv) Free gas, electricity and water facility for personal use for which the
employer pays Rs. 20,000 during the P.Y.
Compute taxable salary of Mr Rakesh for the A.Y. 2021-22
[Answer: 4,68,000]

6) Mr. Sahay joined Surya Private Ltd. His basic salary is Rs. 40,000 p.m.
D.A. Rs. 2,000 p.m, education allowance Rs. 500 for one child and Rs.
1,500 p.m. as entertainment allowance during the P.Y. 2020-21. He paid Rs.
10,000 as professional tax. Determine his taxable salary for the A.Y. 2021-
22.

[Answer: 4,66,800]

7) Mr. Rashid is employed in Khadi Gramodyog in Kanpur on a monthly salary

of Rs. 12,000 p.m. He is getting bonus as two months’ salary, entertainment
allowance Rs. 5,000 p.a. The employer provides following perquisites.
a) Car of 1800 c.c. for both private and official use. All the expenses are
borne by the employer.
b) He has been given a personal loan of Rs. 50,000 at 5% interest on 1st
Jan., 2020.
c) The employer spent Rs. 10,000 on the education of his son who is
abroad.
d) The employee paid Rs. 4,000 as professional tax for the P.Y. 2020-21
Compute taxable income from salary of Mr. Rashid for A.Y. 2021-22
(Note: Assume rate of interest for personal loan is 11.9% as given by
State Bank of India)
[Answer: 1,58,663]

8) Mr Riyaz is reader in a college, run by a society, on a monthly salary of Rs

50,000. Besides salary he also gets 45% of salary as dearness allowance, Rs
1000 p.m., entertainment allowance and Rs 1000 p.m. as proctor’s allowance.
During the year, he gets Rs 500 p.m. as additional DA. Arrears of salary
received Rs 30,000.
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 He contributes 10% of his salary to provident fund. The college contributes Salaries-II
an equal amount interest credited to his provident fund @12% amounted to
Rs 40,000.Three children of Mr Riyaz are studying in an institution run by
the society , which runs the college for which to Rs 1,500 p.m. for one
student. Mr Riyaz is provided with a rent free accommodation in a city
(population 13 lakhs) which is owned by the college. Its fair rental value is
Rs 2,500 p.m. A Gardner for the upkeep of the garden on the back side of
the house is also provided. The salary of Gardner amounting to Rs 300 p.m.
is also paid by the college. During the year Mr Riyaz proceeded on two
months leave with full pay to his home at Jaipur. The college paid Rs 6,500
being the air fare to and from Jaipur for him and his wife for this purpose.

Compute the taxable salaries income of Mr Riyaz for the year ending on
31st march, 2021, for the assessment year 2021-22.

[Answer: Taxable salary = Rs. 9,68,733 ]

Note: These questions will help you to understand the unit better. Try to
write answer for them. But do not submit your answers to the University.
These are for your practice.

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